<PAGE>
As filed with the Securities and Exchange Commission on November 5, 1997
Registration No. 333-37161
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
to
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
AMERICAN FAMILY HOLDINGS, INC.
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
(Address of principal executive offices)
David G. Lasker, President
American Family Holdings, Inc.
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
(Name and address of agent for service)
Copy to:
David R. Decker, Esq.
Arter & Hadden
700 South Flower Street, 30th Floor
Los Angeles, California 90017
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- --------------------------------------------------------------------------------
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Item of Form S-4 Prospectus Caption or Location
- ---------------- ------------------------------
<S> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Cover
Page of Prospectus . . . . . . . . . . . . . . . . . . Cover of Registration Statement; Cross-Reference
Sheet; Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page of
Prospectus . . . . . . . . . . . . . . . . . . . . . . Prospectus Summary; Reports to Shareholders
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information . . . . . . . . . . . . . . . . . . Prospectus Summary; Risk Factors; Business and
Properties; Background and Reasons for the
Acquisition
4. Terms of The Transaction . . . . . . . . . . . . . . . Prospectus Summary; Background and Reasons for
the Acquisition; Comparison of Tenancy-in-
Common Interests and Shares; Comparisons of
Programs and Company; Description of Shares;
Federal Income Tax Consequences; Appraisals and
Fairness Opinion
5. Pro Forma Financial Information. . . . . . . . . . . . Prospectus Summary; Financial Statements
6. Material Contracts with the Company being Acquired . . Background and Reasons for the Acquisition;
Interests of Certain Persons in the Acquisition
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters. . . . . Not Applicable
8. Interests of Named Experts and Counsel . . . . . . . . Not Applicable
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities . . . . . . . . . . . . Fiduciary Responsibility and Indemnification
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants. . . . . . Not Applicable
11. Incorporation of Certain Information by Reference. . . Not Applicable
12. Information with Respect to S-2 or S-3 Registrants . . Not Applicable
13. Incorporation of Certain Information by Reference. . . Not Applicable
</TABLE>
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
(continued)
<TABLE>
<CAPTION>
Item of Form S-4 Prospectus Caption or Location
- ---------------- ------------------------------
<S> <C> <C>
14. Information with Respect to Registrants other than S-3
or S-2 Registrants . . . . . . . . . . . . . . . . . . Prospectus Summary; Business and Properties;
Selected Financial Information; Management's
Discussion and Analysis of Financial Condition and
Results of Operations
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies. . . . . . . Not Applicable
16. Information with Respect to S-2 or S-3 Companies . . . Not Applicable
17. Information with Respect to Companies other than S-3
or S-2 Companies . . . . . . . . . . . . . . . . . . . Prospectus Summary; Business and Properties;
Background and Reasons for the Acquisition;
Selected Financial Information; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Financial Statements
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations are
being Solicited. . . . . . . . . . . . . . . . . . . . Prospectus Summary; Voting Procedures; Interests
of Certain Persons in the Acquisition; Principal
Shareholders; Management Following the
Acquisition
19. Information if Proxies, Consents or Authorizations are
Not to be Solicited or in an Exchange Offer. . . . . . Not Applicable
</TABLE>
<PAGE>
IF YOU ARE AN INVESTOR IN ANY OF THE FOLLOWING, YOUR VOTE IS VERY IMPORTANT
SACRAMENTO/DELTA GREENS "TRUDY PAT" PROGRAM
OCEANSIDE "TRUDY PAT" PROGRAM
YOSEMITE/AHWAHNEE I "TRUDY PAT" PROGRAM
YOSEMITE/AHWAHNEE II "TRUDY PAT" PROGRAM
MORI POINT "TRUDY PAT" PROGRAM
AMERICAN FAMILY HOLDINGS, INC.
- - PROPOSED ACQUISITION OF PROGRAM PROPERTIES
American Family Holdings, Inc. is offering shares of its stock in exchange
for the assets, certain liabilities and business activities owned by
investors in five former "Trudy Pat" programs managed by National Investors
Financial, Inc. For this proposed acquisition, American Family Holdings will
issue $15,772,850 of shares of common stock at $10 per Share. The stock
will be listed for trading on the ___________ under the symbol "___."
In each of the programs, the investors will vote on whether to approve the
acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF
THE FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION IN ORDER FOR IT TO
TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation of votes started on _______, 1997 and expires at 5:00
p.m., pacific time, on __________, 1997 unless extended. Call 1-800-590-7772
with questions.
- - OFFER OF ADDITIONAL STOCK TO INVESTORS
American Family Holdings is also offering $5,000,000 of units (consisting
of one share of common stock and one warrant to purchase two additional
shares) at $10 each exclusively to current investors in the programs. NASD
broker-dealers will receive a commission totalling $0.70 per unit for any
units sold with their help. If all the units are sold with their help, the
proceeds of the sale, net of estimated expenses of $200,000, will be
$4,450,000. If you want to buy units, subscriptions with payments
should be returned with your voting ballot. Subscriptions will be
accepted on a FIRST-COME-FIRST-SERVED BASIS.
SPECIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will receive stock in American
Family Holdings, Inc. You will have no other interest in the real estate
or business of your program.
- - The nature of your investment will change from a tenancy-in-common
interest in the property to shares of stock in American Family Holdings,
Inc.
- - The trading price for the stock is uncertain.
- - There may be conflicts of interest in the structure of the acquisition.
- - No independent advisors represented you in structuring this transaction.
- - American Family Holdings may not have sufficient financial resources
to carry out its business plans following the acquisition, since
it will not be able to require investors to pay mandatory assessments.
You should study the "Risk Factors" on page __.
----------------------------------
THE TRANSACTION AND SECURITIES HAVE NOT BEEN APPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR THE ATTORNEY GENERAL OF THE STATE OF NEW YORK
NONE OF THESE HAS DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------------------
The date of this Prospectus is _______________, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY............................................................1
Exchange Value/Allocation of Shares.......................................1
Current Status of the Programs............................................2
The Company...............................................................3
Organization Chart........................................................4
Consent Solicitation/Summary of Voting Procedures.........................5
No Dissenters' Rights.....................................................5
Alternatives to the Acquisition...........................................6
Fairness..................................................................6
Fairness Opinion..........................................................7
National's Recommendation.................................................7
Summary of Benefits of the Acquisition....................................7
Summary of Business Plan..................................................8
Comparison of the Programs and the Company................................9
Tax Consequences of Acquisition..........................................11
Conflicts of Interest Related to the Acquisition.........................11
Conditions to Acquisition................................................11
Consequences if Acquisition Not Approved.................................12
Delivery of Stock Certificates...........................................12
The Offering/Use of Proceeds.............................................12
Summary Financial Information............................................12
RISK FACTORS.................................................................14
Risks of the Acquisition.................................................14
Real Estate Risks........................................................16
Risks Affecting Operation of a Golf Course...............................18
Risks Relating to Residential Development................................18
Resort Destination Risks.................................................18
Specific Risks Relating to Timeshare.....................................18
Anti-Takeover Provisions.................................................19
BACKGROUND AND REASONS FOR THE ACQUISITION...................................20
General..................................................................20
Management of the Programs Since Foreclosure.............................21
Efforts to Dispose of the Properties.....................................23
Terms of the Acquisition.................................................25
Exchange Value and Allocation of Shares..................................26
Determination of Exchange Values.........................................26
Allocation of Shares among the Programs..................................33
Allocation of Shares among Investors.....................................35
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
Company Shares Held by Affiliates or Employees of National...............35
Expected Benefits of Acquisition.........................................36
Alternatives to Acquisition..............................................37
Conditions to the Acquisition............................................39
Recommendation of National and Fairness Determination....................39
Fairness in View of Conflicts of Interest................................40
Consequences if the Acquisition is Note Approved.........................40
Accounting Treatment.....................................................40
Costs and Expenses.......................................................41
DIVIDEND POLICY..............................................................41
COMPARISON OF TENANCY-IN-COMMON INTERESTS AND SHARES.........................41
COMPARISONS OF PROGRAMS AND COMPANY..........................................47
VOTING PROCEDURES............................................................54
Time of Voting...........................................................54
Record Date and Outstanding Votes........................................54
Approval Date............................................................55
Investor Ballot and Vote Required........................................55
Revocability of Consent..................................................56
Solicitation of Votes; Solicitation Expenses.............................56
No Dissenters' Rights....................................................56
Issuance of Certificates for Acquisition Shares..........................57
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION AND CONFLICTS OF INTEREST....57
Benefits to National.....................................................57
Benefits to Shareholders of National.....................................58
Lack of Independent Representation of Investors..........................58
Features Discouraging Potential Takeovers................................59
Allocation of Services and Expenses......................................59
Non-Arm's-Length Agreements..............................................59
Competition with the Company from Other Programs
Organized by National....................................................59
ii
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION.................................60
Fiduciary Responsibility of National.....................................60
Indemnification of Officers and Directors of the Company.................60
Officers and Directors Insurance.........................................61
BUSINESS AND PROPERTIES......................................................61
The Company..............................................................61
Business of the Company..................................................62
Properties...............................................................62
Consolidation of the Programs............................................64
The Residential Development Industry.....................................64
The Lodging and Recreation Industry......................................65
The Business Strategy....................................................68
The Consolidated Business Plan...........................................69
Employees................................................................72
Legal Proceedings........................................................72
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES..................................72
Investment Policies......................................................72
Financing Policies.......................................................73
Miscellaneous Policies...................................................74
Working Capital Reserves.................................................74
USE OF PROCEEDS..............................................................74
CAPITALIZATION...............................................................75
SELECTED FINANCIAL INFORMATION...............................................76
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................................................79
Overview.................................................................79
Results of Operations - The Oceanside Program............................79
Results of Operations - The Yosemite/Ahwahnee Programs...................80
Results of Operations - The Mori Point Program...........................81
Results of Operations - The Sacramento/Delta Greens Program..............82
Liquidity and Capital Resources..........................................82
Historical Cash Flows....................................................84
New Accounting Pronouncements............................................86
iii
<PAGE>
TABLE OF CONTENTS
(continue)
Page
----
MANAGEMENT FOLLOWING THE ACQUISITION.........................................87
Executive Officers and Directors.........................................88
Directors and Executive Officers Compensation and Incentives.............91
Stock Incentive Plan.....................................................92
401(k) Plan..............................................................94
Employment Agreements....................................................94
Limitation of Liability and Indemnification..............................95
SECONDARY MARKET FOR TENANCY-IN-COMMON INTERESTS.............................96
PRINCIPAL SHAREHOLDERS.......................................................96
Principal Shareholders...................................................96
Director and Officer Stock Ownership.....................................97
DESCRIPTION OF SHARES........................................................97
General..................................................................97
Common Stock.............................................................98
Preferred Stock..........................................................98
Warrants.................................................................99
Certain Shareholder Voting Requirements..................................99
Transfer Agent and Registrar.............................................99
THE OFFERING.................................................................99
Offering of Acquisition Shares...........................................99
Offering of Units.......................................................100
APPRAISALS AND FAIRNESS OPINION.............................................101
General.................................................................101
Experience of Independent Appraisers....................................103
Independent Appraisals..................................................103
On-Going Relationships..................................................104
Experience of Independent Valuator......................................105
Fairness Opinion........................................................105
FEDERAL INCOME TAX CONSEQUENCES.............................................107
Qualification of the Acquisition as a Qualifying Section 351
Transaction.............................................................107
Federal Income Tax Consequences of the Acquisition......................109
Federal Income Tax Consequences to Investors After the Effective Date...111
iv
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
REPORTS TO SHAREHOLDERS......................................................112
LEGAL MATTERS................................................................112
EXPERTS......................................................................112
FURTHER INFORMATION..........................................................113
GLOSSARY.....................................................................114
FINANCIAL STATEMENTS.........................................................F-1
APPENDICES
Appendix 1 Fairness Opinion..............................................A-1
Appendix 2 Selected Additional Appraisal Information.....................A-2
ACCOMPANYING THE PROSPECTUS
- - OFFICIAL INVESTOR BALLOT
- - SUBSCRIPTION ORDER FORM
- - BROKER/DEALER INFORMATION FORM
- - Instructions to Investors on How to Complete the Official Investor Ballot
and Subscription Order Form
v
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARIZES MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
ELSEWHERE IN THIS PROSPECTUS.
EXCHANGE VALUE/ALLOCATION OF SHARES
American Family Holdings, Inc., a Delaware corporation (the "company" or
"we") has offered to acquire the properties of selected "Trudy Pat" programs for
the total acquisition price of $15,772,850 in the form of 1,577,285 shares
arbitrarily valued at $10 per share. The exchange value for a property is not
the same as the appraised value and may not be the same as the amount you might
receive from selling a property separately.
In the Spring of 1997, each of the programs' properties was appraised "as
is" at a value reflecting its highest and best use. However, in all cases,
money is needed for the programs for working capital and development. Due to
the structure of the "Trudy Pat" programs, traditional financing is not
generally available for those purposes. Sources of needed capital are primarily
limited to mandatory assessments from investors. Even though investors in some
programs have contributed money in response to mandatory assessments authorized
by a majority vote pursuant to their tenancy-in-common documents, the money is
not enough to permit them to achieve the highest and best use for the
development.
National and the company believe that the programs, when unified and
operated together, have financial advantages for each other which increase their
potential, and which are not available due to the limitations of "Trudy Pat"
structure. These advantages include
- Certain properties have some cash available from investor assessments
which could be used where most needed.
- Certain properties are able to generate cash which could be used for
development of all of the properties.
- Opportunities to obtain financing from outside sources would be
greater in the new structure which would provide advantages to all of the
properties held in that structure.
With this in mind, exchange values for the programs were calculated by adjusting
the appraised value of each property by factors deemed appropriate by National
and the company to reflect their relative "stand alone" values as "Trudy Pat"
programs. See "Background and Reasons for the Acquisition -- Determination of
Acquisition Prices" at page __.
<PAGE>
The number of shares to be assigned to each program was determined by
dividing the program's exchange value by the total exchange value of all the
properties and multiplying that fraction by the total number of shares to be
paid by the company.
The amount owed by the original borrower to each program plus the amount of
assessments paid by investors at [AUGUST 15, 1997], appraised real estate
values, exchange values and number and percentage of shares allocated to each
program are:
<TABLE>
<CAPTION>
% of Total
% of Shares to be
Amount Real Estate No. of Shares Outstanding
Owed plus Appraised Exchange Shares Issued in After the
Name of Program Assessments Value(1) Value Allocated Acquisition Acquisition(2)
- ------------------------ ------------- ------------- ------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 6,015,723 $ 2,000,000 $ 1,215,200 121,520 7.70% 6.18%
Oceanside 27,325,000 3,700,000 5,303,100 530,310 33.62 26.95
Yosemite/Ahwahnee I 8,982,429 8,050,000 2,007,882 200,788 12.73 10.20
Yosemite/Ahwahnee II 19,450,567 12,866,000 3,955,186 395,519 25.08 20.10
Mori Point 12,240,744 5,500,000 3,291,482 329,148 20.87 16.73
------------- ------------- ------------- ---------- ------------ --------------
TOTAL $ 74,014,463 $32,116,000 $ 15,772,850 1,577,285 100.00% 80.16%
------------- ------------- ------------- ---------- ------------ --------------
------------- ------------- ------------- ---------- ------------ --------------
</TABLE>
- -----------
(1) Appraisals were conducted in May 1997.
(2) 84.18% if all units are sold to investors. The other shares will be held
by management and other founders of the company.
Shares will be distributed to you in accordance with your pro rata
investment in a program (including assessments paid and interest accrued to you
through the date you took beneficial ownership of the property) after adjusting
the amounts to account for voluntary advances made by some investors. For
example
If your adjusted outstanding investment is $10,000 in
Sacramento/Delta Greens
Oceanside
Yosemite/Ahwahnee I
Yosemite/Ahwahnee II
Mori Point
you will receive approximately the following number of company shares
CURRENT STATUS OF THE PROGRAMS
2
<PAGE>
Each of the programs began as tenancy-in-common, secured loan arrangements.
Due to the borrowers' defaults on the loans, the investors in each of the
programs are now the beneficial owners of the real estate that secured the
loans. As the servicing agent for the loans, National became the manager of the
programs' assets.
The properties owe a significant amount of delinquent property taxes
totalling over $920,000 all together as of June 30, 1997. In order to position
the properties for sale on terms that might be deemed acceptable to a majority
of investors, additional expenditures over and above property taxes must be
made. Investors have demonstrated a reluctance to make these additional
expenditures, which are generated through a mandatory assessment process. This
reluctance on the part of investors to provide the necessary funding to position
the assets of their programs for a satisfactory disposition is one of the
primary reasons why National believes that none of the programs are capable of
attaining a maximum return of invested dollars in their present stand-alone
status.
While the properties of the Oceanside and Sacramento/Delta Greens programs
may be able to be sold for cash, under current market conditions they cannot be
sold for prices sufficient to return the investors' money at this time.
National believes that those properties should either be built out and sold as
single-family homes or sold in bulk when appropriate.
Without a substantial infusion of capital, the Yosemite/Ahwahnee properties
cannot reach their full economic potential and, despite the appraised value,
cannot be sold for an amount sufficient to return the investors' money at this
time. National believes that failure to continue to fund the development of the
Yosemite/Ahwahnee property will result in a serious deterioration of its value.
At present, Mori Point is vacant land with a proposal to be developed into
a hotel conference center. In order to continue the predevelopment effort,
capital is needed to proceed with the real estate permitting process and to
establish a plan to protect the habitat of two endangered species that are
located on the property. Presently, this property cannot be sold for an amount
sufficient to return the investors' money.
The acquisition has been proposed because National and the company believe
that the properties, when combined, can be sold and/or developed in a way that
will increase their overall value. If the acquisition occurs, the properties
and assets belonging to the programs will all become assets of the company, and
you
3
<PAGE>
will be shareholders of the company. The value of the company will be reflected
in the market value of its shares. Thus, through the market value of the
shares, you may receive a higher percentage of your outstanding investment than
you might receive if the properties were operated or sold within their separate
programs.
THE COMPANY
The company was formed on August 6, 1997 to conduct the acquisition. The
founding shareholders of the company are Yale Partnership for Growth and
Development, L.P. and J-Pat, L.P., family partnerships established by David
Lasker and James Orth, respectively, as well as other employees, consultants of
National, or the company. The company has no significant assets or liabilities.
The company's principal executive offices are located at 4220 Von Karman Avenue,
Suite 110, Newport Beach, California 92660, telephone number 1-800-590-7772.
ORGANIZATION CHART
After the acquisition, the company will be organized as follows:
- -------------- --------------- --------------- ---------------
Yale
Partnership
for Growth J-Pat, L.P. Consultants
All and (controlled by and other
Programs' Development, James Orth, a Employees of
Investors L.P. principal of National or
(controlled by National) Company
David Lasker,
a principal of
National)
- ------------- ---------------- -------------- --------------
80.16% 7.5% 7.5% 4.84%
(84.18% if all (5.98% (5.98% (3.86% if
units sold) if all units sold) if all units sold) all units sold)
- -------------------------------------------------------------------------
American Family Holdings, Inc.
- -------------------------------------------------------------------------
100%
4
<PAGE>
------------------------
American Family
Communities, Inc.(1)
------------------------
100%
- ---------------- ----------------- ------------- -----------------
Delta Greens Yosemite Woods Oceanside Mori Point
Homes, Inc.(2) Family Resort, Homes, Destinations,
Inc.(2) Inc.(2) Inc.(2)
- ---------------- ----------------- ------------- -----------------
- ----------
(1) A subsidiary formed to coordinate the management and operation of the
properties.
(2) Subsidiaries formed to hold title to the various properties and to conduct
the day-to-day operations.
CONSENT SOLICITATION/SUMMARY OF VOTING PROCEDURES
RECEIPT OF CONSENTS. We must receive your ballot by 11:59 p.m., Pacific
Time, on ____________, 1997 (unless extended by the company) to be counted in
the vote on the acquisition.
VOTING. You are entitled to vote based on the amount you have invested in
a program, on the record date, ___________, 1997. Only investors on the record
date are entitled to vote. Voting will be on a program-by-program basis.
VOTES/OUTSTANDING INVESTMENT. On the record date, the following amounts of
outstanding investment, which correspond to votes, exist for each of the
programs:
OUTSTANDING INVESTMENT;
NUMBER OF VOTES
NAME OF PROGRAM [8/15/97]
--------------- -----------------------
Sacramento/Delta Greens 6,015,723
Oceanside 27,325,000
Yosemite/Ahwahnee I 8,982,429
Yosemite/Ahwahnee II 19,450,567
Mori Point 12,240,744
VOTE REQUIRED. In order for the acquisition to be approved, investors
holding a majority of the outstanding investment/votes in EACH of the programs
must approve the acquisition.
5
<PAGE>
You may vote YES or NO or ABSTAIN on the acquisition. If you do not submit
a ballot or you send a ballot marked ABSTAIN, you will be counted as having
voted AGAINST the acquisition.
You may vote only using the ballot provided, and only during the
solicitation period, which ends __________, 1997 or at a later date the company
may announce. You must return the completed ballot to National before the
solicitation period expires. If we receive your ballot signed but unmarked, it
will be counted as a vote FOR the acquisition.
NO DISSENTERS' RIGHTS
If you vote "NO" on the acquisition, and the acquisition is approved, you
will have no choice other than to take shares in the company. You will not be
entitled to object to the transaction and receive a cash payment for your
interest under the tenancy-in-common agreements governing the programs or
applicable law. See "Voting Procedures -- No Dissenters' Rights" at page __.
You may withdraw or change your ballot before the solicitation period
expires. You will need to complete and mail a substitute ballot, AND a letter
stating that you are revoking your previous vote.
ALTERNATIVES TO THE ACQUISITION
National considered several alternatives to the acquisition, including (a)
continuing the operations of each of the programs under their respective
separate business plans, (b) liquidation of each of the programs either directly
or in the context of a bankruptcy, and (c) a bankruptcy reorganization of the
programs. It concluded that none of these alternatives would be as beneficial
to the investors as the acquisition. See "Background and Reasons for the
Acquisition -- Alternatives to the Acquisition" at page __.
FAIRNESS
From a financial point of view, the company and National believe the terms
of the acquisition are fair as a whole and to the investors in each of the
programs. We have based our determination on many factors, including:
- the shares are a better quality form of investment;
- the relative exchange values offered to investors for their assets;
- the shares in the company to be held by principals, employees, and
consultants of National, the programs or the company upon completion of the
acquisition;
6
<PAGE>
- the opportunity for each of you to vote for or against the
acquisition;
- the valuation of the real estate assets of each of the programs by the
independent appraisers; and
- the Fairness Opinion rendered by the independent valuation firm. See
"Background and Reasons for the Acquisition" at page __.
National reviewed the value you will receive in connection with the
acquisition and compared it with what you might receive under the alternatives
to acquisition. Despite the adjustments to appraised value to arrive at
exchange values, National concluded that the likely market value of the shares
of the company would be higher in the long run than the value you would have
received if any of the alternatives to the acquisition had been implemented.
See "Background and Reasons for the Acquisition -- Recommendation of National
and Fairness Determination" at page __. Based on this comparison, National
concluded that the acquisition is financially fair.
FAIRNESS OPINION
National hired an independent valuation firm to review the fairness of the
acquisition. That firm's opinion (the "Fairness Opinion") concludes that the
allocation of the shares in the transaction (which includes allocation of shares
to the programs and principals, employees and consultants of National and the
company) is financially fair to you. See "Appraisals and Fairness Opinion --
Fairness Opinion" at page __.
NATIONAL'S RECOMMENDATION
While National and the principals of National will receive benefits from
the acquisition, NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON
THE ACQUISITION. See "Interests of Certain Persons in the Acquisition and
Conflicts of Interest" at page __, "Background and Reasons for the Acquisition"
at page __, and "Appraisals and Fairness Opinion" at page __.
SUMMARY OF BENEFITS OF THE ACQUISITION
YOU MAY HAVE A LIQUID TRADING MARKET FOR YOUR SHARES. After the
acquisition, shares will be listed on the ______________. If a trading market
develops, you will have the opportunity to liquidate all or some of those shares
at your discretion.
7
<PAGE>
YOU MAY HAVE MORE CONTROL OF THE TIMING OF LIQUIDATION OF YOUR INVESTMENT.
You can control when you choose to take profits or losses. Under the current
programs, you have been subject to a majority vote to sell or retain the
property, regardless of whether or not the timing and decision were favorable to
you.
YOU WILL OWN SHARES IN A POOL OF ASSETS WHOSE DIVERSITY CAN REDUCE RISK.
Your investment will be spread over an initial asset base of four different real
estate projects (the two Yosemite/Ahwahnee programs will be one project after
the acquisition).
YOU WILL BENEFIT FROM EXPERIENCED PROPERTY MANAGEMENT. We have hired and
intend to hire additional key real estate management professionals who are
experienced in real estate development, operation and construction.
YOU WILL NO LONGER BE LIABLE FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
acquisition, meaning your exposure to mandatory assessments will cease.
YOUR LIABILITY WILL BE LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the programs, you are not
currently effectively insulated from personal liability based on the operation
of those assets. As shareholders of a corporation, you will be.
SUMMARY OF BUSINESS PLAN
Our objective is to preserve as much of the owners' invested dollars as is
possible and improve the value and performance of the properties currently held
by the programs in the following ways:
- By developing selected properties for their highest and best use;
- By increasing the current cash flow from the operating assets;
- By maximizing the potential profit margins of for-sale products;
- By raising funds for the company's operations through a strategic
combination of sales of units to existing investors and the sale of selected
real estate assets acquired from the programs to outside buyers; and
- By acquiring other projects or assets which are consistent with our
objectives and business plan.
8
<PAGE>
RESIDENTIAL DEVELOPMENTS. We will continue to build homes for sale on the
Oceanside Property and seek buyers for the remaining lots. By using the funds
available from the sale of the units or from the sale of certain assets of the
programs, we expect to start construction of single-family lots of the
Sacramento/Delta Greens project. Cash flow from sales of single-family homes
and lots would continue our growth and build value.
RESORT DEVELOPMENTS. We will enhance the value of Yosemite/Ahwahnee by
continuing to develop the project. While the project itself presently has
little cash available for capital improvements, we believe the highest potential
rewards lie in this segment of the company's asset base. By using the funds
available from the sale of the units or from the sale of certain assets of other
programs, we will aggressively seek timeshare approvals at Yosemite/Ahwahnee and
will continue to sell memberships and build recreational vehicle sites. We will
also process the necessary approvals for the Mori Point asset which we believe
has the potential to attract industry-oriented joint venture partners or
purchasers. We may also target additional resort or over-night-stay projects
for potential acquisition or joint venture. See "Business and Properties --
Properties" at page __ and "-- Consolidation of the Programs" at page __ for
further details regarding all of the properties.
MANAGEMENT. The Board of Directors will oversee the management of the
company. After the acquisition all directors will be elected by the
shareholders. The Board will consist of six directors, including three
directors who are independent of the company. For background on management of
the company and their compensation, see "Management Following the Acquisition"
at page __.
COMPARISON OF THE PROGRAMS AND THE COMPANY
The summary information below highlights a number of significant
differences between the programs and the company. See "Comparison of the
Programs and the Company" at page __.
FORM OF ORGANIZATION. The programs began as tenancy-in-common investments
in Trudy Pat loans. The company is a corporation which offers to investors
certain benefits such as limited liability and professional management which may
not be present to the same degree in the present ownership structure.
LENGTH OF INVESTMENT. When you invested in the Trudy Pat loan(s), you
expected to receive repayment of your loan in two to four years. After the
acquisition, the company will have no time limit to dispose of any assets, and
you will not receive net asset sales proceeds. Instead, sales proceeds will be
reinvested in the company. Your publicly traded shares will replace the process
of liquidating program assets as your way to receive a return of your capital
and any profits.
9
<PAGE>
DIVERSIFICATION. Each of the programs has real estate assets in a single
location. By contrast, the company will hold the real estate assets of all five
programs and will be more diversified both geographically and by type of
property. By owning shares, you will be invested in an on-going, diversified,
real estate operating company.
ADDITIONAL EQUITY. None of the programs are currently authorized to raise
additional funds, except through mandatory assessments. The company will have
more flexibility to raise capital to finance its business. We may issue
additional stock to raise money or to make new real estate investments. These
are traditional methods of acquiring capital, but this would dilute your
interests. Such stock could have priority in dividends distributions and
liquidation proceeds.
BORROWING POLICIES. Borrowing is difficult under the present program
structure. The company will be able to borrow to improve or expand its asset
base. However, borrowing may also increase the company's risk from leveraged
investments.
COMPENSATION, FEES AND DISTRIBUTIONS. National will stop earning servicing
fees under the program agreements in the aggregate amount of approximately
$650,000 per year. As of June 30, 1997, the Programs have accrued fees and
advances due to National and its principals of $2,024,621. If the acquisition
is approved, National and its principals will cancel $946,111 of these accrued
fees and advances that it has made on behalf of program owners. National and
its principals will continue to be owed $1,078,510 which will be assumed and
paid in the general course of the company's business. In addition, National
also has represented that it was owed fees and made advances to the programs
totalling $2,191,614 which it previously forgave prior to 1994. Since these
fees and advances were incurred and forgiven prior to 1994, they have not been
accrued on the historical balance sheets of the programs presented in this
prospectus. National's principals will own interests in the company and will
also receive salaries as officers of the company. National, itself, will
receive shares in exchange for its interests held as a "Trudy Pat" investor in
each of the programs in the same manner and at the same cost as all other "Trudy
Pat" investors.
MANAGEMENT CONTROL AND RESPONSIBILITIES. Currently, National serves as
your servicing agent. Under its contract, it cannot be removed except by a
majority vote by investors in a particular program, which is generally an
extraordinary event. You will have greater control over the management of the
company than you had over the programs. You will be able to vote for certain
members of your Board of Directors every year. In the beginning,
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<PAGE>
principals and affiliates of National will control a maximum of 19.84% of the
voting shares (15.82% if all units are sold).
MANAGEMENT LIABILITY AND INDEMNIFICATION. The directors and officers of
the company will be entitled to potentially stronger indemnification from the
company for their actions than is presently the case for National in the program
agreements.
VOTING RIGHTS. Presently, you only have voting rights in the particular
program in which you are an investor. As a shareholder, you will have the right
to vote for directors and other matters according to applicable law or the
company's charter documents. When voting as a shareholder, your vote will
affect all of the businesses and properties owned by the company, which will
include the assets owned by all five programs, whereas your vote as an investor
in the programs affects only the assets owned by the program in which you are
currently invested.
LIQUIDITY. The tenancy-in-common interests in the programs constitute
illiquid investments which are very difficult to sell. The shares are expected
to be listed on the _____ and be freely tradable.
TAX CONSEQUENCES OF ACQUISITION
The company intends to treat the acquisition as a tax-free transaction.
However, due to uncertainties about the individual investors' plans for holding
the stock, no assurance can be given that the acquisition will not create a
taxable transaction for investors. If the acquisition is treated as taxable,
National and the company believe most owners will have tax losses to report.
See "Federal Income Tax Consequences" at page __.
CONFLICTS OF INTEREST RELATED TO THE ACQUISITION
National and the company will be subject to conflicts of interest relating
to the acquisition and the on-going operation of the properties. These include
- the amount of $1,078,510 which will remain owing to National and its
principals after the acquisition;
- principals, consultants and employees of National, the programs and
the company will enjoy certain benefits if the acquisition is completed;
- you did not have independent advisers representing you in structuring
the acquisition;
- employment agreements for the officers of the company were not
negotiated at arm's-length; and
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<PAGE>
- some persons will be employees of the company and National and will
not be able to devote 100% of their time to the company.
For a complete discussion of these risks, see "Interests of Certain Persons
in the Acquisition and Conflicts of Interest" at page __.
CONDITIONS TO ACQUISITION
The principal conditions to the acquisition are
- approval of the acquisition by all of the programs through a majority
vote of the investors in each,
- receipt of a final Fairness Opinion from the independent valuator
regarding the actual allocation of shares,
- approval of the shares for listing on the _______________, and
- the issuance of policies of title insurance to the company.
CONSEQUENCES IF ACQUISITION NOT APPROVED
National will ask investors to approve the sale of the assets of that
program for the best price possible and return any net proceeds of the sale
to the program's investors. National does not believe that a sale of any
program's assets will result in an acceptable recovery of money for the
investors at this time.
DELIVERY OF STOCK CERTIFICATES
The company will mail your shares to you shortly after the acquisition
becomes effective.
THE OFFERING/USE OF PROCEEDS
The company is offering up to 500,000 units at $10 per unit to be issued
exclusively to existing program investors. The sales will be completed if the
acquisition is approved. Each unit consists of one share and a warrant. For a
period of two years, each warrant entitles the holder to purchase two shares of
common stock at a per share purchase price equal to 80% of the closing price for
the company's common stock on the ______ on the trading date before the
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<PAGE>
warrant exercise date. NASD broker-dealers will receive an aggregate of $0.70
per unit commission from the company for any units sold with their help.
The company will use funds raised by the sale of units to pay delinquent
property taxes, expenses of the acquisition, and for working capital, as
detailed in its business plan. Funds raised on exercise of warrants will be
used for working capital.
SUMMARY FINANCIAL INFORMATION
We are providing the following summary financial information to aid you in
your analysis of the financial aspects of the acquisition. This information was
derived from our pro forma and historical financial statements (and related
notes) found later in this prospectus and should be read in conjunction with
that information. See "Financial Statements" beginning on page F-1. The
historical financial statements for the full year were audited; those for
interim periods and those showing pro forma information were not audited. The
unaudited financial information reflects all adjustments (consisting only of
normal recurring accruals) which are considered necessary to present fairly the
financial information for the periods. The results of any interim period are
not necessarily indicative of results for a full year, and historical and pro
forma results do not predict future results.
<TABLE>
<CAPTION>
COMPANY PRO FORMA THE ACQUISITION HISTORICAL
-------------------------------------------------------------- ----------------------------------------
Six Months
Six Months Ended Year Ended Ended Years Ended
June 30, 1997 December 31, 1996 June 30 December 31
---------------- -------------------------------- ------------ ---------------------
The Acquisition The Acquisition
and the Offering The Acquisition and the Offering The Acquisition 1997 1996 1995
---------------- --------------- ---------------- --------------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 4,084,437 $ 4,084,437 $ 6,675,718 $ 6,675,718 $ 4,084,437 $ 6,675,718 $ 6,333,143
Cost of sales 3,069,580 3,069,580 5,327,856 5,327,856 3,069,580 5,327,856 5,346,735
------------ ------------ ------------ ------------ ------------ ----------- -----------
Gross profit 1,014,857 1,014,857 1,347,862 1,347,862 1,014,857 1,347,862 986,408
Expenses:
Selling, general and
administrative 2,280,561 2,280,561 4,017,227 4,017,227 2,105,561 3,667,227 2,033,496
Land write-down 590,172 590,172 845,000 845,000 590,172 845,000 -
Management fees 0 0 0 0 325,000 650,000 650,000
Acquisition expenses 367,000 567,000 575,000 775,000 - - -
------------ ------------ ------------ ------------ ------------ ----------- -----------
Total expenses 3,237,733 3,437,733 5,437,227 5,637,227 $ 3,020,733$ 5,162,227 $ 2,683,496
Net interest income 29,525 29,525 63,518 63,518 29,525 63,518 135,875
------------ ------------ ------------ ------------ ------------ ----------- -----------
Net loss (2,193,351) (2,393,351) (4,025,847) (4,225,847) $ (1,976,351) $(3,750,847) $(1,561,213)
------------ ------------ ------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ------------ ------------ ----------- -----------
Net loss per share (0.89) (1.22) (1.63) (2.15) N/A N/A N/A
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Average number of
shares outstanding 2,467,588 1,967,588 2,467,588 1,967,588 N/A N/A N/A
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Balance Sheet Data:
Cash and cash
equivalents 5,768,366 1,240,366 N/A N/A 1,240,366 863,373 N/A
Total real estate 19,023,727 19,023,727 N/A N/A 19,023,727 19,283,472 N/A
Total assets 28,758,932 24,230,932 N/A N/A 24,308,932 25,535,082 N/A
Total debt 387,512 387,512 N/A N/A 387,512 424,767 N/A
Total liabilities 3,627,764 3,827,764 N/A N/A 4,206,875 3,952,822 N/A
Stockholders'/
owners' equity 25,131,168 20,403,168 N/A N/A 20,102,057 21,582,260 N/A
Other Data:
Cash provided by
operating activities N/A N/A N/A N/A 12,377 (616,257) 652,473
Cash used in
investing activities N/A N/A N/A N/A (94,276) (186,211) (436,545)
Cash provided by
financing
activities N/A N/A N/A N/A 458,893 642,815 115,311
</TABLE>
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<PAGE>
RISK FACTORS
THE ACQUISITION INVOLVES CERTAIN RISKS. YOU COULD LOSE ALL, OR A
SIGNIFICANT AMOUNT OF THE REMAINING VALUE, OF YOUR INVESTMENT IF THE COMPANY IS
NOT SUCCESSFUL, IF THE STOCK MARKET DECLINES OR IF REAL ESTATE VALUES IN
CALIFORNIA DECLINE FURTHER. YOU SHOULD READ THIS ENTIRE PROSPECTUS, INCLUDING
ANY SUPPLEMENTS. BEFORE COMPLETING THE ACCOMPANYING BALLOT, YOU SHOULD ALSO
CAREFULLY CONSIDER THE FOLLOWING RISKS, WHICH APPLY TO ALL PROGRAMS AND THEIR
INVESTORS.
IN THIS PROSPECTUS AND ELSEWHERE, NATIONAL AND THE COMPANY OR THEIR
REPRESENTATIVES HAVE MADE FORWARD-LOOKING STATEMENTS REGARDING VARIOUS BUSINESS
PLANS, TYPES OF INVESTMENTS TO BE MADE AND HYPOTHETICAL RESULTS OF SALES OF
PROGRAM PROPERTIES. THE STATEMENTS ARE QUALIFIED BY THE "RISK FACTORS"
DISCUSSED BELOW. THESE FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE DISCUSSED. YOU SHOULD NOT RELY ON THE COMPANY'S STATEMENTS OR PLANS
AS A PREDICTION OF ACTUAL RESULTS.
RISKS OF THE ACQUISITION
YOU WILL HAVE NO DISSENTERS' RIGHTS IN CONNECTION WITH THE ACQUISITION.
If you vote against the acquisition, and it is approved, you will not be able
to object to the acquisition and receive the appraised value of your
tenancy-in-common interest in your program's assets. You will have no choice
other than to accept shares for your interests. See "Voting Procedures -- No
Right of Appraisal" at page __.
THE NATURE OF YOUR INVESTMENT WILL CHANGE. If the acquisition is
completed, your investment will no longer be a tenancy-in-common interest in a
particular program's property. Instead, you will hold shares in an on-going,
publicly-traded real estate company whose assets may be changed by the company's
management without your approval. You will be able to liquidate your investment
only by selling your shares on the _____________, and only if a trading market
exists, or in private transactions. If the market value of the shares does not
reflect the fair market value of the company's assets, you may not realize the
full value of your investment. You will not receive liquidation proceeds as
individual program properties are sold. As an investor in the larger company,
rather than any individual program, you will have less relative voting power.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. The shares have never been
sold in a public securities market. If the shares trade, the trading price may
be less than the $10 issuance price or the book value of the company's assets.
The market price of the shares may be volatile after the acquisition if
investors decide to sell a large number of the shares shortly after the
acquisition.
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<PAGE>
THERE MAY BE CONFLICTS OF INTEREST IN NATIONAL'S STRUCTURING THE
ACQUISITION. Shares and compensation to be held or received after the
acquisition by National, and by principals, employees and consultants of
National, the programs and the company have been determined by National and its
principals. For additional information concerning the potential conflicts
between National, its principals and the investors and the procedures adopted to
mitigate the impact of these conflicts on the acquisition, see "Interests of
Certain Persons in the Acquisition and Conflicts of Interest" at page __,
"Background and Reasons for the Acquisition - Recommendation of National and
Fairness Determination" at page __, and "--Terms of the Acquisition" at page __.
YOU DO NOT HAVE INDEPENDENT ADVISORS REPRESENTING YOU IN STRUCTURING THIS
TRANSACTION. Therefore, the terms of the acquisition may be less favorable to
you and more favorable to National and its principals. If the acquisition had
been negotiated by independent parties at arm's length, the principals of
National and the company might have been given fewer shares. Additionally, the
allocation of shares might have been more favorable to one program than another.
THERE MAY BE DIFFERENCES BETWEEN EXCHANGE VALUES AND REALIZABLE VALUES.
The exchange value of the programs may not be what the properties would sell for
in a cash sale transaction. Appraisals reflect conditions in the second quarter
of 1997, and do not reflect subsequent events. Exchange values reflect
adjustments to appraised values described in "Background and Reasons for the
Acquisition - Determination of Acquisition Prices" at page __.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the acquisition,
the properties will not be subject to any liens other than possible mechanics'
liens and an aggregate of approximately $920,000 in property taxes owed as of
June 30, 1997. However, the Board of Directors could allow the company to
borrow using the company's real estate assets as security. If cash flow cannot
cover debt repayment, the company could lose those assets to creditors. See
"Policies with Respect to Certain Activities - Financing Policies" at page __.
THE BOARD OF DIRECTORS WILL HAVE THE ABILITY TO CHANGE INVESTMENT,
FINANCING AND OTHER POLICIES OF THE COMPANY WITHOUT SHAREHOLDER CONSENT. The
Board will determine major acquisition, financing, debt and distribution
policies of the company. The Board may amend or revise these policies as well
as the business plan without shareholder approval. You will have no direct
control over these changes. See "Business and Properties" at page __ and
"Policies with Respect to Certain Activities" at page __.
DISTRIBUTIONS WILL BE UNPREDICTABLE. After the acquisition, you will not
receive any regular distributions. Instead, in the early years, the Board
intends to accumulate cash for working capital or other uses.
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<PAGE>
REAL ESTATE RISKS
ALL OF THESE FACTORS CAN AFFECT OUR REVENUES, PROFITS AND DIVIDEND
DISTRIBUTIONS, IF ANY, AND THE VALUE OF YOUR INVESTMENT.
THERE ARE SIGNIFICANT DELINQUENT PROPERTY TAXES. If delinquent property
taxes are not timely paid, the company could lose one or more of the properties
to tax sales. Each of the programs' properties is subject to the following
delinquent property taxes as of June 30, 1997: Sacramento/Delta Greens -
approximately $45,000; Oceanside - approximately $10,000; Yosemite/Ahwahnee
(combined) - approximately $596,000; and Mori Point - approximately $269,000.
Annual payments required for all the properties total approximately $386,700.
In the case of Sacramento/Delta Greens and Mori Point, National has entered into
five year payment plans with the applicable taxing authorities. It plans to do
the same with Yosemite/Ahwahnee shortly.
PERMITS TO DEVELOP CERTAIN PROPERTIES HAVE LAPSED OR HAVE NOT YET BEEN
OBTAINED. If needed permits for development are not obtained or reissued, the
business plan for the company will have to be revised or abandoned.
Additionally, the presence of two endangered species on the Mori Point property
increases the risks that necessary approvals may not be received if an
acceptable habitat mitigation plan cannot be developed. The permitting process
with the California Coastal Commission and other governmental agencies is
expensive and time consuming.
COMPLIANCE WITH CONDITIONS IN EXISTING PERMITS AND APPROVALS MAY REQUIRE
CHANGES TO DEVELOPMENT PLANS. For example, the tentative tract map for the
Sacramento/Delta Greens property requires that studies must be conducted to
identify any endangered species' habitat which may exist on the property. If
any are identified, changes to the tentative development plans will have to be
made and approved that will reduce or eliminate any damage to the habitat.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO FURTHER THE BUSINESS PLAN. Unless
funds from sale of the units or from sale of certain assets of the programs
become available, the company will not be able to proceed with its business plan
and properties might be lost to tax sales before sales to third parties can be
arranged. The company will also need financing from other sources to complete
its plan. Financing sources are not predictable and interest rates or other
costs of financing may be prohibitive. Other than a construction loan source
for the Oceanside project, neither the projects nor the company have received
any commitment from other sources.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE OR
SACRAMENTO/DELTA GREENS PROPERTIES MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL
CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Changing market conditions may
16
<PAGE>
increase the difficulty of selling the lots. If the company chooses to build
homes on the lots, delays in construction, the lack of reasonably priced
construction or mortgage financing, and the general California economy could
lengthen the holding period for the lots.
FEDERAL, STATE AND LOCAL LAW MAY REQUIRE EXPENSIVE HAZARDOUS SUBSTANCE
CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC IMPROVEMENTS. Although we have
not conducted any environmental audits on the properties, we are not aware of
any environmental liability. Local governments have required residential
developers to pay assessments for streets, schools and parks which increase the
cost of development. Increased costs can have a negative affect on the
company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as earthquakes
and floods may be uninsurable or too expensive to insure. The company does not
plan to carry earthquake or flood insurance. If an uninsured loss occurs, the
company would lose capital as well as revenues, and would still owe other debts
related to the property affected, if any.
THERE MAY BE SIGNIFICANT RISKS IN THE DEVELOPMENT OF ADDITIONAL PROJECTS.
We may develop additional projects in the future, although we have no immediate
plans to do so. See "Business and Properties - Investments in Real Estate or
Interests in Real Estate" at page __. Real estate development involves more
risks than in the ownership and operation of established projects. Financing
may not be available on favorable terms for development projects; construction
may not be completed on schedule or budget; long-term financing may not be
available on completion of construction; and sites may not be sold on profitable
terms.
THERE ARE CERTAIN RISKS ASSOCIATED WITH THE CALIFORNIA MARKET. We
presently conduct all of our business in California. While economic conditions
are improving in California, our markets have been affected by substantial
fluctuations in local economic conditions, interest rates, inflation, employment
levels and regulations. California has also experienced draught conditions,
resulting in water conservation measures and rationing. In the past, these
conditions have caused local governments to restrict residential development.
California's climate and geology present risks of natural disaster such as
earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE OWED
[$1,078,510] BY THE COMPANY. This represents accrued fees and expenses from the
programs which National has not cancelled. This amount is due and payable and
the company intends to start paying it in the normal course of business as funds
are available.
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<PAGE>
RISKS AFFECTING OPERATION OF A GOLF COURSE
THERE ARE INDUSTRY OPERATING RISKS, INCLUDING INCREASED COMPETITION,
SEASONALITY, WEATHER AND COURSE CONDITIONS. While no new golf courses have
opened near the Ahwahnee Golf Course, new courses could increase the competition
and reduce the rounds played. Seasonal variations may require the company to
supplement revenue at the golf course to meet operating expenses. Weather can
negatively affect the turf grass and reduce the number of rounds played.
Inflationary costs may not be offset by increased dues. Also, golf's success
depends on discretionary spending by consumers, which may be vulnerable to
regional and economic conditions, as well as to pleasure or destination travel
preferences by visitors and tourists.
RISKS RELATING TO RESIDENTIAL DEVELOPMENT
THE COMPANY MAY BE AFFECTED BY MARKET RISKS AND COMPETITION. The market
for residential real estate is cyclical and the residential lot development
industry is highly competitive. If the demand for new lots does not keep pace
with competitive supply, our properties may be sold at a loss. The location of
the company's lots, the presence of other competition, customer acceptance and
pricing are all factors affecting success. Competitors may have better
financial, managerial and other resources, affecting our ability to successfully
compete.
RESORT DESTINATION RISKS
THERE ARE RISKS ASSOCIATED WITH RESORT DEVELOPMENT. In addition to normal
real estate risks, financing is hard to obtain, and the lodging industry can be
unpredictable, seasonal and very competitive. Without additional financing or
capital, the company will not be able to develop its resort projects as part of
its growth strategy. Economic conditions, changes in travel patterns, extreme
weather conditions, labor and other variable costs can all affect revenues and
profits. For example, Spring through Fall at the Yosemite/Ahwahnee property are
the periods of highest occupancy. Seasonality can be expected to cause
quarterly fluctuations in the company's revenues. In the resort and
hotel/conference center property at Mori Point, we may be competing against
well-known chains and extended-stay inns.
SPECIFIC RISKS RELATING TO TIMESHARE
- - NEGATIVE PRESS SURROUNDING THE REMARKETING OF TIMESHARES MIGHT NEGATIVELY
IMPACT SALES AND OPERATIONS.
- - MARKETING COSTS ARE HIGH RELATIVE TO SELLING PRICE WHICH CAN REDUCE OR
ELIMINATE PROFITS FROM THE SALE OF TIMESHARE INTERESTS.
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<PAGE>
- - THERE ARE RELATIVELY MORE DEFAULTS AMONG TIMESHARE OWNERS WHEN THEY BORROW
TO BUY TIMESHARES COMPARED TO HOMEBUYERS WHO BORROW TO BUY A HOME. IF A BUYER
DEFAULTS, WE WOULD INCUR COSTS IN REMARKETING THE TIMESHARE.
- - WE DO NOT HAVE AN EXCHANGE NETWORK TO ENHANCE MARKETING APPEAL. IF WE
CANNOT OFFER SUCH A NETWORK IN THE FUTURE, WE MAY BE AT A COMPETITIVE
DISADVANTAGE.
- - THE TIMESHARE INDUSTRY IS EXTREMELY COMPETITIVE.
- - WE MAY NOT BE ABLE TO SECURE DEVELOPMENT FINANCING ON ACCEPTABLE TERMS.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the charter documents may restrict changes in control
of the company's management. These provisions may make it more difficult or
expensive for another party to acquire and exercise control of the company or to
change its management, even if that change would be beneficial to you. Some of
these provisions include:
1. THE BOARD'S ABILITY TO ISSUE PREFERRED SHARES WHICH COULD AFFECT YOUR
VOTING POWER AND TO ISSUE ADDITIONAL SHARES TO DISCOURAGE OR IMPEDE A MERGER OR
OTHER TRANSACTION THAT MAY BE IN YOUR BEST OR FINANCIAL INTEREST. See
"Description of Shares" at page __ and "Future Sales of Stock" at page __.
2. THE BOARD IS DIVIDED INTO THREE CLASSES SERVING STAGGERED THREE YEAR
TERMS. You may not be able to efficiently change control of the company if you
believe that change would be in your best interests. See "Comparisons of
Programs and Company - Anti-Takeover Provisions" at page __.
3. THERE ARE RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS WITH
INTERESTED PARTIES. There are restrictions on what interested parties can do
for three years, without the approval of the Board of Directors. See
"Comparison of Programs and Company - Restrictions on Related Party Transactions
and Business Combinations" at page __.
4. THE DELAWARE LAW, AS WELL AS THE CHARTER DOCUMENTS, LIMIT THE
LIABILITY OF DIRECTORS AND OFFICERS TO SHAREHOLDERS. See "Fiduciary
Responsibility and Indemnification - Limitation on Liability of Directors and
Officers of the Company" at page __.
5. CHANGES TO THE COMPANY'S CERTIFICATE OF INCORPORATION WHICH COVER
ANTI-TAKEOVER PROVISIONS REQUIRE THE APPROVAL OF TWO-THIRDS OF THE COMPANY'S
VOTING STOCK. See "Comparisons of the Programs and the Company - Anti-Takeover
Provisions" at page __.
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CAPITALIZED TERMS USED THROUGHOUT THE REST OF THIS PROSPECTUS AND IN THE
ACCOMPANYING SUPPLEMENT ARE DEFINED IN THE GLOSSARY AT THE END OF THE
PROSPECTUS, JUST BEFORE THE FINANCIAL STATEMENTS.
BACKGROUND AND REASONS FOR THE ACQUISITION
GENERAL
National is a California corporation that was formed in 1986. National is
a licensed real estate broker in the State of California. Pursuant to a series
of permits issued by the California Department of Corporations, National offered
fractionalized interests in loans secured by deeds of trusts to investors who
satisfied the suitability standards set forth in the applicable offering
materials and who could invest a minimum of $2,000. The fractionalized
interests were commonly referred to as trust deed participation or "Trudy Pat"
investments.
From 1988 through 1993, National arranged a number of loans for various
builders and land developers. In return, these borrowers offered promissory
notes and the security of a first deed of trust on their real estate project(s)
as collateral for a loan, normally at 50% or less loan-to-value ratio (the ratio
of the cumulative amount of the notes divided by the value of the property as
appraised by an independent qualified real estate appraiser) for unimproved
property and up to 85% loan-to-value of the completed property (determined by
independent appraisers) for property under construction. The notes generally
were short-term (two years), often with extensions for one or two years at the
option of the borrower and provided interest to investors which was
significantly higher than yields of other types of investments available at the
time. Pursuant to a servicing agreement executed by each Investor, National was
to receive a servicing fee of one-twelfth of one percent of the note amount per
month.
Each Trudy Pat offering was independent of another and extensive disclosure
documents were provided to each Investor. The disclosure documents provided
investors with specific details of the investment opportunity including: the
nature of the investment as a tenancy-in-common interest, a description of the
property used as security for the loan, type of property, value as appraised by
an independent qualified appraiser, terms of the loan, loan amount,
loan-to-value ratio, interest rate, borrower resume and experience, borrower
financial statements, other appraisal information, as well as a full disclosure
of the risks involved with the investment.
Trudy Pat interests were sold exclusively through participating NASD member
broker-dealers. At the time of purchase through their broker, all Investors
executed documents which included an acknowledgment of receipt of the offering
circular, a servicing agreement and a tenancy-in-common agreement, as well as
representations of their suitability as participants according to the standards
set forth in the offering documents and an acknowledgment, confirmed by their
broker, of their understanding of the pertinent facts relating to the liquidity
and marketability of their interests. The servicing agreement provided for
National to collect
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payments from the borrower on behalf of the Investors and distribute the
proceeds of the collection net of National's servicing fees. The servicing
agreements also authorized National to take various remedial actions on behalf
of Investors in the event of a borrower default, subject to broad discretionary
powers and authorities. The tenancy-in-common agreement explained the
relationship among the Investors and provided, among other things, that
Investors would be bound by certain decisions made by holders of a majority of
the interests.
In 1989, National completed the funding of a real estate loan for the
Sacramento/Delta Greens Program in an aggregate amount of $5,000,000 by selling
undivided tenant-in-common interests in such loan to 332 Investors. National
completed the funding of similar real estate loans for the Yosemite/Ahwahnee I
Program (1989) in an aggregate amount of $6,500,000 with 426 Investors; for the
Mori Point Program (1990) in an aggregate amount of $10,000,000 with 486
Investors; for the Yosemite/Ahwahnee II Program (1992) in an aggregate amount of
$13,500,000 with 837 Investors; and for the Oceanside Program (1993) in an
aggregate amount of $30,000,000 with 1,755 Investors. All of such offerings
were sold pursuant to permits issued by the California Department of
Corporations and interests were sold only to persons who were residents of the
State of California.
Each Program has served as a separate investment vehicle for Investors.
Underwriting of a loan was based on an appraisal by an independent real estate
appraiser. In the case of each of the Programs, the borrowers have defaulted on
their loans and National has obtained title to the real property securing the
loans as the agent of and for the benefit of the Investors in each of the
Programs. The interests which each of the Investors held in the real estate
loans have been converted through the foreclosure process into tenant-in-common
interests in the underlying real estate that formerly secured the loans. (For
purposes of this discussion, the term "foreclosure" includes, but is not limited
to, taking title to real estate constituting security for the applicable loans
through exercise of a power of sale under a deed of trust or through accepting a
deed from the applicable borrower.)
In the case of each of the Programs, current appraisals indicate that the
value of the Properties is significantly lower than the unpaid principal and
interest on the loans due principally to the deteriorating market conditions for
real estate which occurred throughout California. Despite the limited
additional funding available from Investors or otherwise, National has attempted
to maximize the value of the real estate assets while seeking ways to convert
them to distributable cash for Investors. See "Management of Programs Since
Foreclosure."
MANAGEMENT OF THE PROGRAMS SINCE FORECLOSURE
SACRAMENTO/DELTA GREENS PROGRAM. As the agent of and on behalf of the
Sacramento/Delta Greens Program Investors, National took title to the Property
of the Sacramento/Delta Greens (formerly "North Shores") Program in March 1993.
The Property is located in Sacramento, California, and is held for the benefit
of the Sacramento/Delta Greens Investors by National Investors Land Holding
Trust IV. Subsequent to the foreclosure, on behalf of the Sacramento/Delta
Greens Investors, National hired consultants and engineers to determine
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<PAGE>
the economic, political and environmental issues surrounding the Property. It
was determined that there was considerable resistance to developing the Property
into any duplex housing and, so, it was redesigned to include over 500 lots to
be developed in multiple phases as a single-family detached, entry-level housing
product and the revised tentative map has been accepted by the City of
Sacramento. Attempts have been made to find joint venture partners to assist in
the financial requirements for processing the final tract map, as well as to
provide capital for infrastructure. However, because of market conditions
through 1996, most builders in the area were attracted to real estate projects
that already had finished lots. In late 1996, National hired a market research
firm whose study demonstrated a positive outlook for the demand for entry-level
homes in the area. The study indicated that the Sacramento market for
single-family residential housing has improved. National is in the process of
obtaining engineering for the final subdivision map for the initial phase of the
project and it is anticipated that, subject to the availability of financing,
the Property will be developed and homes will be constructed in successive
phases.
OCEANSIDE PROGRAM. In November 1993, due to a technical default in the
loan, National succeeded in obtaining the borrower's agreement to grant the
ownership of the Oceanside Properties to Oceanside Development, Inc. ("ODI") on
behalf of the Oceanside Investors. An experienced and reputable homebuilder was
hired and, since 1993, a total of 116 homes in the Encore tract have been built
and sold. An additional 23 lots were recently sold to that homebuilder.
Principal and interest in the aggregate amount of approximately $7,000,000 have
also been returned to Investors. There are an additional 111 lots available on
which homes can be built on the Symphony tract. Another major homebuilder and
potential buyer of the Symphony lots has estimated that the cost to finish the
lots is substantially in excess of cost estimates provided by consultants hired
for the project by National. As a result, a potential sale of those lots to
that builder was recently cancelled. Negotiations will continue with this
potential buyer if possible. If a satisfactory sale of the Symphony tract does
not occur, National believes that the remaining lot inventory of the Program can
be built-out within a two to three year time frame based on current absorption
rates and prices. However, without significant increases in prices and sales
velocity, Investors would not likely receive a full return of their investment
from the completion of the construction and sales of homes on the remaining
lots. Since the original projections by the borrower were based on the
construction of a number of homes which exceeded the number of lots initially
acquired with loan proceeds, the Program has anticipated that more lots would be
acquired so that a sufficient number of homes could be constructed and sold to
provide for an acceptable monetary return to Investors.
YOSEMITE/AHWAHNEE PROGRAMS. Title to the Yosemite/Ahwahnee Programs'
Properties was obtained in September 1995. The properties are located in Madera
County, California, approximately 46 miles northeast of Fresno and 15 miles
south of Yosemite National Park. Title to the 660-acre portion of the project
is held by National Investors Land Holding Trust VIII for the benefit of the
Yosemite/Ahwahnee II Program Investors and title to the 990-acre parcel is held
by National Investors Land Holding Trust IX as the agent of and for the benefit
of the Yosemite/Ahwahnee I Program Investors.
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<PAGE>
Upon completion of funding of the Yosemite/Ahwahnee II loan, the Yosemite/
Ahwahnee I Investors were secured by a first deed of trust on the 660-acre
portion and by a second deed of trust on the 990-acre portion. The
Yosemite/Ahwahnee II Investors were secured by a first deed of trust on the
990-acre portion and a second deed of trust on the 660-acre portion. After the
borrower's default, National foreclosed on the second deeds of trust as the
agent of and on behalf of the Investors in each Program. The first deeds of
trust were left in place to protect the Investors against subsequent creditors.
These will be "extinguished" as a part of the Acquisition.
Since taking over the operation of these Properties, National has operated
them as the agent of and on behalf of the Investors through a corporation known
as Ahwahnee Golf Course and Resort, Inc. Approximately $3,000,000 has been
funded by Investors' assessments in these Programs to provide working capital to
maintain, improve and further develop the project, and to fund the negative cash
flow from operations. National has attempted to obtain conventional financing
for the project without success. It has also explored the possibility of a sale
of the entire project; however, no offers were forthcoming. National has
continued its efforts to enhance the revenue production from the golf course,
club house and restaurant facilities, to market and develop recreation vehicle
sites, and to pursue additional entitlements required to develop the remainder
of the project, potentially as a timeshare facility. The project is expected to
experience negative cash flow until and unless additional recreational vehicle
sites are constructed or until timeshare sales can commence.
MORI POINT PROGRAM. The Mori Point Program Property was foreclosed on in
August 1992 after National, on behalf of the Investors, received relief from the
borrower's bankruptcy stay from the Bankruptcy Court. Title is held by National
Investors Land Holding Trust as the agent of and for the benefit of the
Investors. The Property was originally to be developed into a hotel/conference
center in Pacifica, California, which is approximately 15 miles southwest of San
Francisco on the coast. National has endeavored to negotiate alternative uses
for the Property which would be supported by the community and be more
economically feasible than a hotel/conference center. However, improvements in
economic conditions in the Bay Area have recently revived the potential for and
are encouraging to segments of the hotel industry. Reinstating the specific
plan and tentative tract map that expired under the original borrower's
ownership will require substantial funds in order to conduct the necessary
environmental studies and mitigation for two endangered species, as well as to
complete the required land planning, engineering and preliminary architectural
plans. Such funds are not currently available and would have to come from
additional capital submitted by the Program's Investor group or by an industry
joint venture partner. An offer from a potential joint venture partner was
received in early October 1996, but such offer was rejected by Investors holding
a majority of the interests.
EFFORTS TO DISPOSE OF THE PROPERTIES
SACRAMENTO/DELTA GREENS PROGRAM. Subsequent to foreclosure on the Property
in 1993, the project manager informally presented the Property to several small
and medium sized builders in the Sacramento area. No significant interest was
shown by such builders at that time.
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<PAGE>
However, approximately a year later, a purchase offer was received which was
rejected by the Investors. More recently, during the first half of 1997,
National informally presented the Property to a limited number of large, public
homebuilders. While more interest was shown, again no significant steps were
taken by any of such builders to enter negotiations to acquire the Property.
OCEANSIDE PROGRAM. Immediately after acquiring the Property in 1993 from
the original borrower, ODI hired an experienced and reputable homebuilder to
build and market homes on the Property. A total of 116 homes have been built
and sold in the Encore tract. The remaining 23 lots have been recently sold to
that builder. In the second quarter of 1997, ODI began the process of marketing
the Symphony tract lots on an "as-is" basis. Those efforts resulted in an offer
from another major homebuilder to buy the Symphony tract, subject to due
diligence. A sale escrow was opened but the details of the offer were not
submitted to the Oceanside Investors pending completion of the buyer's due
diligence. A sale at that price would not have yielded an amount sufficient to
return the Investors' capital. After conducting due diligence, the potential
buyer was unwilling to complete the transaction at the negotiated price, so the
escrow was cancelled. The Company will purchase all of the remaining real
estate assets of the Oceanside Program and then attempt to complete a sale of
the Symphony tract, if appropriate.
YOSEMITE/AHWAHNEE I AND II PROGRAMS. The foreclosures took place in
September 1995. At that time, the Programs' Properties also included 47
finished one-to-three-acre estate lots available for sale. Two of those lots
were sold and other listings have been allowed to expire. Although the estate
lots were listed with local brokers, no further offers were forthcoming. After
the foreclosure, National contacted several of the former borrowers' potential
joint venture partners and possible purchasers of the Properties, but no offers
were forthcoming.
MORI POINT PROGRAM. After foreclosing, the Property was listed for sale
with a large commercial brokerage firm to no avail. There have been no recent
efforts to sell the Property.
------------------------
In short, after careful consideration, National has determined that none of
the Properties belonging to the Investors of any of the Programs may be sold in
the current real estate market in their respective present conditions for an
amount sufficient to yield the Investors a satisfactory return of their invested
capital. In addition, National has determined that, in present market
conditions, the most likely way that the Investors in any of the Programs have
of receiving a satisfactory return of their invested capital is to consolidate
the assets of the Programs and use the funds that can be generated from the sale
of units and one or more of the Properties to finance the continued development
and expansion of the others, which National believes can be developed and
operated in such a way as to permit the possibility of a greater return to all
of the Investors in the various Programs. Cash from the sale of some of the
Company's assets may also be utilized to acquire other assets that are suitable
for the Company's plans for growth and increased value.
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<PAGE>
TERMS OF THE ACQUISITION
STRUCTURE OF THE ACQUISITION. If the Acquisition is approved, it will take
the form of a purchase of the Properties and assets of each of the Programs by
the Company from the Investors using the Shares of the Company as consideration
for the purchase. As a part of the Acquisition, remaining "Trudy Pat"
encumbrances on any of the Properties will be released by Investors so that the
Company, through subsidiaries, will own the Properties free and clear of all
mortgage liens.
Each purchase is proposed to be effected pursuant to a purchase agreement
with each Program (acting through National as the agent) and the Company.
Pursuant to the purchase agreements, the Properties will be purchased "as is"
with no warranties, other than title, surviving the closing of the sale. The
Company will receive a deed to each of the Properties and new policies of title
insurance will be included with each transfer.
The transactions described below will have occurred or will take place
simultaneously with, or shortly after, the closing of the Acquisition.
- The Company was formed as a Delaware corporation with family
partnerships of the principals of National (David Lasker and James Orth), along
with certain affiliates, consultants and employees of National and the Company,
as the founders. American Family Communities, Inc. will be formed as a
subsidiary of the Company to oversee all of the Programs' Properties. Also,
Delta Greens Homes, Inc., Oceanside Homes, Inc., Yosemite Woods Family Resort,
Inc., and Mori Point Destinations, Inc. will be formed as second-tier subsidiary
corporations of the Company to hold the Properties of each of the Programs with
the two Yosemite/Ahwahnee Programs being combined into one subsidiary. Upon
completion of the Acquisition, the founders will hold 19.84% of the Company's
outstanding Shares assuming that no units are purchased pursuant to this
Prospectus. See "Appraisals and Fairness Opinion" for a discussion of the
fairness of the transaction.
- The Shares of the Company issued pursuant to the Acquisition, as well
as those sold as part of the units pursuant to this Prospectus, will have been
approved for listing, upon notice of issuance, by the ____________.
- Certificates for the Shares will be mailed to Investors after the
Acquisition is completed.
- Shares and warrants underlying the units purchased pursuant to this
Prospectus will be mailed to the Investors who purchase them and the funds in
the Escrow representing the purchase price of such units will be released to the
Company after the Acquisition is completed.
As a result of the Acquisition, the Investors will cease to own interests
in the Properties of the respective Programs in which they have invested. After
the Acquisition, through subsidiaries, the Company will own all of the
Properties, as well as the business and operations, owned by the Programs prior
to the Acquisition.
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<PAGE>
National may decide not to pursue the Acquisition at any time before it
becomes effective, whether before or after approval by the Investors.
EFFECTIVE TIME. If approved, the Acquisition is expected to be completed
(with title to the real estate being transferred to the applicable subsidiary)
on __________, 1997 (approximately five business days after the planned date for
tabulation of the votes of Investors in each Program (the "Effective Time").
EXCHANGE VALUE AND ALLOCATION OF SHARES
GENERAL. Exchange Values were determined as of September __, 1997, and
have been assigned to each of the Programs solely to establish a consistent
method of allocating Company Shares for purposes of the Acquisition. The
Exchange Values of the Programs do not necessarily reflect the aggregate price
at which Company Shares may be sold, nor are they based solely on the Appraised
Value of the real estate assets of each Program. See "-- Determination of
Exchange Values" and "Risk Factors." The number of Shares to be issued to each
Program upon consummation of the Acquisition will equal the Exchange Value of
the Program divided by $10, an arbitrary amount chosen for the sole purpose of
allocating Shares and which is not intended to imply that such Shares will trade
at a price of $10 per share. As of the date of this Prospectus, National does
not know of any material change in the prospects or financial performance of any
of the Programs which will materially affect the Exchange Value.
No fractional Shares will be issued by the Company in connection with the
Acquisition. Each Investor who would otherwise be entitled to a fractional
Share will receive one Share for each fractional Share of 0.5 or greater. No
Shares will be issued for fractional Shares of less than 0.5.
DETERMINATION OF EXCHANGE VALUES
National has followed and applied a carefully considered method to estimate
the value of the Programs in an "as is" condition based on their present "Trudy
Pat" ownership structure.
The "Trudy Pat" was designed to provide a way for large numbers of
individuals to invest together in notes secured by real property. If a note
went into default, then National, acting in its capacity as servicing agent on
behalf of investors, was empowered to take the necessary steps to foreclose on
the property securing the note. In the case of the Properties, National was
successful in converting defaulted notes into ownership of the Properties for
Investors. While the "Trudy Pat" structure worked well for investors when the
note was performing and through the foreclosure process, certain disadvantages
became evident for investors once they became investors in the Properties. The
main disadvantages are as follows:
1. Although the original notes were designed to provide investors with
positive cash flow in the form of interest income and principal repayment,
ownership of property held for development does not generate cash flow.
Requirements related to the maintenance, management and development of the real
estate often result in negative cash flow to the owners
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<PAGE>
until the time that the real estate is sold. In order to cover the negative
cash flow, investors are each obligated to submit their proportional share of
funds required to protect their interest in the property and to perform the
necessary maintenance and improvements in accordance with their specified
objectives as directed by the majority of investors. Some investors do not meet
those obligations and thereby delay or impair the results.
2. Although some of the funding requirements might be addressed by
introducing outside financing to the projects, the "Trudy Pat" structure is not
conducive to securing outside financing because traditional lenders are
reluctant to make loans where ownership is widely dispersed and management is
unable to make certain decisions without conducting votes. Nearly all title
companies now maintain policies which include restrictions making it very
difficult to obtain title insurance when multiple investors hold beneficial
ownership. All lenders require title insurance as a condition of financing. In
the cases where National has negotiated proposals from non-traditional lenders
to introduce outside financing, investors have found the terms unappealing for
various reasons and have never voted to approve such financing.
3. Investors who originally planned on a short two to four year term, now
own property and hold an investment that does not provide them with the ability
to sell their interests or to otherwise obtain liquidity and which exposes them
to the disadvantages explained above. Thus, the Acquisition by the Company has
many advantages over the "Trudy Pat" structure. See "Benefits of the
Acquisition."
The starting point for determining the Exchange Value was the current "as
is" real estate value of each Property. This value was estimated by independent
appraisers who conducted appraisals on each Property according to industry
standards. Then, the real estate value was adjusted for certain critical
business factors which, in National's and the Company's opinion, are necessary
to arrive at a fair, proper and meaningful Exchange Value for each "Trudy Pat"
Program. Certain business factors are considered "positive," and will cause the
Exchange Value to be adjusted upward from the estimates contained in the
respective real estate appraiser's reports. Likewise, certain factors are
considered "negative," and will cause the Exchange Value to be adjusted downward
from the estimates contained in the respective real estate appraiser's reports.
The following are considered the positive factors:
POTENTIAL LIQUIDITY FACTOR. The Potential Liquidity Factor of a Program is
measured by estimating the amount of cash that the Company believes might be
available through financing of a Program's assets within a six month period
following the Effective Time and dividing that amount by the current real estate
value.
POTENTIAL INVESTOR ASSESSMENT FACTOR. The Potential Investor Assessment
Factor of a Program is determined by estimating the average yearly amount that
National estimates that Investors would be able and willing to invest in the
Program in the form of mandatory assessments, based on prior experience, and
dividing that amount by the current real estate value.
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<PAGE>
QUICK-SALE FACTOR. The Quick-Sale Factor of a Program is determined by
estimating the amount of cash that the Company believes might be available
through a sale of Program assets which could be liquidated within a six month
period following the Effective Time and dividing that amount by the current real
estate value.
The following are considered the negative factors:
CASH REQUIREMENT FACTOR. The Cash Requirement Factor is determined by
estimating the average amount that the Company believes is needed yearly to meet
the average reasonable and prudent financial needs of the Program and dividing
that amount by the current real estate value.
INVESTOR ASSESSMENT RESISTANCE FACTOR. The Investor Assessment Resistance
Factor is determined by estimating the difference between the average amount
that the Company believes is needed yearly to meet the average reasonable and
prudent financial needs of the Program and the average amount that National
believes that Investors would be able and willing to invest in the Program in
the form of mandatory assessments, based on prior experience (the numerator of
the Potential Assessment Resistance Factor described above). This amount is
then divided by the numerator of the Potential Investment Assessment Factor.
TERM TO MAXIMUM/FULL REPAYMENT FACTOR. The Term to Maximum/Full Repayment
Factor is determined by the following chart:
Term Factor
------ ------
0-6 months 0%
7-12 months 10%
13-18 months 20%
19-24 months 30%
25-30 months 40%
31-36 months 50%
and increasing 10% for every
additional six month period or part
thereof up to 100%.
The importance of each factor is unique. Therefore, each factor has been
weighted as a percentage in determining the Exchange Value. National and the
Company determined that a very important factor should have a weight of 70% to
100%, a moderately important factor should have a weight of 40% to 60%, and a
less important factor should have a weight of ten percent to 30%.
These weighted percentages were used to arrive at the Exchange Value
through the adjustment to the appraised real estate value by multiplying the
factor by the weight. The factors described above have been assigned the
following weights:
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POTENTIAL LIQUIDITY FACTOR. Although the potential for financing a
Program's Property was considered to be very important, Investors have indicated
an unwillingness to assume the risks of borrowing money using the Property as
security. Therefore, this factor has been assigned a relatively low weight of
20%.
POTENTIAL INVESTOR ASSESSMENT FACTOR. This factor is considered to be
moderately important because the willingness of Investors to support their
Program with payment of assessments has been determined to have a positive
result on the disposition of the Property. This factor has been assigned a
weight of 50%.
QUICK SALE FACTOR. A quick sale of a Property can result in cash
distributions to Investors. Often, the quick sale price is just a fraction of
the fair market value of a Property. This was not considered to be a
relatively important factor due to the fact that it does not fall within the
Investors' objectives for the Programs based on the initial documentation,
follow-up questionnaires and surveys and many conversations with Investors.
Investors in all of the Programs have generally indicated an unwillingness to
accept a quick sale at a greatly discounted price, and therefore it has been
assigned a weight of 10%.
CASH REQUIREMENT FACTOR. This factor is considered to be moderately
important because the cash requirements must be met if a Property is to be
disposed of successfully. It was determined that this factor is of equal
importance to the Potential Investor Assessment Factor, so it has been assigned
a weight of 50%.
INVESTOR ASSESSMENT RESISTANCE FACTOR. If Investors are unable or
unwilling to support the Property they own, then their Property could face
severe hardships. This was considered to be a major factor and has been
assigned a weight of 75%.
TERM TO MAXIMUM REPAYMENT FACTOR. Although "Trudy Pat" Investors expected
a short-term investment, their beneficial ownership of real estate may not
provide a realistic possibility for a short-term holding period. However, some
balance can be sought to maximize the yield in the shortest possible time frame.
Since this balance is subject to considerable external constraints, it has been
assigned a weight of 10%.
The weighted factors resulted in an upward adjustment to the appraised real
estate value in the case of positive factors, or a downward adjustment in the
case of negative factors, and the results of this method of calculating the
Exchange Value of the Properties effectively lowered the Exchange Value of the
Sacramento/Delta Greens, the Yosemite/Ahwahnee I, the Yosemite/Ahwahnee II and
the Mori Point Properties. The Oceanside Property was unaffected by the
calculations because its assets are the nearest to realizing cash, relative to
the other properties. The following comments are provided to explain how the
most significant adjustments affected the Properties since each Property is a
distinctly separate entity prior to the Acquisition and each Property has
different characteristics.
MORI POINT. The value of the Mori Point Property is seriously impaired by
the Investor Assessment Resistance Factor. National estimates that property
taxes, maintenance and
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processing of the Property for permits will cost significantly more than
Investors are willing to reinvest in coming years in the form of mandatory
assessments, based on actual experience. Unless funds are made available to
process an endangered species habitat conservation plan, and unless such a plan
is approved by the appropriate governmental authorities, the Property will
likely remain undeveloped and the value will not approach the amount estimated
by the real estate appraiser.
SACRAMENTO/DELTA GREENS. Sacramento/Delta Greens has a tentative tract map
to build over 500 single-family homes. Final engineering and plans must be
completed soon to retain the map and Investors as a group have demonstrated a
resistance to pay even the most basic costs. Thus, the project is seriously
impaired by the Investor Assessment Resistance Factor.
YOSEMITE/AHWAHNEE. Although Investors have supported this project since
foreclosure in September 1995, much work was needed. The golf course is in good
condition and gross revenue has risen significantly. Unfortunately, revenues
from golf, food services and recreational vehicle membership sales have fallen
well short of expenses and the project has severe negative cash flow. A major
cash infusion is necessary to expand the recreational vehicle park and develop a
potential timeshare sales program on the site. There has been extensive
participation by Yosemite/Ahwahnee Investors in past assessments. However,
based on steadily declining compliance with mandatory assessments, National does
not believe that Yosemite/Ahwahnee Investors are willing to provide sufficient
additional capital to support these further efforts through additional
assessments. National further expects that negative cash flow will continue to
create financial stress on the project. Current property taxes must be paid
this year, and a payment plan must be entered into for the delinquent property
taxes, or the Property may be lost to a forced sale by the tax assessor.
Therefore, the Investor Assessment Resistance Factor has a major negative affect
on the Exchange Value of the Yosemite/Ahwahnee Properties.
In summary, the weighted factors adversely influence the Exchange Value of
each of the projects with the exception of Oceanside. These adjustments are a
result of the disadvantages of the present "Trudy Pat" ownership structure. The
Properties require a significant amount of cash to achieve their "highest and
best use" as set forth in the recent independent appraisers' reports. A change
in the ownership structure like the Acquisition provides alternative methods of
raising working capital and does not depend on mandatory assessment of
investors.
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The following table summarizes the calculation of the Exchange Value of the
Programs:
<TABLE>
<CAPTION>
Appraised Net Other Net Business
Value of Assets and Factor Exchange
Name of Program Real Estate(1) + Liabilities(2) - Adjustments = Value
- --------------- -------------- -------------- ------------- --------
<S> <C> <C> <C> <C>
Sacramento/Delta Greens $ 2,000,000 $ (52,300) $ (732,500)(3) $ 1,215,200
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<PAGE>
Oceanside $ 3,700,000 $ 1,603,100 $ 0 (4) $ 5,303,100
Yosemite/Ahwahnee I $ 8,050,000 $ (337,345) $(5,704,773)(5) $ 2,007,882
Yosemite/Ahwahnee II $ 12,866,000 $ (504,590) $(8,406,224)(6) $ 3,955,186
Mori Point $ 5,500,000 $ (623,518) $(1,585,000)(7) $ 3,291,482
</TABLE>
- ----------
(1) Reflects independent appraisals as of 1997.
(2) Includes cash in trust account, amounts due to National after the
Acquisition is completed, and property taxes due and payable at June 30,
1997. There is no mortgage debt on the Properties of the Sacramento/Delta
Greens and Mori Point Programs, and, after the Acquisition, there will be
no mortgage debt on the other Programs' Properties.
(3) While each of the above positive factors permitted minor upward adjustments
to the Program's value, a significant cash requirement to complete final
engineering and plans, coupled with heavy historical Investor resistance to
advance funds to pay even the most basic costs, required a substantial
negative adjustment to the value of the Program Property in comparison with
the value of the other Programs' Properties.
(4) This Property was unaffected by the business factor adjustments as its
assets are the nearest to realizing cash relative to the other Programs'
Properties.
(5) While each of the above positive factors permitted minor upward adjustments
to the Program's value, a significant cash requirement to fund expansion of
the recreational vehicle park and to develop a timeshare program, steadily
increasing Investor resistance to assessments, anticipated negative cash
flow and significant delinquent property taxes combined to require a
substantial negative adjustment to the value of the Program's Property in
comparison with the value of the other Programs' Properties.
(6) While each of the above positive factors permitted minor upward adjustments
to the Program's value, a significant cash requirement to fund expansion of
the recreational vehicle park and to develop a timeshare program, steadily
increasing Investor resistance to assessments, anticipated negative cash
flow and significant delinquent property taxes combined to require a
substantial negative adjustment to the value of the Program's Property in
comparison with the value of the other Programs' Properties.
(7) While each of the above positive factors permitted minor upward adjustments
to the Program's value, a significant cash requirement to fund the required
environmental studies and to complete the land planning, engineering and
architectural plans in order to reinstate the specific plan and tentative
tract map for a hotel/conference center in addition to significant
delinquent property taxes all combined to require a substantial negative
adjustment to the value of the Program's Property in comparison with the
value of the other Programs' Properties.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, its
officers, employees or affiliates, as well as actually paid to National, during
the years ended December 31, 1996, 1995 and 1994, and for the six month
Fcapitalization period ending June 30, 1997.
32
<PAGE>
<TABLE>
<CAPTION>
Incurred Actually
Incurred Actually Incurred Actually Incurred Actually for Six Paid for
for Year Paid for for Year Paid for for Year Paid for Months Six Months
Ended Year Ended Ended Year Ended Ended Year Ended Ended Ended
Name of Program 12/31/94(1) 12/31/94(2) 12/31/95(1) 12/31/95(2) 12/31/96(1) 12/31/96(2) 6/30/97(1) 6/30/97(2)
- --------------- ----------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 50,000 $ -0- $ 50,000 $ -0- $ 50,000 $ -0- $ 25,000 $ 4,167
Oceanside $ 492,000 $ 300,000 $ 492,000 $ 300,000 $ 492,000 $ 300,000 $ 246,000 $ 150,000
Yosemite/Ahwahnee I $ 65,000 $ -0- $ 84,051 $ -0- $ 150,800 $ 101,626 $ 75,400 $ 30,309
Yosemite/Ahwahnee II $ 135,000 $ -0- $ 174,569 $ -0- $ 313,200 $ 211,069 $ 156,600 $ 62,948
Mori Point $ 100,000 $ -0- $ 100,000 $ -0- $ 100,000 $ -0- $ 50,000 $ -0-
</TABLE>
- ----------
(1) These amounts represent accrued servicing fees and, in the case of
Oceanside, Yosemite/Ahwahnee I and Yosemite/Ahwahnee II, salaries for
officers and employees of Oceanside Development Inc. and Ahwahnee Golf
Course and Resort, Inc., respectively.
(2) These amounts represent servicing fees only.
If the Acquisition had been completed during the above periods, National
would not have been entitled to receive any further servicing fees. The only
compensation National or any of its affiliates would have been entitled to
receive would have been from salaries payable to officers and employees of the
Company. In the case of the Oceanside Program, compensation to National or any
of its affiliates would have been from accrued salaries payable to the officers
and employees of Oceanside Development, Inc. In the case of the
Yosemite/Ahwahnee I and II Programs, compensation to National or any of its
affiliates would have been from accrued salaries payable to the officers and
employees of Ahwahnee Golf Course and Resort, Inc. or as current salaries
payable to officers and employees of the Company. No cash would have been
available to pay bonuses or dividends.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and
during the six months ended June 30, 1997:
<TABLE>
<CAPTION>
Prior to
Name of Program 1992 1992 1993 1994
--------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Sacramento/Delta Greens
Principal $ 0 $ 0 $ 0 $ 0
Interest $ 1,654,013 $ 343,750 $ 0 $ 0
Oceanside
Principal $ 0 $ 0 $ 0 $ 375,000
Interest $ 0 $ 1,080,804 $ 3,145,869 $ 393,750
Yosemite/Ahwahnee I
Principal $ 45,000 $ 135,000 $ 103,085 $ 4,756
Interest $ 1,903,306 $ 920,794 $ 335,557 $ 0
Yosemite/Ahwahnee II
Principal $ 20,000 $ 60,000 $ 68,264 $ 10,273
Interest $ 592,498 $ 1,153,352 $ 688,303 $ 0
Mori Point
Principal $ 0 $ 0 $ 0 $ 0
Interest $ 1,354,705 $ 0 $ 0 $ 0
<CAPTION>
June 30,
Name of Program 1995 1996 1997 Total
--------------- ---- ---- ---- -----
<S> <C> <C> <C> <C>
Sacramento/Delta Greens
Principal $ 0 $ 0 $ 0 $ 0
Interest $ 0 $ 0 $ 0 $ 1.997,763
Oceanside
Principal $ 900,000 $ 900,000 $ 450,000 $ 2,625,000
Interest $ 0 $ 0 $ 0 $ 4,620,423
Yosemite/Ahwahnee I
Principal $ 0 $ 0 $ 0 $ 287,841
Interest $ 0 $ 0 $ 0 $ 3,159,657
Yosemite/Ahwahnee II
Principal $ 0 $ 0 $ 0 $ 158,537
Interest $ 0 $ 0 $ 0 $ 2,434,153
Mori Point
Principal $ 0 $ 0 $ 0 $ 0
Interest $ 0 $ 0 $ 0 $ 1,354,708
</TABLE>
33
<PAGE>
ALLOCATION OF SHARES AMONG THE PROGRAMS
The total number of Shares issued in the Acquisition (sometimes referred to
as "Acquisition Shares") will be equal to the aggregate Exchange Value of the
Programs divided by the arbitrary price of $10. The number of Acquisition
Shares allocable to each Program will be determined by multiplying the number of
Acquisition Shares allocable among all of the Programs by a fraction, the
numerator of which is the Exchange Value of the Program and the denominator of
which is the total Exchange Value of all of the Programs.
The amount owed by the original borrower to each Program plus the amount of
assessments paid by Investors at [AUGUST 15, 1997], appraised real estate
values, Exchange Values and the number and percentage of Shares allocated to
each Program are:
<TABLE>
<CAPTION>
% of Total
% of Shares Shares to be
Amount Real Estate No. of Shares Issued in Outstanding
Owed plus Appraised Exchange Allocated Acquisition After the
Name of Program Assessments Value (1) Value --------- ----------- Acquisition(2)(3)
- --------------- ----------- --------- ----- -----------------
<S> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 6,015,723 $ 2,000,000 $ 1,215,200 121,520 7.70% 6.18%
Oceanside 27,325,000 3,700,000 5,303,100 530,310 33.62 26.95
Yosemite/Ahwahnee I 8,982,429 8,050,000 2,007,882 200,788 12.73 10.20
Yosemite/Ahwahnee II 19,450,567 12,866,000 3,955,186 395,519 25.08 20.10
Mori Point 12,240,744 5,500,000 3,291,482 329,148 20.87 16.73
--------------- ---------------- -------------- ----------- -------- -------
TOTAL $ 74,014,463 $ 32,116,000 $ 15,772,850 1,577,285 100.00% 80.16%
--------------- ---------------- -------------- ----------- -------- -------
--------------- ---------------- -------------- ----------- -------- -------
</TABLE>
- ----------
(1) Appraisals were conducted in May 1997.
(2) 84.18% if all units are sold. The other shares will be held by management
and other founders of the company.
(3) The founders of the Company include members of Company management, as well
as certain employees of National and consultants to the Company and the
Programs. The Company was formed, and shares were purchased by the
founders, prior to making the Acquisition proposed. The total number of
shares to be retained by the founders was determined by reviewing the fees
cancelled and to be cancelled, as well as the additional value being
brought to the Investors through the Acquisition. A total of 390,303
shares of Company common stock was issued at the organization of the
Company at $0.01 per share. See "Dilution" at page __ of the Prospectus.
If the Acquisition is completed, the following table sets forth the fees
which National and its principals have cancelled, or will cancel:
34
<PAGE>
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------------- --------- --------- ---------
Sacramento/Delta Greens(1) $ 137,111 $ 500,000 $ 637,111
Oceanside(2) 704,000 (0-) 704,000
Yosemite/Ahwahnee I(3) 35,000 72,158 107,158
Yosemite/Ahwahnee II(4) 70,000 1,157,867 1,227,867
Mori Point(5) (0-) 461,589 461,589
---------- ------------ ------------
TOTAL $ 946,111 $ 2,191,614 $ 3,137,725
---------- ------------ ------------
---------- ------------ ------------
- ----------
(1) If the shares to be retained by the founders had been allocated to the
founders from the Programs based on cancelled fees, 20.30% of the total
shares to be outstanding after the Acquisition (79,232) which will be held
by the founders of the Company would have been deemed allocated from this
Program.
(2) If the shares to be retained by the founders had been allocated to the
founders from the Programs based on cancelled fees, 22.44% of the total
shares to be outstanding after the Acquisition (87,428) which will be held
by the founders of the Company would have been deemed allocated from this
Program.
(3) If the shares to be retained by the founders had been allocated to the
founders from the Programs based on cancelled fees, 3.42% of the total
shares to be outstanding after the Acquisition (13,348) which will be held
by the founders of the Company would have been deemed allocated from this
Program.
(4) If the shares to be retained by the founders had been allocated to the
founders from the Programs based on cancelled fees, 39.13% of the total
shares to be outstanding after the Acquisition (152,726) which will be held
by the founders of the Company would have been deemed allocated from this
Program.
(5) If the shares to be retained by the founders had been allocated to the
founders from the Programs based on cancelled fees, 14.71% of the total
shares to be outstanding after the Acquisition (57,414) which will be held
by the founders of the Company would have been deemed allocated from this
Program.
ALLOCATION OF SHARES AMONG INVESTORS
The method utilized to allocate shares to the Investors will involve two
steps. The Shares will first be allocated among the Programs based upon the
Exchange Value of each of the Programs relative to the aggregate Exchange Value
of all of the Programs. National believes that the Exchange Values of the
Programs represent fair estimates of the "as is" value of each Program based on
the current "Trudy Pat" ownership structure and constitute a reasonable basis
for allocating the Shares among all of the Programs.
Next, the Shares allocable to a particular Program will be allocated among
the Investors pro rata in relation to each Investor's Adjusted Outstanding
Investment in a particular Program.
35
<PAGE>
An Investor's Adjusted Outstanding Investment is calculated by adding the unpaid
principal balance of the Investor's original loan, the accrued but unpaid
interest on the unpaid principal balance to the Ownership Date, mandatory
assessments paid, voluntary advances made, plus interest at 10% per annum
through the Record Date on voluntary advances made, and deducting therefrom
interest at 10% per annum through the Record Date on mandatory assessments NOT
paid. The basis for such adjustments is found in Section 2.3 of each of the
Programs' tenancy-in-common agreements.
Once each Investor's Adjusted Outstanding Investment has been calculated,
that amount is divided by the aggregate Adjusted Outstanding Investment for all
Investors, and the resulting fraction is multiplied by the number of Shares
allocated the Program to determine the number of shares allocated to each
Investor.
All Shares allocated to Investors will be exactly equal to each other, that
is, they will all be part of a single class of common stock.
COMPANY SHARES HELD BY AFFILIATES OR EMPLOYEES OF NATIONAL
None of the Acquisition Shares or units described in this Prospectus are
allocable to National or any of its shareholders except to the extent of any of
National's investments in the Programs. At June 30, 1997, such investments are
$3,118 in the Sacramento/Delta Greens Program; $2,099 in the Oceanside Program;
$2,373 in the Yosemite/Ahwahnee I Program; $46,537 in the Yosemite/Ahwahnee II
Program; and $5,279 in the Mori Point Program. In the Acquisition, National
will receive an aggregate of 1,245 Shares, reflecting 63 Shares, 41 Shares, 53
Shares, 946 Shares and 142 Shares, respectively, for its investments in the
Sacramento/Delta Greens Program, Oceanside Program, Yosemite/Ahwahnee I Program,
Yosemite/Ahwahnee II Program and Mori Point Program. As described in "Terms of
the Acquisition" above, the principal founders of the Company were the family
partnerships of David Lasker and James Orth, the principals of National. Upon
completion of the Acquisition, they will retain, in the aggregate, 295,000
Shares, or 15% of the outstanding Shares of the Company assuming none of the
units are sold or 11.96% of the outstanding Shares of the Company if all of the
units are sold. National and the management of the Company believe that this is
a fair allocation of the outstanding Shares of the Company after the Acquisition
because it fairly reflects the management efforts that have been brought to bear
to accomplish the Acquisition. The fairness of the allocation of shares to the
founders of the Company is included in the Fairness Opinion described later in
this Prospectus.
EXPECTED BENEFITS OF ACQUISITION
National believes that the Acquisition is the best way to obtain a maximum
recovery by Investors in each of the Programs for the following reasons:
36
<PAGE>
CONTROL OF TIMING OF LIQUIDATION. By creating freely tradable equity
securities in the Company, the Acquisition permits Investors to liquidate all or
a portion of their Shares when such liquidation best serves such Investors. In
addition, by controlling the timing of the liquidation of their investments,
Investors will have better control of the timing of the tax impact of the
liquidation. Furthermore, the Programs will not be forced to sell their
Properties in the current economic environment and recognize the losses that
would be generated by such sales. If the Programs could be liquidated by
selling off the Properties at the current Appraised Value (which, except for the
Oceanside Property, National does not believe is likely), the Investors would
realize unreturned cash (exclusive of accrued interest) losses aggregating
approximately $33,829,000, including estimated aggregate losses on the
Sacramento/Delta Greens Property of $3,571,000, the Oceanside Property of
$23,675,000, the Yosemite/Ahwahnee Properties in the aggregate of $1,583,000,
and the Mori Point Property of $5,069,000.
BENEFITS TO THE COMPANY OF LISTED SHARES. In addition to the flexibility
Investors will have to liquidate their interests at a time that best suits their
respective individual needs, National believes that having the Shares of the
Company listed for trading on the _______________ will provide benefits to the
Company itself which could enhance Investor value. The Company may have access
to outside capital in the form of debt or equity through the capital markets
that the individual Programs would not have. For example, it is possible that
the Company may be able to take advantage of its size in order to access the
capital markets for additional debt or equity investors to provide expansion or
completion of development and construction funding for the various projects. The
growth of the Company will be a capital-intensive process.
DIVERSITY OF INVESTMENT. The Acquisition will allow Investors to
participate in an investment portfolio of four properties rather than one
property. These Properties are in diverse geographic locations in California
and have different development orientation. The diversity of the Company's
portfolio spreads the risk of an investment in the Company over a broader group
of assets and reduces the dependence of the investment upon the performance of
any particular asset.
LIQUIDITY THROUGH LISTING OF SHARES. The Company has applied for listing
of the Shares on the ______________. Listing the Shares is a condition to the
Acquisition. Thus, the Acquisition offers liquidity to the Investors for all or
some of their Shares if a market develops. Although the Acquisition is not the
only means by which Investors could achieve liquidity in their investments in
the Programs, National believes that the Acquisition is preferable to the
alternatives (described below in "--Alternatives to Acquisition") even though an
indefinite period of time may be required before the value of the Shares is
stabilized and there is an adequate demand from buyers for the Shares. National
believes that a sale of the Properties in the current market would result in
unnecessary losses to Investors.
EXPERIENCED MANAGEMENT. The Company will employ key management
professionals that have expertise in real estate development, operation and
construction. See "Management After the Acquisition."
37
<PAGE>
ELIMINATION OF MANDATORY ASSESSMENTS. Completion of the Acquisition will
result in the cancellation of the servicing agreement and the tenancy-in-common
agreement for each of the Programs and National will no longer be a Servicing
Agent for the Investors. There will be no further assessments of Investors of
any kind pursuant to those agreements.
ALTERNATIVES TO ACQUISITION
Before deciding to recommend the Acquisition, National considered
alternatives in an effort to achieve the most favorable cash flow distribution
and the maximum Investor return. These alternatives were (i) continued
operation of each of the Programs under their respective business plans under
the existing tenancy-in-common structure, (ii) liquidation of each of the
Programs in an orderly manner or in a bankruptcy liquidation, and (iii) a
reorganization of the Programs in a bankruptcy proceeding. Set forth below are
the conclusions of National regarding its belief that the Acquisition is more
beneficial to the Investors than the alternatives considered. At this time,
National is unable to quantify the consideration that would be received by
Investors pursuant to any of the alternatives.
CONTINUATION OF THE PROGRAMS. An alternative to the Acquisition would be
to continue the Programs. The Programs would remain separate groups of
tenancy-in-common investors, with their own assets and liabilities, governed by
their existing servicing agreement and tenancy-in-common agreement. Although
National would still be entitled to servicing fees on an on-going basis, as well
as accrued fees and expenses, National could discern no advantages to Investors
in achieving their objectives from the continued operation of the Programs under
their respective existing business plans. National rejected this alternative
because it was concluded that maintaining the Programs separately would likely
have the following negative results when compared with the benefits that
National perceived may be derived from the Acquisition: (i) a less efficient
and cost effective exit strategy for Investors wishing to liquidate their
investment at a future date; (ii) inability of the Investors to better control
the timing of the tax impact of the liquidation of their particular investment;
(iii) illiquidity of individual investments on a current basis due to the lack
of any established secondary market; (iv) difficulty in valuing the individual
investments due to the virtual non-existence of a secondary market for the
interests; (v) less flexibility and control in actively managing the real estate
underlying each of the Programs; and (vi) access to capital for the Programs
would be limited to Investor assessments.
38
<PAGE>
The capital needed to finish lots and provide for the infrastructure is a
requirement for the Sacramento/Delta Greens Program. Continuing to build homes
and potentially acquiring additional lots are requirements for the Oceanside
Program. With respect to Yosemite/Ahwahnee, the business plan for those
Programs assumes that there will be a large infusion of additional capital to
support the expansion of the recreational vehicle park, construction of
timeshare units and very aggressive marketing of these and other products. The
Mori Point project needs funds to continue with the hotel/conference center
entitlement process. Unfortunately, there are limited sources of outside
capital to fund the financial demands of any of these business plans
independently. Absent the Acquisition which may provide the Company with more
traditional financing alternatives and which, through the sale of certain
portions of some of the real estate assets, could generate internal capital, THE
MOST LIKELY SOURCE OF CAPITAL TO COMPLETE THE BUSINESS PLANS OF THE RESPECTIVE
PROGRAMS IS MANDATORY ASSESSMENTS AND VOLUNTARY ADVANCES FROM TRUDY PAT
INVESTORS. ANY DELAY ON THE PART OF INVESTORS IN PROVIDING SUCH CAPITAL WOULD
HAVE A SIGNIFICANT NEGATIVE EFFECT ON THE SUCCESS OF ANY OF SUCH BUSINESS PLANS.
LIQUIDATION OF THE PROGRAMS. Another alternative available to National is
to proceed with a liquidation of each of the Programs and distribute the net
liquidation proceeds to the Trudy Pat Investors. National concluded that there
would be several disadvantages to using this strategy. A complete liquidation
of the Programs would deprive those Investors who do not desire to liquidate
their investment from participating in the benefits of future performance and
possible property value improvements. In the case of each of the Programs, a
sale in bulk in the near future of the applicable Properties would yield a
significant loss to each of the Investors. This result would be contrary to the
original objectives of the Programs and those of the Investors as confirmed
through surveys, questionnaires and conversations. Such a liquidation might be
accomplished in a bankruptcy proceeding, the complexities involved due to the
"Trudy Pat" format of the Programs, as well as the administrative and other
costs, made bankruptcy liquidation particularly unattractive. In addition,
liquidation of the Programs' Properties does not have certain other benefits of
the Acquisition, including (i) permitting Investors to hold their investment
until the time when liquidation is appropriate for their individual investment
and tax strategy, (ii) the opportunity to participate in acquisition and
financing opportunities existing in the real estate market through equity
ownership in the Company, (iii) the transaction costs and time associated with
the Acquisition are expected to be significantly less than those which would be
incurred in an orderly liquidation of the Programs' assets through additional
improvements or a build-out, and (iv) the complete liquidation of the Programs
would cause the recognition of capital losses by Investors to the extent the
selling price of the Properties is less than their tax basis. See "--Expected
Benefits of Acquisition - Control of Timing of Liquidation" for the estimated
total capital loss that would be recognized for each of the Programs if their
respective Properties were sold in bulk for their appraised value.
BANKRUPTCY REORGANIZATION. In addition to a liquidation in a bankruptcy
proceeding, National also considered attempting to use the bankruptcy laws to
reorganize the Programs to accomplish the consolidation goals of the Acquisition
subject to approval of the Bankruptcy Court. This approach was not selected
because (i) there was some question as to whether the Programs, individually or
collectively, met the conditions precedent to a successful
39
<PAGE>
reorganization in a bankruptcy proceeding, and (ii) National determined that the
administrative costs and further delays would not be as beneficial to the
Investors as the Acquisition.
CONDITIONS TO THE ACQUISITION
The principal conditions to the Acquisition are: (i) approval of the
Acquisition by holders of a majority of the tenancy-in-common interests in each
of the Programs; (ii) commitment of a reputable title company to issue to the
Company an extended coverage policy of title insurance on each of the parcels of
real property owned by each of the Programs; (iii) receipt of the Fairness
Opinion from the Independent Valuator regarding the allocation of the Shares;
and (iv) approval of the Shares for listing on the _______________. No federal
or state regulatory requirements must be complied with or approval obtained in
connection with the Acquisition. National may decide not to pursue the
Acquisition at any time before it becomes effective, whether before or after
approval by the Investors.
RECOMMENDATION OF NATIONAL AND FAIRNESS DETERMINATION
National believes the Acquisition to be fair to, and in the best interests
of, each of the Programs and the Investors therein. National recommends that
the Investors approve the Acquisition.
National believes that the likely market value of the Shares will be higher
than the expected proceeds from liquidation, but, of course, there can be no
assurance that that will be true. In proposing the Acquisition, the current
form of each of the Programs was outweighed by the Company's (i) potential to
provide improved liquidity to the Investors through ownership of the Company's
Shares; (ii) potential for growth; and (iii) Investors' increased control over
the timing of the tax consequences of liquidation.
Based on its analysis of the Acquisition, National believes that (i) the
terms of the Acquisition when considered as a whole are fair to the Investors;
(ii) the Shares offered to the Investors constitute fair consideration for the
Properties held in tenancy-in-common by the Investors; and (iii) after comparing
the potential benefits and detriments of the Acquisition with those of the
earlier described alternatives, the Acquisition is more attractive to the
Investors than such alternatives. These beliefs are based upon National's
analysis of the terms of the Acquisition, an assessment of its potential
economic impact upon the Investors, a consideration of the amount of the equity
of the Company which will be held by consultants and employees of National, the
Company and the Programs, a comparison of the potential benefits and detriments
of the Acquisition and alternatives to the Acquisition, and a review of the
financial condition and performance of the Programs and the terms of critical
agreements such as the servicing agreements and the tenancy-in-common agreements
for each of the Programs.
National also believes that the Acquisition is procedurally fair for the
following reasons. First, the Acquisition is required to be approved by
Investors holding a majority of each Program's outstanding tenancy-in-common
interests in compliance with the provisions of the tenancy-in-common agreement
of each of the Programs, and is subject to certain conditions set
40
<PAGE>
forth under "Conditions to the Acquisition" above. Second, National believes
that the Exchange Values of the Programs have been determined according to a
process that is fair, because the process involved appraisals of all of the
Programs' Properties by independent appraisers, as well as certain adjustments
thereto to take into account certain factors deemed material by the Company and
National for an equitable allocation of Shares among the Programs. See
"--Determination of Exchange value."
All of the above factors were deemed important by National in concluding
that the Acquisition is fair, substantively and procedurally. No special
emphasis was assigned to any of the factors. There are no material differences
in the fairness analysis for any Program.
FAIRNESS IN VIEW OF CONFLICTS OF INTEREST
Although National reasonably believes the terms of the Acquisition are fair
to the Investors, the principals of National have conflicts of interest with
respect to the Acquisition. These conflicts include, among others, (i) the
determination not to retain independent parties to act on behalf of the
Investors or the Programs, (ii) the principal shareholders of National may
realize substantial economic benefits upon completion of the Acquisition, and
(iii) National's relief from on-going obligations under the servicing agreements
with respect to each of the Programs. However, it should be noted that, prior
to 1994, National forgave $2,191,614 of fees for the performance of servicing
agent and other project management-related activities under the applicable
servicing agreements, and will forgive an additional $946,111 of similar fees
upon the successful completion of the Acquisition. It should be further noted
that, at $10 per Share, the amount of fees cancelled by National and its
principals would be equal to over 300,000 Shares. Additionally, National will
not be entitled to any further servicing fee with respect to the Properties
which amounts, in the aggregate, to $650,000 annually. To help mitigate the
potential conflicts, National obtained the independent appraisals and the
Fairness Opinion. For a further discussion of the conflicts of interest and
potential benefits of the Acquisition to National and its principal
shareholders, see "Interests of Certain Persons in the Acquisition and Conflicts
of Interest - Substantial Benefits to Affiliates of National."
CONSEQUENCES IF THE ACQUISITION IS NOT APPROVED
If the Acquisition is not consummated for any reason, National will be
unable to continue to manage the Programs without receiving contracted-for fees
and expenses. Thus, National will seek Investors' approval to sell each of the
Programs' Properties for the highest amount then available and distribute the
proceeds, net of expenses and fees due to National, to the Investors in the
respective Programs. No other transaction is currently being actively
considered as an alternative to the Acquisition. The Programs will, however,
pay the expenses of the Acquisition even if it is not approved.
ACCOUNTING TREATMENT
41
<PAGE>
Because the Acquisition involves a transaction to be accounted for as a
roll-up transaction, the assets and liabilities of the Programs will be
transferred to the Company at their pre-Acquisition, historical cost basis.
COSTS AND EXPENSES
All costs and expenses incurred by the Company or the Programs in
connection with the Acquisition will be paid by the Programs from cash on hand,
whether or not the Acquisition is consummated. The following is a statement of
certain estimated costs and expenses incurred by the Programs and the Company in
connection with the Acquisition.
Securities and Exchange Commission Registration Fee $
[STOCK EXCHANGE] Fee
Fairness Opinion and Appraisals
Legal Fees and Expenses
Accounting Fees and Expenses
Solicitation Fees and Expenses
Printing and Engraving Expenses
Miscellaneous
Total $
DIVIDEND POLICY
The Company has no plans to pay dividends in the foreseeable future. Funds
otherwise available for dividends will be utilized to potentially increase Share
value through acquisition and development. The effect of this policy will be
that, as Company real estate assets are sold, unlike in the Programs, no cash
distributions will be made to Investors.
COMPARISON OF TENANCY-IN-COMMON INTERESTS AND SHARES
The following summary compares a number of differences between the
ownership of tenancy-in-common interests in the Programs and Shares of the
Company and the effect relating thereto.
42
<PAGE>
Differing Factor Tenancy-in-Common Interests Shares
- ----------------- --------------------------- ------
GENERAL BUSINESS Each of the Programs The business of all five
commenced as opportunities to of the Programs will be
participate in a loan secured consolidated into the
by to-be-improved real Company. The Company
property. The Programs are has broader investment
not seeking to make objectives which will
additional loans or purchase include the sale or
new properties. completion of the
projects originally
undertaken by the
developers which
borrowed from Investors
of the Programs, as well
as possibly expanding
into other real estate
ventures. The current
plans of the Company may
be recast at the
discretion of the Board
of Directors without the
consent of the
Shareholders.
DISTRIBUTIONS AND The Programs were initially The initial policy of
DIVIDENDS designed to yield regular the Company will be to
interest payments to the preserve its cash
Investors and to have the resources for growth and
principal of the various internal development
loans repaid in accordance and, thus, the Company
with their respective terms, does not plan to make
usually two to four years. dividend distributions
in the foreseeable
future. The Board of
Directors has the
discretion to determine
whether or not and when
to declare and pay
dividends and the amount
thereof.
43
<PAGE>
MANAGEMENT The business and affairs of The business and affairs
each of the Programs are of the Company are
managed by National pursuant managed by the officers
to the applicable servicing of the Company under the
agreement. National may be direction of the Board
terminated as the servicing of Directors. The Board
agent by the vote of holders of Directors will
of a majority of the ultimately be divided
interests of a particular into three classes
Program. serving staggered three
year terms. One-third
of the Board of
Directors will be
elected annually by
holders of the Shares to
serve for three year
terms. Directors can be
removed from office by
the affirmative vote of
the holders of at least
a majority of the then-
outstanding Shares.
FIDUCIARY DUTIES None of the Programs are Officers and Directors
partnerships and, thus, of the Company are
National does not have the subject to the Delaware
common law fiduciary duties common law which imposes
that it would have if it were fiduciary duties of
the general partner of a care, loyalty, good
partnership. However, as an faith and fair dealing
agent, National has on the officers and
fiduciary-like duties to directors of the
Investors to use reasonable Company.
care, skill and diligence in
its work, not to compete with
Investors' interests without
consent, and not to take
adverse interests to
Investors without consent.
44
<PAGE>
VOTING RIGHTS Under the tenancy-in-common Under the Charter
agreements of each of the Documents of the
Programs, the Investors have Company, the
voting rights with respect to Shareholders have voting
collection, servicing and rights with respect to
administration of the (i) election of
Outstanding Investment of the Directors; (ii) the sale
Programs, as well as or disposition of all or
termination of the applicable substantially all of the
servicing agreement. Each assets of the Company at
holder of a tenancy-in-common any one time; (iii) the
interest is entitled to vote merger or consolidation
on each matter presented to of the Company; (iv) the
the Investors of a particular dissolution of the
Program. Approval of any Company; and (v) certain
matter submitted to the anti-takeover
Investors in a particular provisions.
Program requires approval
of holders of a majority Each Share entitles its
of the tenancy-in-common holder to cast one vote
interests of that Program. on each matter presented
to holders of Shares.
Approval of any matter
submitted to holders of
Shares generally requires
the affirmative vote of
holders of a majority of
the outstanding shares,
however, amendments to
the anti-takeover
provisions of the
Certificate of
Incorporation of the
Company require a
two-thirds vote.
SPECIAL MEETINGS None A special meeting of
Shareholders may by
called by the Board of
Directors of the
Company, the Chairman of
the Board or the
President only.
REDEMPTION The tenancy-in-common The Shares are not
interests are not redeemable. redeemable. The Shares
Investors in a particular can be sold on the
Program may only receive a ________________ if an
return of their investment active trading market
upon the repayment of the exists.
applicable note or other
liquidation of all or part of
the assets of the Program.
45
<PAGE>
LIQUIDATION RIGHTS In the event of the Upon liquidation of the
liquidation of a particular Company, the
Program, the assets of the Shareholders will be
Program remaining after entitled to share
satisfaction of all debts and ratably in any assets
liabilities of the Program, remaining after the
the satisfaction of expenses satisfaction of
of liquidation of the assets obligations to creditors
of the Program and the and any liquidation
establishment of a reasonable preferences on any
reserve in connection Preferred Stock that may
therewith are distributed to be then outstanding.
the Investors pro rata in
accordance with their
respective percentage
interests in the applicable
Program.
RIGHT TO COMPEL Holders of a majority of the The vote of Shareholders
DISSOLUTION tenancy-in-common interests owning at least a
in a particular Program may majority of the
vote to compel the sale of outstanding shares in
the Program's assets with the the Company is
result that the Program will sufficient to cause the
be dissolved. dissolution of the
Company.
LIMITED LIABILITY As tenancy-in-common owners Shareholders are not
of the assets of the generally liable for
Programs, the Investors are obligations of the
NOT effectively insulated Company.
from personal liability based
on operation of those assets.
LIQUIDITY AND There is no organized The Shares will be
MARKETABILITY secondary market for the freely transferable and
tenancy-in-common interests it is a condition to the
held by Investors. Thus, consummation of the
trading in the tenancy-in- Acquisition that the
common interests is sporadic Shares be approved for
and occurs solely through listing on the
private transactions. ________________.
RESTRICTIONS ON There are certain None.
TRANSFER restrictions on transfer of
the tenancy-in-common
interests.
CONTINUITY OF None of the Programs are The Charter Documents
EXISTENCE designed to have perpetual provide for perpetual
existence. existence.
46
<PAGE>
FINANCIAL REPORTS None of the Programs are The Company will be
subject to the reporting subject to the reporting
requirements of the Exchange requirements of the
Act. However, National, Exchange Act and will
without obligation to do so, file annual and
has endeavored to provide the quarterly reports. The
Investors in each of the Company currently
Programs with regular reports intends to provide
about such Programs' annual and quarterly
respective activities. reports to its
Shareholders.
PAYMENTS TO National is entitled to fees While National and its
NATIONAL AND ITS and reimbursement of expenses Affiliates will hold
AFFILIATES for services it renders to Shares of the Company,
each of the Programs pursuant the only form of
to the servicing agreements. compensation paid to
some of such persons
will be pursuant to
their employment
agreements or otherwise.
ONLY [$1,078,510] OF THE
PAST DUE FEES AND
EXPENSES DUE TO NATIONAL
AND ITS PRINCIPALS WILL
REMAIN AS LIABILITIES OF
THE COMPANY.
CERTAIN LEGAL Holders of a majority of the Delaware law affords
RIGHTS Outstanding Investment in a shareholders rights to
Program must vote to bring derivative actions
terminate the servicing when the officers or
agreement between National Directors of the Company
and the Program Investors. have failed to institute
an action to recover
damages and class
actions to recover
damages. Shareholders
may also have rights to
bring actions in federal
court to enforce federal
rights.
47
<PAGE>
INSPECTION OF Holders of tenancy-in-common Under Delaware law, each
BOOKS AND RECORDS interests in a Program have Shareholder has the
no contractual right to right, subject to
inspect books and records certain reasonable
maintained by National with standards, to obtain
regard to a Program. from the Company from
However, as the servicing time to time upon
agent for the Investors, reasonable written
National permits them to demand for any purpose
review such books and records reasonably related to
on reasonable notice. the Shareholder's
interest as a
Shareholder of the
Company, certain
information regarding
the status of the
business, affairs and
financial condition of
the Company. Pursuant
to Rule 14a-7 under the
Exchange Act, the
Shareholders will have
the right to obtain a
list of Shareholders
from the Company
whenever the Company
solicits proxies or
consents.
COMPARISONS OF PROGRAMS AND COMPANY
The information below highlights a number of the significant differences
between the Programs and the Company relating to, among other things, forms of
organization, investment objectives, policies and restrictions, asset
diversification, capitalization, management structure and investor rights.
These comparisons are intended to assist Investors in understanding how their
investments will be changed if, as a result of the Acquisition, their tenancy-
in-common interests in the assets, liabilities and businesses of their
respective Programs are exchanged for Shares of the Company.
FORM OF ORGANIZATION
Program Company
------- -------
None of the Programs are organized The Company is a Delaware corporation
business entities such as formed for the purpose of acquiring
corporations, partnerships or business the Programs' Properties, as well as
trusts. Each commenced as an investing in and managing other real
opportunity to participate in a loan estate opportunities. The Company
secured by to-be-improved real will be taxed as a corporation.
property through a tenancy-in-common
investment mechanism. Each Program
remains as a tenancy-in-common among
its Investors. Investors are
individually responsible for the tax
48
<PAGE>
consequences of a Program and the
reporting thereof.
LENGTH OF INVESTMENT
Program Company
------- -------
An investment in any of the Programs Unlike the Programs, the Company
originally was presented to Investors intends to continue its operations for
as an opportunity to take a tenancy- an indefinite time period and the
in-common participation in a loan Company has no specific plans for the
secured by real property. As such, disposition of assets acquired through
the investments were finite in length the Acquisition or subsequent
with the expectation that Investors' acquisitions. The Company is allowed
investments were to be returned, with to retain net sale or refinancing
interest, within a two to four year proceeds for new investments, capital
period. expenditures, working capital reserves
or other appropriate purposes.
NATURE OF INVESTMENT
Program Company
------- -------
Since the respective Ownership Date of The Shares constitute equity interests
each of the Programs, the Investors in in the Company. Each Shareholder will
such Programs have been the beneficial be entitled to its pro rata share of
owners (as tenants-in-common) of the distributions made with respect to the
assets and the businesses of the Shares. The distributions payable to
respective Programs. Actual title to Shareholders are not fixed in amount
the Properties is held by various and are only paid when declared by the
entities acting as agents for the Board of Directors. The Company has
Investors in the several Programs. no present plans to pay distributions.
PROPERTIES AND DIVERSIFICATION
Program Company
------- -------
The investment portfolio of each of The Company is authorized to own and
the Programs is limited to the assets acquire the Programs' Properties, make
acquired as of the applicable other investments and issue additional
Ownership Date, as well as such equity and debt securities to acquire
additional assets as may have been additional assets.
acquired with mandatory Investor
assessments or voluntary Investor
advances since the Ownership Date.
None of the Programs have the
authority to raise additional funds
from third parties to expand its
investment portfolios.
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<PAGE>
ADDITIONAL EQUITY AND DILUTION
Program Company
------- -------
None of the Programs are authorized to The Board of Directors may, in its
raise additional funds other than discretion, issue additional equity
through the assessment/advance process securities. The Company may sell
prescribed by the applicable tenancy- additional equity from time to time to
in-common agreement. Therefore, increase its available capital. The
except to the extent that existing issuance of additional equity
Investors in a particular Program pay securities may result in a dilution of
mandatory assessments or make the interests of the Shareholders.
voluntary advances, no dilution of an
Investor's interest in the Program can
occur.
BORROWING POLICIES
Program Company
------- -------
None of the Programs are authorized to The Company is permitted to borrow, on
borrow funds necessary, appropriate or a secured or unsecured basis, funds to
advisable to conduct its business and advance its business without limits.
affairs. The only additional funds
which the Programs may raise comes
from mandatory assessments from, or
voluntary advances by, existing
Investors.
RESTRICTIONS ON RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS
Program Company
------- -------
None of the applicable servicing Under Delaware law, transactions
agreements or tenancy-in-common between the Company and one or more of
agreements for the Programs restrict its directors or officers, or between
any of the Programs from entering into the Company or any affiliate of a
business transactions with National or director or officer, are not void or
its affiliates. voidable if the transaction is
approved in good faith by a majority
of the disinterested directors or
Shareholders based on full disclosure;
or the transaction is fair as to the
Company as of the time it is
authorized, approved or ratified by
the Board of Directors, an appropriate
committee or the Shareholders. In
addition, the Company's Certificate of
Incorporation, as well as Delaware
law, prohibit certain business
combinations with owners of more than
15% of the outstanding voting stock of
the Company ("interested
stockholders"), or an
50
<PAGE>
affiliate of
such person, within the three year
period immediately prior to the date
on which such stockholder became an
interested stockholder.
MANAGEMENT CONTROL AND RESPONSIBILITY
Program Company
------- -------
National acts as servicing agent for The Board of Directors has exclusive
each of the Programs pursuant to control over the Company's business
servicing agreements entered into with and affairs subject only to the
each of the Investors in each Program. restrictions in the Charter Documents.
Pursuant to the servicing agreements, Shareholders have the right to elect
National is essentially invested with members of the Board of Directors.
management authority to conduct the The Directors are accountable to the
business of each of the Programs. The Company as fiduciaries and are
servicing agreements are terminable on required to exercise good faith and
30 days' written notice, provided that integrity in conducting the Company's
the Investors do not have the power to affairs. See "Fiduciary
terminate the servicing agreements Responsibility." The Shareholders
unless and until all amounts owed to have greater control over the
National thereunder have been paid in management of the Company than the
full. National does not need to seek Investors have over the Programs
re-election but instead serves unless because members of the Company's Board
removed by the Investors, which is of Directors are elected by the
generally an extraordinary event. Shareholders.
Pursuant to the tenancy-in-common
agreements for each of the Programs,
matters concerning the collection,
servicing and administration of the
Outstanding Investment for each of the
Programs is governed by the will of
Investors holding more than 50% of the
Outstanding Investment. As servicing
agent, National is accountable as a
fiduciary to each of the Programs and
is required to exercise good faith and
integrity in its dealings in
conducting the affairs of each of the
Programs. See "Fiduciary
Responsibility."
MANAGEMENT LIABILITY AND INDEMNIFICATION
Program Company
------- -------
Pursuant to the servicing agreements, The Company's Directors are not
National is indemnified and held personally liable for ordinary
harmless by the Investors from and liabilities of the Company. The
against any and all Charter Documents provide that a
51
<PAGE>
liabilities for acts or omissions Director's liability for breach of
performed in the course of its fiduciary duty is limited to the full
activities as servicing agent, extent allowable under Delaware law.
except as to such liabilities The Charter Documents and Delaware law
caused or contributed to, in whole provide indemnification rights to
or in part, by any gross Directors and officers who act in good
negligence or willful misconduct faith, and in a manner reasonably
on the part of National or its believed to be in or not opposed to
Agents. the best interests of the Company and,
with respect to criminal actions or
proceedings, who act without
reasonable cause to believe their
conduct was unlawful. In addition,
the Charter Documents indemnify
Directors and officers against amounts
paid for settlement, authorize the
Company to advance expenses incurred
in defense upon receipt of an
appropriate undertaking to repay such
amounts if appropriate, and authorize
the Company to carry insurance for the
benefit of the officers and Directors.
See "Fiduciary Responsibility."
ANTI-TAKEOVER PROVISIONS
Program Company
------- -------
Changes in management of any of the The Charter Documents contain a number
Programs can be effected only by of provisions that may have the effect
removal of National as the servicing of delaying or discouraging a hostile
agent by holders of a majority of the takeover of the Company. These
Outstanding Investment in such provisions include, among others, (i)
Programs. This would be an the power of the Board of Directors to
extraordinary event. issue additional equity securities in
the Company; (ii) the classified Board
of Directors wherein only one-third of
the Directors are re-elected to the
Board in any given year and Directors
serve three year terms; (iii) any
action required or permitted to be
taken by Shareholders of the Company
must be effected at a duly called
annual meeting or a special meeting
unless such action requiring or
permitting stockholder approval is
approved by a majority of the Board of
Directors; (iv) special meetings of
Shareholders may only be called by a
majority of the Board, a Chairman of
the Board or the President; (v)
Directors may only be removed for
cause and only by the affirmative vote
of holders of not less than
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<PAGE>
two-thirds of the voting power of all
outstanding Shares; and (vi) amendments
to the anti-takeover provisions of the
Certificate of Incorporation may only
be effected by the affirmative vote of
holders of not less than two-thirds of
the voting power of all outstanding
Shares. See "Description of Shares."
VOTING RIGHTS
Program Company
------- -------
Holders of a majority of the The Company's Board of Directors
Outstanding Investment in each Program consists of three classes.
may control decisions respecting the Shareholders are entitled to elect one
collection, servicing and class of the Company's Board of
administration of such Outstanding Directors at each annual meeting of
Investment. Otherwise, investors in the Company. In addition,
the Programs have no voting rights. Shareholders have the power to amend
the Charter Documents by the votes
required therein, to dissolve the
Company and to approve business
combinations between the Company and
other entities.
LIMITED LIABILITY OF INVESTORS
Program Company
------- -------
As tenants-in-common in the respective Under Delaware law, Shareholders will
programs, the Investors are not not be liable for Company debts or
effectively insulated from personal obligations. Upon issuance, the
liability. Pursuant to the tenancy- Shares will be fully paid and non-
in-common agreements, Investors are assessable.
susceptible to mandatory assessments.
VOTING PROCEDURES
THE VOTE OF EACH INVESTOR IS IMPORTANT. EACH INVESTOR IS URGED TO MARK,
DATE AND SIGN THE INVESTOR BALLOT AND RETURN IT IN THE ENCLOSED ENVELOPE.
TIME OF VOTING
The vote of the Investors with respect to the Acquisition will be tabulated
on _____________, 1997, unless such date is extended by the Company in its sole
discretion. The
53
<PAGE>
vote will be tabulated by National and verified by BDO Seidman, LLP, which is
not affiliated with the Company, the Programs or National. See "Investor
Ballot and Vote Required."
RECORD DATE AND OUTSTANDING VOTES
The Acquisition is being submitted for approval to those Investors holding
interests in the Programs as of the Record Date. The Record Date is
[_________________] for all Programs. At the Record Date, the following number
of votes were held of record by the number of Investors indicated below.
Number of Votes
[AT 8/15/97] Required for
Number of Votes Approval of Number of
Program Held of Record Acquisition Investors
- ------- -------------- ----------- ---------
Sacramento/Delta 6,015,723 3,007,862 332
Greens
Oceanside 27,325,000 13,662,501 1,755
Yosemite/Ahwahnee I 8,982,429 4,491,215 426
Yosemite/Ahwahnee II 19,450,567 9,725,284 837
Mori Point 12,240,744 6,120,373 486
Each Investor is entitled to one vote for each dollar (or fraction thereof
exceeding $0.50) of Outstanding Investment it has in the applicable Program.
APPROVAL DATE
The Prospectus and form of Investor Ballot constitutes National's notice of
the proposed Acquisition. Each Investor has until 11:59 p.m., Pacific Time, on
________________ [45 DAYS FROM THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT], unless extended by the Company in its sole discretion (the "Approval
Date"), to inform the Company whether such Investor wishes to approve or
disapprove of his Program's participation in the Acquisition. The Company and
National ask that each Investor vote by completing and returning the form of
Investor Ballot accompanying this Prospectus in the manner described below.
INVESTOR BALLOT AND VOTE REQUIRED
Investors who wish to vote "YES" for the Acquisition should complete, sign
and return the Investor Ballot relating to their interests which accompanies
this Prospectus. Each Investor's attention is directed to the Investor Ballot
and Instructions accompanying this Prospectus. Investor Ballots must be
delivered in person or by mail or by other delivery service to National at the
following address on, or prior to, the Approval Date: National Investors
Financial, Inc., Attention: Vivian Kennedy, 4220 Von Karman Avenue, Suite 110,
Newport Beach, California 92660.
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<PAGE>
Approval of the Acquisition by a Program requires the vote of Investors
holding a majority of the outstanding votes as of the Record Date. National
will tabulate the votes and such tabulation will be verified by BDO Seidman,
LLP. Abstentions will be tabulated with respect to the Acquisition and related
matters. Broker (or other custodian) non-votes, if any, are not counted for
purposes of determining whether the Acquisition and related proposals have been
approved. Abstentions and broker (or other custodian) non-votes will have the
effect of a vote against the Acquisition. See table in "--Record Date and
Outstanding Votes" for the number of votes which must be cast in favor of the
Acquisition for it to be approved by each respective Program.
Investors who sign and return the Investor Ballot without indicating a vote
will be deemed to have voted "YES" in favor of the Acquisition.
Investors who wish to vote against the Acquisition should also complete a
Investor Ballot. The failure to return a Investor Ballot will have the effect
of a vote against the Acquisition.
If the Acquisition is approved by all Programs, Investors in all Programs
will receive Acquisition Shares whether they voted in favor or against, or
abstained from voting on the Acquisition.
All questions as to the form of all documents and the validity (including
time of receipt) of all approvals will be determined by National and such
determinations will be final and binding. National reserves the absolute right
to waive any of the defects or irregularities in any approval of the Acquisition
or preparation of the form of Investor Ballot. National's interpretation of the
terms and conditions of the Acquisition will be final and binding. National
shall be under no duty to give notification of any defects or irregularities in
any approval of the Acquisition or preparation of the form of Investor Ballot
and shall not incur any liability for failure to give such notification.
REVOCABILITY OF CONSENT
Investors may withdraw or revoke their consent at any time prior to the
Approval Date. To be effective, a written, telegrahic, fax or telex notice of
revocation or withdrawal of the Investor Ballot must be received by no later
than the Approval Date, addressed as follows: National Investors Financial,
Inc., Attention: Vivian Kennedy, 4220 Von Karman Avenue, Suite 110, Newport
Beach, California 92660, telecopy number 714-752-9753. A notice of revocation
or withdrawal must specify the Investor's name and the name of the Program to
which such revocation or withdrawal relates.
SOLICITATION OF VOTES; SOLICITATION EXPENSES
Votes of Investors may be solicited by the management of National or by
third parties. Costs of solicitation will be allocated among the Programs, pro
rata in accordance with Exchange
55
<PAGE>
Values. No party will receive any compensation contingent upon solicitation of
a favorable vote or success of the Acquisition.
NO DISSENTERS' RIGHTS
If the Acquisition is approved, Investors in any of the Programs who
dissent or abstain from consenting to the Acquisition will not be entitled to
dissenters' or appraisal rights under the tenancy-in-common agreements or the
Delaware or California Law. Such rights, when they exist, give the holders of
securities the right to surrender such securities for an appraised value in
cash, if they oppose a merger or similar reorganization. No such rights will be
provided by National, the Programs, or the Company.
ISSUANCE OF CERTIFICATES FOR ACQUISITION SHARES
Promptly after the Effective Time, there will be issued and mailed to
former Investors of record at the Effective Time a certificate representing the
number of Acquisition Shares to which such Investor is entitled.
If any certificate representing Acquisition Shares is to be issued in a
name other than that in which an Investor is registered on National's books for
each Program as of the Effective Time, it will be a condition of such issuance
that the person requesting such change pay to the Company's transfer agent any
transfer fee or taxes required by reason of the issuance of a certificate
representing shares in any name other than that of the registered Investor, or
the person requesting such change establishes to the satisfaction of the Company
that any transfer tax has been paid or is not applicable.
After the Effective Time, there will be no further registration of
transfers of tenancy-in-common interests that were issued and outstanding
immediately before such time and that were exchanged for Shares.
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION
AND CONFLICTS OF INTEREST
A number of potential conflicts of interest are inherent in the
relationship between National (and its shareholders) and the Trudy Pat
Investors. In recognition of these conflicts, and the resulting need to
independently determine that the Acquisition is in the best interest of the
Investors, National and the Company engaged the Independent Valuator to render
the Fairness Opinion and the independent appraisers to independently determine
the value of the Properties. Certain conflicts of interest are summarized
below.
BENEFITS TO NATIONAL
The benefits of the Acquisition for National primarily reside in the relief
from its duties and related costs as servicing agent for the Programs that are
acquired by the Company. Asset
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<PAGE>
management for the Programs will no longer be necessary. Although some of
the Programs (Oceanside and Yosemite Ahwahnee I and II) paid National its
contractual fees for such activities, some of the Programs (Sacramento/Delta
Greens and Mori Point) accrued these fees and other amounts due National.
Without having current payments for such fees, National frequently operated
under financial constraints and unprofitably. Additionally, without
obligation to do so, National also advanced its own funds to the Mori Point
and Yosemite/Ahwahnee Programs, for the benefit of those Investors. Aside
from servicing-related activities, specific operational functions performed
by National's principals and employees that will no longer be required to be
performed by them relate to construction disbursements, budget analysis,
vendor and subcontractor payments, accounting and bookkeeping, site
inspections and work verifications, insurance negotiations, bonding, property
and use tax coordination and payment, council and planning meeting
attendance, political involvement, consultant selection and management,
securities, real estate and specialty legal resource management, investor and
broker administration and tenancy-in-common-oriented communication and
management. If the Acquisition is approved, these duties will be undertaken
by the Company's management.
Upon completion of the Acquisition, National can focus on its duties on
other projects for which it serves and performs the functions of servicing agent
and asset manager. Since the volume of its responsibilities will decrease with
the Acquisition, National may be able to decrease some of the associated direct
and variable costs.
BENEFITS TO SHAREHOLDERS OF NATIONAL
The two principals of National, David Lasker and James Orth, will benefit
significantly and individually from the Acquisition since their respective
family partnerships are shareholders of the Company. National can make more
concentrated efforts to relieve itself of the costly responsibilities of asset
and development management on behalf of others and determine ways to regain and
increase profitable loan servicing activities, which are less demanding in terms
of management, personnel and other resources. See "Principal Shareholders."
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS
While the Independent Valuator has provided the Fairness Opinion, and the
independent appraisers have independently determined the value of the
Properties, neither the Company nor National has retained any outside
representatives to act solely on behalf of the Investors in determining the
terms and conditions of the Acquisition. National did not engage an independent
representative because it believes it can fairly represent the interests of the
Investors. Further, Investors have the opportunity to vote on the Acquisition.
No group of Investors was empowered to negotiate the terms and conditions of the
Acquisition or to determine what procedures should be in place to safeguard the
rights and interests of the Investors. In addition, no investment banker,
attorney, financial consultant or expert was engaged to represent the interests
of the Investors. National and its principals have been the parties responsible
for structuring all the terms and conditions of the Acquisition. Legal counsel
was engaged by National to assist with the preparation and documentation of the
Acquisition, including this Prospectus, and did not serve, or purport to serve,
as legal counsel for the Programs or the
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<PAGE>
Investors. If another representative or representatives had been retained for
the Investors, the allocation of the Shares may have been more favorable to
certain Programs and less favorable to others, and fewer Shares may have been
allocated to principals and other Affiliates of National. In addition, had
separate representation for each of the Programs been arranged by National, the
terms of the Acquisition may have been different.
While independent representatives were not engaged to represent the
interests of the Programs in structuring the Acquisition, National believes the
procedures used to protect the financial interests of the Investors are fair.
For example, National received independent verification of its view that
permitting the Company's founders to hold 19.84% of the outstanding Shares of
the Company upon completion of the Acquisition is fair under the circumstances.
In addition, the Shares will be allocated among the Programs in accordance with
their respective Exchange Values, and within the Programs among the Investors
pro rata in accordance with their Adjusted Outstanding Investment in each of the
Programs. Recognizing the inherent conflict of interest of having National
establish these numbers independently (without active involvement from persons
not having a financial interest in the Acquisition), they engaged independent
appraisers to value the real estate assets owned by each of the Programs and the
Independent Valuator to render an opinion on the overall fairness of the
allocation of Shares in the transaction, including the number of Shares in the
Company allocated to the programs, as well as to affiliates, employees, and the
principal shareholders of National and the Company. See "Appraisal and Fairness
Opinion."
FEATURES DISCOURAGING POTENTIAL TAKEOVERS
Certain features of the Charter Documents, as well as the Delaware law,
could be used by management of the Company to delay, discourage or defeat
efforts of third parties to take control of the Company, or acquire a
significant number of the Shares. See "Comparisons of Programs and the Company
- - Anti-Takeover Provisions."
ALLOCATION OF SERVICES AND EXPENSES
Certain employees of National who will become employees of the Company
currently provide services related to the operation of other Programs which will
not be included in the Acquisition. These Programs were also formed by
National. If the Acquisition is consummated, certain employees of National who
will become employees of the Company will continue to provide services related
to non-participating programs. As a result, possible conflicts of interest may
arise regarding allocation of services of these employees between the Company,
National and the non-participating programs.
NON-ARM'S-LENGTH AGREEMENTS
All agreements and arrangements, including those relating to compensation,
between the Company and employees of the Company who are also employees of
National will not be the result of arm's-length negotiations.
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COMPETITION WITH THE COMPANY FROM OTHER PROGRAMS ORGANIZED BY NATIONAL
National will retain the servicing agent and asset management
responsibilities for the following five other projects: two undeveloped
projects that are zoned for single-family residential use (totalling over 30
acres) an undeveloped 6-acre project that is zoned for commercial use, located
in Victorville, California; an undeveloped 660-acre project with a vesting,
tentative map for 1,330 single-family mixed units with a golf course and
amenities that is located in Contra Costa County, California; and an undeveloped
800-acre project with an application for a vesting tentative tract map for 539
single-family detached, large lot, equestrian-oriented residential lots located
in Palmdale, California. Some or all of these projects may be available for
future acquisition by the Company or its subsidiaries. However, National will
continue to apply time and resources to the management of these projects. In
order to do this, they will require the on-going attention of Messrs. Orth and
Lasker, as well as some of the personnel expertise that may also be employed by
the Company or its subsidiaries. It is anticipated that there will be minimal
conflicts; however, National is committed to continue to provide the same
quality of service for these projects as it currently does on behalf of and for
the benefit of the Programs.
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION
FIDUCIARY RESPONSIBILITY OF NATIONAL
The Programs are not partnerships and, thus, National does not have the
fiduciary duties of a general partner in dealing with the Programs. However, as
servicing agent for each of the Programs, National has the specific duties to
Investors set forth in the various servicing agreements. In addition, under
California law, as an agent, National is under a fiduciary duty to Investors (i)
to use reasonable care, diligence and skill in its work, (ii) not to compete
with the Investors' interests without full disclosure to, and agreement from,
the Investors, and (iii) not to obtain an interest adverse to the Investors
without full disclosure to, and consent from, the Investors.
INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY
The directors and officers of the Company, in exercising the powers and
responsibilities of managing the Company, owe the Company and its shareholders a
duty of care and a duty of loyalty. However, under the so-called "business
judgment rule," which could apply to the officers and directors of the Company,
the officers and directors of the Company may not be liable for errors in
judgment or other acts or omissions made in good faith which are done in a
manner they believe to be in the best interests of the Company and are performed
with the care that an ordinarily prudent person in a like position would use
under similar circumstances. In the event any legal action were brought against
officers or directors of the Company, they might be able to assert defenses
based on the business judgment rule.
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According to the Charter Documents, officers and directors and other agents
of the Company are entitled to indemnification from the Company for any loss,
damage or claim (including any reasonable attorneys' fees incurred by such
person in connection therewith) due to any act or omission made by him or her,
except in the case of fraudulent or illegal conduct of such person. See
"Management After the Acquisition - Limitation of Liability and
Indemnification."
The indemnification provided by the Charter Documents is not deemed to be
exclusive of any other rights to which those indemnified may be entitled under
any agreement, vote of shareholders or directors, or otherwise, and shall inure
to the benefit of the heirs, executors and administrators of such person. Any
repeal or modification of the indemnification provisions contained in the
Charter Documents will not adversely affect any right or protection of a
director or officer of the Company existing at the time of such repeal or
modification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to officers, directors or persons controlling the Company
pursuant to any provisions described in this Consent Solicitation/Prospectus, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
OFFICERS AND DIRECTORS INSURANCE
The Company intends to obtain insurance for the benefit of the Company's
officers, directors and other agents relating to the liability of such persons.
Such insurance would insure the officers, directors and agents of the Company
from any claim arising out of an alleged wrongful act by such persons while
acting as officers, directors or agents of the Company, and the Company to the
extent that it has indemnified the officers, directors and agents for such loss.
BUSINESS AND PROPERTIES
THE COMPANY (OR ITS REPRESENTATIVES) OR NATIONAL FROM TIME TO TIME MAY MAKE
OR MAY HAVE MADE CERTAIN FORWARD-LOOKING STATEMENTS, WHETHER ORALLY OR IN
WRITING, INCLUDING WITHOUT LIMITATION, STATEMENTS IN THIS PROSPECTUS OR
OTHERWISE RELATING TO THE BUSINESS PLAN OF THE COMPANY, THE BUSINESS PLANS OF
THE RESPECTIVE PROGRAMS, ESTIMATES OF REAL ESTATE VALUES, ESTIMATES OF POTENTIAL
FINANCIAL RESULTS FROM PROGRAM OPERATIONS OR FROM SALES OF PROGRAM REAL ESTATE
AND OTHER MATTERS. SUCH STATEMENTS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE
TO, AND ARE ACCOMPANIED BY, THE FACTORS DISCLOSED UNDER THE HEADING "RISK
FACTORS." SUCH FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE RESULTS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS. ACCORDINGLY,
FORWARD-LOOKING STATEMENTS SHOULD NOT BE RELIED UPON AS A PREDICTION OF ACTUAL
RESULTS.
THE COMPANY
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The Company was formed as a Delaware corporation named American Family
Holdings, Inc. on August 6, 1997 to conduct the Acquisition. It currently files
no reports with the Commission under the Exchange Act. It will operate as a
holding company, with actual day-to-day management of the operations of the
Properties being handled by a wholly-owned subsidiary named American Family
Communities, Inc. ("AFC"). Upon completion of the Acquisition, the Properties
will be held and operated through four separate subsidiaries of AFC, namely
Delta Greens Homes, Inc. (Sacramento/Delta Greens Property), Yosemite Woods
Family Resort, Inc. (Yosemite/Ahwahnee Properties), Oceanside Homes, Inc.
(Oceanside Property) and Mori Point Destinations, Inc. (Mori Point Property).
BUSINESS OF THE COMPANY
Upon completion of the Acquisition, the Company will be a diversified real
estate company involved in the residential development industry, as well as the
lodging and recreational industries. Its overall initial objective will be to
consolidate the various business plans of the Programs into a unified Company
business plan with the ultimate goal of creating sufficient value in the
Company's Shares to allow for Investors in the Programs to have the ability to
recover a significantly larger portion of their Outstanding Investments in such
Programs than if the Acquisition did not occur.
As a part of its plan, in the future the Company may seek to acquire
certain assets and properties that are synergistic and add value to the
Company in accordance with its overall business plan. It may also seek to
acquire and develop additional properties that take advantage of its
expertise or its competitive position in order to enhance its financial
performance. Such additional acquisitions may include, but are not limited
to: (a) resort-oriented properties, such as hotels; (b)
extended-stay-oriented properties, such as recreational vehicle or timeshare
facilities; (c) leisure-oriented properties, such as golf courses and
recreation facilities; and (d) residential development properties. The
Company may also purchase or form adjunct businesses to supplement and
enhance these types of properties, such as customer financing, loan
servicing, mortgage brokerage, real estate brokerage, property management,
merchandising, marketing and telecommunications.
PROPERTIES
The Company will purchase the Properties in their "as is" condition from
the Investors in the Programs, except that any remaining Investors' liens will
be removed. Upon completion of the Acquisition, the Company, through its
subsidiaries, will own four Properties which are described below.
SACRAMENTO/DELTA GREENS PROPERTY. The Delta Greens Property consists of a
121-acre site in South Sacramento, California, located approximately one-half
mile east of Interstate 5. Title is held by National Investors Land Holding
Trust IV as the agent of and for the benefit of the Program's Investors. The
Property is unencumbered by liens and is subject to no leases, sales contracts
or options. It has a revised and approved tentative tract map from the City of
Sacramento for over 500 lots for the construction of single-family homes. The
area in which the
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Property is located is populated primarily by lower to lower-middle income
workers with combined family incomes of $25,000 to $35,000. The nearby
Meadowview has a reputation as a high crime area, but an active community effort
is underway to upgrade the community identity.
OCEANSIDE PROPERTY. The Oceanside Property consisted of two tracts named
"Encore," and "Symphony." Title is held by ODI as the agent of and for the
benefit of Oceanside Investors. The Property is located in the east-central
portion of the city of Oceanside, California, some five miles east of the
downtown area. There are several homebuilding companies building competitive
single-family residences in the immediate area surrounding the property.
The Property is presently encumbered by a first lien in the amount of
$27,325,000 which is held by ODI for the benefit of the Oceanside Program's
Investors. That lien will be extinguished in the Acquisition so that the
Company will own the Property free of encumbrances other than property taxes.
The Symphony tract of the Property is for sale.
YOSEMITE/AHWAHNEE PROPERTIES. The Yosemite/Ahwahnee Properties consist of
approximately 1,650 acres divided into two parcels, one containing 660 acres and
one containing 990 acres. The 660 acre parcel was intended to be developed with
218 residential estate lots, 1-3 acres in size. Of the 58 completed lots in
this portion of the property, 13 have been sold. The balance of the project
consists of approximately 990 acres which has been partially developed into an
18-hole golf course, a clubhouse and other amenities. In addition, this portion
contains a recreational vehicle membership park developed for an eventual 600
spaces. It currently contains 54 "full hookup" sites with an additional 110
sites with full hookups under construction. "Full hookups" are spaces that have
water, sewer, electrical and even cable service to the site. The Properties are
located in Madera County, California, approximately 46 miles northeast of Fresno
and 15 miles south of Yosemite National Park. Over the past few years, the Park
has averaged an annual visitor rate of 4.1 million people with the average group
size being approximately 3.3 people.
Title to the 660 acre parcel is held by National Investors Land Holding
Trust VIII for the benefit of the Investors in Yosemite/Ahwahnee II Program.
Title to the 990 acre parcel is held by National Investors Land Holding Trust IX
for the benefit of Investors in the Yosemite/Ahwahnee I Program. The 660 acre
parcel is presently encumbered by a first trust deed held for the benefit of the
Investors in the Yosemite/Ahwahnee I Program. The 990 acre parcel is presently
encumbered by a first trust deed held for the benefit of the Investors in the
Yosemite/Ahwahnee II Program. The aggregate principal balance due on the both
parcels remains at approximately $20,000,000. The trust deeds will be
extinguished as part of the Acquisition so that there will be no liens on the
Properties except for taxes.
MORI POINT PROPERTY. The Mori Point Property consists of approximately 105
acres oceanfront land located in Pacifica, California. Pacifica is a coastal
suburban community of approximately 40,000 residents located about 15 miles from
downtown San Francisco and 7.5 miles west of the San Francisco International
Airport. The site is bounded on the north by Sharp Park Golf Course, which is a
publicly-owned golf course operated by the City of San Francisco; on the south
by a 120-acre parcel known as the "Quarry" which is approved for mixed-use
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development as part of Pacifica's Redevelopment District; and on the east by the
Pacific Coast Highway. There is in excess of a quarter of a mile of oceanfront
on the west. The Property is unencumbered by liens and is subject to no leases
or sales contracts or options. Portions of this Property include habitat for
two endangered species. Development will not be permitted unless it can be
demonstrated that impact on the garter snake habitat can be ultimately
mitigated. The cost to develop and implement a mitigation plan is expected to
be expensive and potentially time-consuming. The Company believes that the
impact can be mitigated and that approvals from the Department of Fish and Game
can be obtained; however, if a satisfactory, economical, mitigation plan cannot
be developed, no development could take place on the Property. This would
radically reduce its value. Title to the Mori Point property is held by
National Investors Land Holding Trust for the benefit of Investors in the Mori
Point Program.
CONSOLIDATION OF THE PROGRAMS
Prior to the Acquisition, the Programs operated according to their
respective business plans. There have been many impediments to achieving the
objectives of Investors under those business plans. Upon completion of the
Acquisition, each of the Properties will be held in subsidiaries of the Company
with AFC coordinating the management according to a unified business plan which
is designed to maximize the value of the Company's Shares. The economies of
scale which will result from the consolidation will allow AFC to introduce
resources such as additional management and development opportunities that would
not have been economically feasible for the Program to obtain for themselves.
Further, the consolidation will also reduce the dependence of Investors in a
particular Program on the geographic or economic constraints which their
respective operations were subject to prior to the Acquisition. For example,
Sacramento/Delta Greens Investors are entirely dependent upon the economic
opportunities available from building entry-level homes in South Sacramento
submarket. That dependency will be substantially reduced by the Acquisition.
As another example, the Oceanside Investors are restricted to accepting the
economic opportunities available from building homes in Oceanside, California,
and acquiring additional lots. The Acquisition will allow for Oceanside
Investors to have geographical diversification in residential development
because of the Sacramento/Delta Greens Property, as well as being diversified
into the lodging and recreation industries as made available with the
Yosemite/Ahwahnee and the Mori Point Properties. This diversification will
reduce the Oceanside Investors dependence on homebuilding exclusively in the
Oceanside market. Conversely, the Yosemite/Ahwahnee and Mori Point Investors'
opportunities will be expanded and diversified as well to take advantage of
those represented by the Sacramento/Delta Greens and the Oceanside Properties.
Upon completion of the Acquisition, the Company's resources can be managed
such that the operation of each of its subsidiaries contributes meaningfully to
the achievement of its consolidated business objectives. Initially, the Company
will be involved in two primary industries: (1) the residential development
industry, and (2) the lodging and recreation industry.
THE RESIDENTIAL DEVELOPMENT INDUSTRY
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After a protracted economic downturn, the residential development industry
shows signs of significant improvement in California. Until recently,
inventories of lots were at relatively high levels and capital for acquisition
and development of unimproved land was limited.
The Company anticipates that the demand for unimproved land will increase
substantially in the near future and that unimproved properties with
entitlements, ready for physical improvements, will be in greatest demand. In
order to build homes, land entitlements (necessary governmental approvals) must
be obtained and maintained in effect. Entitlements include development
agreements, vesting tentative maps and recorded maps. These give a developer
the right to obtain building permits to begin construction upon compliance with
conditions that are usually within the developer's control.
In order to acquire land for residential development, the Company may use
options and other relatively non-capital intensive structures, and will fund
additional acquisitions whenever possible with non-recourse seller financing.
The Company views land as a component of a home's cost structure, rather
than for its speculative value. Due to the cyclical nature of the industry, the
critical role of risk-management in land development, and the low margins that
are typical in today's homebuilding market, the Company will seek to place more
emphasis on the acquisition and development of residential land to entitle and
sell to merchant homebuilders as opposed to a primary emphasis on the actual
construction of homes. The Company intends to focus its residential development
operations primarily in the infill and emerging market segments. Properties
acquired by the Company through the Acquisition will be in various stages of the
approval process and development.
THE LODGING AND RECREATION INDUSTRY
This industry includes many distinct product categories, including
commercial lodging-oriented products such as hotels and conference centers,
recreation-oriented products such as golf courses, equestrian facilities, sports
complexes, marinas, theme parks, destination resorts, recreational vehicle
resorts, and vacation-oriented products such as timeshare resorts, to name a
few. Initially, the Company will focus on the future development of an
executive conference center and timeshare resort, and the operation of a golf
course and recreational vehicle and timeshare resorts.
THE EXECUTIVE CONFERENCE CENTER INDUSTRY
An Executive Conference Center is distinguished from general, resort,
institutional and academic conference centers by virtue of its positioning
within the target market to attract corporate executive meetings. According
to the International Association of Conference Centers ("IACC"), a conference
center is defined as "a facility whose primary purpose is to accommodate
small to medium-sized meetings." A fully dedicated conference center differs
from a hotel or resort that has meeting space in that the primary purpose of
a conference center is to satisfy and accommodate groups by offering a
self-contained, full-service meeting environment. It is dedicated to
accommodating small-to-medium sized groups, and meetings usually comprise at
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least 60% of a facility's overall business. Due to this dedication to meetings,
conference centers tailor their facilities and services primarily to the needs
of the meeting planner by providing all necessary arrangements for the complete
schedule of activities from arrival to departure. The pricing structure for a
conference is often a single, uniform per person rate - a package that includes
lodging, meals, coffee breaks, meeting services, and equipment fees, called a
Complete Meeting Package, or the Full American Plan. Meeting rooms are designed
and used only for meetings and do not double as banquet rooms or exhibition
space. Meal functions are held in a central dining area. The IACC defines five
types of conference centers, one of which, the Executive or Dedicated Conference
center, the Company feels suits the Mori Point site the best.
At an Executive (Dedicated) Conference Center, groups are typically
composed of corporations, associations, and other organizations that emphasize
quality of accommodations and services over price. This type of facility was
developed primarily to satisfy upper-level management meetings and
education/training seminars. Facilities usually include sophisticated equipment
and are staffed with professional conference coordinators. Because of its
proximity to San Francisco and the Silicon Valley, the Company believes that the
Mori Point Conference Center could be positioned within this category of
facilities.
According to a recent report issued by the IACC and PKF Consulting entitled
"Conference Center Industry, A Statistical and Financial Profile - North
American 1996," since the recession in 1991 to year-end 1995, U.S. conference
centers have achieved a 27.2% increase in occupancy. This compares to an 8.3%
increase in occupancy for the overall lodging industry during the same period.
Except for resort conference centers, all types of conference facilities have
enjoyed double digit increases in occupancy since 1991.
Total revenue, measured on a per occupied room basis, has grown
approximately 20% for resort and executive conference centers since 1991. For
comparative purposes, cumulative inflation during the same period was 11.9% and
the total revenue for U.S. hotels grew only 10.4%.
The primary competitive lodging market for the proposed conference center
at Mori Point is comprised of four hotels with a total of 508 rooms. The
selection of the competitive supply was based on location, facilities and
amenities, room rate structure, and market orientation. These hotels are all
full-service hotels and conference centers which cater to group and leisure
demand emanating primarily from the Bay Area, but with a secondary component of
national business attracted to their coastal locations. The secondary
competitive lodging market is comprised of three group-oriented airport
properties with 1,865 guest rooms, rendering the total potential current
competition to 2,373 rooms.
THE RECREATIONAL VEHICLE RESORT INDUSTRY.
Recent statistics indicate that recreational vehicle travel is on the rise
and, like timeshare, is being pushed by the baby boomer demands. According to
the California Travel Parks Association, there are now an estimated 25 million
recreational vehicle enthusiasts in the United States. Recreational vehicle
owners travel an average of 5,900 miles a year and spend 23 days on
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the road. The average recreational vehicle owner is 48 years old, owns his own
home, has a household income just under $40,000 and is overwhelmingly pleased
with the purchase. Recreational vehicle sales have increased by 44% between
1992 and 1995 and are projected to continue to increase as the "boomers" enter
their prime buying years of between 45 and 54. They value the recreational
vehicle as a less expensive way for the entire family to travel together.
Recreational vehicle camping topped hiking, wilderness camping, biking,
horseback riding, canoeing, boating and many other forms of recreation for
satisfaction among participants in outdoor activities. Nine of ten recreational
vehicle owners agree that recreational vehicles are a great way to travel
because they offer the convenience of home away from home; a majority said that
recreational vehicle parks are like a second neighborhood; and there is a real
camaraderie among users. Also, weekend trips have increased 85% since 1984 and
recreational vehicles are well suited for such weekend travel.
THE TIMESHARE INDUSTRY
THE MARKET. The leisure industry is primarily made up of two components
for overnight accommodations: commercial lodging establishments and timeshare
or "vacation ownership" resorts. For many vacationers, particularly those with
families, a lengthy stay at a quality commercial lodging establishment can be
very expensive, and the space provided to the guest relative to the cost
(without renting multiple rooms) is not economical for vacationers. First
introduced in Europe in the mid-1960s, ownership of vacation intervals has been
one of the fastest growing segments of the hospitality industry over the past
two decades.
The Company believes that the following factors have contributed to the
increased acceptance of the timeshare concept among the general public and the
substantial growth of the timeshare industry over the past 15 years:
- Increased consumer confidence resulting from consumer protection
regulation of the timeshare industry;
- The entrance of brand name national lodging companies to the industry;
- Increased flexibility of timeshare ownership due to the growth of
exchange organizations;
- Improvement in the quality of both the facilities themselves and the
management of available timeshare resorts;
- Increased consumer awareness of the value and benefits of timeshare
ownership; and
- Improved availability of financing for purchasers of timeshare units.
The timeshare industry traditionally has been highly fragmented and
dominated by local and regional resort developers and operators. The Company
believes that one of the most
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significant factors contributing to the current success of the timeshare
industry is the entry into the market of some of the world's major lodging,
hospitality and entertainment companies, such as Marriott, Disney, Hilton,
Hyatt, Four Seasons and Inter-Continental, as well as Promus and Westin.
However, none of such brand name lodging companies are presently potential
competitors of the Company.
THE CONSUMER. The Company believes that the prime market for vacation
intervals is customers in the 40-55 year age range who are reaching the peak of
their earning power and are rapidly gaining more leisure time.
According to an American Resort Development Association ("ARDA") study, the
three primary reasons cited by consumers for purchasing a vacation interval are
(i) the ability to exchange the vacation interval for accommodations at other
resorts through exchange networks (cited by 82% of vacation interval
purchasers), (ii) the money savings over traditional resort vacations (cited by
61% of purchasers) and (iii) the quality and appeal of the resort at which they
purchased a vacation interval (cited by 54% of purchasers). The ARDA study also
indicated that vacation interval buyers have a high rate of repeat purchases.
In addition, customer satisfaction increases with length of ownership, age,
income, multiple location ownership and accessibility to vacation interval
exchange networks. The Company plans to create a timeshare facility at the
Yosemite/Ahwahnee Property to take advantage of expected growth in the timeshare
industry as the baby-boom generation enters the 40-55 year age bracket, the age
group which purchased the most vacation intervals in 1994.
TIMESHARE EXCHANGE COMPANIES. Exchange privileges simply represents the
opportunity for timeshare owners to place their timeshare interval in a pool and
exchange it for a comparable timeshare elsewhere. The ability to do this is the
single most important motivation for timeshare purchases, and appears especially
important to educated consumers, who look forward to opportunities to learn
through travel.
Two exchange companies dominate the industry. These are Resort
Condominiums International, which started in 1974 and controls about two-thirds
of the market, and Interval International, which began in 1976 and controls most
of the remaining one-third. Both systems operate similarly. They compete to
sign up new resorts; once a resort is affiliated with one or the other company,
anyone who purchases a timeshare at the resort is automatically signed up with
the exchange. Timeshare owners must renew their membership with the exchange
company every year for about $75. Exact figures are not available, bit it is
estimated that about 75% of timeshare owners are affiliated with an exchange
company.
A timeshare owner wishing to make an exchange places his time in the
exchange system and requests a location and time to exchange into. Exchange
requests generally cost less than $100. Time placed in the exchange system does
not have to be used in order for the person who places it to receive the
exchange they request, it is not a one-for-one trade.
THE BUSINESS STRATEGY
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The Company's objective is to become one of North America's leading
developers and operators of timeshare and recreational vehicle resort
properties, utilizing its residential assets to create the necessary cash flow
and capital to do so. The Company expects that it will have a competitive
advantage by virtue of the location advantages of the Yosemite/Ahwahnee and Mori
Point Properties. By striving to meet this objective, the Company expects that
it will be capable of enhancing the value and financial performance of the
businesses and assets currently held by the Investors in separate Programs
through the consolidation which the Acquisition will provide.
In order to meet its objectives, the Company intends to (i) develop the
Properties for their highest and best use, thereby maximizing the value of
the Company's asset base; (ii) increase the current cash flow from the
Company's consolidated operations, thereby enhancing the value of the
Company's businesses; (iii) maximize the profit margins of tangible and
intangible for-sale products by lowering costs and promoting efficiencies
through economies of scale; (iv) raise funds through a strategic combination
of the sale of units to Investors and the sale of selected real estate assets
acquired from the Programs to outside parties in order to finance the
Company's operations and expansion; and (v) generate revenues through lateral
expansion by acquiring complimentary projects and assets which are consistent
with the Company's objectives and business plans (external growth).
EXTERNAL GROWTH STRATEGY. When appropriate, and assuming market acceptance
for the Company's Shares, it is intended that growth through acquisitions will
be initially achieved through (i) the issuance of Shares of the Company to the
seller of the asset(s) to be acquired or (ii) the utilization of options to
purchase real estate assets. Preserving cash may be preferable even though such
transactions may result in the dilution of the current Shareholders.
THE CONSOLIDATED BUSINESS PLAN
It is anticipated that the Company will have approximately $300,000 of
liquidity if none of the units are sold and approximately $5,000,000 if all
units are sold. The Company will seek additional liquidity from the sale of one
or more of the Company's assets or a combination thereof. It will then conduct
the following activities in such a manner so as to maximize positive cash flow
in the most expeditious way.
THE SACRAMENTO/DELTA GREENS PROPERTY. It is the intent of the Company to
develop the Property in phases. Depending on the availability of working
capital from the sale of units and/or assets, the Company will seek to obtain
final map approval from the City of Sacramento for 50 lots by the second quarter
of 1998. The necessary infrastructure (main road and utilities) can then be
built along with finished lots, model homes and the first phase of productions
homes. The Company believes that the first home sales can occur within six
months of obtaining the final map. It will cost nearly $3,000,000 for the
infrastructure and first phase of home construction. Subject to receipt of
government approvals and construction occurring on a timely basis, the project
is expected to generate cash flow by the fourth quarter of 1998, and to become
profitable by the second quarter of 1999. Depending on the amount, the Company
may provide these funds internally should no outside financing sources be
available. Once the first phase of homes has been built and are selling, the
Company will begin processing the final map for the
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next parcel of 50 lots and will begin an aggressive program to sell this and
other parcels to merchant builders so as to accelerate the cash flow and
profitability to the Company and its Shareholders.
THE OCEANSIDE PROPERTY. The Company has completed the construction and
recent sale of the Encore tract. The Company will also continue to pursue the
buildout of the Symphony tract and aggressively seek a potential buyer as soon
as possible after the Acquisition is completed.
THE YOSEMITE/AHWAHNEE PROPERTIES. Yosemite National Park is located within
a six hour drive of over 30 million people. The Company plans to aggressively
focus on the following areas of operations and development for these properties:
(1) recreational vehicle facility, (2) timeshare development, and (3) the golf
course facility.
Recreational vehicle development presents additional cash flow and profit
opportunities. In addition to the existing 54 recreational vehicle sites, the
Company intends to complete the construction of 110 more. Revenue from
membership sales and dues is expected to continue to increase in 1998 based on
investing an additional amount of about $350,000 in the construction of the new
recreational vehicle sites. Additional revenues can be generated from the
financing of the installment purchases of memberships, since most memberships
are purchased on an installment basis over a two to seven year time frame.
There are virtually no competitive recreational vehicle resorts in the
immediate area of the Property. The recreational vehicle park is a member of
Coast to Coast Resorts, AOR and Western Horizons. These affiliations are
important marketing tools. They allow members reciprocal use of many other
recreational vehicle camp resorts located regionally and across the country.
Bass Lake Resort, the nearest competitor, consists of 175 sites and is located
about 12 miles from the Property's site. It has about 1,900 members and has
been operational since 1984. On the other hand, the Yosemite/Ahwahnee
recreational vehicle park has been fully operational since August 1996 with 54
sites and has over 280 members to date. The Company intends to aggressively
expand this membership base. The Bass Lake recreational vehicle resort is of
significantly lesser quality than the Yosemite/Ahwahnee recreational vehicle
park. It is older with deferred maintenance, has no golf course and lacks space
for any additional amenities or expansion.
The timeshare industry continues its significant growth pace, particularly
for developments that are well located near natural amenities, like the
Yosemite/Ahwahnee Property. A prominent timeshare industry consultant has
evaluated the project and has recommended a 170-unit timeshare development on
the Property. The Company will begin the processing of permits and licenses
with the appropriate agencies as soon as possible. Final approval is expected
to take about nine months before construction can begin. An initial investment
of approximately $3,000,000 will be required to begin timeshare construction and
an aggressive marketing program.
69
<PAGE>
In terms of timeshare competition, the Property has none. As of October
1996, there were 15 timeshare projects in California with active marketing and
sales programs. They include six from the Desert-Palm Springs and Big Bear
Mountain ski areas, four from the Lake Tahoe area and the remaining five in
other scattered locations. There is one relatively small project of 13 units
near Bass Lake, run by Worldmark, a timeshare operator located in Seattle. That
project is of no competitive consequence because of its size and lack of
comparable amenities. There is no present or planned direct competition in the
immediate vicinity from any of the major companies involved in the timeshare
industry such as Marriott, Hyatt, Four Seasons, Disney or Hilton.
Since 1995, a significant amount of capital has been used for improvements
to the golf course. The golf course is considered to be a primary amenity to
attract future timeshare sales. Annual revenues have increased over 200% since
1995 and rounds played have more than doubled. Additional revenues are a
natural bi-product from the golf course for the ancillary products like food,
liquor and clothing.
There are also no comparable golf courses in the area. A nine-hole
course exists approximately five miles from the Property. It offers a
recreational facility primarily for local players but has no resort-type
amenities or room for expansion. In addition, there is another nine-hole
course just inside Yosemite Park near the Wawona Hotel. It is designed and
used primarily for tourist day stop and family-type entertainment. For
persons seeking a golf-related vacation or the challenges of a regulation
course, neither nine-hole course would be viewed as competitive.
THE MORI POINT PROPERTY. The Company will continue with the proposed
development plan for a hotel/conference center on the Property. Because of its
proximity to San Francisco and the Silicon Valley, the Company considers that
the Mori Point Property could be positioned competitively within the executive
conference center category of facilities. Furthermore, it presents itself as an
outstanding timeshare location. Detailed plans for the development of the
Property do not exist at this time. Therefore, an accurate cost to develop the
facility, as well as a timetable, is not possible. A study of the endangered
species' habitat and any potential mitigation measures is being conducted as are
other environmentally-related issues like traffic impacts. It is anticipated
that over $500,000 will be needed by the Company to complete the permitting
process and deal with any other environmental concerns. Within 12-18 months
from completion of the Acquisition, the Company will determine whether it can
obtain governmental approvals to complete the development of the Property.
During that period, it will consider whether it will be necessary to sell the
Property or enter into a joint venture agreement.
The following table provides a summary of the current primary and second
competition of the proposed executive conference center for Mori Point.
Property Number Of Rooms Amenities
--------- --------------- ---------
Primary Competition
Seascape Resort - Aptos 164 A, B, C, D
70
<PAGE>
Chaminade Conference Center - Santa Cruz 152 A, C
Lighthouse Inn - Pacifica 95 A, B, C
Half Moon Bay Lodge 81
Secondary Competition
Hyatt Regency 791 A, B, C, D
Marriott 684 A, B, C, D
Westin 330 A, B, C, D
TOTAL 2,373
-------
A - Restaurant
B - Meeting Rooms
C - Swimming Pool
D - Exercise Room
INSURANCE
Management of the Company believes that each of the Properties is
adequately insured for title, property and casualty matters.
EMPLOYEES
It is anticipated that the Company's initial employees will consist of
approximately 15 individuals located at the home office in Newport Beach,
California, who will handle the responsibilities of management, accounting and
administration of the subsidiaries through AFC. There will initially be
approximately 35 additional full- and part-time employees at the
Yosemite/Ahwahnee Property who will handle the operation and maintenance of the
project and carry forward with the development and entitlement activities.
Marketing and consulting services for the recreational vehicle membership sales
and resort operations are contracted through Western Horizons, a Colorado-based
recreational vehicle park management and marketing company. None of the
employees will be subject to collective bargaining agreements.
LEGAL PROCEEDINGS
Neither the Company nor the Properties is the subject of any material,
legal proceeding.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing, conflicts
of interest and other policies of the Company. These policies have been
determined by the Company's Board of Directors and generally may be amended or
revised from time to time by the Board of Directors without a vote of the
shareholders.
INVESTMENT POLICIES
71
<PAGE>
INVESTMENTS IN REAL ESTATE. Initially, the Company will invest in the
Properties it receives in the Acquisition. This is a portfolio of properties in
various stages of development. As the business plans for the various Properties
described herein are either completed or matured, the Company will seek to
acquire and develop or manage, as appropriate, properties which are compatible
with its existing properties. Such properties may include resort properties (in
the development phase or completed), residential properties (in the development
phase), or such other types of properties as the Board of Directors may from
time to time in its sole discretion deem to be appropriate investments for the
Company. The Company expects that most of its initial investments will be
located in the State of California, although there is no requirement that such
be the case.
The Company has no policy with regard to whether it will acquire assets
primarily for possible capital gain or primarily for income. It will acquire
the Properties in the Acquisition and properties in the future in the manner
deemed by the Board of Directors to be in the best interests of the Company and
its shareholders in making profits. The Company has no specific policy as to
the percentage of assets which will be concentrated in any specific property;
however, the Board of Directors will use its best efforts to diversify the
Company's investment portfolio as much as possible.
INVESTMENTS IN REAL ESTATE MORTGAGES. While the Company will emphasize
equity real estate investments, it may, in its discretion, invest in mortgages
and other interests related to real estate. The Company does not presently
intend to invest in mortgages, but may do so. The mortgages which the Company
may purchase may be first mortgages or junior mortgages and may or may not be
insured by a governmental agency.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES. The Company may also invest in securities of entities engaged in
real estate activities or securities of other issuers, including for the purpose
of exercising control over such entities. However, the Company has no present
plans to make any such investment in securities. In any event, the Company does
not intend that its investments in securities will require it to register as an
"investment company" under the Investment Company Act of 1940, and the Company
would divest itself of such securities before any such registration would be
required.
JOINT VENTURES. The Company may enter into joint ventures or partnerships
or other participations with real estate developers, builders, owners and others
for the purpose of obtaining or retaining equity interests in a particular
property.
OFFERING SECURITIES IN EXCHANGE FOR PROPERTY. The Company may offer its
securities in exchange for a property in which it wishes to invest.
REPURCHASING ITS OWN SHARES. The Company may purchase or repurchase Shares
from any person for such consideration as the Board of Directors may determine
in its reasonable discretion, whether more or less than the original issuance
price of such Share or the then trading price of such Share.
72
<PAGE>
ISSUANCE OF ADDITIONAL SECURITIES. The Board of Directors may, in its
discretion, issue additional equity securities from time to time to increase its
available capital. Such issuance will result in a dilution of the interests of
the then-existing Shareholders.
FINANCING POLICIES
ISSUANCE OF SENIOR SECURITIES. The Company may, at any time, issue
securities senior to the Shares, upon such terms and conditions as may be
determined by the Board of Directors.
BORROWING POLICY. The Company may, at any time, borrow, on a secured or
unsecured basis, funds to finance its business and, in connection therewith,
execute, issue and deliver promissory notes, commercial paper, notes,
debentures, bonds and other debt obligations which may be convertible into
shares or other equity interests or be issued together with warrants to acquire
shares or other equity interests. The Charter Documents impose no limit upon
the Company's debt.
LENDING POLICIES. The Company may, at any time, make mortgage loans
secured by properties of the type in which the Company may invest, subject to
restrictions on related party transactions contained in the Delaware General
Corporation Law.
MISCELLANEOUS POLICIES
REPORTS TO SHAREHOLDERS. The Company will be subject to the reporting
requirements of the Exchange Act and will file annual and quarterly reports.
The Company currently intends to provide annual and quarterly reports to its
Shareholders.
COMPANY CONTROL. The Board of Directors has exclusive control over the
Company's business and affairs subject only to restrictions in the Charter
Documents and the Delaware General Corporation Law. Shareholders have the right
to elect members of the Board of Directors. The Directors are accountable to
the Company as fiduciaries and are required to exercise good faith and integrity
in conducting the Company's affairs.
WORKING CAPITAL RESERVES
The Company will attempt to maintain working capital reserves (and when not
sufficient, access to borrowing) in amounts that the Board of Directors
determines to be adequate to meet the normal contingencies in connection with
the operation of the Company's business and investments.
USE OF PROCEEDS
If all units are sold through the efforts of broker-dealers, the Company
will receive $4,650,000 before estimated offering expenses of $200,000. The net
proceeds from the sale of
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<PAGE>
the units offered hereby will be used by the Company to pay delinquent property
taxes, Acquisition Expenses, to fund its business plan and for working capital
purposes.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 after giving effect to the completion of the Acquisition and the
Acquisition and the Offering.
June 30, 1997
------------------------------
Pro Forma
Pro Forma Acquisition
Acquisition and the Offering
------------- -----------------
DEBT:
Capital lease obligations . . . . . . . $ 387,512 $ 387,512
------------ ------------
Total debt . . . . . . . . . . . . . 387,512 387,512
STOCKHOLDERS' EQUITY:
Common Stock(1) . . . . . . . . . . . . 1,968 2,468
Additional paid-in capital(1) . . . . . 21,050,103 25,499,603(2)
Accumulated deficit(3). . . . . . . . . (645,000) (367,000)
Stockholders' notes receivable. . . . . (3,903) (3,903)
------------ ------------
Total stockholders' equity . . . . . 20,403,168 25,131,168
------------ ------------
Total capitalization. . . . . . . . . . $20,790,680 $ 25,518,680
------------ ------------
------------ ------------
- -----------------
(1) Gives pro forma effect to the utilization of carryover basis in conjunction
with the Acquisitions, the conversion of investor interests into common
stock ownership in the Company and the initial capitalization of the
Company.
(2) Gives pro forma effect to the sale of 500,000 units at $10 per unit, after
commissions and estimated expenses totalling $550,000.
(3) Gives pro forma effect to the reduction to stockholders' equity of costs
allocated to the Acquisition upon completion of the Acquisition or the
Acquisition and the Offering.
DILUTION
Assuming completion of the Acquisition, the following table sets forth on a
pro forma basis as of June 30, 1997, with respect to the founders and
consultants, existing Program Investors and the Investors purchasing units in
the Offering, a comparison of the number and percentage of Shares purchased and
cash or other consideration paid and the average price per
74
<PAGE>
share. The calculations are based on the Offering price of $10 per unit, before
deduction of underwriting discounts and commissions and estimated offering
expenses payable by the Company. Further, it assumes no separate value is
assigned to the warrants which are part of the units.
<TABLE>
<CAPTION>
Acquisition
------------------------------------------------------------------------------
Shares Purchased Total Consideration Average
------------------------- ---------------------------- Price per
Number Percent Number Percent Share
--------- -------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Founders and Consultants 390,303 20% $ 950,014(1) 5% $ 2.43
Program Investors 1,577,285 80 20,102,057 95 12.74
---------- ---- ----------- ---- --------
Total 1,967,588 100% $ 21,052,071 100% $ 10.70
---------- ---- ----------- ---- --------
---------- ---- ----------- ---- --------
<CAPTION>
Acquisition and Offering
------------------------------------------------------------------------------
Shares Purchased Total Consideration Average
------------------------- ---------------------------- Price per
Number Percent Number Percent Share
--------- -------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Founders and Consultants 390,303 16% $ 950,014(1) 4% $ 2.43
Program Investors 1,577,285 64 20,102,057 77 12.74
Offering Investors 500,000 20 5,000,000 19 10.00
---------- ---- ----------- ---- --------
Total 2,467,588 100% $ 26,052,071 100% $ 10.56
---------- ---- ----------- ---- --------
---------- ---- ----------- ---- --------
</TABLE>
- ------------------
(1) Amount consists of $3,903 of cash and $946,111 of fees to be forgiven by
National and its principals upon the successful completion of the
Acquisition.
SELECTED FINANCIAL INFORMATION
75
<PAGE>
The following selected financial information should be read in conjunction
with the discussion set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and all of the financial
statements included elsewhere in this Prospectus. The pro forma financial
information is not necessarily indicative of what the actual financial position
and results of operations of the Company would have been as and for the periods
indicated, nor does it purport to represent the future financial position and
results of operations for future periods.
76
<PAGE>
<TABLE>
<CAPTION>
Company Pro Forma
-------------------------------------------------------------------------------------
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
---------------- -------------------------------------
The Acquisition The Acquisition
and the Offering The Acquisition and the Offering The Acquisition
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 4,084,437 $ 4,084,437 $ 6,675,718 $ 6,675,718
Cost of sales 3,069,580 3,069,580 5,327,856 5,327,856
------------ -------------- ------------- ------------
Gross profit 1,014,857 1,014,857 1,347,862 1,347,862
Expenses:
Selling, general and
administrative 2,280,561 2,280,561 4,017,227 4,017,227
Land write-down 590,172 590,172 845,000 845,000
Management fees 0 0 0 0
Acquisition expenses 367,000 567,000 575,000 775,000
------------ -------------- ------------- ------------
Total expenses 3,237,733 3,437,733 5,437,227 5,637,227
Net interest income 29,525 29,525 63,518 63,518
------------ -------------- ------------- ------------
Net loss (2,193,351) (2,393,351) (4,025,847) (4,225,847)
------------ -------------- ------------- ------------
Net loss per share (0.89) (1.22) (1.63) (2.15)
------------ -------------- ------------- ------------
Average number of
shares outstanding 2,467,588 1,967,588 2,467,588 1,967,588
------------ -------------- ------------- ------------
Balance Sheet Data:
Cash and cash
equivalents 5,768,366 1,240,366 N/A N/A
Total real estate 19,023,727 19,023,727 N/A N/A
Total assets 28,758,932 24,230,932 N/A N/A
Total debt 387,512 387,512 N/A N/A
Total liabilities 3,627,764 3,827,764 N/A N/A
Stockholders'/
owners' equity 25,131,168 20,403,168 N/A N/A
Other Data:
Cash provided by
<CAPTION>
The Acquisition Historical
-------------------------------------------------------------
Six Months
Ended Years Ended
June 30 December 31
---------------- ----------------------------------
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Revenues $ 4,084,437 $ 6,675,718 $ 6,333,143
Cost of sales 3,069,580 5,327,856 5,346,735
-------------- -------------- -------------
Gross profit 1,014,857 1,347,862 986,408
Expenses:
Selling, general and
administrative 2,105,561 3,667,227 2,033,496
Land write-down 590,172 845,000 -
Management fees 325,000 650,000 650,000
Acquisition expenses - - -
-------------- -------------- -------------
Total expenses $ 3,020,733 $ 5,162,227 $ 2,683,496
Net interest income 29,525 63,518 135,875
-------------- -------------- -------------
Net loss $ (1,976,351) $ (3,750,847) $ (1,561,213)
-------------- -------------- -------------
-------------- -------------- -------------
Net loss per share N/A N/A N/A
Average number of
shares outstanding N/A N/A N/A
Balance Sheet Data:
Cash and cash
equivalents 1,240,366 863,373 N/A
Total real estate 19,023,727 19,283,472 N/A
Total assets 24,308,932 25,535,082 N/A
Total debt 387,512 424,767 N/A
Total liabilities 4,206,875 3,952,822 N/A
Stockholders'/
owners' equity 20,102,057 21,582,260 N/A
Other Data:
Cash provided by
</TABLE>
77
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
operating activities N/A N/A N/A N/A
Cash used in
investing activities N/A N/A N/A N/A
Cash provided by
financing activities N/A N/A N/A N/A
<CAPTION>
<S> <C> <C> <C>
operating activities 12,377 (616,257) 652,473
Cash used in
investing activities (94,276) (186,211) (436,545)
Cash provided by
financing activities 458,893 642,815 115,311
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
The Acquisition Historical
---------------------------------------------------------------
Six Months
Ended Years Ended
June 30 December 31
----------- ----------------------------------------
1997 1996 1995
----------- ----------------- --------------
Investment Program
Data
Oceanside
- ----------
<S> <C> <C> <C>
Cash and cash
equivalents $ 985,670 $ 660,207 $ N/A
Real estate 3,219,920 3,219,920 N/A
Total assets 6,818,707 7,938,216 N/A
Total debt - 3,910 N/A
Total liabilities 1,197,804 1,207,402 N/A
total owners' equity 5,620,903 6,730,814 N/A
Revenues 3,240,050 5,490,180 5,920,600
Gross margin 368,036 515,020 624,859
Net Loss 659,911 548,675 367,219
Ahwahnee
- ---------
Cash and cash
equivalents $ 173,997 $ 101,551 $ N/A
Real estate 9,703,807 9,734,050 N/A
Total assets 11,300,190 11,165,251 N/A
Total debt 387,512 420,857 N/A
Total liabilities 2,010,140 1,678,840 N/A
Total owners' equity 9,290,050 9,486,411 N/A
Revenues 844,387 1,185,538 412,543
Gross margin 646,821 832,842 361,549
Net Loss 870,008 1,950,363 915,537
<CAPTION>
The Acquisition Historical
-------------------------------------------------------------
Six Months
Ended Years Ended
June 30 December 31
------------ ----------------------------------------
1997 1996 1995
---------- ----------------- --------------
Investment Program
Data
Mori Point
- -----------
<S> <C> <C> <C>
Cash and cash
equivalents $ 58,428 $ 39,032 $ N/A
Real estate 4,100,000 4,100,000 N/A
Total assets 4,164,950 4,139,032 N/A
Total debt - - N/A
Total liabilities 759,908 807,514 N/A
Total owners' equity 3,405,242 3,331,518 N/A
Revenues - - -
Gross margin - - -
Net Loss 122,852 189,125 146,867
Sacramento/Delta
Greens
- ----------------
Cash and cash
equivalents $ 22,272 $ 62,583 $ N/A
Real estate 2,000,000 2,230,000 N/A
Total assets 2,025,085 2,292,583 N/A
Total debt - - N/A
Total liabilities 239,023 259,066 N/A
Total owners' equity 1,786,062 2,033,517 N/A
Revenues - - -
Gross margin - - -
Net Loss 323,580 1,062,684 131,590
</TABLE>
79
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the "Selected
Financial Information" as well as the financial statements listed in the index
on page F-1. If approved by the Investors in the five former "Trudy Pat"
programs, the programs discussed below will be acquired by the Company. Except
for historical information contained herein, the matters discussed in this
report contain forward-looking statements that involve risks and uncertainties
that could cause results to differ materially.
RESULTS OF OPERATIONS - THE OCEANSIDE PROGRAM
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO 1996
For the six months ended June 30, 1997 the net loss amounted to $659,911
compared to $269,996 for the six months ended June 30, 1996. The increase in
the net loss is primarily due to the following factors: an increase in revenue
of $168,570, an increase in cost of sales of $55,231, an increase in selling,
general and administrative expenses of $135,827 and a writedown in the real
estate inventory of $360,172 during 1997.
The increase in revenues is principally due to the increase in the average
selling price per home of $10,000, while the number of homes sold during each
period remained the same.
The increase in cost of sales of approximately $55,231 (2%) was principally
due to the significant increase in incentives provided to the buyers in
conjunction with the sales of homes during the six months ended June 30, 1997 as
compared to 1996.
Selling, general and administrative expenses increased by $135,827 (33%)
due to an increase in professional fees related to the proposed acquisition of
the investment program by the Company.
Based on feedback and offers received from potential buyers in the
marketplace, the Program wrotedown its real estate inventory to its estimated
fair value as of June 30, 1997 of $1,000,000, resulting in a $360,172 charge
against income during the six months ended June 30, 1997.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO 1995
For the year ended December 31,1996, the net loss amounted to $548,675
compared to a net loss of $367,219 for the year ended December 31,1995. The
change of results are primarily from the following factors: a decrease in
revenue of $430,420, which has been offset by a
80
<PAGE>
decrease in cost of sales of $320,581, an increase in selling, general and
administrative expenses of $46,126 and a decrease in interest income of $25,491.
Revenues decreased in 1996 by $430,420 or 7% as compared to 1995. This
decrease was caused by two less homes being sold in 1996 as compared to 1995, as
well as a decrease in the average selling price of approximately $2,000 per
house. These figures are indicative of the soft single family housing market
throughout Southern California during 1995 and 1996.
Cost of sales decreased in 1996 by $320,581 or 6% as compared to 1995
primarily due to the decrease in the number of houses sold discussed above.
Selling, general and administrative expenses increased $46,126 or 6% as
compared to 1995. The increase is principally due to an increase in rent
expense paid for leases of model homes within the development.
The decrease in interest income of $25,491 or 24% was due to a decrease in
the average invested cash balance during 1996 as compared to 1995.
RESULTS OF OPERATIONS - THE YOSEMITE/AHWAHNEE PROGRAMS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO 1996
For the six months ended June 30, 1997, the net loss amounted to $870,008,
compared to a net loss of $812,670 for the six months ended June 30, 1996. The
change of results is primarily from the following factors: an increase in
revenues $600,679, an increase in cost of sales of $131,465 and an increase in
selling, general and administrative expenses of $524,072.
The increase in revenues of $600,679 (246%) was primarily due to the
operation of the golf course for the entire period of 1997, while it was closed
for refurbishing for a portion of the six months ended June 30, 1996, as well as
$427,489 of recreational vehicle memberships. The increase in cost of sales of
$131,465 (199%) was principally due to the increase in membership sales
activity.
The increase in selling, general and administrative expenses of $524,072
(59%) is a result of the increased operations of the golf course and the
increased recreational vehicle membership sales effort during 1997 as compared
to the same period in 1996.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO 1995
Due to the minimal operations of the resort during the first nine months of
1995, the property experienced significant increases in revenues and expenses
which are discussed in the following paragraphs.
For the year ended December 31, 1996, the property experienced a net loss
of $1,950,363 compared to a net loss of $915,537 for the year ended December 31,
1995. The change of results is due to the following factors: an increase in
revenue of $772,995, an increase in cost of sales of
81
<PAGE>
$301,702, an increase in selling, general and administrative expenses of
$1,467,998 and an increase in interest expense of $38,121.
Revenues increased in 1996 by $772,995 or 187%. This increase was
primarily attributable to the sale of $513,799 of recreational vehicle
memberships, the increased fees received from the operation of the golf course
during 1996 and the sale of two of the property's developed lots for $99,961
during 1996. The increase in cost of sales of $301,702 (592%) was principally
due to the increase in, and the change in makeup of, revenues.
Selling, general and administrative expenses increased $1,467,998 (134%)
during 1996 as compared to 1995. The increase was primarily attributable to
increases in salaries and wages of $506,693, consulting fees of $272,557,
advertising and promotion of $178,489, repairs and maintenance of $139,110 and
depreciation and amortization of $77,535.
The property had interest expense of $18,962 during 1996, while having
interest income of $19,159 during 1995. This change was due to the incurrence
of capital lease obligations during 1996, the interest expense from which more
than offset any interest income from bank accounts and notes receivable.
RESULTS OF OPERATIONS - THE MORI POINT PROGRAM
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO 1996
No sales activity occurred during the period on this property location.
There were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses increased from $28,511 for the
six months ended June 30,1996 to $73,340 at June 30, 1997, an increase of
$44,829. The operating expenses primarily consist of property taxes and costs
associated with the contemplated acquisition of this program by the Company.
Property tax expense increased by $26,405 due to an increase in the assessed
property value, while the program expended approximately $20,000 associated with
the acquisition of the program. Management fees were consistent for both
periods at $50,000 per period. These fees were for the management and
administration of the property.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO 1995
No sales activity occurred during the period on this property location.
There were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses increased from $46,867 at
December 31,1995 to $90,348 at December 31, 1996, an increase of $43,481. The
operating expenses primarily consist of property taxes and legal expenses.
During 1996, property taxes increased by $27,092 due to an increase in the
property value. Legal expenses increased by $10,525. These legal expenses
mainly relate to a proposed development on this property which never
materialized. Management fees were consistent for both year ends at $100,000
per year. These fees were for the management and administration of the
property.
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<PAGE>
RESULTS OF OPERATIONS - THE SACRAMENTO/DELTA GREENS PROGRAM
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO 1996
No development activity occurred during the periods on this property.
There were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses increased from $40,365 for the
six months ended June 30,1996 to $69,059 at June 30, 1997, an increase of
$28,694. The increased operating expenses is primarily due to the employment of
consultants during 1997 to perform studies related to the proposed development
of the property. Management fees were consistent for both periods at $25,000
per period.
Due to a decrease in the median prices of homes in the communities
surrounding Delta Greens during 1996 and a decrease in the number homes zoned
for this property during 1997, impairment losses of $422,500 and $230,000 were
recorded on the property's financial statements during the periods presented.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO 1995
No development activity occurred during the periods on this property.
There were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses increased from $93,523 at
December 31,1995 to $169,649 at December 31, 1996, an increase of $76,126. The
operating expenses primarily consist of property taxes, planning and engineering
expenses, and consulting fees. During 1996, planning and engineering expenses
increased by $48,219 due to engineer studies and surveys performed on the
property. Consulting fees increased by $44,875. These consulting expenses
relate to the proposed development of this property. Management fees were
consistent for both year ends at $50,000 per year. These fees were for the
management and administration of the property.
Due to a decrease in the median prices of homes in the communities
surrounding Delta Greens during 1996, an impairment loss of $845,000 was
recorded on the property's 1996 financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Acquisitions on a pro forma basis as of June 30,
1997, the Company will have approximately $1,240,000 of unrestricted cash
available to operate the Company and develop its owned real estate. The Company
is also attempting to raise additional funds by offering units for sale in
conjunction with the Acquisitions, which if fully subscribed would result in net
proceeds of approximately $4,450,000, after allocated Acquisition Expenses of
$200,000.
In addition to the methods discussed above, the Company anticipates
creating additional liquidity through the following methods on an as needed
basis:
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(a) Obtain additional mortgage debt against the properties: At June 30,
1997, the Company had no debt and approximately $920,000 of delinquent property
taxes levered against its real estate. Based on its lack of significant
leverage, the Company believes that significant liquidity can be generated
through additional borrowings, if necessary
(b) Obtain additional funding by selling off additional properties: The
Company believes some of the properties, or portions thereof, can be sold to
generate sufficient liquidity to develop the remaining properties
(c) Reduce development capital needs through joint venture arrangements:
The Company believes that it will be able enter into joint venture arrangements
to develop and operate one or more of its current properties.
(d) Conserve development capital by slowing down the currently planned
development process: If the Company is unable to raise sufficient development
funds utilizing the methods discussed above, the pace of property development
can be slowed until necessary internal or external funding is generated.
Listed below is a summary, by project, of the estimated time period to
develop each project as well as the projected external financing needed to
complete development:
YOSEMITE/AHWAHNEE
The Company would develop and construct 170 vacation homes on currently
entitled lots which would be sold as time share intervals. The Company expects
that it will require an initial amount of approximately $3,000,000 of funding
for this development phase which would last for approximately 6 years. In
addition, the Company plans to continue to develop the recreational vehicle
park, which should be self-funding from sales of currently available
recreational vehicle memberships. Although the Company currently does not have
the proper entitlements to develop the remaining raw land within the resort, the
Company does anticipate eventually developing this land subsequent to the
completion of the other projects occurring within the resort which have been
described above.
OCEANSIDE
The Company could start developing the Symphony project residential homes.
The Symphony project consists of 111 lots upon which the Company projects
building single family homes principally containing 3 to 4 bedrooms. The Company
anticipates that funds which have been generated from the Encore tract, along
with approximately $700,000 of equity funding and an estimated maximum of
$3,500,000 of construction financing, will be sufficient to develop Symphony,
which should be completed within approximately two years from the date of
commencement.
MORI POINT
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The Company anticipates developing a state of the art business conference
center located near San Francisco, California. The Company anticipates that
approximately $500,000 and 1.5 years is needed to complete the entitlement and
mapping process. If construction commences upon completion of the
entitlement/mapping process, the Company anticipates that the business
conference center would be operational by 2001. The business conference center
will consist of multiple meeting rooms, restaurant, indoor and outdoor
facilities, which is expected to require approximately $40,000,000 of external
funding. Due to the significant development funding required for this project,
the Company anticipates that it will seek a joint venture development partner to
reduce the funding required of the Company.
SACRAMENTO/DELTA GREENS
The property is zoned for a single-family housing project, consisting of
over 500 homesites, in Sacramento, California. The total expected funding needs
for this project are approximately $3,000,000, with completion of the project
currently estimated for approximately 10 years after commencement.
LIQUIDITY SUMMARY
The Company expects to meet its short- and long-term liquidity requirements
through the methods described above in addition to cash generated from the
operations of the resort properties once these properties are operational. The
Company believes that the liquidity sources described above will be adequate to
satisfy the cash requirements of the Company for the 12 months following the
completion of the Acquisition.
HISTORICAL CASH FLOWS
THE OCEANSIDE PROGRAM
Cash flows from operations decreased from net inflows of $1,277,135 for the
year ended December 31, 1995 to net inflows of $1,002,238 for the year ended
December 31, 1996. The decrease is principally due to the increase in the net
loss of the property from $367,219 during 1995 to $548,675 during 1996. Cash
flows from operations increased from inflows of $765,061 for the six months
ended June 30, 1996 to inflows of $784,227 for the six months ended June 30,
1997. The significant cash inflows were due to the large number of houses sold
during the six months ended June 30, 1996 and 1997.
Cash flows used in investing activities decreased, going from $323,914 in
1995 to $114,062 in 1996, due to the slowdown in development of the Symphony
site. Cash flows used in investing activities decreased from the six months
ended June 30, 1996 to the six months ended June 30, 1997 also due to changes in
the level of development expenditures made on the Symphony site.
Cash flows from financing activities were net outflows of $900,000 and
$896,090 for the years ended December 31, 1995 and 1996, which were principally
composed of capital
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distributions. For the six months ended June 30, 1996, cash outflows for
financing activities of $450,000 occurred while cash outflows for the six
months ended June 30, 1997 of $453,910 occurred. These outflows are also
composed principally of distributions paid to Program investors.
THE YOSEMITE/AHWAHNEE PROGRAM
Cash used in operations increased from net outflows of $546,788 for the
year ended December 31, 1995 to net outflows of $1,247,623 for the year ended
December 31, 1996. The decrease is principally due to the increase in the net
loss of the property from $915,537 during 1995 to $1,950,363 during 1996. Cash
flows from operations improved from the six months ended June 30, 1996 to 1997,
decreasing from outflows of $512,083 to outflows of $478,434. The decrease is
principally due to significant increases in accounts payable and accrued
expenses in 1997 versus smaller increases in these balances during the six
months ended June 30, 1996.
Cash flows used in investing activities resulted principally from
purchasing equipment for the golf course and minor additions to the property as
a whole. Net cash used in investing activities was $112,631, $72,149, $20,084
and $89,422 for the years ended December 31, 1995 and 1996 and for the six
months ended June 30, 1996 and 1997.
Cash flows from financing activities were net inflows of $1,003,278,
$1,074,023, $245,665 and $640,302 for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997. The level of owner
contributions into the property was the principal component driving the above
fluctuations in cash flows from financing activities.
THE MORI POINT PROGRAM
Cash flows from operations changed from $0 for the year ended December 31,
1995 to outflows of $163,278 for the year ended December 31, 1996. The change
is principally due to payments being made on accrued liabilities. Cash flows
used in operations increased from outflows of $130,414 for the six months ended
June 30, 1996 to $176,980 for the six months ended June 30, 1997. The increase
is principally due to a decrease in accrued liabilities in 1997.
Cash flows from financing activities for the year ended December 31, 1996
consisted of $202,310 made up of contributions from investors. For the six
months ended June 30, 1996 and 1997, cash inflows from financing activities were
$163,463 and $196,376. Inflows consisted of additional contributions from
existing program investors.
THE SACRAMENTO/DELTA GREENS PROGRAM
Cash outflows from operations were $77,874, $207,594, $120,912 and $116,436
for the years ended December 31, 1995 and 1996 and for the six months ended June
30, 1996 and 1997. The variations are principally due to the timing of payments
of accounts payable and accrued liabilities.
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Cash flows from financing activities for the years ended December 31 1996
and 1995 and the six months ended June 30, 1996 and 1997 consisted of
contributions from investors of $12,033, $262,572, $245,816 and $76,125.
NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board ("FASB") is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. Because the Company is
not currently engaging in any transactions within the scope of this
pronouncement, the Company does not expect adoption of SFAS No. 125 to have a
material effect on its financial position or result of operations.
Statements of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128) issued by the FASB is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Earlier application
is not permitted. SFAS 128 requires dual presentation of basic and diluted
earnings per share ("EPS") on the face of the income statement. It also
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This statement also requires restatement of all prior period EPS data presented.
The Company does not expect adoption of SFAS No. 128 to have a material effect
on its results of operations.
Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The adoption of SFAS No. 129 will not have a
material effect on the financial position or results of operations of the
Company.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of general-
purpose financial statements. The adoption of SFAS No. 130 will not have a
material effect on the financial position or results of operations of the
Company
Statements of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statement beginning after December 15, 1997
(although the FASB is encouraging earlier application). The new standard
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to shareholders.
It also requires
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that public business enterprises report certain information about their products
and services, the geographic areas in which they operate and their major
customers. The adoption of SFAS No. 131 will not have a material effect on the
financial position or results of operations of the Company.
MANAGEMENT FOLLOWING THE ACQUISITION
The Company will operate under the direction of the Board, the members of
which are accountable to the Company and its shareholders as fiduciaries. The
Board will be responsible for the management and control of the affairs of the
Company; however, the executive officers of the Company and its subsidiaries
will manage the Company's and its subsidiaries' day-to-day affairs and the
acquisition and disposition of investments, subject to the Board's supervision.
The Company currently has six directors; it must have at least one and may have
no more than nine directors. As a matter of policy, the Company will maintain
at least two Independent Directors on the Board; that is, persons who are not
employed by or otherwise affiliated with the Company prior to becoming
directors. The Board will then be divided into three classes serving staggered
three year terms. See "Comparisons of Programs and the Company -- Anti-Takeover
Provisions."
Any director may resign at any time and may be removed with or without
cause by the shareholders upon the affirmative vote of a majority of all the
votes entitled to be cast for the election of directors at a special meeting
called for the purpose of such proposed removal. The notice of such meeting
shall indicate that the purpose, or one of the purposes, of such meeting is to
determine if a director will be removed. A vacancy created by death,
resignation or removal of a director may be filled by a vote of a majority of
the remaining directors. Each director will be bound by the Company's Charter
Documents.
The directors are not required to devote all of their time to the Company
and are only required to devote such of their time to the affairs of the Company
as their duties require. The directors will meet quarterly or more frequently
if necessary. It is not expected that the directors will be required to devote
a substantial portion of their time to discharge their duties as directors.
Consequently, in the exercise of their fiduciary responsibilities, the directors
will be relying heavily on the executive officers of the Company. The Board is
empowered to fix the compensation of all officers that it selects and may pay
directors such compensation for special services performed by them as it deems
reasonable. Initially, the Company will pay Independent Directors a retainer
fee of $20,000 per year, plus $1,000 per meeting attended, plus 2,500 options to
purchase shares, plus out-of-pocket expenses in attending meetings The Company
will not pay any director compensation to the officers of the Company who also
serve as directors.
The general investment and borrowing policies of the Company are set forth
in this Prospectus. The directors shall establish further written policies on
investments and borrowings and shall monitor the administrative procedures,
investment operations and performance of the Company to assure that such
policies are in the best interest of the shareholders and are fulfilled.
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Until modified by the directors, the Company shall follow the policies on
investments and borrowings set forth in this Prospectus.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Director
Name Age Position Term Expires
---- --- -------- ------------
<S> <C> <C> <C>
David G. Lasker 52 Co-Chairman of the Board, 2000
President and Chief Financial Officer
James N. Orth 50 Co-Chairman of the Board, 2000
Chief Executive Officer and Secretary
L.C. "Bob" Albertson, Jr. 54 Executive Vice President of the Company 1999
and President and Chief Executive Officer
of American Family Communities, Inc.,
Director
Mark K. Kawanami 34 Vice President N/A
Charles F. Hanson 60 Director 1999
Dudley Muth 57 Director 1998
James G. LeSieur, III 56 Director 1998
</TABLE>
The following is a biographical summary of the experience of the
directors and executive officers of the Company.
DAVID G. LASKER - Co-Chairman of the Board, President and Chief Financial
Officer of the Company. Mr. Lasker has served as Chairman and President of
National Investors Financial, Inc. since 1986. Prior to that, he served as
Chairman and Vice chairman of the Board of Directors of American Merchant Bank,
a commercial bank headquartered in Orange County, California, from 1985 to 1986.
His experience includes all phases of negotiating, underwriting, closing and
servicing of residential and commercial loans. Since the Ownership Date, Mr.
Lasker has overseen the development and construction of the Oceanside Property.
He has served as project manager of the Mori Point Property. He and Mr. Orth
have supervised the predevelopment activities of the Sacramento/Delta Greens
Property and they have shared the responsibility for the management and ultimate
development of a business plan for the Yosemite/Ahwahnee Properties. He and Mr.
Orth are responsible for overall management of the
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Company. Mr. Lasker holds a Bachelor of Science degree from Purdue University
and an M.B.A. from the University of Southern California.
JAMES ORTH - Co-Chairman of the Board, Chief Executive Officer and
Secretary of the Company. Since 1986, Mr. Orth has been Executive Vice
President and a member of the Board of Directors of National Investors
Financial, Inc. Prior to that, in 1980, he was a founding member of NIF
Securities, Inc., a securities broker-dealer oriented to the capitalization of
start-up and second-stage business ventures. In addition, he has been a founder
and executive officer of a variety of companies specializing in financial
management, marketing and distribution. From 1969 through 1976, Mr. Orth was
employed by IBM Corporation as a marketing representative and territory manager.
From 1978 to 1980, he was vice president and branch manager of ENI Corporation,
an oil and gas exploration company. He received a Bachelor of Science in
Mathematics-Statistics, French and Economics from the University of Wyoming in
1969 and did post-graduate work in the MBA-Finance program at the University of
Colorado.
L.C. "BOB" ALBERTSON, JR. - Executive Vice President and Director of the
Company, President and Chief Executive Officer of American Family Communities,
Inc., a wholly-owned subsidiary of the Company. Mr. Albertson is responsible
for the operation of the Company's Properties and the implementation of the
Company's business plan. Mr. Albertson is a 32-year veteran of the homebuilding
industry. From 1985 to 1996, he served as President of Presley Homes, Southern
California Region, a large publicly-traded homebuilding company. From 1981 to
1983, he was President of Barrett American, Irvine, a publicly-traded
homebuilding company based in Great Britain. Mr. Albertson is President of
HomeAid America, a non-profit organization supported by the National Association
of Homebuilders. From 1985 to 1986, he served as President of the Building
Industry Association/Orange County Region.
MARK K. KAWANAMI - Vice President of the Company and Vice President of
Finance of American Family Communities, Inc., a wholly-owned subsidiary of the
Company. From March 1996 to October 1997, he was Corporate Controller for
California Pacific Homes, Inc.;. From January 1995 to March 1996, he was
Director of Finance and Administration for Creative Design Consultants, Inc.
From August 1991 to January 1995, he was Assistant Treasurer/Controller for
A-M/Greystone Homes. After leaving public accounting in 1989, Mr. Kawanami held
two other finance positions with Southern California homebuilders. From 1986 to
1989, he was with the accounting firm of KPMG Peat Marwick (independent
accountants) where he earned his CPA. Mr. Kawanami received a Bachelor of Arts
degree in Economics from the University of California, Los Angeles, in 1985.
CHARLES F. HANSON - Director of the Company. Since 1989, Mr. Hanson has
served as Co-Chairman of the Board of Larson Training Centers, Inc., a
vocational training company with campuses in the Cities of Orange and Carson,
California. Also, since 1994, he has served as an independent marketing
director for a major pharmaceutical company. In 1991, he developed Coastal
Pacific Commercial Corporation, a consulting company to the real estate
industry. From 1987 to 1989, Mr. Hanson was associated with CIS Corporation, a
New York stock exchange-listed company and a leading equipment leasing firm, as
Vice President and National Sales
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Manager. In 1985, he developed Half-Time Associates, Inc., a national seminar
company. From 1983 to 1985, Mr. Hanson was associated with Integrated
Resources, Inc. as Vice President, Director of Marketing. Prior positions at
Integrated Resources, Inc. included Senior Executive Vice President of
Integrated Resources Equity Corp. and Executive Vice President, National Sales
Manager and Director of Marketing for Integrated Resources Energy Group. Mr.
Hanson received his Liberal Arts degree from the University of Washington. He
is Registered Principal with the NASD and is licensed with the New York Stock
Exchange.
DUDLEY MUTH - Director of the Company. Mr. Muth's career includes over 20
years of extensive experience in the field of corporate management, law,
securities and real estate. From June 1993 through May 1997, Mr. Muth served as
a consultant on real estate and securities matters and as Vice President of
Drake Capital Securities, Inc. He recently rejoined Drake Capital Securities,
Inc. to direct all compliance and legal activities. From March 1990 until June
1992, he served as president of First Diversified Financial Services, Inc., a
syndicator of all-cash investments in California real estate. From June 1987
until February 1990, he was President of USREA/WESPAC which controlled two
public real estate investment trusts. From January 1985 to May 1987, Mr. Muth
was President of Cambio Equities Corporation and Cambio Securities Corporation.
From October 1982 to December 1984, he served as Executive Vice President of
Angeles Corporation. From July 1977 through September 1979, he was Vice
President and Director of Compliance for Pacific Stock Exchange, Inc. In 1967,
he began his career in the tax department of Arthur Andersen & Co. Mr. Muth
received his Bachelor of Arts degree in Economics from Pomona College, his
M.B.A. in accounting from UCLA Graduate School of Management, and his J.D. from
the University of Southern California. He is a member of the California State
Bar and a Registered Principal with the NASD.
JAMES G. LESIEUR, III - Director of the Company. From April 1991 to the
present, Mr. LeSieur has been President and Chief Executive Officer of Sunwest
Bank, Tustin, California. Prior to that, he was Executive Vice President and
Chief Financial Officer of Sunwest Bank from December 1985 to March 1991, and
held other responsible officer positions with that bank from September 1975 to
November 1985. Before joining Sunwest Bank, he was with Arthur Young & Company
(independent accountants). He received a Bachelor of Science degree from Purdue
University and an M.B.A. degree from Wharton Graduate School of University of
Pennsylvania.
COMMITTEES OF THE BOARD OF DIRECTORS
EXECUTIVE COMMITTEE. In due course, the Board of Directors will establish
an executive committee (the "Executive Committee") which will be granted the
authority to acquire and dispose of real property and the power to authorize, on
behalf of the full Board of Directors, the execution of certain contracts and
agreements. The Company expects that the Executive Committee will ultimately
consist of the co-Chairmen of the Board of Directors and two Independent
Directors.
AUDIT COMMITTEE. The audit committee will consist of two Independent
Directors and one "inside" director (the "Audit Committee"). The Audit
Committee will make recommendations concerning the engagement of independent
auditors, review with the independent auditors the
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plans and result of the audit engagement, approve professional services provided
by the independent auditors, review the independence of the independent
auditors, consider the range of audit and non-audit fees and review the adequacy
of the Company's internal accounting controls.
COMPENSATION COMMITTEE. In due course, the Board of Directors will
establish a compensation committee (the "Compensation Committee") to determine
compensation, including awards under the Company's Stock Incentive Plan for the
Company's executive officers. The Company expects that the Compensation
Committee will ultimately consist of two Independent Directors.
NOMINATING COMMITTEE. In due course, the Board of Directors will establish
a nominating committee (the "Nominating Committee") to nominate persons to serve
on the Company's Board of Directors as vacancies arise. The Nominating
Committee will ultimately consist of three directors, at least two of whom will
be Independent Directors
DIRECTORS AND EXECUTIVE OFFICERS COMPENSATION AND INCENTIVES
The Company will compensate designated key managers of the Company with
cash compensation and certain incentives including stock option and bonus plans.
The below table sets forth the estimated annual base salary to be paid to the
Chief Executive Officer, President and Vice Presidents, as well as the stock
options for the officers and directors.
<TABLE>
<CAPTION>
Annual Common Stock
Name Position Salary(1) Options
- ---- -------- -------- -------
<S> <C> <C> <C>
David G. Lasker* Co-Chairman of the Board, $180,000 10,000(2)
President and Chief
Financial Officer
James N. Orth Co-Chairman of the Board, $180,000 10,000(2)
Chief Executive Officer
and Secretary
</TABLE>
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<TABLE>
<CAPTION>
Annual Common Stock
Name Position Salary(1) Options
- ---- -------- --------- ------------
<S> <C> <C> <C>
L.C. "Bob" Albertson, Jr. Executive Vice President and $200,000 10,000(2)
Director of the Company;
President and Chief Executive
Officer of American Family
Communities, Inc., Director
Mark K. Kawanami Vice President of the Company; $100,000 5,000(2)
Vice President of Finance of
American Family Communities,
Inc.
Charles F. Hanson Director - 2,500(3)
Dudley Muth* Director - 2,500(3)
James G. LeSieur, III* Director - 2,500(3)
</TABLE>
- -------------------------
* Initial members of Audit Committee.
(1) Employment Agreements for Messrs. Lasker, Orth and Albertson contain
provisions for bonus payments based on performance criteria.
(2) To be issued upon completion of the Acquisition. These options are
nonqualified stock options which are not issued pursuant to the Company's
1997 Stock Option and Incentive Plan. They have a ten year term, vest
one-third per year commencing with the date of grant, with the exception of
Mr. Kawanami's whose options will vest in one year. They are exercisable
at $10 per share.
(3) To be issued upon completion of the Acquisition. These options are issued
pursuant to the Company's 1997 Stock Option and Incentive Plan. They have
a ten-year term and are exercisable one year from the date of grant at $10
per Share.
STOCK INCENTIVE PLAN
The Company has established a stock incentive plan (the "Stock Incentive
Plan") to enable executive officers, key employees and directors of the Company
and its subsidiaries to participate in the ownership of the Company. The Stock
Incentive Plan is designed to attract and retain executive officers, other key
employees and directors of the Company and its subsidiaries and to provide
incentives to such persons to maximize the Company's value, as well as cash
flow, available for distribution. The Stock Incentive Plan provides for the
award to such executive officers and employees of the Company and its
subsidiaries of stock-based compensation alternatives such as restricted stock,
nonqualified stock options and incentive stock options and provides for the
grant to Independent Directors of nonqualified stock options on a formula basis.
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The Stock Incentive Plan will be administered by the Compensation
Committee, which is authorized to select from among the eligible employees of
the Company and its subsidiaries the individuals to whom options are to be
granted and to determine the number of shares to be subject thereto and the
terms and conditions thereof. The Compensation Committee is also authorized to
adopt, amend and rescind rules relating to the administration of the Stock
Incentive Plan. Nonqualified stock options shall be granted to Independent
Directors in accordance with the formula set forth in the Stock Incentive Plan.
The Stock Incentive Plan was approved by the Company's founding
shareholders September 15, 1997. The following awards may be made under the
Plan:
NONQUALIFIED STOCK OPTIONS will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the date
of grant (but not less than par value), and usually will become exercisable in
installments after the grant date. Nonqualified stock options may be granted
for any reasonable term.
INCENTIVE STOCK OPTIONS, if granted, will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of fair market value of
Common Stock on the grant date and a ten year restriction on their term, but may
be subsequently modified to disqualify them from treatment as an incentive stock
option.
RESTRICTED STOCK is Common Stock of the Company which may be awarded to key
employees of the Company by the Compensation Committee, subject to such
restrictions on the exercise of full ownership as such Committee may determine.
Restrictions may relate, among other things, to duration of employment, Company
performance and individual performance
Promptly after the Closing of the Acquisition, the Company expects to issue
to certain officers, directors and key employees of the Company and its
subsidiaries options to purchase an aggregate of _____ shares of Common Stock
pursuant to the Stock Incentive Plan. The term of each of such options will be
_____ years from the date of grant. Commencing one year from the Closing, each
such option will vest 25% per year over four years and is exercisable at a price
per share equal to the public offering price per Share in the Offering. The
expected allocations of the options to such persons is as presented above in the
"Directors and Executive Officers Compensation and Incentives."
185,000 shares of Common Stock, subject to adjustment, will be reserved for
issuance under the Stock Incentive Plan. There is no limit on the number of
awards that may be granted to any one individual (other than Independent
Directors who annually receive a fixed number of options automatically)
FEDERAL INCOME TAXES. If the option has no readily ascertainable fair
market value, no income is recognized by a participant at the time an option is
granted. If the option is an incentive stock option ("ISO"), no income will be
recognized upon the participant's exercise of the option. Income is recognized
by a participant when he or she disposes of shares acquired
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under an ISO. The exercise of a nonqualified stock option ("NQSO") generally is
a taxable event that requires the participant to recognize, as ordinary income,
the difference between the shares' fair market value on the exercise date and
the option price.
The employer (either the Company or its affiliate) will be entitled to
claim a federal income tax deduction on account of the exercise of a NQSO. The
amount of the deduction is equal to the ordinary income recognized by the
participant. The employer will not be entitled to a federal income tax
deduction on account of the grant or the exercise of an ISO. The employer may
claim a federal income tax deduction on account of certain dispositions of
Common Stock acquired upon the exercise of an ISO.
401(k) PLAN
The Company intends to establish a qualified retirement plan, with a salary
deferral feature designed to qualify under Section 401 of the Code (the "401(k)
Plan"). The 401(k) Plan will permit the employees of the Company and the
Operating Partnership to defer a portion of their compensation in accordance
with the provisions of Section 401(k) of the Code. The 401(k) Plan will allow
participants to defer up to 15% of their eligible compensation on a pre-tax
basis subject to certain maximum amounts. Matching contributions may be made in
amounts and at times determined by the Company. Amounts contributed by the
Company for a participant will vest over a period of years to be determined and
will be held in trust until distributed pursuant to the terms of the 401(k)
Plan.
Employees of the Company and its subsidiaries will be eligible to
participate in the 401(k) Plan if they meet certain requirements concerning
minimum age and period of credited service. All contributions to the 401(k)
Plan will be invested in accordance with participant elections among certain
investment options. Distributions from participant accounts will not be
permitted before age 59 1/2, except in the event of death, disability, certain
financial hardships or termination of employment.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Lasker and
Orth for a term of five years and Mr. Albertson for a term of three years, each
subject to automatic one year extensions unless terminated. The agreements
provide for annual compensation in the amounts set forth under "Executive
Compensation" above and contain provisions for bonus consideration based on
performance standards. In addition, except to the extent required to carry on
pre-existing duties to investors in other programs managed by National or other
pre-existing real estate investments, each agreement includes provisions
restricting the officers from competing with the Company during the term of such
employment; providing for certain salary and benefit continuance for six months
if the officer is permanently disabled; and, providing for a severance payment
in the amount of 2.99 times the officer's average salary and bonus over the past
five years (or such shorter time as the officer was employed), payable in 18
equal monthly installments, in the event of a change of control of the Company
resulting in the officer's demotion or reduction in his compensation or
responsibilities within two years of the change of
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control event. Change of control is generally defined to include a
consolidation in the hands of one Person of 40% or more of the voting securities
of the Company, a business combination which is not approved by employee after
which the existing shareholders of the Company hold less than 51% of the voting
securities of the resulting entity, or a change in membership of the Board of
Directors resulting in 50% or more of the Board of Directors not being nominated
by management.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Charter Documents limit the liability of the Company's
directors to the Company and its stockholders for money damages to the fullest
extent permitted from time to time by Delaware law. Delaware law presently
permits the liability of directors to a corporation or its shareholders for
money damages to be limited, except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
the law; (iii) for unlawful distributions to stockholders; and (iv) for any
transaction from which the director derived an improper benefit.
The Company's By-Laws require the Company to indemnify its directors,
officers and certain other parties (collectively "agents") to the fullest extent
permitted from time to time by Delaware law. The Company's Certificate of
Incorporation and By-Laws also permit the Company to indemnify its agents who
have served another corporation or enterprise in various capacities at the
request of the Company. The Delaware law presently permits a corporation to
indemnify its agents against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service to or at the
request of the Company, unless it is established that: (i) the act or omission
of the indemnified party was material to the matter giving rise to the
proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) the indemnified party actually received an improper
personal benefit; or (iii) in the case of any criminal proceeding, the
indemnified party had reasonable cause to believe that the act or omission was
unlawful. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or officer
in connection with the proceeding; provided, however, that if the proceeding is
one by or in the right of the Company, indemnification may not be made with
respect to any proceeding in which the director or officer has been adjudged to
be liable to the Company. In addition, a director or officer may not be
indemnified with respect to any proceeding charging improper personal benefit to
the director or officer in which the director or officer was adjudged to be
liable on the basis that the personal benefit was improperly received. The
termination of any proceeding by conviction, or upon a plea of NOLO CONTENDERE
or its equivalent, or an entry of any order of probation prior to judgment,
creates a rebuttable presumption that the director or officer did not meet the
requisite standard of conduct required for indemnification to be permitted.
Indemnification under the provisions of the Delaware law is not deemed exclusive
to any other rights, by indemnification or otherwise, to which an officer or
director may be entitled under the Company's Charter or By-Laws, or under
resolutions of shareholders or directors, contract or otherwise.
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The Company will apply for a directors and officers liability insurance
policy in an amount of $5,000,000. The directors and officers liability
insurance insures (i) the directors and officers of the Company from any claim
arising out of an alleged wrongful act by such persons while acting as directors
and officers of the Company and (ii) the Company to the extent that it has
indemnified the directors and officers for such loss.
SECONDARY MARKET FOR TENANCY-IN-COMMON INTERESTS
There is no organized market for the tenancy-in-common interests held by
Investors in the Programs. Any transfers of such interests must be privately
negotiated among willing parties.
PRINCIPAL SHAREHOLDERS
The following tables set forth information as of the date hereof as to each
person or entity who owns of record or is known by the Company to own
beneficially five percent or more of the Company's outstanding voting securities
and information as to the securities ownership of management. All stock
ownership shown below is direct unless otherwise indicated.
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
Percent of All
Voting Shares Outstanding, Assuming
----------------------------------------
Acquisition
Acquisition Completed and All
Name and Address Common Stock Completed Only Units Sold
- ---------------- ------------ --------------- -----------------
<S> <C> <C> <C>
Yale Partnership for Growth
and Development, L.P.(1)
4220 Von Karman Avenue 147,500 7.5% 5.98%
Suite 110
Newport Beach, CA 92660
J-Pat, L.P.(2)
4220 Von Karman Avenue 147,500 7.5% 5.98%
Suite 110
Newport Beach, CA 92660
</TABLE>
- -------------------------
(1) As manager of the general partner, Mr. Lasker controls this partnership and
has sole voting and investment power.
(2) As manager of the general partner, Mr. Orth controls this partnership and
has sole voting and investment power.
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DIRECTOR AND OFFICER STOCK OWNERSHIP
<TABLE>
<CAPTION>
Percent of
Percent Class if
of Class if Acquisition
Acquisition Completed Common
Common Completed and All Stock Percent
Name/Position Stock Only Units Sold Options of Class
- ------------- -------- ----------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
David G. Lasker, President,
Chief Executive Officer,
Chief Financial Officer
and Director(2) 147,500 7.5% 5.98% 10,000(1) 23.53%
James Orth, Chief Executive
Officer, Secretary and
Director(3) 147,500 7.5% 5.98% 10,000(1) 23.53%
L.C. "Bob" Albertson, Jr.
Executive Vice President,
Director 54,118 2.75% 2.19 10,000(1) 23.53%
Mark K. Kawanami 1,000 .05% 5,000(1) 11.77%
Charles F. Hanson, Jr.,
Director - - - 2,500 5.88%
Dudley Muth, Director - - - 2,500 5.88%
James G. LeSieur III,
Director - - - 2,500 5.88%
Directors and Officers
as a group 350,118 17.80% 14.15% 42,500 100.00%
</TABLE>
- -------------------------
(1) Messrs. Lasker, Orth and Albertson each may exercise options to purchase
3,333 shares presently.
(2) Mr. Lasker controls Yale Partnership for Growth and Development, L.P. which
owns the Shares reported. He has sole voting and investment power.
(3) Mr. Orth controls J-Pat, L.P. which owns the Shares reported. He has sole
voting and investment power.
DESCRIPTION OF SHARES
The following description of the Shares and other capital stock of the
Company does not purport to be complete but contains a summary of portions of
the Company's Certificate of Incorporation and is qualified in its entirety by
reference to the Company's Certificate of Incorporation.
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GENERAL
The total number of shares of stock which the Company has authority to
issue is 12,000,000 shares, of which 10,000,000 are shares of Common Stock,
$0.001 par value per share ("Common Stock"), and 2,000,000 are shares of
Preferred Stock, $0.001 par value per share ("Preferred Stock"). The Board of
Directors is authorized to provide for the issuance of shares of Preferred Stock
in one or more series, to establish the number of shares in each series and to
fix the designation, powers, preferences and the rights of such series and the
qualifications, limitations or restrictions thereof.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of any other shares
or series of shares of Preferred Stock, holders of Common Stock will be entitled
to receive distributions on such Common Stock if, as and when authorized and
declared by the Board of Directors of the Company out of assets legally
available therefor and to share ratably in the assets of the Company legally
available for distribution to its Shareholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for, all known
debts and liabilities of the Company.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of Shareholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of stock, the holders of such
shares of Common Stock will possess the exclusive voting power. There is no
cumulative voting in the election of directors, which means that the holders of
a majority of the outstanding shares of Common Stock can elect all of the
directors then standing for election and the holders of the remaining shares, if
any, will not be able to elect any directors. Holders of Common Stock have no
conversion, sinking fund, redemption rights or any preemptive rights to
subscribe for any securities of the Company.
PREFERRED STOCK
The Preferred Stock may be issued from time to time in one or more series
as authorized by the Board of Directors. Prior to issuance of shares of each
series, the Board of Directors by resolution shall designate that series to
distinguish it from all other series and classes of stock of the Company, shall
specify the number of shares to be included in the series and shall set the
terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption. Subject to the express terms of any other series of
preferred stock outstanding at the time and notwithstanding any other provision
of the Certificate of Incorporation, the Board of Directors may increase or
decrease the number of shares of, or alter the designation or classify or
reclassify, any unissued shares of any series of Preferred Stock by setting or
changing, in any one or more respects, from time to time before issuing the
shares, and the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other
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distributions, qualifications or terms or conditions of redemption of the shares
of any series of Preferred Stock. There are no shares of Preferred Stock
outstanding and the Company has no present plans to issue any.
WARRANTS
The only presently existing warrants will be issued as part of the units.
Each warrant will have a two year life, is immediately exercisable, and will
allow the holder to purchase two shares of Common Stock for a per share purchase
price equal to 80% of the closing price for the Company's Common Stock on the
trading date immediately preceding the warrant exercise date. These warrants
are detachable from the units immediately on issuance and contain appropriate
anti-dilution clauses and will be fully transferable from the date of the close
of the Acquisition. The Common Stock issued upon exercise of these warrants has
been registered under the Securities Act and, when issued, will be freely
tradable. The Company does not intend to list the warrants on any market or
exchange.
CERTAIN SHAREHOLDER VOTING REQUIREMENTS
The Company's Certificate of Incorporation requires the concurrence of the
holders of two-thirds of the voting power of the outstanding voting stock to
amend specified provisions of the Company's Certificate of Incorporation and
By-Laws, which provide that (i) shareholders generally may not call a special
meting of shareholders or act by written consent; (ii) subject to applicable
law, the Company's Board of Directors will be divided into three classes, the
effect of which is that only approximately one-third of the Board will be
elected each year; (iii) directors may be removed by the Shareholders only for
cause and only upon the affirmative vote of two-thirds of the voting power of
the outstanding voting stock; (iv) a vote of two-thirds of the voting power of
the outstanding voting stock not held by an "interested stockholder" is required
for the approval of specified types of business combinations; and (v) subject to
applicable law, holders of Common Stock will not be entitled to cumulative
voting of shares for the election of directors. These provisions, together with
a classified Board of Directors and the authorization to issue Preferred Stock
on terms designated by the Board of Directors, could be used to defend against
certain business combinations not favored by the Board of Directors (so-called
"hostile takeovers").
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
THE OFFERING
OFFERING OF ACQUISITION SHARES
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Subject to the conditions set forth in this Prospectus, the Company is
offering to Investors in the Programs an aggregate of 1,577,285 Shares
("Acquisition Shares") in exchange for all of the real estate, certain of the
liabilities and business of all of the Programs. The Acquisition Shares will be
allocated to the Programs based on Exchange Values and will be further allocated
within each of the Programs pro rata in respect of the Adjusted Outstanding
Investments of the Investors in the respective Programs. For example,
If your Adjusted Outstanding You will receive the following number
Investment is $10,000 in of Acquisition Shares
- ---------------------------- -------------------------------------
Sacramento/Delta Greens
Oceanside
Yosemite/Ahwahnee I
Yosemite/Ahwahnee II
Mori Point
No sales commission will be paid by any party in connection with the
exchange of the Acquisition Shares for the real estate of the Programs.
Immediately after the approval of the Acquisition, as agent of and on
behalf of the Investors, National or an affiliated entity will execute the
acquisition agreements for the Properties of each of the Programs and title to
each of the Properties will pass to the Company in accordance with California
real estate law. In addition, certificates for the Acquisition Shares will be
prepared by the Company's Transfer Agent and Registrar, and promptly mailed to
all Investors of record.
OFFERING OF UNITS
The Company is also offering to Investors EXCLUSIVELY an aggregate of
500,000 units at $10 per unit. A unit consists of one Share and one Warrant.
For a period of two years, each warrant entitles the holder to purchase two
additional shares of Common Stock at a per share price equal to 80% of the
closing price for the Company's Common Stock on the trading date immediately
preceding the warrant exercise date. The Warrants are immediately exercisable.
Shares purchasable upon exercise of Warrants will be registered under the
Securities Act. units will be allocated among the Investors on a
first-come-first-serve basis. NASD broker-dealers which assist in selling the
units will receive an aggregate commission of $0.70 per unit sold.
Any unsubscribed for units may be purchased at the offering price by
officers or directors of the Company simultaneously with the Closing of the
Acquisition.
ESCROW ARRANGEMENTS. Commencing on the date of this Prospectus, all funds
received by the Company from orders for units will be placed promptly in an
interest bearing escrow account with the Escrow Agent at the National's expense
until such funds are released as described below. Separate escrow accounts will
be established for benefit plan funds as required by law or
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such benefit plans. Payment for units will be payable to "First Trust of
California, N.A., as Escrow Agent for American Family Holdings, Inc. Unit
Offering," but sent to the Company which will promptly send them to the Escrow
Agent. Such funds will be held in trust for the benefit of subscribing
Investors to be used for the purposes set forth in this Prospectus. The funds
will be invested in a money market account maintained by the Escrow Agent. The
interest, if any, earned on escrow funds prior to the transmittal of such
proceeds to the Company will not become part of the Company's capital. Instead,
within 15 days following the issuance of units, the Company will cause the
Escrow Agent to make distributions to subscribing Investors of all interest
earned on their escrowed funds used to purchase the Shares.
As soon as practicable after the Closing of the Acquisition, the Company
will cause to be issued units to all Investors whose orders have been accepted.
The Offering of units will terminate at the time of the Effective Time of the
Acquisition.
On or after the date received by the Escrow Agent, Investors will have no
right to withdraw any funds submitted to the Escrow Agent prior to the earlier
of the Effective Time of the Acquisition or the determination by National that
the votes to approve the Acquisition are not available. No sales of units will
be consummated unless the Acquisition is approved.
If the Acquisition is not approved within 45 days after the date of this
Prospectus, or such later date as may by approved by National and the Company,
then the Company will cancel all existing orders for units and all funds
submitted on account of such orders will be released from escrow and promptly
returned to each investor together with all interest earned thereon.
Pending use of funds received by the Company from the Escrow Agent, the
Company may invest such funds in Permitted Temporary Investments.
FIRST TRUST OF CALIFORNIA, N.A., IS ACTING ONLY AS AN ESCROW AGENT IN
CONNECTION WITH THE OFFERING OF THE UNITS DESCRIBED IN THIS PROSPECTUS, AND HAS
NOT ENDORSED, RECOMMENDED OR GUARANTEED THE PURCHASE VALUE OR REPAYMENT OF THE
UNITS.
APPRAISALS AND FAIRNESS OPINION
GENERAL
Exchange Values were determined as of _________, 1997 (the "Record Date")
and have been assigned to each of the Programs solely to establish a method of
allocating the Shares for purposes of the Acquisition. The Exchange Values were
determined by National and the Company. The starting point for the Exchange
Values was the independent appraised value of each of the Program's real estate.
See "Background and Reasons for the Acquisition -- Determination of Exchange
Values" for adjustments to the appraised values that were made to arrive at the
Exchange Values for the property of each Program. Such appraised values were
determined for the Programs by the following appraisers:
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Name of Program Name and Address of Appraisers
- --------------- ------------------------------
Sacramento/Delta Greens David E. Lane, Inc.
9851 Horn Road, Suite 150
Old Mills Winery Office Park
Sacramento, California 95827
Oceanside Boznanski & Company
283 North Rampart Street
Suite A
Orange, California 92868
Yosemite/Ahwahnee I and II Arnold Associates
751 West 18th Street
Post Office Box 272
Merced, California 95341
and
The Mentor Group, Inc.
4333 Park Terrace Drive
Suite 200
Westlake Village, California 91361
Mori Point PKF Consulting
425 California Street
San Francisco, California 94104
National then engaged Houlihan Valuation Advisors, 2029 Century Park East,
Suite 2890, Los Angeles, California 90067, the Independent Valuator, to render
an opinion that the transaction, including allocation of Shares among the
Programs, as well as the number of Shares retained by management of the Company
and other founders of the Company, is fair to the Investors from a financial
point of view. The independent appraisals are attached as Appendix 1 to this
Prospectus. The Fairness Opinion and appraisals have been filed as exhibits to
the Registration Statement of which this Prospectus is a part. Copies may be
obtained without charge by writing to Vivian Kennedy, National Investors
Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport Beach, California
92660.
National did not impose any limitations on the scope of the investigations
of the independent appraisers or the Independent Valuator to enable them to
render their respective appraisals and the Fairness Opinion. National and the
Company determined the consideration to be paid to the Investors.
EXPERIENCE OF INDEPENDENT APPRAISERS
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Each of the independent appraisers is a member in a nationally recognized
society such as the American Institute of Real Estate Appraisers ("MAI"). Each
has been involved in the appraisal of real estate in California in the various
Programs' regions for many years. National believes that each of the
independent appraisers is recognized among such appraiser's regional peers as
being well experienced in appraising the type of real estate it was asked to
value. National selected the appraisers because of the appraisers' respective
experience and reputation in connection with real estate assets of the nature
they were, respectively, asked to value.
INDEPENDENT APPRAISALS
Each of the independent appraisers was engaged by National in the Spring of
1997 to appraise the "as is," highest and best use, value of the real estate
portfolio of a particular Program. Each of the independent appraisers has
consented to the use of the appraisals in this Prospectus.
SUMMARY OF METHODOLOGY. In the case of the real estate in the
Sacramento/Delta Greens Program, the independent appraiser determined that the
sales comparison, land residual, and discounted cash flow methods for appraising
real estate were appropriate to use. In the case of the real estate in the
Oceanside Program, the independent appraiser determined that the sales
comparison and land residual methods for appraising real estate were appropriate
to use for both the 23 remaining finished lots in the Encore tract and the 111
partially finished residential lots in the Symphony tract. In the case of the
real estate in the Yosemite/Ahwahnee I and II Programs, the independent
appraiser determined that the sales comparison, income and cost methods for
appraising real estate were appropriate to use on various portions of the
Properties. In the case of the real estate in the Mori Point Program, the
independent appraiser determined that the discounted cash flow, ground rent
capitalization and sales comparison methods for appraising real estate were
appropriate to use.
In conducting each of the appraisals, representatives of the several
appraisers reviewed and relied upon, without independent verification, certain
information provided by National, including, but not limited to: applicable
financial information; property descriptions; historical acquisition
information; title information relating to encumbrances; and such other
information as was requested by the appraiser and available to National.
Representatives of each of the appraisers performed site inspections on the real
estate of each of the Programs in 1997. In the course of these visits, any
physical facilities were inspected and information on the local market, as well
as the subject property, was gathered.
Where appropriate, applicable government records were reviewed and
information was gathered from applicable government officials. As appropriate,
historical operating statements for certain of the Properties were reviewed.
Each appraiser then estimated the value of the real estate of the
applicable Programs based on the approaches to valuation described above.
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CONCLUSION AS TO APPRAISED VALUE. Based on the valuation methodology used
by each of the appraisers, the estimated "as is" value of the real estate for
each of the Programs is as follows:
Real Estate "As Is"
Name of Program Value Conclusion(1) Appraisal Date
--------------- -------------------- --------------
Sacramento/Delta Greens $2,000,000 May 9, 1997
Oceanside $3,700,000 May 15, 1997
Yosemite/Ahwahnee I and II $20,916,000(2) May 1, 1997
Mori Point $5,500,000 May 1, 1997
- -------------------------
(1) See Appendix 2 for a description of each appraiser's conclusion with regard
to the valuation methods selected and with regard to separately
identifiable portions of the Property of each program.
(2) In the Fall of 1996, National hired The Mentor Group, Inc. ("Mentor") to
appraise the Yosemite/Ahwahnee Properties as a guide for planning purposes.
National used the Mentor appraisal to estimate the quick sale proceeds of
the Yosemite/Ahwahnee Properties if the Investors were unwilling to fund
the substantial capital costs required to develop the Properties to their
highest and best use. As of October 10, 1996, using primarily the cost
approach, Mentor determined the "as is" value of the subdivision portion of
the properties to be $530,000 and the "as is" value of the balance (deemed
excess land) as $3,460,000 for an aggregate appraised value of
approximately $4,000,000. Mentor determined that the highest and best use
of the Properties, as of the appraisal date, was to hold the project for
future study or project implementation. National has also used the Mentor
appraisal to further analyze the financial constraints of the "Trudy Pat"
structure and its lack of ability to attract traditional sources of
financing. In the Spring of 1997, National hired Arnold Associates to
determine the "as is" value of the Properties assuming that they were
developed at their highest and best use, recognizing that, to achieve
highest and best use, it would take a substantial continued investment in
the Properties and a significant amount of time.
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS. Each appraisal report was
prepared in accordance with the Uniform Standards of Professional Appraisal
Practice. Each appraiser utilized certain assumptions to determine the
Appraised Value of the Properties.
ON-GOING RELATIONSHIPS
Each of the appraisers was paid a fee for its appraisals deemed to be
reasonable by National. The fees for such appraisals were paid out of funds
available to the respective Programs through cash flow or assessments. In
addition, each appraiser was reimbursed for reasonable travel and other
out-of-pocket expenses incurred in making site visits and in preparing the
valuations. The fees were negotiated between National and each of the
appraisers and payment thereof is not dependent upon completion of the
Acquisition. Neither National nor the Company has retained any of the
appraisers in the past, although the borrower in the Oceanside Program used
Boznanski & Company and the borrower in the Yosemite/Ahwahnee I and II Programs
used Arnold Associates in connection with the original "Trudy Pat" loan.
National and
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the Company may engage one or more of the appraisers to provide appraisal and
other services in the future. There is no contract, agreement or understanding
between National or the Company on the one hand and any of the appraisers on the
other hand regarding any future engagement.
None of the appraisers have any obligation to update their appraisals.
Except for improvement in revenues from operations of the golf course at the
Yosemite/Ahwahnee Properties, since the date of the Mentor appraisal, neither
National nor the Company are aware of any conditions which have changed since
the date of the appraisals which may affect appraised values.
EXPERIENCE OF INDEPENDENT VALUATOR
The Independent Valuator is regularly engaged in the valuation of
businesses and their securities in connection with a variety of business
combination transactions and for estate, tax, corporate and other purposes. The
founding principals of the Independent Valuator have been regularly engaged in
business valuations for more than 20 years. National selected the Independent
Valuator because of its experience and reputation in connection with the
valuation of business combination transactions. Neither National nor the
Company has any prior relationship with the Independent Valuator and neither has
present plans to retain the Independent Valuator in the future.
FAIRNESS OPINION
GENERAL. The Independent Valuator was engaged by National to analyze
certain aspects of the Acquisition and has delivered a written summary of its
determination, based on the review, analysis, scope and limitations described
therein, as to the fairness of the allocation of Shares pursuant to the
Acquisition, from a financial point of view, to the Investors in each of the
Programs (the "Fairness Opinion"). The full text of the Fairness Opinion is set
forth in Appendix A and should be read in its entirety. A development of a
fairness opinion is a complex analytical process. It is not easily susceptible
to partial analysis or summary description.
Neither National nor the Company imposed any conditions or limitations on
the scope of the Independent Valuator's investigation or methods and procedures
to be used in rendering the Fairness Opinion. The Company has agreed to
indemnify the Independent Valuator against certain liabilities arising out of
the Independent Valuator's engagement.
MATERIALS REVIEWED. In preparing the Fairness Opinion, the Independent
Valuator reviewed and analyzed the following: (i) this Consent Solicitation
Statement/Prospectus; (ii) real estate appraisals with respect to each of the
Properties prepared by independent real estate appraisers; (iii) feasibility
studies with respect to the Yosemite/Ahwahnee Properties and the
Sacramento/Delta Green Property; (iv) audited financial statements for each of
the Sacramento/Delta Greens Property, the Mori Point Property, the Oceanside
Property, and the Yosemite/Ahwahnee I and II Properties, as well as unaudited
pro forma consolidated financial statements for the Company for the year ended
December 31, 1996 and the six months ended June 30, 1997; (v) certain documents
related to the Trudy Pat loans on the Properties; and (vi)
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other documents and schedules pertinent to their analysis. In addition, the
Independent Valuator met with members of management of the Company and National
regarding matters pertinent to its analysis, conducted site visits to each of
the Properties, met with the general manager of the Yosemite/Ahwahnee I and II
Properties, and conducted such other studies, analyses and inquiries as it
deemed appropriate.
The Independent Valuator did not independently verify the accuracy or
completeness of the information supplied to it with respect to the Company or
the Properties and does not assume any responsibility with respect to that
information.
CONCLUSIONS. National requested that the Independent Valuator opine as to
the fairness, from a financial point of view, of the allocation of the Shares
among the Programs and to the founders of the Company. Based on its review and
analysis described above, as well as certain assumptions described below, the
Independent Valuator concluded that the allocation is fair, from a financial
point of view, to the Investors.
ASSUMPTIONS. The Independent Valuator assumed that the financial
statements provided to it correctly reflect the financial results and condition
of the Company (on a pro forma basis) and the Properties for the time periods
covered in accordance with generally accepted accounting principles consistently
applied. The Independent Valuator further assumed that there has been no
material change in the financial results and condition of the Company (on a pro
forma basis) or the Properties since the date of the most recent financial
statements made available to it.
LIMITATIONS AND QUALIFICATIONS. The Independent Valuator was not asked to
and therefore did not solicit third party indications of interest in acquiring
all or any of the Properties. Furthermore, the Independent Valuator did not
negotiate the Acquisition or advise National or the Company with respect to
alternatives to the Acquisition, or select the method of determining the
allocation of the Shares or establish the allocations.
Further, the Independent Valuator expressed no opinion as to (a) the
fairness of the Acquisition (other than the fairness of the allocations) as
described above or the amounts or allocations of Acquisition Expenses; (b) the
prices at which the Shares may trade following the Acquisition or the trading
value of the Shares as compared with the current market value of the Programs'
Properties if liquidated in current real estate markets; and (c) alternatives to
the Acquisition.
COMPENSATION. The Independent Valuator has been paid a fee of $35,000 for
preparing the Fairness Opinion. In addition, the Independent Valuator will be
reimbursed for all reasonable out-of-pocket expenses, including legal fees up to
a maximum of $750, and indemnified against certain liabilities, including
certain liabilities under the federal securities laws. The fee was negotiated
between National and the Independent Valuator. Payment of the fee is not
dependent upon completion of the Acquisition. The Independent Valuator has
rendered no services to either National or the Company, or their Affiliates, in
the past.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material Federal income tax
consequences of the Acquisition to the Investors and the Company. It is based
on the Internal Revenue Code of 1986, as amended ("Code"), the Income Tax
Regulations, judicial decisions, current positions of the Treasury Department
and the Internal Revenue Service ("Service") contained in published Revenue
Rulings and Revenue Procedures, and current administrative positions of the
Service, any of which could be materially and adversely changed, possibly on a
retroactive basis, at any time.
It is impractical to summarize all potential Federal, state, local and
foreign tax consequences of the Acquisition. Accordingly, the following
discussion does not address any aspect of state, local or foreign law or Federal
estate or gift tax matters. Moreover, the following discussion does not address
special considerations that may apply (i) to certain classes of Investors
including, without limitation, Investors who are insurance companies, financial
institutions, securities dealers, foreign persons or Investors who receive
Shares as compensation, or (ii) to Investors subject to special rules including,
without limitation, the personal holding company tax, the accumulated earnings
tax, the tax on unrelated business taxable income of tax-exempt entities, and
the S corporation rules. The Federal income tax consequences to any particular
Investor may be affected by matters not discussed below. Consequently, the
following discussion should not be regarded as a complete analysis of all the
possible tax consequences or as a substitute for careful tax planning by
Investors.
No advance rulings have been or will be obtained from the Service with
respect to any aspect of the Acquisition. Consequently, no assurance can be
given that the Service will not challenge an Investor's or the Company's tax
treatment of the Acquisition. In the event of a challenge, an Investor or the
Company may be adversely affected and personally may incur substantial legal and
accounting fees and costs even if the challenge proves to be unsuccessful.
INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE ACQUISITION AS THEY
RELATE TO THEIR PERSONAL TAX SITUATIONS.
QUALIFICATION OF THE ACQUISITION AS A QUALIFYING SECTION 351 TRANSACTION
1. GENERAL RULES. The Federal income tax consequences of the Acquisition
will depend primarily on whether the Acquisition qualifies as a Section 351
transaction. (All "Section" references in this summary are to the specified
Section of the Code.) The Company intends to treat the Acquisition as a
qualifying Section 351 transaction.
The Acquisition will qualify under Section 351 if, collectively,
Investors in the Programs which sell the Properties to the Company in exchange
for Shares and Investors who acquire units are in "control" of the Company
"immediately after the exchange." The Company's transfer of the Properties to
its subsidiary corporations will not invalidate the
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Acquisition from qualifying as a Section 351 transaction. See Revenue Ruling
77-499, 1977-2 C.B. 110.
(a) CONTROL. The term "control" is defined in Section 368(c) as
stock possessing at least 80% of the total combined voting power of all classes
of stock entitled to vote and at least 80% of the total number of shares of all
other classes of stock of a corporation. Investors will acquire 80% or more of
the Shares of the Company (which is the only class of stock of the Company) and,
accordingly, will acquire "control" of the Company.
(b) IMMEDIATELY AFTER THE EXCHANGE. The "immediately after the
exchange" requirement of Section 351 has been the subject of considerable
litigation, remains uncertain in certain respects, and is subject to a
case-by-case analysis of the facts subject to application of the "step
transaction doctrine" to those facts. This uncertainty is compounded because
the courts have not universally agreed upon all of the components that are used
in determining whether the step transaction doctrine should be applied.
The principal issue of the step transaction doctrine as
potentially applicable to the Acquisition is whether Investors, who will own 80%
or more of the outstanding Shares on the Effective Date, may be treated as
owning less than 80% "immediately after the exchange." This may occur if
Investors, in subsequent transactions contemplated by them on the Effective
Date, dispose of any Shares. This also could occur if the Company issues
additional Shares after the Acquisition in a transaction subject to the step
transaction doctrine. The Company does not intend to issue any additional
Shares with respect to which the step transaction may apply.
Under the step transaction doctrine, if an Investor's subsequent
disposition of Shares and his receipt of Shares in the Acquisition are treated
as elements of a single integrated transaction of the Investor, the Acquisition
may fail to satisfy the "immediately after the exchange" requirement.
Courts generally have enunciated three tests to determine whether
the step transaction doctrine may be applied to disqualify a transaction under
Section 351, and one court may apply one of the following tests while another
court applies another:
(i) END RESULT TEST: Under this test, ostensibly separate
transactions are combined when it appears that they were really components steps
of a single transaction and that each of the steps was intended to be taken for
the purpose of reaching a specific end result.
(ii) MUTUAL INTERDEPENDENCE TEST: Under this test, the courts
consider whether steps are so interdependent that the legal relationships
created by one transaction would be fruitless without the completion of the
entire series of transactions.
(iii) BINDING OBLIGATION TEST: Under this test, a transaction
will be aggregated with another transaction if there is a binding commitment to
do the other transaction.
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2. APPLICATION TO THE ACQUISITION. The Company is not aware of any facts
which lead it to believe that any subsequent disposition of Shares by one or
more Investors may be subject to any of the "step transaction" tests discussed
above. Accordingly, the Company intends to take the position that the
Acquisition is a qualifying Section 351 transaction. There can be no assurance,
however, that the Service will not take a contrary position.
FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION
1. TAX CONSEQUENCES TO INVESTORS OF A QUALIFYING SECTION 351 TRANSACTION.
If the Acquisition is a qualifying Section 351 transaction, the tax consequences
to the Investors will include the following:
(a) Pursuant to Section 351(a), no gain or loss will be recognized by
Investors in a Program which sells a Property in exchange for Shares. Sections
357(b) and 357(c) provide special gain recognition rules if properties subject
to liabilities are contributed to a corporation for the principal purpose of tax
avoidance or if such liabilities exceed the tax basis of the contributed
Properties. It is not anticipated that any Investor will recognize gain under
these rules.
(b) Pursuant to Section 358, an Investor's tax basis in his Shares on
the Effective Date generally will be equal to the sum of the tax basis of his
real estate interests in the purchased Properties at that time and any gain
recognized by him (none is anticipated) in the Acquisition. However, an
Investor's tax basis in his Shares will be reduced by the amount of his share of
any liabilities to which the contributed Properties are subject, except to the
extent that the payment of such liabilities would have been deductible.
(c) Pursuant to Section 1223(1), an Investor's holding period in his
Shares will be determined by including ("tacking") the holding period of his
real estate interests in the Properties purchased by the Company if held by him
as capital assets or Section 1231(b) assets. An Investor's interests in the
contributed Properties may constitute a combination of capital assets and
Section 1231(b) assets, for which tacking of holding periods is allowed, and
non-capital assets, for which tacking of holding periods is not allowed. In
such event, it may be necessary to make an allocation under Section 1223(1),
with the result that the tax basis of each Share received by the Investor will
be divided for holding-period purposes. See Rev. Rul. 85-164, 1985-2 C.B. 117.
2. TAX CONSEQUENCES OF ACQUISITION TO THE COMPANY OF A QUALIFYING SECTION
351 TRANSACTION. If the Acquisition is a qualifying Section 351 transaction,
the tax consequences to the Company will include the following:
(a) Pursuant to Section 1032, no gain or loss will be recognized by
the Company on its receipt of the Properties in exchange for the issuance of
Shares.
(b) Pursuant to Section 362(a), the initial tax bases of the Company
in the contributed Properties will be equal to the sum of the tax bases of the
Investors in the Properties
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on the Effective Date and any gain recognized by the Investors (none is
anticipated) in the Acquisition.
(c) Pursuant to Section 1223(2), the Company's holding periods in the
contributed Properties will include tacking of the holding periods of the
Investors in the Properties.
3. TAX CONSEQUENCES OF PURCHASE OF UNITS. No gain or loss will be
recognized by an Investor with respect to the purchase of units. An Investor's
$10 tax basis for each unit is divided between the Share and warrant to purchase
Shares based on the relative fair market value of the Share and the warrants on
the Effective Date. Each Investor should consult and rely on his own tax
advisor for purposes of determining the allocation of tax basis between the
Share and the warrant. The holding periods of the Share and warrant
constituting a unit will commence on the day after the Effective Date.
4. TAX CONSEQUENCES IF THE ACQUISITION DOES NOT QUALIFY AS A SECTION 351
TRANSACTION. As discussed above, the Company intends to report the Acquisition
as a qualifying Section 351 transaction. However, if for any reason the
Acquisition does not qualify, the tax consequences will include the following:
(a) INVESTORS.
(i) An Investor will recognize gain or loss upon his receipt
of Shares in exchange for his real estate interests in the Properties sold by
the Programs. The amount of gain or loss will equal the difference between the
tax basis of his interests in the Properties sold to the Company on the
Effective Date and his amount realized in the Acquisition. The amount realized
generally will be equal to the sum of the fair market value on the Effective
Date of the Shares he acquires and his share of any liabilities to which the
Properties are subject. The character of an Investor's gain or loss will depend
on his holding periods with respect to his interests in the contributed
properties and whether such interests are capital assets, Section 1231(b) assets
or non-capital assets.
(ii) An Investor's initial tax basis in the Shares he acquires
will be equal to the fair market value of the Shares on the Effective Date. An
Investor's holding period of such Shares will commence on the day after the
Effective Date, with no tacking of his holding periods for his interests in the
Properties sold to the Company.
(b) COMPANY. The Company will not recognize any gain or loss upon
the receipt of contributed Properties of the Programs in exchange for the
issuance of Shares. The initial tax basis of the Company in the Properties
generally will be equal to the sum of the fair market value of the Shares on the
Effective Date and the amount of liabilities to which the Properties are
subject. The Company's holding periods in the Properties will commence on the
day after the Effective Date.
FEDERAL INCOME TAX CONSEQUENCES TO INVESTORS AFTER THE EFFECTIVE DATE
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1. SHAREHOLDERS NOT TAXABLE ON COMPANY'S INCOME. The Company is a C
corporation ( a "regular" corporation, rather than an S corporation) and is a
separate entity from the Shareholders for tax purposes. Consequently, the
Company will file its own income tax returns and pay tax on its taxable income.
The Company's taxable income will not flow through to the shareholders for
purposes of determining their tax liabilities.
2. DISTRIBUTIONS TO SHAREHOLDERS. Distributions by the Company to the
Shareholders will be taken into account in determining their tax liabilities.
In general, distributions will be taxable as dividend income to the extent of
the Company's current or accumulated "earnings and profits" (as calculated for
Federal income tax purposes). Any distributions to a Shareholder in excess of
earnings and profits (i) will constitute a non-taxable return of capital to the
extent of the tax basis of his Shares, and (ii) will be treated as taxable gain
from the sale or exchange of the Shares to the extent the distribution exceeds
the tax basis of his Shares. The character of such gain will depend on the
Investor's holding period for such Shares and whether the Shares are held as a
capital asset (subject to the "collapsible corporation" rules discussed below).
3. DISPOSITION OF SHARES; EXERCISE OF WARRANTS.
(a) SHARES. If an Investor disposes of Shares in a taxable
transaction, the Investor generally will recognize gain or loss equal to the
difference between the tax basis of his Shares and the amount realized in the
disposition. The character of such gain or loss generally will depend on the
Investor's holding period for such Shares and whether the Shares are held as a
capital asset. The "collapsible corporation" rules of Section 341 may apply
under some circumstances to convert capital gain into ordinary income. However,
even if the Company were treated as a collapsible corporation, any capital gain
recognized by an Investor would not be converted into ordinary income unless (i)
the Investor owns (taking into account certain attribution rules) at certain
times more than 5% of the outstanding stock of the Company, or (ii) the
Investor's stock is attributed to another shareholder who owns at certain times
more than 5% the outstanding stock of the Company.
(b) WARRANTS. No gain or loss will be recognized by an Investor upon
his receipt of Shares pursuant to the exercise of warrants. The tax basis of
such Shares will be equal to the sum of the exercise price and the tax basis of
the warrants. The holding period for Shares will commence on the date of
exercise of the warrants. An Investor will recognize a loss if a warrant
expires without being exercised in an amount equal to the tax basis of the
warrant. An Investor generally will recognize gain or loss upon the
disposition of a warrant in an amount equal to the difference of the amount
realized upon disposition and the tax basis of the warrant.
REPORTS TO SHAREHOLDERS
The Company intends to provide periodic reports to Shareholders regarding
the operations of the Company over the course of the year. Financial
information contained in all reports to Shareholders will be prepared on the
accrual basis of accounting in accordance with
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generally accepted accounting principles. The Company's annual report, which
will include financial statements audited and reported upon by independent
public accountants, will be furnished within 120 days following the close of
each fiscal year. Summary information regarding the quarterly financial results
of the Company will be furnished to Shareholders on a quarterly basis.
Investors have the right under applicable federal and Delaware laws to
obtain information about the Company and, at their expense, may obtain a list of
names and addresses of all of the Shareholders to be used for a proper purpose.
In the event that the Commission promulgates rules and/or in the event that the
applicable ________________ Exchange rules and regulations are amended so that,
taking such changes into account, the Company's reporting requirements are
reduced, the Company may cease preparing and distributing certain of the
aforementioned reports, if the directors determine such action to be in the best
interests of the Company and if such cessation is in compliance with the rules
and regulations of the Commission.
LEGAL MATTERS
Certain legal matters, including the legality of the Shares and the Units
and the description of federal income tax consequences contained under "Federal
Income Tax Considerations," will be passed upon for the Company by Arter &
Hadden, Los Angeles, California.
EXPERTS
The Financial Statements of American Family Holdings, Inc. and its
subsidiaries and the Programs included in this Prospectus and in the
Registration Statement of which this Prospectus is a part have been audited by
BDO Seidman, LLP, independent certified public accountants, to the extent and
for the periods set forth in their reports appearing elsewhere herein and in the
Registration Statement and have been so included in reliance upon such reports
given upon the authority of that firm as experts in accounting and auditing
FURTHER INFORMATION
This Consent Solicitation Statement/Prospectus does not contain all the
information set forth in the Registration Statement on Forms S-4 and the
exhibits relating thereto which the Company has filed with the Commission, in
Washington, D.C., under the Securities Act, and to which reference is hereby
made. The Registration Statement and the exhibits and schedules forming a part
thereof filed by the Company with the Commission can be inspected and copies
obtained at the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World
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Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
can be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D. C. 20549, at prescribed rates, and electronically
through the Commission's Electronic Data Gathering, Analysis and Retrieval
system at the Commission's Website (http://www.sec.gov).
All summaries contained herein of documents which are filed as exhibits to
the Registration Statement are qualified in their entirety by this reference to
those exhibits. The Company has not knowingly made any untrue statement of a
material fact or omitted to state any fact required to be stated in the
Registration Statements, including this Prospectus, or necessary to make the
statements therein not misleading.
GLOSSARY
"Acquisition" means the purchase of the assets, liabilities and business of
each of the Programs in exchange for Shares.
"Acquisition Expenses" means all of the costs and expenses incurred by the
Company or the Programs in connection with the Acquisition including such
expenses as: (i) preparation, printing, filing and delivering of the
Registration Statement and the Prospectus; (ii) the filing fees payable to the
Securities and Exchange Commission and to the National Association of Securities
Dealers, Inc.; (iii) costs associated in transferring to the Company title to
the Properties and providing the Company with title insurance with respect to
each of the Properties; (iv) the escrow arrangements, including the compensation
to the Escrow Agent; (v) the fees and costs incurred by the Company in listing
its Shares on the ______________; (vi) fees and costs of the Company's counsel
and independent auditors; (vii) fees and costs of independent appraisers and the
Independent Valuator; (viii) all expenses incurred in connection with the
solicitation of Investor votes regarding the Acquisition; and (ix) other
expenses related to the offering of the units.
"Acquisition Shares" means the Shares to be delivered to the Investors in
exchange for their interests in Programs.
"Adjusted Outstanding Investment" means the Outstanding Investment of an
Investor adjusted to take into account the interest owed, or due to be received,
as the case may be, on voluntary advances to the applicable Program made in lieu
of mandatory assessments which certain other Investors failed to make.
"Affiliate" means, with respect to any Person, (i) any Person directly or
indirectly controlling, controlled by or under common control with such Person,
(ii) any Person owning or controlling ten percent or more of the outstanding
voting securities of such Person; (iii) any officer, director, member (in the
case of a limited liability company) or partner of such Person or of any Person
specified in (i) or (ii) above; and (iv) any company in which any officer,
director,
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member or partner of any Person specified in (iii) above is an officer,
director, member or partner.
"Appraised Value" means the fair market value of a Property according to an
appraisal made by an independent qualified appraiser. Such qualification may be
demonstrated by membership in a nationally recognized society such as American
Institute of Real Estate Appraisers ("MAI"), or its equivalent, but not limited
thereto.
"Charter Documents" means the Certificate of Incorporation and By-Laws of
the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any similar law or provision enacted in lieu thereof, unless the
context indicates otherwise.
"Commission" means the Securities and Exchange Commission.
"Company" means American Family Holdings, Inc., a Delaware corporation.
"Directors" means persons authorized to manage and direct the affairs of
the Company and who are members of the Board of Directors of the Company.
"Effective Time" means the date and time as of which the Acquisition is
completed, and title to the Properties has passed to the Company.
"Escrow" means the account established by the Company with the Escrow Agent
wherein the funds received from Investors desiring to purchase units are held
pending completion of the Acquisition.
"Escrow Agent" means First Trust of California, N.A.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Value" means the value of the assets, liabilities and business of
a Program for purposes of allocating Shares among the Programs in the
Acquisition.
"Fairness Opinion" means the opinion of the Independent Valuator to the
Programs as to the fairness, from a financial point of view, of the Acquisition
transaction to the Investors.
"Independent Director" means a Director of the Company whose primary
business or professional affiliations, if any, are with organizations not
affiliated with the Company. As of the date of the Prospectus, there are no
Independent Directors.
"Independent Valuator" means Houlihan Valuation Advisors.
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"Investor" means a Person that purchased a tenancy-in-common interest in
one of the Trudy Pat loans, secured by a deed of trust, that formed the basis of
one of the Programs.
"Investor Ballot" means the ballot accompanying this Prospectus to be used
by the Investor to vote its wishes to approve or disapprove participation of a
particular Program in the Acquisition, and to subscribe for units.
"IRS" means the U.S. Internal Revenue Service.
"NASD" means the National Association of Securities Dealers, Inc.
"National" means National Investors Financial, Inc., the company which
organized, and acts as servicing agent for the Investors in, each of the
Programs.
"ODI" means Oceanside Development, Inc., the entity formed to hold title to
the Oceanside Property for the benefit of Investors in the Oceanside Program and
to supervise continued development.
"Offering" means the offering of 500,000 units described in the Prospectus.
"Outstanding Investment" means the sum of the unpaid principal balance owed
to an Investor as of the Ownership Date plus accrued but unpaid interest on such
balance as of the Ownership Date plus all amounts paid by the Investor pursuant
to mandatory assessments called for by National plus all amounts voluntarily
advanced by an Investor on behalf of Investors who failed to honor a demand for
an advance from National.
"Ownership Date" means, with respect to a particular Program Property, the
date on which title to the Property in question was taken and controlled for the
benefit of the Investors in such Program.
"Permitted Temporary Investments" means United States government
securities, certificates of deposit or other time or demand deposits of
commercial banks, savings banks, savings and loan associations or similar
institutions which have a net worth of at least $100,000,000 or in which such
certificates or deposits are fully insured by any federal or state government
agency, United States dollar deposits in foreign branches of banks which have a
net worth of at least $100,000,000, bank repurchase agreements covering
securities of the United States government or governmental agencies, commercial
paper, bankers acceptance, public money funds or other similar short-term highly
liquid investments.
"Person" means any natural person, partnership, corporation, limited
liability company, association or other legal entity.
"Prior Ownership Group" or "POG" means the Properties to be acquired by the
Company from Investors in each of the Programs.
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"Program" means any one of the following: Sacramento/Delta Greens Program,
Mori Point Program, Oceanside Program, Yosemite/Ahwahnee I Program or
Yosemite/Ahwahnee II Program. "Programs" means each of the foregoing
collectively. None of the Programs is structured as a partnership, corporation,
trust, limited liability company, or separately identifiable business
association of any kind. Each Program merely consists of a group of Persons,
each of whom purchased a fractionalized, tenancy-in-common, interest in a loan
secured by a deed of trust on real property. Such group of Persons is bound
together only by a servicing agreement with National and a tenancy-in-common
agreement among themselves. The tenancy-in-common agreements permit holders of
a majority of the Outstanding Investments in a particular Program to bind the
Program on certain decisions including the sale of the Program's Property.
"Property" or "Properties" means the interests in real property held by one
or more of the Programs or the Company.
"Prospectus" means this Consent Solicitation Statement/Prospectus which is
included in the Registration Statement filed with the Commission in connection
with the issuance of the Shares in the Acquisition and the issuance of the
units.
"Record Date" means the date five days before the date of this Prospectus.
"Registration Statement" means the Company's registration statement on Form
S-4 containing the Prospectus, filed with the Commission in the form in which it
becomes effective, as the same may be at any time and from time to time
thereafter amended or supplemented.
"Securities Act" means the U.S. Securities Act of 1933, as amended.
"Shares" means common stock in the Company.
"Shareholder" means a Person holding Shares.
"Solicitation Period" means the period commencing on the date this Consent
Solicitation Statement/Prospectus is first mailed or delivered to Investors and
continuing until the later of (i) ___________, 199_ [45 days from the effective
date of the registration statement] and (ii) such later dates as may be selected
by the Company.
"Trudy Pat" means trust deed participation. With regard to the Programs,
Trudy Pat refers to the loans, secured by first deeds of trust, in which
fractional, tenancy-in-common, interests were purchased by the applicable
Investors. Each Program started out as a "Trudy Pat" loan.
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INDEX TO FINANCIAL STATEMENTS
PRO FORMA COMBINED FINANCIAL INFORMATION:
Pro Forma Combined Balance Sheets as of June 30, 1997................ F-4
Notes to Pro Forma Combined Balance Sheets........................... F-5
Pro Forma Combined Statements of Operations for the year ended
December 31, 1996 and for the six months ended June 30, 1997....... F-6
Notes to Pro Forma Combined Statements of Operations................. F-7
AMERICAN FAMILY HOLDINGS, INC.
Report of Independent Certified Public Accountants................... F-8
Balance Sheet as of August 31, 1997.................................. F-9
Notes to Balance Sheet............................................... F-10
THE OCEANSIDE PROGRAM
Report of Independent Certified Public Accountants................... F-12
Balance Sheets as of December 31, 1996 and June 30, 1997
(unaudited)........................................................ F-13
Statements of Operations for two years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 and 1996
(unaudited)........................................................ F-14
Statements of Owners' Equity for two years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 (unaudited)........ F-15
Statements of Cash Flows for two years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 and 1996
(unaudited)........................................................ F-16
Notes to Financial Statements........................................ F-17
THE YOSEMITE/AHWAHNEE PROGRAMS
Report of Independent Certified Public Accountants................... F-22
Balance Sheets as of December 31, 1996 and June 30, 1997
(unaudited)........................................................ F-23
Statements of Operations for two years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 and 1996
(unaudited)........................................................ F-24
Statements of Owners' Equity for two years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 (unaudited)........ F-25
Statements of Cash Flows for two years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 and 1996
(unaudited)........................................................ F-26
Notes to Financial Statements........................................ F-27
THE MORI POINT PROGRAM
Report of Independent Certified Public Accountants................... F-32
Balance Sheets as of December 31, 1996 and June 30, 1997
(unaudited)........................................................ F-33
Statements of Operations for two years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 and 1996
(unaudited)........................................................ F-34
Statements of Owners' Equity for two years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 (unaudited)........ F-35
Statements of Cash Flows for two years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 and 1996
(unaudited)........................................................ F-36
Notes to Financial Statements........................................ F-37
F-1
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INDEX TO FINANCIAL STATEMENTS
THE SACRAMENTO/DELTA GREENS PROGRAM
Report of Independent Certified Public Accountants................... F-40
Balance Sheets as of December 31, 1996 and June 30, 1997
(unaudited)........................................................ F-41
Statements of Operations for two years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 and 1996
(unaudited)........................................................ F-42
Statements of Owners' Equity for two years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 (unaudited)........ F-43
Statements of Cash Flows for two years ended December 31, 1996
and 1995 and the six months ended June 30, 1997 and 1996
(unaudited)........................................................ F-44
Notes to Combined Financial Statements............................... F-45
F-2
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
*PRO FORMA COMBINED BALANCE SHEETS
The following unaudited Pro Forma Combined Balance Sheets as of June
30, 1997 and the Pro Forma Combined Statements of Operations and the Pro
Forma Combined Statements of Cash Flows for the year ended December 31, 1996
and for the six months ended June 30, 1997 have been prepared to reflect the
(i) acquisitions of the assets, certain liabilities and business of the
Oceanside Program, the Yosemite/Ahwahnee Programs, the Mori Point Program and
the Sacramento/Delta Greens Program and (ii) the incorporation of American
Family Holdings, Inc. ("the Company") (collectively, "The Acquisition"); and
(i) The Acquisition and (ii) The sale of $5,000,000 of Units at $10 per Unit
(collectively, "The Acquisition and The Offering"). The unaudited Pro Forma
Balance Sheets have been prepared as if The Acquisition and The Acquisition
and The Offering had been consummated as of June 30, 1997. The unaudited Pro
Forma Statements of Operations for the year ended December 31, 1996 and the
six months ended June 30, 1997 have been prepared as if The Acquisition and
The Acquisition and The Offering, occurred at the beginning of the periods
presented. The unaudited Pro Forma Combined Financial Statements and related
notes should be read in conjunction with the audited financial statements
contained elsewhere in this Prospectus. The unaudited Pro Forma Combined
Financial Statements are not necessarily indicative of what the actual
financial position or results of operations would have been for the
respective periods if the transactions had been consummated on the dates
indicated, nor does it purport to represent the future financial position or
results of operations of the Company.
F-3
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30, 1997
-------------------------------------------------------------------------
The Pro Forma Pro Forma
Company Programs(1) Adjustments Combined
------- ----------- ----------- ---------
<S> <C> <C> <C>
THE ACQUISITION
ASSETS:
Real estate, net........................... $ - $ 19,023,727 $ $ 19,023,727
Cash and cash equivalents.................. - 1,240,366 1,240,366
Restricted cash............................ - 1,529,782 - 1,529,782
Notes receivable........................... - 421,670 421,670
Inventory.................................. - 1,497,248 1,497,248
Property and equipment..................... - 450,537 450,537
Other assets............................... - 145,602 (78,000)(3) 67,602
----------- ------------ ------------
Total assets.......................... - 24,308,932 24,230,932
----------- ------------ ------------
----------- ------------ ------------
LIABILITIES:
Line of credit............................. - 0 0
Capital lease obligations.................. - 387,512 387,512
Accounts payable and other liabilities..... - 3,819,363 567,000(3) 3,440,252
..................................... (946,111)(5)
----------- ------------ ------------
Total liabilities..................... - 4,206,875 3,827,764
----------- ------------ ------------
----------- ------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock............................... - 0 1,577(2) 1,968
..................................... 391(2)
Additional paid-in-capital................. - 0 20,100,480(2) 21,050,103
..................................... 3,512(2)
..................................... 946,111(5)
Accumulated deficit........................ - - (645,000)(3) (645,000)
Stockholders' notes receivable............. - - (3,903)(2) (3,903)
Owners' equity............................. - 20,102,057 (20,102,057)(2) -
----------- ------------ ------------
Total stockholders' equity............ - 20,102,057 20,403,168
----------- ------------ ------------
Total liabilities and
stockholders' equity............. - 24,308,932 24,230,932
----------- ------------ ------------
----------- ------------ ------------
THE ACQUISITION AND THE OFFERING
ASSETS:
Real estate, net........................... $ - $ 19,023,727 $ $ 19,023,727
Cash and cash equivalents.................. - 1,240,366 4,528,000(4) 5,768,366
Restricted cash............................ - 1,529,782 - 1,529,782
Notes receivable........................... - 421,670 421,670
Inventory.................................. - 1,497,248 1,497,248
Property and equipment..................... - 450,537 450,537
Other assets............................... - 145,602 (78,000)(4) 67,602
----------- ------------ ------------
Total assets.......................... - 24,308,932 28,758,932
----------- ------------ ------------
----------- ------------ ------------
LIABILITIES:
Line of credit............................. - 0 0
Capital lease obligations.................. - 387,512 387,512
Accounts payable and other liabilities..... - 3,819,363 367,000(3) 3,240,252
..................................... (946,111)(5)
----------- ------------ ------------
Total liabilities..................... - 4,206,875 3,627,764
----------- ------------ ------------
----------- ------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock............................... - 0 1,577(2) 2,468
..................................... 391(2)
500(3)
Additional paid-in-capital................. - 0 20,100,480(2) 25,499,603
..................................... 3,512(2)
..................................... 946,111(5)
..................................... 4,449,500(3)
Accumulated deficit........................ - - (367,000)(3) (367,000)
Stockholders' notes receivable............. - - (3,903)(2) (3,903)
Owners' equity............................. - 20,102,057 (20,102,057)(2) -
----------- ------------ ------------
Total stockholders' equity............ 20,102,057 25,131,168
----------- ------------ ------------
----------- ------------ ------------
Total liabilities and
stockholders' equity............. - 24,308,932 28,758,932
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
F-4
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
*NOTES TO PRO FORMA COMBINED BALANCE SHEETS
PRO FORMA ADJUSTMENTS
These pro forma adjustments reflect two scenarios: (i) the completion
of the Acquisition, and (ii) the completion of the Acquisition and the
receipt of the net proceeds from the Offering. The following sets forth the
adjustments:
(1) Reflects the historical combined balance sheets of the Programs as of
June 30, 1997.
(2) To reflect the utilization of carryover basis in conjunction with the
Acquisitions, the conversion of investor interests into common stock
shares of the Company and the initial capitalization of the Company.
(3) To reflect accrual of the Acquisition costs and the effect on the
accumulated deficit.
June 30, 1997
-------------
Acquisition
Acquisition and Offering
----------- ------------
Total costs $ 800,000 $ 800,000
Less: Amount previously
expensed (233,000) (233,000)
---------- ------------
Costs to account for $ 567,000 $ 567,000
Costs allocated to proceeds
from the Offering 0 (200,000)
---------- ------------
Acquisition expenses to
accrue $ 567,000 $ 367,000
Deferred offering costs to
expense 78,000 -
---------- ------------
Increase in accumulated
deficit $ 645,000 $ 367,000
---------- ------------
---------- ------------
(4) Reflects the following:
Proceeds of offering $ 5,000,000
Costs allocated to proceeds
of the offering (200,000)
Commissions (350,000)
---------------
Increase to stockholder's equity 4,450,000
Costs previously incurred 78,000
---------------
Increase in cash and cash equivalents $ 4,528,000
---------------
---------------
(5) Represents the forgiveness of accrued expenses, owed to National, upon
successful completion of the Acquisition.
F-5
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
*PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The pro forma combined statements of operations presented below reflect
the acquisitions as previously described as if they occurred at the beginning
of the periods presented. The Company was omitted from the statements
presented below since it had no operations during the periods presented.
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Six Months Ended June 30, 1997
------------------------------------------- ----------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Programs(1) Adjustments Combined Programs(1) Adjustments Combined
----------- ----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
THE ACQUISITION
Revenues................. $ 6,675,718 $ $ 6,675,718 $ 4,084,437 $ $ 4,084,437
Cost of sales............ 5,327,856 5,327,856 3,069,580 3,069,580
------------ ------------ ------------ ------------
Gross profit............. 1,347,862 1,347,862 1,014,857 1,014,857
Selling, general and
administrative......... 3,667,227 350,000(2) 4,017,227 2,105,561 175,000(2) 2,280,561
Land write down.......... 845,000 845,000 590,172 590,172
Management fees.......... 650,000 (650,000)(2) 0 325,000 (325,000)(2) -
Acquisition expenses(3).. 0 775,000 775,000 0 567,000 567,000
------------ ------------- ------------ ------------ ------------- ------------
Total expenses........... 5,162,227 5,637,227 3,020,733 3,437,733
------------ ------------ ------------ ------------
Interest income (expense) 63,518 63,518 29,525 29,525
------------ ------------ ------------ ------------
Net income (loss)........ (3,750,847) (4,225,847) (1,976,351) (2,393,351)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per
common share(4)..... (2.15) (1.22)
------------ ------------
------------ ------------
THE ACQUISITION AND THE OFFERING
Revenues................. $ 6,675,718 $ $ 6,675,718 $ 4,084,437 $ $ 4,084,437
Cost of sales............ 5,327,856 5,327,856 3,069,580 3,069,580
------------ ------------ ------------ ------------
Gross profit............. 1,347,862 1,347,862 1,014,857 1,014,857
Selling, general and
administrative......... 3,667,227 350,000(2) 4,017,227 2,105,561 175,000(2) 2,280,561
Land write down.......... 845,000 845,000 590,172 590,172
Management fees.......... 650,000 (650,000)(2) 0 325,000 (325,000)(2) -
Acquisition expenses(3).. 0 575,000 575,000 0 367,000 367,000
------------ ------------- ------------ ------------ ------------- ------------
Total expenses........... 5,162,227 5,437,227 3,020,733 3,237,733
------------ ------------ ------------ ------------
Interest income (expense) 63,518 63,518 29,525 29,525
------------ ------------ ------------ ------------
Net income (loss)........ (3,750,847) (4,025,847) (1,976,351) (2,193,351)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per
common share(4)........ (1.63) (0.89)
------------ ------------
------------ ------------
</TABLE>
F-6
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
*NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
PRO FORMA ADJUSTMENTS
(1) Reflects the historical combined statements of operations of the Programs
for the year ended December 31, 1996 and the six months ended
June 30, 1997.
(2) To reflect the replacement of National as asset manager of the investment
programs with the new management structure of the Company:
Year Ended Six Months Ended
December 31, 1996 June 30, 1997
----------------- ----------------
Officers and staff salaries to be
included in selling, general and
administration after Acquisition $ 806,000 $ 403,000
---------- ----------
---------- ----------
Officers salaries included in selling,
general and administration prior to
Acquisition $ (456,000) $ (228,000)
---------- ----------
---------- ----------
Pro forma adjustment to selling
general and administration $ 350,000 $ 175,000
---------- ----------
---------- ----------
(3) To reflect the cost of the Acquisition transaction as shown below:
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1997
----------------- -------------
Acquisition Acquisition
Acquisition and Offering Acquisition and Offering
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Total costs $ 800,000 $ 800,000 $ 800,000 $ 800,000
Less: Amount
previously expensed (25,000) (25,000) (233,000) (233,000)
---------- ---------- ---------- ----------
Costs to account for $ 775,000 $ 775,000 $ 567,000 $ 567,000
Costs allocated to
proceeds from the
Offering 0 (200,000) 0 (200,000)
---------- ---------- ---------- ----------
Acquisition expenses $ 775,000 $ 575,000 $ 567,000 $ 367,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(4) Net loss per share is based on 1,967,588 (Acquisition) and 2,467,588
(Acquisition and Offering) weighted average number of shares outstanding.
F-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Family Holdings, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of American Family Holdings,
Inc. as of August 31, 1997. The balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit, the balance sheet referred to above
presents fairly, in all material respects, the financial position of American
Family Holdings, Inc. of as of August 31, 1997 in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
September 5, 1997
F-8
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
BALANCE SHEET
AUGUST 31, 1997
STOCKHOLDERS' EQUITY (Note 2):
Preferred Stock, shares authorized - 2,000,000;
issued and outstanding 0............................................. -
Common Stock, $0.001 par value; shares authorized -
10,000,000; shares issued and outstanding - 371,183.................. 371
Additional paid in capital........................................... 3,341
Stockholders notes receivable........................................ (3,712)
-----
Total stockholders' equity.......................................... -
-----
-----
See accompanying notes to financial statements.
F-9
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO BALANCE SHEET
NOTE 1. ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
American Family Holdings, Inc. (the Company) was organized and
incorporated in Delaware to become a publicly held corporation which would
acquire the assets, certain liabilities and business activities owned by
investors in the investment programs listed below in exchange for ownership
in the Company. The Company will also attempt to sell a maximum of 500,000
shares of common stock and warrants (the "Units") at a price of $10 per Unit.
Each warrant entitles the holder to purchase two additional shares of common
stock at 80% of the closing price of the stock on the day prior to exercise
of the warrant. The warrant has a term of two years following the completion
of the Offering. Listed below are the investment programs to be acquired and
the number of common stock shares of the Company issued to the investors in
these programs:
Shares of
Investment Program Common Stock
- ------------------ ------------
Oceanside 530,310
Yosemite/Ahwahnee I and II 596,307
Mori Point 329,148
Sacramento/Delta Greens 121,520
---------
1,577,285
---------
---------
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, contingent upon the
successful completion of the Acquisition, with two members of senior
management for a term of five years and one member of senior management for a
term of three years, each subject to automatic one year extensions unless
terminated. The agreements provide for annual compensation of $180,000,
$180,000 and $200,000 and contain provisions for bonus consideration based on
performance standards. In addition, except to the extent required to carry
on pre-existing duties to investors in other programs managed by National or
other pre-existing real estate investments, each agreement includes
provisions restricting the officers from competing with the Company during
the term of such employment; providing for certain salary and benefit
continuance for six months if the officer is permanently disabled; and,
providing for a severance payment in the amount of 2.99 times the officer's
average salary and bonus over the past five years (or such shorter time as
the officer was employed), payable in 36 equal monthly installments, in the
event of a change of control of the Company resulting in the officer's
demotion or reduction in his compensation or responsibilities within two
years of the change of control event.
F-10
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO BALANCE SHEET
(CONTINUED)
NOTE 3. STOCK INCENTIVE PLAN
The Company has established a stock incentive plan (the "Stock Incentive
Plan") to enable executive officers, key employees and directors of the
Company and its subsidiaries to participate in the ownership of the Company.
The following awards may be made under the Plan:
NONQUALIFIED STOCK OPTIONS will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the
date of grant (but not less than par value), and usually will become
exercisable in installments after the grant date. Nonqualified stock options
may be granted for any reasonable term.
INCENTIVE STOCK OPTIONS, if granted, will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of fair market value
of Common Stock on the grant date and a ten year restriction on their term,
but may be subsequently modified to disqualify them from treatment as an
incentive stock option.
RESTRICTED STOCK is Common Stock of the Company which may be awarded to
key employees of the Company by the Compensation Committee, subject to such
restrictions on the exercise of full ownership as such Committee may
determine. Restrictions may relate, among other things, to duration of
employment, Company performance and individual performance
Promptly after the Closing of the Acquisition, the Company expects to
issue to certain officers, directors and key employees of the Company and its
subsidiaries options to purchase an aggregate of _____ shares of Common Stock
pursuant to the Stock Incentive Plan. The term of each of such options will
be _____ years from the date of grant. Commencing one year from the Closing,
each such option will vest 25% per year over four years and is exercisable at
a price per share equal to the public offering price per Share in the
Offering. The expected allocations of the options to such persons is as
presented above in the "Directors and Executive Officers Compensation and
Incentives."
185,000 shares of Common Stock, subject to adjustment, will be reserved
for issuance under the Stock Incentive Plan. There is no limit on the number
of awards that may be granted to any one individual (other than Independent
Directors who annually receive a fixed number of options automatically)
F-11
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Oceanside "Trudy Pat"
Program ("Oceanside Program") (as defined in Note 1) as of December 31, 1996,
and the related statements of operations, changes in owners' equity and cash
flows for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of 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 audits 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
presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Oceanside Program as of December 31, 1996, and the results of operations and
cash flows for each of the two years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 27, 1997
F-12
<PAGE>
THE OCEANSIDE PROGRAM
BALANCE SHEETS
December 31, June 30,
1996 1997
------------ -----------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 660,207 $ 985,670
Restricted cash 1,780,141 1,529,781
Real estate inventory 2,231,159 1,000,000
Real estate property held for sale (Note7) 3,219,920 3,219,920
Property and equipment, net (Note 3) 21,823 22,422
Other assets 24,966 60,914
---------- ---------
Total assets $7,938,326 $6,818,707
---------- ---------
---------- ---------
LIABILITIES:
Line of credit (Note 4) $ 3,910 $ -
Accounts payable 585,768 476,779
Due to affiliate (Note 5) 608,000 704,000
Accrued expenses and other liabilities 9,724 17,025
---------- ---------
Total liabilities 1,207,402 1,197,804
COMMITMENTS AND CONTINGENCIES (Note 5)
OWNERS' EQUITY:
Owners' Equity 6,730,814 5,620,903
---------- ---------
Total liabilities and owners' equity $7,938,216 $6,818,707
---------- ----------
---------- ----------
See accompanying notes to financial statements.
F-13
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- -------------------
1996 1995 1997 1996
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES FROM HOME SALES $5,490,180 $5,920,600 $3,240,050 $3,071,480
COST OF HOME SALES 4,975,160 5,295,741 2,872,014 2,816,783
---------- ---------- ---------- ----------
GROSS PROFIT 515,020 624,859 368,036 254,697
EXPENSES:
Selling, general and administrative 842,987 796,861 551,563 415,736
Real estate inventory writedown (Note 8) - - 360,172 -
Management fees (Note 5) 300,000 300,000 150,000 150,000
--------- ---------- ---------- ----------
Total expenses 1,142,987 1,096,861 1,061,735 565,736
Interest income 79,292 104,783 33,788 41,043
--------- ---------- ---------- ----------
Net income (loss) $ (548,675) $ (367,219) $ (659,911) $ (269,996)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF OWNERS' EQUITY
Amount
----------
Balance January 1, 1995 $9,446,708
Capital distributions (900,000)
Net loss for the year (367,219)
----------
Balance December 31, 1995 8,179,489
Capital distributions (900,000)
Net loss for the year (548,675)
----------
Balance December 31, 1996 6,730,814
Capital distributions (unaudited) (450,000)
Net loss for the period (unaudited) (659,911)
----------
Balance June 30, 1997 (unaudited) $5,620,903
----------
----------
See accompanying notes to financial statements.
F-15
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- ----------------------
1996 1995 1997 1996
---------- ---------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (548,675) $ (367,219) $ (659,911) $ (269,996)
Adjustments net loss to cash
provided by (used in) operating
activities:
Depreciation and amortization 3,352 903 4,255 1,676
Increase (decrease) from changes in:
Restricted cash 326,089 447,123 250,360 185,806
Real estate inventory 770,688 761,195 1,231,159 1,102,682
Other assets (24,120) 400,718 (35,948) (152,324)
Accounts payable 286,196 (160,904) (108,989) (187,622)
Accrued expenses and
other liabilities 188,708 195,319 103,301 84,839
--------- ---------- --------- ---------
Net cash provided by (used in)
operating activities 1,002,238 1,277,135 784,227 765,061
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (17,600) (8,478) (4,854) (4,712)
Additions to real estate property held
for sale (96,462) (315,436) - (34,681)
---------- ---------- --------- ---------
Net cash used in investing activities (114,062) (323,914) (4,854) (39,393)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds 3,600,000 - 1,821,560 -
Line of credit repayments (3,596,090) - (1,825,470) -
Contributions (distributions) (900,000) (900,000) (450,000) (450,000)
----------- ---------- ---------- ---------
Net cash provided by (used in)
financing activities (896,090) (900,000) (453,910) (450,000)
---------- ---------- ---------- ---------
Net increase (decrease) in
cash and cash equivalents (7,914) 53,221 325,463 275,668
Cash and cash equivalents
at beginning of period 668,121 614,900 660,207 668,121
-------- ---------- ---------- --------
Cash and cash equivalents
at end of period $ 660,207 $ 668,121 $ 985,670 $ 943,789
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Cash paid during the
period for interest $ 9,526 $ - $ 4,272 $ -
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
Interest capitalized for the year ended December 31, 1996 and for the six
months ended June 30, 1997 were $14,939 and $4,536.
See accompanying notes to financial statements.
F-16
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1993 National Investors Financial, Inc. ("National"), represented
by NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Oceanside Program (the "Program") to entities affiliated
with the Ved Corporation, the original borrowers, in the amount of
$30,000,000 by selling undivided tenant-in-common interests in such loan to
1,755 investors. In November of 1993, the borrower granted the property
("Oceanside Development") securing the loan to Oceanside Development, Inc., a
California corporation (the "Company"), formed by National on behalf of the
investors in the Oceanside Program. Oceanside Development is a single family
detached home development consisting of two tracts, Encore and Symphony. The
property is located in Oceanside, California and is currently held by
Oceanside Development, Inc. on behalf of the Oceanside Investors. The
Oceanside property was recently appraised at $6,484,000 as of the date of
grant from the original borrower. Therefore, the property has been written
down to its fair market value at the time of grant and the investors'
interests in the property is reflected as Owners' Equity in the financial
statements.
The accompanying financial statements include the accounts of the Program and
do not include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc. a California corporation, was formed to be
a publicly-held corporation to acquire the businesses of certain investment
programs previously syndicated by National in exchange for common stock. In
addition, American Family Holdings, Inc. will offer a maximum of 500,000
units, which consists of one share of common stock and one warrant at a price
of $10 per unit. Each warrant entitles the holder to purchase two additional
shares of common stock at 80% of the closing price of the stock on the day
prior to exercise of the warrant. The warrant has a term of two years
following the completion of the Offering.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS AND RESTRICTED CASH
The Oceanside Program management considers all highly liquid investments
with an original maturity of three months or less when purchased to be cash
equivalents. The Program has restricted bonded cash accounts which may only
be used for capital expenditures on the residential properties. The
restricted cash balance at December 31, 1996 and June 30, 1997 were
$1,780,141 and $1,529,781.
REAL ESTATE INVENTORIES AND REAL ESTATE PROPERTY HELD FOR SALE
Costs incurred which are included in real estate inventories and property
held for sale consist of land, land development costs, direct and indirect
costs of construction, other overhead costs, interest and property taxes.
Interest and property taxes are capitalized to real estate inventories when
development activities begin, and capitalization ends when the qualifying
assets are ready for their intended use. As of December 31, 1996 and June
30, 1997, the Oceanside Development had 41 and 25 lots classified as
inventory and 111 lots classified as property held for sale.
F-17
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective January 1, 1996, the Program adopted the provisions of Statement of
Financial Accounting Standards No.121 ("SFAS No. 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which requires impairment losses to be recorded on long-lived assets being
developed, based on fair value, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Assets held for sale are to be
carried at the lower of cost or fair value less the costs to sell.
Real estate properties are carried at its net realizable value. Net
realizable value is the price obtainable in the future for parcels as
improved with a completed housing unit, net of disposal and holding costs
(including interest), without provision for future profit and without
discounting future cash receipts to present value.
The estimation process in determining the value of real estate assets is
inherently uncertain and relies to a considerable extent on current and
future economic and market conditions, the availability of suitable financing
to fund holding, development, and construction activities, and the repayment
or refinancing of existing indebtedness. Such economic and market conditions
may effect management's development and marketing plans. Accordingly, the
ultimate realizations to differ from amounts presently estimated.
SALE AND PROFIT RECOGNITION
Revenues from home sales are recognized when closings have occurred. At
the time of revenue recognition, costs of home sales are charged with direct
costs of construction and an allocation of a project's total estimated costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are being provided principally on the straight line method over the estimated
useful lives or the related assets. Estimated useful lives range from 3-5
years.
INCOME TAXES
The financial statements include the activity of the Program, which income
or losses are included in the investors' respective tax returns.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1996
and 1997 are unaudited; however in the opinion of management of the Program,
the interim financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
results for the interim period. The results of operations for such interim
period are not necessarily indicative of the results to be obtained for the
full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-18
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Based upon certain market assumptions and information available to
management, the carrying values of financial instruments as of December 31,
1996 and June 30, 1997 approximate their fair values. The carrying value of
cash and cash equivalents, accounts payable and accrued expenses are assumed
to approximate fair value as they are short term in nature and receivable or
payable on demand. The fair value of the line of credit was estimated based
on similar interest rates available for comparable financial instruments.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, June 30,
1996 1997
------------ --------
Office and computer equipment $ 933 $ 933
Furniture and fixtures 25,145 29,999
-------- --------
26,078 30,932
Less accumulated depreciation (4,255) (8,510)
-------- --------
$ 21,823 $ 22,422
-------- --------
-------- --------
NOTE 4. LINE OF CREDIT
The line of credit is as discussed below:
<TABLE>
<CAPTION>
Interest December 31, June 30,
Rate 1996 1997
-------- ------------ --------
<S> <C> <C> <C>
OCEANSIDE PROPERTY
$3,600,000 construction loan facility with a bank,
paid through the sales of homes, due on
demand including interest; collateralized by a
first trust deed on a portion of the property 9.5% $ 3,910 $ -
------- -------
------- -------
</TABLE>
Accrued interest at December 31, 1996 and June 30, 1997 was $5,413 and $0.
Subsequent to June 30, 1997, this facilty was retired.
F-19
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 5. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages six other programs under similar
servicing agreements. As documented within the servicing agreement, National
is to receive an annual fee equal to 1% of the original loan balance.
National's requirements under the servicing agreement include managing the
assets of the Program to assure that the purpose and the activities of the
Program are continued for the investors. The Program incurred asset
management expenses of $300,000, $300,000, $150,000 and $150,000 for the
years ended December 31, 1995 and 1996 and for the six months ended June 30,
1996 and 1997. Additionally, the Program accrued compensation expense of
$192,000, $192,000, $96,000 and $96,000 for the years ended December 31, 1995
and 1996 and for the six months ended June 30, 1996 and 1997 payable to
senior management of the Program, who are also the principals of National.
Total accrued and unpaid management fees and compensation included in
"accrued expenses and other liabilities" as of December 31, 1996 and June 30,
1997 were $608,000 and $704,000.
CONTRACT WITH FEE BUILDER
The Program entered into an agreement with a fee builder to build out and
sell the Oceanside Development property. The agreement can be terminated
without cause by the Company with sixty days notice to the builder.
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant
effect on the financial position of the Program.
NOTE 6. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in
the Program to make additional capital contributions. Such contributions are
only recorded to the extent of cash received.
NOTE 7. CONCENTRATION OF CREDIT RISK
The Program's financial instruments that are exposed to concentrations of
credit risk consist of cash and cash equivalents and restricted cash accounts
placed with federally insured financial institutions. Such accounts may at
times exceed federally insured limits. The Program has not experienced any
losses on such accounts.
F-20
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 8. REAL ESTATE INVENTORY WRITEDOWN
Based on offers received from potential buyers in the marketplace, the
Program wrotedown its real estate inventory to its estimated fair value as of
June 30, 1997 of $1,000,000, resulting in a $360,172 charge against income
during the six months ended June 30, 1997.
F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheets of the Yosemite/Ahwahnee I
and II "Trudy Pat" Programs (the "Yosemite/Ahwahnee Programs") (as defined in
Note 1) as of December 31, 1996, and the related consolidated statements of
operations, changes in owners' equity and cash flows for each of the two
years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of 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 audits 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
presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Yosemite/Ahwahnee Programs as of December 31, 1996, and the results of
operations and cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 27, 1997
F-22
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS:
Real estate and improvements (Note 3).............. $ 9,734,050 $ 9,703,807
Cash and cash equivalents.......................... 101,551 173,997
Notes receivable (Note 4).......................... 255,274 421,670
Inventory.......................................... 538,414 497,248
Property and equipment, net (Note 5)............... 490,296 428,115
Other assets....................................... 45,666 75,353
---------- -----------
Total assets..................................... $11,165,251 $11,300,190
----------- -----------
----------- -----------
LIABILITIES:
Capital lease obligations (Note 6)................. 420,857 387,512
Accounts payable................................... 210,740 328,373
Due to affiliate (Note 7).......................... 508,129 661,959
Accrued property taxes (Note 7).................... 508,429 595,994
Accrued expenses and other liabilities............. 3,685 36,302
----------- -----------
Total liabilities................................. 1,678,840 2,010,140
COMMITMENTS AND CONTINGENCIES (NOTE 7)
OWNERS' EQUITY:
Owners' Equity..................................... 9,486,411 9,290,050
----------- -----------
Total liabilities and owners' equity............. $11,165,251 $11,300,190
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- -------------------
1996 1995 1997 1996
---------- ---------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Golf course operations $ 571,778 $ 412,543 $ 416,898 $ 243,708
Sale of RV memberships 513,799 - 427,489 -
Sale of developed lots 99,961 - - -
---------- --------- --------- ---------
Total revenues 1,185,538 412,543 844,387 243,708
COST OF SALES
Golf course operations 165,836 50,994 90,827 66,101
RV memberships 103,670 - 106,739 -
Developed lots 83,190 - - -
---------- --------- --------- ---------
Total cost of sales 352,696 50,994 197,566 66,101
GROSS PROFIT 832,842 361,549 646,821 177,607
EXPENSES:
Selling, general and administrative 2,564,243 1,096,245 1,411,599 887,527
Management fees (Note 7) 200,000 200,000 100,000 100,000
---------- --------- --------- ---------
Total expenses 2,764,243 1,296,245 1,511,599 987,527
Interest income(expense) (18,962) 19,159 (5,230) (2,750)
---------- --------- --------- ---------
Net loss $(1,950,363) $(915,537) $(870,008) $(812,670)
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF OWNERS' EQUITY
Balance January 1, 1995 (Note 8) $10,202,036
Capital contributions 1,009,164
Net loss for the year (915,537)
----------
Balance December 31, 1995 10,295,663
Capital contributions 1,141,111
Net loss for the year (1,950,363)
----------
Balance December 31, 1996 9,486,411
Capital contributions (unaudited) 673,647
Net loss for the period (unaudited) (870,008)
-----------
Balance June 30, 1997 (unaudited) $ 9,290,050
-----------
-----------
See accompanying notes to financial statements.
F-25
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- ------------------
1996 1995 1997 1996
----------- -------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,950,363) $(915,537) $(870,008) $(812,670)
Adjustments net loss to cash
provided by (used in) operating activities:
Cost of developed lots sold 83,190 - - -
Depreciation and amortization 303,228 225,763 181,846 136,889
Increase (decrease) from changes in:
Inventory 103,670 - 41,166 -
Other assets (264,478) (36,462) (196,083) 4,708
Accounts payable 172,210 109,530 46,633 59,085
Accrued expenses and
other liabilities 304,920 69,918 318,012 99,905
---------- -------- --------- --------
Net cash used in operating activities (1,247,623) (546,788) (478,434) (512,083)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (48,899) (25,650) (83,481) (18,569)
Additions to real estate (23,250) (86,981) (5,941) (1,515)
---------- -------- --------- --------
Net cash provided by (used in)
investing activities (72,149) (112,631) (89,422) (20,084)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease repayments (67,088) (5,886) (33,345) (11,763)
Contributions 1,141,111 1,009,164 673,647 257,428
---------- -------- --------- --------
Net cash provided by (used in)
financing activities 1,074,023 1,003,278 640,302 245,665
---------- -------- --------- --------
Net increase (decrease) in
cash and cash equivalents (245,749) 343,859 72,446 (286,502)
Cash and cash equivalents
at beginning of period 347,300 3,441 101,551 347,300
---------- -------- --------- --------
Cash and cash equivalents
at end of period $ 101,551 $ 347,300 $ 173,997 $ 60,798
---------- -------- --------- --------
---------- -------- --------- --------
Cash paid during the
period for interest $ - $ - $ - $ -
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1989 and 1992 National Investors Financial, Inc. ("National"),
represented by NASD registered securities broker-dealers, completed the
funding of two real estate loans for the Yosemite/Ahwahnee Programs (the
"Programs") by selling undivided tenant-in-common interests in such loans to
investors. The Yosemite/Ahwahnee I loan was in the amount of $6,500,000 to
426 investors and Yosemite/Ahwahnee II was in the amount of $13,500,000 to
837 investors. In September of 1995, on behalf of the Yosemite/Ahwahnee
investors, National foreclosed on the borrower and took title to the property
("Ahwahnee Golf Course and Resort") involved. Ahwahnee Golf Course and
Resort is projected to be a multi-faceted resort, which currently includes a
country club and a partially completed recreational vehicle park, with plans
to develop the remainder of the project, potentially as a timeshare facility.
The 1,650 acre property is located in Madera County, California,
approximately 15 miles south of Yosemite National Park and is currently held
in trust by National on behalf of the Yosemite/Ahwahnee Investors. During
1996, the Company had the property appraised. This appraisal assumed an
immediate cash sale and resulted in a valuation of $4,000,000. Since the
Company's business plan is to develop the property and not sell it, a second
appraisal of the property was performed. During 1997, the Company obtained
this appraisal, which assumes that the property is developed at its highest
and best use, and the result of the appraisal, after certain
accounting-related adjustments made by the Company, was a value of
$10,800,000. Therefore, the property has been written down to its fair
market value at the time of the foreclosure and the investors' interest in
the property is reflected as Owners' Equity in the financial statements.
Since taking over these properties, National has operated them on behalf of
the investors through a corporation known as Ahwahnee Golf Course and Resort,
Inc.
The accompanying financial statements include the accounts of the Programs
and do not include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc. a California corporation, was formed to be
a publicly-held corporation to acquire the businesses of certain investment
programs previously syndicated by National in exchange for common shares. In
addition, American Family Holdings, Inc. will offer a maximum of 500,000
units, which consist of one share of common stock and one warrant at a price
of $10 per unit. Each warrant entitles the holder to purchase two additional
shares of common stock at 80% of the closing price of the stock on the day
prior to exercise of the warrant. The warrant has a term of two years
following the completion of the Offering.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Programs' management considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash
equivalents.
REAL ESTATE AND IMPROVEMENTS
Real estate and improvements are carried at cost. Expenditures for
additions and improvements are capitalized, and expenditures for repairs and
maintenance are charged to expense as incurred. Depreciation is provided on
a straight-line basis on land improvements and buildings and improvements
over estimated useful lives ranging from 5-30 years.
F-27
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective January 1, 1996, the Programs adopted the provisions of Statement
of Financial Accounting Standards No.121 ("SFAS No. 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which requires impairment losses to be recorded on long-lived assets being
developed, based on fair value, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Assets held for sale are to be
carried at the lower of cost or fair value less the costs to sell.
Real estate properties are carried at its net realizable value. Net
realizable value is the price obtainable in the future for parcels as
improved with a completed housing unit, net of disposal and holding costs
(including interest), without provision for future profit and without
discounting future cash receipts to present value.
The estimation process in determining the value of real estate assets is
inherently uncertain and relies to a considerable extent on current and
future economic and market conditions, the availability of suitable financing
to fund holding, development, and construction activities, and the repayment
or refinancing of existing indebtedness. Such economic and market conditions
may effect management's development and marketing plans. Accordingly, the
ultimate realizations may differ from amounts presently estimated.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are being provided principally on the straight line method over the estimated
useful lives or the related assets. Estimated useful lives range from 3-5
years.
REVENUE RECOGNITION
The Programs generate revenues from its golf course operations and sales
of recreational vehicle memberships. Revenues from the sale of recreational
vehicle memberships are not recognized until the Programs have received at
least 10% of the total purchase price and the statutory 3 day rescission
period has elapsed. Until a contract to purchase a recreational vehicle
membership qualifies as a sale, all payments received are accounted for as
customer deposits.
COST OF SALES AND INVENTORY OF RV MEMBERSHIPS
Cost of sales of recreational vehicle memberships is determined by
dividing the total costs incurred in the development of the recreational
vehicle facility by the number of units completed. Inventory of recreational
vehicle memberships, including all land costs and improvements, is stated at
cost, which is not greater than its net realizable value.
INCOME TAXES
The financial statements include the activity of the Programs, whose
income or losses are included in the investors' respective tax returns.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 are
unaudited; however in the opinion of Programs' management, the interim
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for
the interim period. The results of operations for such interim period are
not necessarily indicative of the results to be obtained for the full year.
F-28
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Based upon certain market assumptions and information available to
management, the carrying values of financial instruments as of December 31,
1996 and June 30, 1997 approximate their fair values. The carrying value of
cash and cash equivalents, accounts payable and accrued expenses are assumed
to approximate fair value as they are short term in nature and receivable or
payable on demand. The fair values of notes receivable and capital lease
obligations were estimated based on similar interest rates available for
comparable financial instruments.
NOTE 3. REAL ESTATE AND IMPROVEMENTS
Real estate and improvements consist of the following:
December 31, June 30,
1996 1997
------------- ---------
Land $ 8,114,645 $8,114,645
Land improvements 1,251,044 1,334,526
Buildings and improvements 820,783 820,783
------------- ---------
10,186,472 10,269,954
Less accumulated depreciation (452,422) (566,147)
------------- ---------
$ 9,734,240 $9,703,807
------------ ----------
------------ ----------
NOTE 4. NOTES RECEIVABLE
The Programs make unsecured loans to individuals in conjunction with its
sales of recreational vehicle memberships. These loans bear interest at
rates between 0% and 17%, range in length from one to seven years and may be
prepaid at any time without penalty. Notes receivable are shown net of
discounts of $8,500 and $16,250 as of December 31, 1996 and June 30, 1997.
F-29
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1997
----------------- --------------
<S> <C> <C>
Capital lease equipment $505,998 $ 507,382
Furnitures and fixtures 25,349 25,349
Machinery and equipment 37,033 41,677
----------- --------------
568,380 574,408
Less accumulated depreciation (78,084) (146,293)
----------- --------------
$ 490,296 $ 428,115
----------- --------------
----------- --------------
</TABLE>
NOTE 6. CAPITAL LEASE OBLIGATIONS
Future minimum rental payments under noncancellable capital leases as of
December 31, 1996 were as follows:
Amount
--------
1997 $121,433
1998 120,923
1999 113,893
2000 113,893
2001 59,184
--------
Total minimum lease payments 529,326
Amount representing interest 108,469
--------
Present value of minimum lease payments 420,857
--------
--------
NOTE 7. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Programs are currently managed, subject to a servicing agreement, by
National. National also currently manages five other programs under similar
servicing agreements. As documented within the servicing agreement, National
is to receive an annual fee equal to 1% of the original loan balance.
National's requirements under the servicing agreement include managing the
assets of the Programs to assure that the purpose and activities of the
Programs are continued for the investors. The Programs incurred asset
management expenses of $200,000, $200,000, $100,000 and $100,000 for the
years ended December 31, 1995 and 1996 and for the six months ended June 30,
1996 and 1997. Additionally, the Programs accrued compensation expense of
$58,620, $264,000, $132,000 and $132,000 for the years ended December 31,
1995 and 1996 and for the six months ended June 30, 1996 and 1997 payable to
senior management of the Company, who are also principals of National. Total
accrued and unpaid management fees and compensation included in "accrued
expenses and other liabilities" as of December 31, 1996 and June 30, 1997
were $508,129 and $661,959.
F-30
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 7. COMMITMENTS (CONTINUED)
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant
effect on the financial position of the Program.
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $595,994 as of June 1997.
The Program is in the process of negotiating a payment plan with appropriate
taxing authorities relative to the payment of these past due taxes.
NOTE 8. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in
the Program to make additional capital contributions. Such contributions are
only recorded to the extent of cash received.
NOTE 9. DEBT FORECLOSURE
In September 1995, the management company, for the benefit of investors in
debt securities secured by the Property, foreclosed on the Property. Due to
the debtor's financial position as of December 31, 1994, the foreclosure has
been accounted for as if it took place prior to January 1, 1995.
NOTE 10. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the years ended December 31, 1995 and 1996, the Company entered
into capital lease obligations of $195,259 and $298,572.
F-31
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Mori Point "Trudy Pat"
Program (the "Mori Point Program") (as defined in Note 1) as of December 31,
1996, and the related statements of operations, changes in owners' equity and
cash flows for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of 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 audits 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
presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Mori Point Program as of December 31, 1996, and the results of operations and
cash flows for each of the two years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 27, 1997
F-32
<PAGE>
THE MORI POINT PROGRAM
BALANCE SHEETS
December 31, June 30,
1996 1997
----------- ----------
(Unaudited)
ASSETS:
Land $4,100,000 $4,100,000
Cash and cash equivalents 39,032 58,428
Other assets -- 6,522
----------- ----------
Total assets $4,139,032 $4,164,950
----------- ----------
----------- ----------
LIABILITIES:
Due to affiliate (Note 3) $ 441,218 $ 491,218
Accrued property taxes (Note 3) 366,296 268,690
Total liabilities $ 807,514 $ 759,908
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 3,331,518 3,405,042
----------- ----------
Total liabilities and
owners' equity $4,139,032 $4,164,950
----------- ----------
----------- ----------
See accompanying notes to financial statements.
F-33
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- --------------------
1996 1995 1997 1996
----------- ----------- ---------- --------
(Unaudited)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 90,348 $ 46,867 $ 73,340 $ 28,511
Management fees (Note 3) 100,000 100,000 50,000 50,000
--------- --------- --------- --------
Total expenses 190,348 146,867 123,340 78,610
Interest income 1,223 -- 488 589
--------- --------- --------- --------
Net loss $(189,125) $(146,867) $(122,852) $(77,922)
--------- --------- --------- --------
--------- --------- -------- --------
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF OWNERS' EQUITY
Total
----------
Balance January 1, 1995 $3,465,200
Net loss for the year (146,867)
----------
Balance December 31, 1995 3,318,333
Capital contributions 202,310
Net loss for the year (189,125)
----------
Balance December 31, 1996 3,331,518
Capital contributions (unaudited) 196,376
Net loss for the period (unaudited) (122,852)
----------
Balance June 30, 1997 (unaudited) $3,405,042
----------
----------
See accompanying notes to financial statements.
F-35
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- -----------------------
1996 1995 1997 1996
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(189,125) $(146,867) $(122,852) $ (77,922)
Increase (decrease) from changes in:
Other assets - - (6,522) -
Accrued expenses 25,847 146,867 (47,606) (52,492)
---------- ---------- ---------- ---------
Net cash used in operating
activities (163,278) - (176,980) (130,414)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 202,310 - 196,376 163,463
---------- ---------- ---------- ---------
Net cash provided by
financing activities 202,310 - 196,376 163,463
Net increase (decrease) in cash and cash
equivalents 39,032 - 19,396 33,049
Cash and cash equivalents at beginning
of period - - 39,032 -
---------- ---------- ---------- ---------
Cash and cash equivalents
at end of period $ 39,032 $ - $ 58,428 $ 33,049
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1990 National Investors Financial, Inc. ("National"), represented
by NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Mori Point "Trudy Pat" Program (the "Program") in the
amount of $10,000,000 by selling undivided tenant-in-common interests in such
loan to 486 investors. In August of 1992, on behalf of the Mori Point
Program investors, National foreclosed on and took title to the property
("Mori Point") involved in the Mori Point Program. Mori Point is currently
raw land which is zoned for a 275 room hotel/conference center, 60
residential units and an equestrian/commercial facility. The property is
located in Pacifica, California and is currently held in trust by National on
behalf of the Mori Point Investors. The Mori Point property was recently
appraised at $4,100,000 as of the date of foreclosure. Therefore, the
property has been written down to its fair market value at the time of the
foreclosure and the investors' interest in the property is reflected as
Owners' Equity in the financial statements.
The accompanying financial statements include the accountants of the Program
and do not include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc. a California corporation, was formed to be
a publicly-held corporation to acquire the businesses of certain investment
programs previously syndicated by National in exchange for common shares. In
addition, American Family Holdings, Inc. will offer a maximum of 500,000
units, which consist of one share of common stock and one warrant at a price
of $10 per unit. Each warrant entitled the holder to purchase two additional
shares of common stock at 80% of the closing price of the stock on the day
prior to exercise of the warrant. The warrant has a term of two years
following the completion of the Offering.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Management of the Program considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash
equivalents.
LAND
Land is carried at the lower of cost or its net realizable value.
Effective January 1, 1996, the Program adopted the provisions of Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which requires impairment losses to be recorded on long-lived assets being
developed, based on fair value, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Assets held for sale are to be carried
at the lower of cost or fair value less the costs to sell.
Real estate properties are carried at its net realizable value. Net
realizable value is the price obtainable in the future for parcels as
improved with a completed housing unit, net of disposal and holding costs
(including interest), without provision for future profit and without
discounting future cash receipts to present value.
F-37
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimation process in determining the value of real estate assets is
inherently uncertain and relies to a considerable extent on current and
future economic and market conditions, the availability of suitable financing
to fund holding, development, and construction activities, and the repayment
or refinancing of existing indebtedness. Such economic and market conditions
may effect management's development and marketing plans. Accordingly, the
ultimate realizations may differ from amounts presently estimated.
INCOME TAXES
The financial statements include the activity of the Program, whose income
or losses are included in the investors' respective tax returns.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1996
and 1997 are unaudited; however in the opinion of the Program's management,
the interim financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
results for the interim period. The results of operations for such interim
period are not necessarily indicative of the results to be obtained for the
full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages six other programs under similar
servicing agreements. As documented within the servicing agreement, National
is to receive an annual fee equal to 1% of the original loan balance.
National's requirements under the servicing agreement include managing the
assets of the Program to assure that the purpose and activities of the
Program are continued for the investors. The Program incurred asset
management expenses of $100,000, $100,000, $50,000 and $50,000 for the years
ended December 31, 1995 and 1996 and for the six months ended June 30, 1996
and 1997. Total accrued and unpaid management fees included in "accrued
expenses and other liabilities" as of December 31, 1996 and June 30, 1997
were $441,218 and $491,218.
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant
effect on the financial position of the Program.
F-38
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 3. COMMITMENTS (CONTINUED)
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $268,690 as of June 1997.
The Program has entered into a five-year payment plan with appropriate taxing
authorities relative to the payment of these past due taxes.
NOTE 4. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in
the Program to make additional capital contributions. Such contributions are
only recorded to the extent of cash received.
F-39
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Sacramento/Delta Greens
"Trudy Pat" Program (the "Sacramento/Delta Greens Program") (as defined in
Note 1) as of December 31, 1996, and the related statements of operations,
changes in owners' equity and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of 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 audits 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
presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Sacramento/Delta Greens Program as of December 31, 1996, and the results of
operations and cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 27, 1997
F-40
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
BALANCE SHEETS
December 31, June 30,
1996 1997
------------- -----------
(Unaudited)
ASSETS:
Land $2,230,000 $2,000,000
Cash and cash equivalents 62,583 22,272
Other assets - 2,813
---------- ----------
Total assets $2,292,583 $2,025,085
---------- ----------
---------- ----------
LIABILITIES:
Accounts payable $ 29,924 $ 25,640
Due to affiliate (Note 3) 146,611 167,444
Accrued property taxes (Note 3) 82,531 45,939
---------- ----------
Total liabilities 259,066 239,023
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 2,033,517 1,786,062
---------- ----------
Total liabilities and owners' equity $2,292,583 $2,025,085
---------- ----------
---------- ----------
See accompanying notes to financial statements.
F-41
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------ ---------------------
1996 1995 1997 1996
---------- ---------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 169,649 $ 93,523 $ 69,059 $ 40,365
Land write-down (Note 5) 845,000 - 230,000 422,500
Management fees (Note 3) 50,000 50,000 25,000 25,000
----------- --------- --------- ---------
Total expenses 1,064,649 143,523 324,059 487,865
Interest income 1,965 11,933 479 731
----------- --------- --------- ---------
Net income (loss) $(1,062,684) $(131,590) $(323,580) $(487,134)
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF OWNERS' EQUITY
TOTAL
----------
Balance January 1, 1995 $2,953,186
Capital contributions 12,033
Net loss for the year (131,590)
----------
Balance December 31, 1995 2,833,629
Capital contributions 262,572
Net loss for the year (1,062,684)
----------
Balance December 31, 1996 2,033,517
Capital contributions (unaudited) 76,125
Net loss for the period (unaudited) (323,580)
----------
Balance June 30, 1997 (unaudited) $1,786,062
----------
----------
See accompanying notes to financial statements.
F-43
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------ ----------------------
1996 1995 1997 1996
----------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,062,684) $(131,590) $(323,580) $(487,134)
Adjustment to reconcile net income
(loss) to net cash provided by (used in)
operating activities -
Real estate property write-down 845,000 - 230,000 422,500
Increase (decrease) from changes in:
Other assets - (2,813) -
Accounts payable 29,924 - (4,284) -
Accrued expenses (19,834) 53,716 (15,759) (56,278)
----------- --------- --------- ---------
Net cash provided by (used in)
operating activities (207,594) (77,874) (116,436) (120,912)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 262,572 12,033 76,125 245,816
----------- --------- --------- ---------
Net cash provided by
financing activities 262,572 12,033 76,125 245,816
----------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 54,978 (65,841) (40,311) 124,904
Cash and cash equivalents at beginning
of period 7,605 73,446 62,583 7,605
----------- --------- --------- ---------
Cash and cash equivalents
at end of period $ 62,583 $ 7,605 $ 22,272 $ 132,509
----------- --------- --------- ---------
----------- --------- --------- ---------
Cash paid during the period for interest $ - $ - $ - $ -
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1989 National Investors Financial, Inc. ("National"), represented
by NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Sacramento/Delta Greens Program (the "Program") in the
amount of $5,000,000 by selling undivided tenant-in-common interests in such
loan to 332 investors. In March of 1993, on behalf of the Sacramento/Delta
Greens Program investors, National foreclosed on the property and took title
to the property ("Sacramento/Delta Greens") involved in the Sacramento/Delta
Greens Program. Sacramento/Delta Greens is currently raw land which is zoned
and has an approved tentative tract map for a single-family detached housing
development of 534 homes. The property is located in Sacramento, California
and is currently held in Trust by National on behalf of the Sacramento/Delta
Greens investors. The Sacramento/Delta Greens property was recently
appraised at $3,075,000 as of the date of foreclosure. Therefore, the
property has been written down to its fair market value at the time of the
foreclosure and the investors' interest in the property is reflected as
Owners' Equity in the financial statements.
The accompanying financial statements include the accounts of the Program and
do not include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc. a California corporation, was formed to be
a publicly-held corporation to acquire the businesses of certain investment
programs previously syndicated by National in exchange for common shares. In
addition, American Family Holdings, Inc. will offer a maximum of 500,000
units, which consist of one share of common stock and one warrant at a price
of $10 per unit. Each warrant entitles the holder to purchase two additional
shares of common stock at 80% of the closing price of the stock on the day
prior to exercise of the warrant. The warrant has a term of two years
following the completion of the Offering.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Management of the Program considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash
equivalents.
LAND
Land is carried at the lower of cost or its net realizable value.
Effective January 1, 1996, the Program adopted the provisions of Statement of
Financial Accounting Standards No.121 ("SFAS No. 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which requires impairment losses to be recorded on long-lived assets being
developed, based on fair value, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Assets held for sale are to be carried
at the lower of cost or fair value less the costs to sell.
Real estate properties are carried at its net realizable value. Net
realizable value is the price obtainable in the future for parcels as
improved with a completed housing unit, net of disposal and holding costs
(including interest), without provision for future profit and without
discounting future cash receipts to present value.
F-45
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimation process in determining the value of real estate assets is
inherently uncertain and relies to a considerable extent on current and
future economic and market conditions, the availability of suitable financing
to fund holding, development, and construction activities, and the repayment
or refinancing of existing indebtedness. Such economic and market conditions
may effect management's development and marketing plans. Accordingly, the
ultimate realizations may differ from amounts presently estimated.
INCOME TAXES
The financial statements include the activity of the Program, whose income
or losses are included in the investors' respective tax returns.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1996
and 1997 are unaudited; however in the opinion of the Property's management,
the interim financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
results for the interim period. The results of operations for such interim
period are not necessarily indicative of the results to be obtained for the
full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages six other programs under similar
servicing agreements. As documented within the servicing agreement, National
is to receive an annual fee equal to 1% of the original loan balance.
National's requirements under the servicing agreement include managing the
assets of the Program to assure that the purpose and activities of the
program are continued for the investors. The Program incurred asset
management expenses of $50,000, $50,000, $25,000 and $25,000 for the years
ended December 31, 1995 and 1996 and for the six months ended June 30, 1996
and 1997. Total accrued and unpaid management fees included in "accrued
expenses and other liabilities" as of December 31, 1996 and June 30, 1997
were $146,611 and $167,444.
LAWSUIT
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant
effect on the financial position of the Program.
F-46
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the six months
ended June 30, 1996 and 1997 is unaudited)
NOTE 3. COMMITMENTS (CONTINUED)
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $45,939 as of June 30, 1997.
The Program has entered into a five-year payment plan with appropriate taxing
authorities relative to the payment of these past due taxes.
NOTE 4. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in
the Program to make additional capital contributions. Such contributions are
only recorded to the extent of cash received.
NOTE 5. LAND WRITE-DOWN
Due to changes in zoning and the housing market surrounding
Sacramento/Delta Greens, write-downs in the cost of the land of $845,000,
$422,500 and $230,000 were recorded during the year ended December 31, 1996
and the six months ended June 30, 1996 and 1997.
F-47
<PAGE>
APPENDICES
Appendix 1 Fairness Opinion
Appendix 2 Selected Additional Appraisal Information
<PAGE>
APPENDIX 1
[Form of Fairness Opinion]
_________ __, 1997
Mr. David G. Lasker
President
National Investors Financial, Inc.
4220 Von Karman Avenue
Suite 110
Newport Beach, CA 92660
Dear Mr. Lasker:
We understand that a transaction is contemplated (the "Acquisition") whereby a
newly formed company, American Family Holdings, Inc. (the "Company"), will
purchase the real estate assets, liabilities and business activities (the
"Properties") relating to certain trust deed participation ("Trudy Pat") loan
programs sponsored by National Investors Financial, Inc. ("National"). The
Trudy Pat loans were initially funded by groups of investors (the "Investors")
who, by virtue of the borrowers' default on the loans, have become the
beneficial owners of the Properties which secured the loans. These include
Trudy Pat loans on real property in Sacramento, California ("Delta Greens"),
Pacifica, California ("Mori Point"), Oceanside, California ("Oceanside"), and
two separate parcels in Oakhurst, California ("Yosemite/Ahwahnee I" and
"Yosemite/Ahwahnee II"). The Company's initial capitalization was 390,303
shares of common stock, represented by 147,500 shares each to two partnerships
controlled by the principals of National and 95,303 total shares issued to
employees of National and the Company, and consultants to certain of the
Properties (collectively, the "Founders' Shares") and National. As
consideration for the purchase of the Properties, the Company will issue shares
of common stock (the "Shares") to the respective Investors in the following
amounts: [121,520] shares to the Delta Greens Investors (representing [6.18]
percent of the total shares outstanding after the issuance of the Shares),
[329,148] Shares to the Mori Point Investors (representing [20.87] percent of
the total Shares outstanding after the issuance of the Shares), [530,310] shares
to the Oceanside Investors (representing [33.62] percent of the total Shares
outstanding after the issuance of the Shares), [200,788] Shares to the
Yosemite/Ahwahnee I Investors (representing [10.20] percent of the total Shares
outstanding after the issuance of the Shares) and [395,519] Shares to the
Yosemite/Ahwahnee II Investors (representing [20.10] percent of the total Shares
outstanding after the issuance of the Shares). In connection with the
Acquisition, it is anticipated that the Company's common stock will be listed
for public sale on the ____________ under the symbol ________. Current with the
Acquisition, the Company will also commence an offering (the
A1.1
<PAGE>
"Offering") of additional common shares to the Investors in the aggregate amount
of up to $5,000,000, at a price of $10 per Unit, each Unit representing one new
share of common stock and one warrant to purchase two additional shares of
common stock at a per share purchase price equal to 80% of the closing market
price on the trading date immediately prior to the exercise date.
You have requested our opinion (the "Opinion") as to the fairness of the
allocation of Shares pursuant to the Acquisition, inclusive of the Founders'
Shares, from a financial point of view, to the Investors in each of Delta
Greens, Mori Point, Oceanside, Yosemite/Ahwahnee I and Yosemite/Ahwahnee II.
Our Opinion is limited to the fairness of the allocation of Shares to the
Investors in connection with the Acquisition and does not consider the terms of
the proposed Offering. Therefore, we have not performed an analysis of, and
express no opinion with respect to, the proposed price of $10 per Unit nor the
fairness of such price to the Investors. Our Opinion is further limited by the
fact that, due to lack of information, we were unable to perform an analysis of
the Company's anticipated cost structure after giving effect to the Acquisition
and the Offering. As a result, we have not performed an analysis of, and
express no opinion with respect to, the Company's cost structure on a going
forward basis and whether such structure will result in a greater cost for
services to the Investors than they were incurring collectively when the
Properties were being managed by National.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. Reviewed a draft copy of the Consent Solicitation Statement/Prospectus for
the Transaction (the "Prospectus") dated October ___, 1997;
2. Reviewed the following real estate appraisals (the "Appraisals") with
respect to the Properties:
a) an appraisal of the Yosemite/Ahwahnee I and II Properties, prepared by
Arnold Associates, as of May 1, 1997 (the "Arnold Appraisal"),
b) an appraisal of the Yosemite/Ahwahnee I and II Properties, prepared by
the Mentor Group, as of October 10, 1996 (the "Mentor Appraisal"),
c) an appraisal of the Mori Point Property, prepared by PKF Consulting,
as of May 19, 1997 (the "PKF Appraisal"),
d) an appraisal of the Delta Greens Property, prepared by David E, Lane,
Inc., as of May 9, 1997 (the "Lane Appraisal"), and
e) an appraisal of the Oceanside Property, prepared by Boznanski and
Company, as of March 31, 1997 (the "Boznanski Appraisal");
A1.2
<PAGE>
3. Reviewed the following feasibility studies with respect to the Properties:
a) a study of the Yosemite/Ahwahnee I and II Properties, prepared by
LEXES Enterprises, dated August 28, 1996,
b) a study of the Yosemite/Ahwahnee I and II Properties, prepared by RCI
Consulting, dated November 1996, and
c) a study of the Delta Greens Property, prepared by Barnett Research
Associates, dated December 23, 1996;
4. Reviewed the Agreement of Purchase and Sale and Joint Escrow Instructions
between Oceanside Development, Inc. and a publicly traded homebuilder, dated as
of June 18, 1997 (the "Purchase Agreement"), relating to a potential sale of a
portion of the Oceanside Property, the Symphony tract (which agreement has since
been canceled by the Company in accordance with its rights under the agreement);
5. Reviewed audited financial statements for each of the Delta Greens
Property, the Mori Point Property, the Oceanside Property and the
Yosemite/Ahwahnee I and II Properties, as well as pro forma consolidated
financial statements for the Company, for the year ended December 31, 1996 and
the six months ended June 30, 1997;
6. Met with management of the Company and National regarding matters pertinent
to our analysis;
7. Conducted site visits to each of the Properties, and met with the General
Manager of the Yosemite/Ahwahnee I and II Properties;
8. Reviewed certain documents related to the Trudy Pat loans on the
Properties;
9. Reviewed certain other documents and schedules which were pertinent to our
analysis; and
10. Conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company or the Properties and do
not assume any responsibility with respect to it. Our Opinion is necessarily
based on business, economic, market and other conditions as they exist and can
be evaluated by us at the date of this letter.
We have assumed that the financial statements provided to us correctly reflect
the financial results and condition of the Company (on a pro forma basis) and
the Properties for the time periods covered in accordance with generally
accepted accounting principles consistently
A1.3
<PAGE>
applied. We have further assumed that there has been no material change in the
financial results and condition of the Company (on a pro forma basis) or the
Properties since the date of the most recent financial statements made available
to us. We have not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of the Properties.
Furthermore, at your request, we have not negotiated the Acquisition or advised
you with respect to alternatives to it.
We are not experts in real estate appraisal and, therefore, we have relied to an
extent upon the opinions and analyses expressed in the Appraisals. However,
because of certain issues that exist with respect to both the Properties and the
Appraisals, the determination of the fairness of the Acquisition to the
Investors was not based solely on the Appraisals. With respect to the
Yosemite/Ahwahnee I and II Properties, the wide disparity between the
conclusions expressed in the Arnold and Mentor Appraisals necessitated
additional analysis and scrutiny of the Appraisals. Management has represented
to us that it believes that the expected price that could be obtained for these
Properties under a scenario whereby they would need to be sold quickly is closer
to the values expressed in the Mentor Appraisal than those expressed in the
Arnold Appraisal, whereas the value of the Properties as part of the Company,
with sufficient time and financial resources to develop them according to plan,
is closer to the values expressed in the Arnold Appraisal than those expressed
in the Mentor Appraisal. The Yosemite/Ahwahnee I and II Properties have also
been operating in a substantial negative cash flow situation, necessitating
frequent additional cash investments from the Investors in those programs.
Management represents that it believes those Investors are no longer willing to
fund those negative cash flows which is a factor which must be considered in our
analysis. With respect to the Mori Point Property, management is of the opinion
that the PKF Appraisal does not adequately reflect the impact on the value of
the Property related to the time, expense and uncertainty regarding the
environmental mitigation issues . With respect to the Oceanside Property, in
spite of the fact that the Purchase Agreement has been canceled, we have
considered the fact that, according to management, negotiations with the
potential buyer are expected to continue and that there is a high likelihood
that a sale of the Symphony tract will be completed to either that particular
entity or another buyer in the near future. We have also relied upon
management's representations regarding the estimated amount of cash and liquid
assets to be generated by the liquidation of the other portion of the Oceanside
Property, the Encore tract.
Based on the foregoing, and in reliance thereon, it is our opinion that the
allocation of the Shares pursuant to the Acquisition, inclusive of the Founders'
Shares, is fair to the Investors in Delta Greens, Mori Point, Oceanside,
Yosemite/Ahwahnee I and Yosemite/Ahwahnee II, from a financial point of view.
This Opinion is furnished solely for your benefit and may not be relied upon by
any other person without our express, prior written consent. We understand,
however, that this Opinion may be referred to in the Prospectus to be filed by
the Company in connection with this Acquisition. This Opinion is delivered to
you subject to the conditions, scope of engagement, limitations and
A1.4
<PAGE>
understandings set forth in this Opinion and subject to the understanding that
the obligations of HVA in the Acquisition are solely corporate obligations, and
no officer, director, employee, agent, shareholder or controlling person of HVA
shall be subjected to any personal liability whatsoever to any person, nor will
any such claim be asserted by or on behalf of you or your affiliates.
HOULIHAN VALUATION ADVISORS
A1.5
<PAGE>
Appendix 2
SELECTED ADDITIONAL APPRAISAL INFORMATION
The following selected additional information about the appraisals of the
Programs' Properties is presented so that the Investors can better understand
the methods used and results of the appraisals.
SACRAMENTO/DELTA GREENS PROGRAM (David E. Lane, Inc.)
Sales Comparison Approach $2,134,000
Land Residual Approach 2,403,000
Discounted Cash Flow 1,815,000
Conclusion of "as is" value $2,000,000
----------
----------
Heaviest reliance was placed on the Sales Comparison Approach because the
Property is undeveloped and generates no revenue.
OCEANSIDE PROGRAM (Boznanski & Company)
ENCORE 23 lots
Sales Comparison Approach $1,265,000
Land Residual Approach 851,000
Conclusion of "as is" value $ 850,000
----------
----------
The Land Residual Approach was deemed to be the more realistic as it took
into account remaining development costs and a builder's profit.
SYMPHONY 111 lots
Sales Comparison Approach $2,636,000 -$3,164,000
Land Residual Approach 2,850,000
Conclusion of "as is" value $2,850,000
----------
----------
The Land Residual Approach was deemed to be the more realistic as it took
into account remaining development costs and was approximately the mid-point of
Sales Comparison Approach range.
MORI POINT (PKF Consulting)
Discounted Cash Flow $5,300,000
Ground Rent Capitalization
Approach 6,000,000
A2.1
<PAGE>
Sales Comparison Approach 5,400,000
Conclusion of "as is" value $5,500,000
----------
----------
As the sales comparisons available were not similarly sized or located, of
a similar development potential, the greatest reliance was placed on the
Discounted Cash Flow Approach as good market information was available to
support the potential cash flow and development cost of the potential project.
The Ground Rent Capitalization Approach was used as a test of reasonableness.
YOSEMITE/AHWANHEE I AND II (Arnold Associates)
GOLF COURSE/COUNTRY CLUB
Sales Comparison Approach $5,400,000
Income Approach 4,810,000
Cost Approach 6,270,000
Conclusion of "as is" value $4,480,000(1)
----------
----------
(1) Reflects a $5,100,000 stabilized value less $620,000 of lost income
during stabilization process of the golf course.
The Sales Comparison Approach was deemed the most reliable because
sufficient market data existed, although the comparables were superior in
location, quality or condition. The Income Approach was not reliable as there
was no historical data available.
RV PARK
Sales Comparison Approach $3,886,000
Cost Approach 3,986,000
Conclusion of "as is" value $3,886,000
----------
----------
The Sales Comparison Approach was deemed the most reliable. The Cost
Approach was suspect because of lack of historical data. There was no
historical data to support the Income Approach.
COUNTRY CLUB ESTATES ("as is") $2,250,000
ESTATE "OUTLOTS" F, G AND H ("as is") $5,800,000
OTHER "OUTLOTS" C, D AND E ("as is") $4,500,000
In each of the above three categories, only the Sales Comparison Approach
was used as such approach was deemed the only reliable indicator value for the
types of property in question.
Utilizing primarily a cost approach, in October 1996, The Mentor Group,
Inc. appraisal valued the subdivision (Country Club Estates) "as is" at $530,000
and the balance of the real
A2.2
<PAGE>
estate (as excess land) at "as is" $3,460,000, for a combined appraised value of
approximately $4,000,000.
A2.3
<PAGE>
OFFICIAL INVESTOR BALLOT
[attach mailing label here The Primary Investor named on this
for each distinct investor] label is listed as a participant in one
or more of the Programs involved in the
Acquisition and is eligible to vote
and subscribe.
THE SOLICITATION OF VOTES AND THE OFFERING OF UNITS EXPIRES AT 11:59 PM,
PACIFIC TIME, ON ___________, 199_, UNLESS EXTENDED (THE
"EXPIRATION TIME").
Pursuant to the Prospectus dated _________, 1997 (the "Prospectus"), which
accompanied the original mailing of this Official Investor Ballot, American
Family Holdings, Inc. (the "Company") is proposing to acquire the assets,
certain liabilities and business activities of the Programs (the "Acquisition")
in exchange for shares of the Company's common stock (the "Shares"). The
Acquisition requires the approval of Investors holding a majority beneficial
economic interest in each of the Programs. If a majority of Investors in any
one of the Programs does not approve the Acquisition prior to the Expiration
Time, then the Acquisition will not occur. If the Acquisition is approved, all
Investors in each of the Programs are bound by the vote of the majority that
granted approval. Capitalized terms in this Official Investor Ballot shall have
the same meaning as in the accompanying Prospectus.
NATIONAL RECOMMENDS A "YES" VOTE.
VOTING BALLOT (PLEASE INDICATE ONE CHOICE ONLY)
_____ YES! I vote to approve the Acquisition described in the
Prospectus, and, as part of that Acquisition, to receive
Acquisition Shares in the Company in exchange for my
Adjusted Outstanding Investment in the Program. I authorize
and instruct National to reconvey and extinguish on my
behalf all encumbrances against the Program's real estate in
which I have an interest.
_____ NO. I vote against the Acquisition. I have read and understand
the portions of the Prospectus which describe the
consequences to my investment in the Program if the
Acquisition does not occur.
_____ ABSTAIN. I abstain from voting. I understand that my abstention will
be counted as a vote AGAINST the Acquisition.
I represent and warrant that I (1) have received and reviewed the Prospectus,
(2) understand that if the Acquisition is completed, I will become a shareholder
in the Company, (3) have full power and authority to vote as an Investor
pursuant to the Program's tenancy-in-common agreement, (4) understand that if a
voting selection is not indicated, but this ballot is signed and delivered, I
will be deemed to have voted in favor of the Acquisition, and (5) that to the
best of my knowledge, when and if my interests in the property sold are
transferred to the Company in exchange for Shares, the Company will acquire
good, marketable and unencumbered title to them, free and clear of all liens,
restrictions and encumbrances, and that the interests in the property sold will
not be subject to any adverse claim other than property taxes. By voting in
favor of the Acquisition, I confirm that I am concurrently voting to terminate
the tenancy-in-common agreement and the servicing agreement which govern the
Program and I understand that the provisions of such agreement states that such
termination, if it occurs, will result in National being relieved from any and
all liabilities or responsibilities connected with the Program, and that all
amounts owing to National under the servicing agreement shall remain owing to
National. This vote, and all authority conferred herein, shall survive my death
or incapacity, and any of my obligations in connection with this vote and
subscription shall be binding upon my heirs, successors and assigns.
___________________________________ ___________________________
Signature of Primary Investor Date
___________________________________
Print Name
Daytime Telephone__________________ Tax I.D. No. ______________
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
SUBSCRIPTION ORDER FOR UNITS
I am subscribing for _______ Units at $10.00 each for a total amount of
$__________. I have enclosed a check for that amount, made payable to "First
Trust of California, N.A, as Escrow Agent for American Family Holdings, Inc.
Unit Offering." I understand that no Units will be sold if the Acquisition
described in the Prospectus, dated _________________, 1997, of American Family
Holdings, Inc. is not completed.
The undersigned investor(s) having read and reviewed the Prospectus,
understand that if the Acquisition is completed, the Company is offering to
sell, on a first-come, first-served basis, up to 500,000 Units at $10.00 per
Unit, and that each Unit consists of one share of common stock and one warrant
to purchase two additional shares at a 20% discount. In making this
subscription order, I/we represent and warrant that I/we am/are eligible to
participate in the Offering by virtue of the fact that I/we am/are currently
invested in the Program, and that I/we followed the Instructions which
accompanied this Subscription Order Form. Furthermore, under penalties of
perjury, I/we certify that (i) the number shown below is my/our correct Taxpayer
Identification Number or Social Security Number (or I/we am/are waiting for a
number to be issued) and (ii) I/we am/are not subject to backup withholding
either because I/we have not been notified by the Internal Revenue Service (IRS)
that I/we am/are subject to backup withholding as a result of a failure to
report all interests or dividends, or the IRS has notified me/us that I/we
am/are no longer subject to backup withholding. (NOTE: CLAUSE (ii) IN THIS
CERTIFICATION SHOULD BE CROSSED OUT IF AN INVESTOR IS SUBJECT TO BACKUP
WITHHOLDING.)
INVESTOR INFORMATION
Name of Investor ________________________________________________
Name of Joint Investor ________________________________________________
Street address ________________________________________________
City/State/Zip ________________________________________________
Business Telephone Number ________________________________________________
Home Telephone Number ________________________________________________
______________________________________________ ____________________________
Investor's Tax I.D. No./Social Security No. Joint Investor's Tax I.D.
______________________________________________ ____________________________
No./Social Security No.
______________________________________________ ____________________________
Signature of Investor Signature of Joint Investor
Date: ________________________________ Date: ____________________________
<PAGE>
BROKER / DEALER INFORMATION FORM
This Form must be returned with a subscription order, or the order cannot
be processed. If a broker is involved in the subscription order, the registered
representative broker/dealer must sign the form. If the subscription is made
without the assistance of a broker, the Investor must sign the form.
Broker/Dealer Name ___________________________________________________________
Registered Representative Name________________________________________________
Registered Representative Mailing Address_____________________________________
______________________________________________________________________________
______________________________________________________________________________
City_________________________ State__________________ Zip Code _________
Broker Number ______________ Telephone Number____________________________
BROKER STATEMENT: The undersigned confirms by his or her signature that the
broker/dealer is duly licensed and may lawfully sell shares in the state
designated as the Investor's residence, and that the person named as the
registered representative is duly licensed to represent the broker in this
transaction, and that he or she (i) has reasonable grounds to believe that the
information and representations concerning the Investor identified herein are
true, correct and complete in all respects; (ii) has discussed such Investor's
prospective purchase of Units with such Investor; (iii) has advised such
Investor of all pertinent facts with regard to the liquidity and marketability
of the Units pursuant to the NASD's Conduct Rules; (iv) has delivered a current
Prospectus and related supplements, if any, to such Investor; and (v) has
reasonable grounds to believe that the purchase of Units is a suitable
investment for such Investor and that such Investor is in a financial position
to enable such Investor to realize the benefits of such an investment and to
suffer any loss that may occur with respect thereto.
Registered Representative Name _______________________________________________
______________________________________________________________________________
Registered Representative Signature Date
Broker/Dealer Authorized Signature ___________________________________________
Print Name ___________________________________________________________________
ALL INVESTOR AND BROKER/DEALER INFORMATION MUST BE COMPLETED
OR REGISTRATION CANNOT PROCEED
INVESTOR STATEMENT: I confirm by my signature below that I have made my
subscription order without the assistance of a broker.
Name________________________________________ Joint Investor__________________
Signature __________________________________ Signature_______________________
Date _______________________________________ Date____________________________
<PAGE>
INSTRUCTIONS TO INVESTORS ON HOW TO COMPLETE THE
OFFICIAL INVESTOR BALLOT AND SUBSCRIPTION ORDER FORM
STEPS TO COMPLETE THE INVESTOR BALLOT AND SUBSCRIPTION ORDER
1. Indicate your voting selection in the space provided on the ballot.
Select one choice only.
2. Sign the ballot, indicate the date, and print your name and the
taxpayer identification number associated with your investment. Also,
make sure to include your daytime phone number in case someone needs
to contact you.
3. If you want to purchase Units, complete the Subscription Order form
and attach your check for the full amount (see "Subscriptions" on the
next page of these Instructions for more details). Remember, orders
are first-come, first-served.
4. Make sure to include a Broker/Dealer Information Form with your
Subscription Order form, or your order cannot be processed.
SIGNATURES
The signature on the ballot must correspond with the name shown on the
label attached to the ballot and must match the signature on file with the
Program. Pursuant to the tenancy-in-common agreements governing the Programs,
if two or more persons jointly hold title to a beneficial interest in a Program,
then only the Primary Investor is entitled to sign the ballot and cast votes for
that interest. If the Investor signing the ballot is the Primary Investor in
more than one of the Programs involved in the Acquisition, his/her vote will be
recorded for all of the interests which they are entitled to cast votes, unless
the Investor acts in a fiduciary or representative capacity for the separate
interests, in which case separate ballots bearing different labels will be
required and provided to the Investor.
If the ballot is being signed by a trustee, an executor, an administrator,
a guardian, an attorney-in-fact, an officer of a corporation, an agent or
another person acting in a fiduciary or representative capacity, such person
should so indicate when signing, and must submit proper evidence of their
authority to so act, unless such evidence is already on file with the Program.
Official Forms may be signed by a legal representative of a deceased or
legally disabled Investor, provided the legal representative has obtained the
necessary court authorizations and has furnished National with appropriate
copies of such authorizations, either prior to executing the Official Forms or
by enclosing them with the Forms. In the event any legal representative of a
deceased or legally disabled Investor refuses to cast votes on behalf of the
Program interests held in the name of an Investor, they will be deemed to have
voted IN FAVOR of the Acquisition, and that affirmative vote shall be binding
and effective as though the deceased or legally disabled Investor has cast such
vote themselves, while alive and not under any legal disability (per Section 2.5
of each Tenancy-in-Common Agreement).
<PAGE>
SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
If the Shares are to be issued in a name other than that shown on the label
affixed to the ballot, or if the Shares are to be sent to someone or someplace
other than what is shown on the label affixed to the ballot, contact the
Investor Services department at National Investors Financial, Inc. at
1-800-548-0050 for a special issuance letter. All special issuance and delivery
requests are subject to acceptance.
DELIVERY OF THE INVESTOR BALLOT
In order for a vote to be counted towards approval of the Acquisition, a
properly completed and duly executed ballot, along with any other documents
required pursuant to the ballot, these instructions, or the agreements governing
the Programs, must be received by National prior to the Expiration Time. The
method of delivering the ballot and related documents to National's offices is
at the Investor's election and risk, but delivery will only be deemed to have
been made when actually received by National. If an Investor decides to use
delivery by U.S. mail or by another common carrier, it is recommended that the
materials be sent a sufficient amount of time prior to the Expiration Time to
ensure timely delivery.
REVOCATION OF A VOTE
If you have cast a vote and want to change it at any time prior to the
Expiration Time, you may revoke your previous vote by delivering a substitute
ballot to National along with a letter stating that the prior vote is revoked
and that the substitute ballot supersedes it. After the Expiration Time, votes
will no longer be revocable unless the Acquisition does not occur, in which case
all votes will be revoked automatically. Any notice of revocation, to be
effective, must indicate the beneficial interests to which it relates and must
be executed in the same manner as the ballot that contained the vote which is
subject to revocation.
SUBSCRIPTIONS
Subscription Orders for Units will be accepted on a first-come,
first-served basis, and the quantity of Units offered to Investors is strictly
limited. If you choose to subscribe, you must enclose a check payable to "First
Trust of California, N.A, as Escrow Agent for American Family Holdings, Inc.
Unit Offering," along with your order form, and your funds will be held in
escrow until the Acquisition is completed. If you complete the subscription
information, but fail to enclose a check, your subscription will be deemed
invalid. You may subscribe after sending your ballot by sending a copy of the
form with your check at any time prior to completion of the Acquisition, subject
to availability of Units. All subscriptions must be accompanied by a
Broker/Dealer Information Form. Units can only be issued to the same
investor(s), and in the same manner, as Shares are issued to those same
investor(s) entitled to participate in the Acquisition and the Offering. If the
Acquisition is not completed, the Offering will be terminated and your money
(plus accrued interest) will be returned by the Escrow Agent.
<PAGE>
TRANSFER OF INTERESTS
If you transfer your beneficial interests in a Program after the date the
solicitation begins but before the Expiration Time, then if time permits, the
Prospectus will be sent to the successor holder(s) of the interests. Such a
transfer will terminate your right to vote on the Acquisition or to participate
in the Offering, and any votes concerning the transferred interests must be cast
by the successor holder(s).
WHERE TO SEND YOUR INVESTOR BALLOT AND SUBSCRIPTION ORDER
Send your completed and duly executed ballot or order for Units, along with
any related documents, to National Investors Financial, Inc., 4220 Von Karman
Avenue, Suite 110, Newport Beach, CA 92660. After determining that
subscriptions are valid, checks will be forwarded immediately to the Escrow
Agent.
VOTING UPDATES AVAILABLE 24 HOURS
Throughout the voting period, which will end on the Expiration Time,
information on the percentages of votes received from Investors in each Program
in favor of the Acquisition, as of the previous day, is available by recorded
messages posted on the Trudy Pat Bulletin Board. To access the system, simply
call 1-800-590-7772 (toll-free from outside California). During business hours,
ask to be connected to the Trudy pat Bulletin Board and follow the simple
instructions. After hours, a recorded message provides instructions on how to
access the system.
QUESTIONS OR ADDITIONAL MATERIALS:
Contact National at the above address or by calling 1-800-590-7772.
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/ PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
SACRAMENTO/DELTA GREENS "TRUDY PAT" PROGRAM
As described in the accompanying Consent Solicitation Statement/Prospectus
("Prospectus"), American Family Holdings, Inc. (the "Company") is offering
shares of its stock in exchange for the assets, certain liabilities and business
activities owned by investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. For this proposed Acquisition, the Company
will issue an aggregate of $15,772,850 of shares of common stock at $10 per
Share. The stock will be listed for trading on the ___________ under the symbol
"___."
In each of the Programs, the Investors will vote on whether to approve the
Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF THE
FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1997 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
The Company is also offering $5,000,000 of units (consisting of one share
of common stock and one warrant to purchase two additional shares) at $10 each
exclusively to current investors in the Programs. NASD broker-dealers will
receive a commission totalling $0.70 per unit for any units sold with their
help. If all the units are sold with their help, the proceeds of the sale, net
of estimated expenses of $200,000, will be $4,450,000. If you want to
participate, subscriptions for units should be returned with your ballot.
Subscriptions will be accepted on a FIRST-COME-FIRST-SERVED BASIS.
______________________
This Supplement has been prepared to help the investors in the Sacramento/Delta
Greens Program to understand how the Acquisition will affect them. If
completed, the effects of the Acquisition may be different for Investors in the
other Programs. A separate supplement has been prepared for each of the other
Programs, copies of which may be obtained, without charge, by writing to
National Investors Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport
Beach, California 92660, Attention: Vivian Kennedy, or calling 1-800-590-7772.
Capitalized terms used in this Supplement and not defined herein have the
meaning given to them in the Prospectus. See "Glossary" at page __ of the
Prospectus.
<PAGE>
MATERIAL RISKS
A full description of the material risks of the Acquisition may be found on
pages [14] through [19] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
YOU WILL HAVE NO DISSENTERS' RIGHTS IN CONNECTION WITH THE ACQUISITION. If
you vote against the Acquisition, and it is approved, you will not be able to
object to the Acquisition and receive the appraised value of your
tenancy-in-common interest in your Program's assets. You will have no choice
other than to accept shares.
THE NATURE OF YOUR INVESTMENT WILL CHANGE. If the Acquisition is
completed, your investment will no longer be a tenancy-in-common interest in a
particular Program's Property. Instead, you will hold shares in an on-going,
publicly-traded real estate company whose assets may be changed by the Company's
management without your approval. You will be able to liquidate your investment
only by selling your shares on the _____________, and only if a trading market
exists, or in private transactions.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. The shares of the Company
have never been sold in a public securities market. If the shares trade, the
trading price may be less than the arbitrary $10 issuance price or the book
value of the Company's assets. The market price of the shares may be volatile
after the Acquisition if investors decide to sell a large number of the shares
shortly after the Acquisition.
THERE MAY BE CONFLICTS OF INTEREST IN NATIONAL'S STRUCTURING THE
ACQUISITION. Shares and compensation to be held or received after the
Acquisition by National, and by principals, employees and consultants of
National, the Programs and the Company have been determined by National and its
principals.
YOU DO NOT HAVE INDEPENDENT ADVISORS REPRESENTING YOU IN STRUCTURING THIS
TRANSACTION. Therefore, the terms of the Acquisition may be less favorable to
you and more favorable to National and its principals. If the Acquisition had
been negotiated by independent parties at arm's length, the principals of
National and the Company might have been given fewer shares. Additionally, the
allocation of shares might have been more favorable to one Program than another.
THERE MAY BE DIFFERENCES BETWEEN EXCHANGE VALUES AND REALIZABLE VALUES.
The exchange value of the Programs may not be what the properties would sell for
in a cash sale transaction. Appraisals reflect conditions in the second quarter
of 1997, and do not reflect subsequent events. Exchange values reflect
adjustments to appraised values described in "Background and Reasons for the
Acquisition - Determination of Acquisition Prices" at page __.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the Acquisition,
the properties will not be subject to any liens other than possible mechanics'
liens and property taxes owed. However, the Board of Directors could allow the
Company to borrow using the Company's real
2
<PAGE>
estate assets as security. If cash flow cannot cover debt repayment, the
Company could lose those assets to creditors.
THE BOARD OF DIRECTORS WILL HAVE THE ABILITY TO CHANGE INVESTMENT,
FINANCING AND OTHER POLICIES OF THE COMPANY WITHOUT SHAREHOLDER CONSENT. The
Board will determine major Acquisition, financing, debt and distribution
policies of the Company. The Board may amend or revise these policies as well
as the business plan without shareholder approval.
DISTRIBUTIONS WILL BE UNPREDICTABLE. After the Acquisition, you will not
receive any regular distributions. Instead, in the early years, the Board
intends to accumulate cash for working capital or other uses.
REAL ESTATE RISKS
THERE ARE SIGNIFICANT DELINQUENT PROPERTY TAXES. If delinquent property
taxes are not timely paid, the Company could lose one or more of the properties
to tax sales. Each of the Programs' properties is subject to the following
delinquent property taxes as of June 30, 1997: Sacramento/Delta Greens -
approximately $45,000; Oceanside - approximately $10,000; Yosemite/Ahwahnee
(combined) - approximately $596,000; and Mori Point - approximately $269,000.
Annual payments required for all the properties total approximately $386,700.
PERMITS TO DEVELOP CERTAIN PROPERTIES HAVE LAPSED OR HAVE NOT YET BEEN
OBTAINED. If needed permits for development are not obtained or reissued, the
business plan for the Company will have to be revised or abandoned.
COMPLIANCE WITH CONDITIONS IN EXISTING PERMITS AND APPROVALS MAY REQUIRE
CHANGES TO DEVELOPMENT PLANS. For example, the tentative tract map for the
Sacramento/Delta Greens property requires that studies must be conducted to
identify any endangered species' habitat which may exist on the property. If
any are identified, changes to the tentative development plans will have to be
made and approved that will reduce or eliminate any damage to the habitat.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO FURTHER THE BUSINESS PLAN. Unless
funds from sale of the units or from sale of certain assets of the Programs
become available, the Company will not be able to proceed with its business plan
and properties might be lost to tax sales before sales to third parties can be
arranged. The Company will also need financing from other sources to complete
its plan. Financing sources are not predictable and interest rates or other
costs of financing may be prohibitive.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE OR
SACRAMENTO/DELTA GREENS PROPERTIES MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL
CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Changing market conditions may
increase the difficulty of selling the lots.
FEDERAL, STATE AND LOCAL LAW MAY REQUIRE EXPENSIVE HAZARDOUS SUBSTANCE
CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC IMPROVEMENTS.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY.
3
<PAGE>
THERE ARE CERTAIN RISKS ASSOCIATED WITH THE CALIFORNIA MARKET. While
economic conditions are improving in California, its markets have been affected
by substantial fluctuations in local economic conditions, interest rates,
inflation, employment levels and regulations. California has also experienced
draught conditions, resulting in water conservation measures and rationing. In
the past, these conditions have caused local governments to restrict residential
development. California's climate and geology present risks of natural disaster
such as earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE OWED
$1,078,510 BY THE COMPANY. This represents accrued fees and expenses from the
Programs which National has not cancelled.
GOLF COURSE RISKS
THERE ARE INDUSTRY OPERATING RISKS, INCLUDING INCREASED COMPETITION,
SEASONALITY, WEATHER AND COURSE CONDITIONS. While no new golf courses have
opened near the Ahwahnee Golf Course, new courses could increase the competition
and reduce the rounds played. Seasonal variations may require the Company to
supplement revenue at the golf course to meet operating expenses. Weather can
negatively affect the turf grass and reduce the number of rounds played.
Inflationary costs may not be offset by increased dues. Also, golf's success
depends on discretionary spending by consumers, which may be vulnerable to
regional and economic conditions, as well as to pleasure or destination travel
preferences by visitors and tourists.
RESIDENTIAL DEVELOPMENT RISKS
THE COMPANY MAY BE AFFECTED BY MARKET RISKS AND COMPETITION. The market
for residential real estate is cyclical and the residential lot development
industry is highly competitive. If the demand for new lots does not keep pace
with competitive supply, our properties may be sold at a loss.
RESORT DESTINATION RISKS
THERE ARE RISKS ASSOCIATED WITH RESORT DEVELOPMENT. In addition to normal
real estate risks, financing is hard to obtain, and the lodging industry can be
unpredictable, seasonal and very competitive. Without additional financing or
capital, the Company will not be able to develop its resort projects as part of
its growth strategy.
TIMESHARE RISKS
- NEGATIVE PRESS SURROUNDING THE REMARKETING OF TIMESHARES MIGHT
NEGATIVELY IMPACT SALES AND OPERATIONS.
- MARKETING COSTS ARE HIGH RELATIVE TO SELLING PRICE WHICH CAN REDUCE OR
ELIMINATE PROFITS FROM THE SALE OF TIMESHARE INTERESTS.
4
<PAGE>
- THERE ARE RELATIVELY MORE DEFAULTS AMONG TIMESHARE OWNERS WHEN THEY
BORROW TO BUY TIMESHARES COMPARED TO HOMEBUYERS WHO BORROW TO BUY A HOME. IF A
BUYER DEFAULTS, WE WOULD INCUR COSTS IN REMARKETING THE TIMESHARE.
- WE DO NOT HAVE AN EXCHANGE NETWORK TO ENHANCE MARKETING APPEAL. IF WE
CANNOT OFFER SUCH A NETWORK IN THE FUTURE, WE MAY BE AT A COMPETITIVE
DISADVANTAGE.
- THE TIMESHARE INDUSTRY IS EXTREMELY COMPETITIVE.
- WE MAY NOT BE ABLE TO SECURE DEVELOPMENT FINANCING ON ACCEPTABLE
TERMS.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the charter documents may restrict changes in control
of the Company's management. These provisions may make it more difficult or
expensive for another party to acquire and exercise control of the Company or to
change its management, even if that change would be beneficial to you. Some of
these provisions include:
1. THE BOARD'S ABILITY TO ISSUE PREFERRED SHARES WHICH COULD AFFECT YOUR
VOTING POWER AND TO ISSUE ADDITIONAL SHARES TO DISCOURAGE OR IMPEDE A MERGER OR
OTHER TRANSACTION THAT MAY BE IN YOUR BEST OR FINANCIAL INTEREST.
2. THE BOARD IS DIVIDED INTO THREE CLASSES SERVING STAGGERED THREE YEAR
TERMS. You may not be able to efficiently change control of the Company if you
believe that change would be in your best interests.
3. THERE ARE RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS WITH
INTERESTED PARTIES. There are restrictions on what interested parties can do
for three years, without the approval of the Board of Directors.
4. THE DELAWARE LAW, AS WELL AS THE CHARTER DOCUMENTS, LIMIT THE
LIABILITY OF DIRECTORS AND OFFICERS TO SHAREHOLDERS.
5. CHANGES TO THE COMPANY'S CERTIFICATE OF INCORPORATION WHICH COVER
ANTI-TAKEOVER PROVISIONS REQUIRE THE APPROVAL OF TWO-THIRDS OF THE COMPANY'S
VOTING STOCK.
EFFECT OF THE ACQUISITION
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE FOR
YOUR INVESTMENT IN THE PROGRAM, AS ADJUSTED PER THE TERMS OF THE GOVERNING
AGREEMENTS.
- YOU MAY HAVE A LIQUID TRADING MARKET FOR YOUR SHARES. After the
Acquisition, shares will be listed on the ______________. If a trading market
exists, you will have the opportunity to liquidate all or some of those shares
at your preference.
5
<PAGE>
- YOU MAY HAVE MORE CONTROL OVER THE TIMING OF LIQUIDATING OF YOUR
INVESTMENT. You can control when you choose to take profits or losses. Under
the current Programs, you are required to abide by a majority vote to sell or
retain the property, regardless of whether or not the timing of the action or
the decision of the majority is consistent with your individual preferences.
- YOU WILL OWN SHARES IN A POOL OF ASSETS WHOSE DIVERSITY CAN MITIGATE
RISK AND INCREASE THE LIQUIDITY OF THE PROPERTIES. Your investment will be
spread over an initial asset base of four different real estate projects (the
two Yosemite/Ahwahnee Programs will be one project after the Acquisition).
- YOU WILL HAVE EXPERIENCED PROPERTY MANAGEMENT. We have hired and
intend to hire additional key real estate management professionals who are
experienced in real estate development, operation and construction.
- YOU WILL NO LONGER BE LIABLE FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
Acquisition, meaning your liability for mandatory assessments will cease.
- YOUR LIABILITY WILL BE LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the Programs, you are not
effectively insulated from personal liability based on operation of those
assets. As shareholders of a corporation, you will be.
- THE ASSETS OWNED BY THE COMPANY WILL NO LONGER BE SUBJECTED TO
SERVICING FEES. For all programs involved in the Acquisition, National will
stop earning servicing fees of approximately $650,000 per year and will forgive
a total of $946,111 of unpaid servicing fees if the Acquisition is approved.
Although the services of National are being replaced by a management team and
staff to run the Company, National believes that the cost of this new management
team will be modestly lower than the historical cost of National servicing the
programs on an individual basis.
- For further information about how the Acquisition will affect you and
the Program, see the following portions of the Prospectus:
- "Background and Reasons for the Acquisition" commencing at page
__.
- "Comparison of Tenancy-in-Common Interests and Shares" commencing
at page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
6
<PAGE>
FAIRNESS TO INVESTORS IN THE SACRAMENTO/DELTA GREENS PROGRAM
From a financial point of view, National believes the terms of the
Acquisition are fair as a whole and to the investors in each of the Programs.
National based its determination on many factors, including:
- a better quality form of investment (shares of stock in a publicly
traded company);
- the exchange value offered to investors for their assets in comparison
with what National believes could be received on sale of the assets unless a
source of external financing for further development was available (which may
not be the case);
- the number of shares in the Company to be held by principals,
employees, and consultants of National, the Programs or the Company upon
completion of the Acquisition;
- the opportunity for each investor to vote for or against the
Acquisition;
- valuation of the real estate assets of the Program by an independent
appraiser; and
- the Fairness Opinion rendered by the independent valuation firm. See
"Background and Reasons for the Acquisition" at page __.
National reviewed the value you will receive in connection with the
Acquisition and compared it with what you might receive under the alternatives
to Acquisition. Despite the adjustments to appraised value to arrive at
exchange values, National concluded that the likely market value of the shares
of the Company would be higher in the long run than the value you would have
received if any of the alternatives to the Acquisition had been implemented.
See "Background and Reasons for the Acquisition -- Alternative to the
Acquisition" and "-- Recommendation of National and Fairness Determination" at
pages __ and __ of the Prospectus. Based on this comparison, National concluded
that the Acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE OF THE PROGRAM
The Exchange Value of the Program (as well as each of the other four
Programs) is essentially the consideration at which the Company is offering in
exchange for the real estate assets, certain liabilities and business of the
Program. The value is reflected as a number of shares of the Company common
stock (in the case of the Program, 121,520 shares) multiplied by an arbitrary
$10 per share value.
The starting point for determining the Exchange Value was the current "as
is" real estate value of the Program's Property. This value was estimated by
independent appraiser who conducted the appraisal on the Property according to
industry standards with the assumption that financing would be available to
permit the Property to attain its highest and best use. Then, the real estate
value was adjusted for
7
<PAGE>
- the net value of other assets and liabilities, and
- certain critical business factors which, in National's opinion, must
be considered in order to arrive at a fair, proper and meaningful Exchange Value
for each "Trudy Pat" Program in relation to the others in the context of the
Acquisition.
Certain business factors were considered "positive," and caused the Exchange
Value to be adjusted upward from the estimates contained in the real estate
appraiser's report. Likewise, certain factors were considered "negative," and
caused the Exchange Value to be adjusted downward from the estimates contained
in the real estate appraiser's report.
The following were considered the positive factors:
POTENTIAL LIQUIDITY FACTOR. The Potential Liquidity Factor of a Program is
measured by estimating the amount of cash that might be available through
financing of a Program's assets within a six month period following the
Effective Time and dividing that amount by the appraised real estate value.
POTENTIAL INVESTOR ASSESSMENT FACTOR. The Potential Investor Assessment
Factor of a Program is determined by estimating the average yearly amount that
National estimates that Investors in a particular Program would be able and
willing to invest in the Program in the form of mandatory assessments, based on
prior experience, and dividing that amount by the appraised real estate value.
QUICK-SALE FACTOR. The Quick-Sale Factor of a Program is determined by
estimating the amount of cash that might be available through a sale of Program
assets which could be liquidated within a six month period following the
Effective Time and dividing that amount by the appraised real estate value.
The following were considered the negative factors:
CASH REQUIREMENT FACTOR. The Cash Requirement Factor is determined by
estimating the average amount that is needed yearly to meet the average
reasonable and prudent financial needs of the Program and dividing that amount
by the appraised real estate value.
INVESTOR ASSESSMENT RESISTANCE FACTOR. The Investor Assessment Resistance
Factor is determined by estimating the difference between the average amount
that is needed yearly to meet the average reasonable and prudent financial needs
of the Program and the average amount that. based on prior experience, National
believes that Investors would be able and willing to invest in the Program in
the form of mandatory assessments (the numerator of the Potential Assessment
Resistance Factor described above). This amount is then divided by the
numerator of the Potential Investment Assessment Factor.
8
<PAGE>
TERM TO MAXIMUM/FULL REPAYMENT FACTOR. The Term to Maximum/Full Repayment
Factor is determined by the following chart:
TERM FACTOR
---- ------
0-6 months 0%
7-12 months 10%
13-18 months 20%
19-24 months 30%
25-30 months 40%
31-36 months 50%
and increasing 10% for
every additional six
month period or part
thereof up to 100%.
The importance of each factor is unique. Therefore, each factor was
weighted as a percentage in determining the Exchange Value of each Program.
These weighted percentages were used to arrive at the Exchange Value of
each Program through the adjustment to the appraised real estate value by
multiplying the factor by the weight. The factors described above have been
assigned the following weights:
- Potential Liquidity Factor -- positive 20%
- Potential Investor Assessment Factor -- positive 50%
- Quick Sale Factor -- positive 10%
- Cash Requirement Factor -- negative 50%
- Investor Assessment Resistance Factor -- negative 75%
- Term to Maximum Repayment Factor -- negative 10%
See "Background and Reasons for the Acquisition -- Determination of
Exchange Value" at page __ of the Prospectus for more information about the
adjustment factors.
The following table summarizes the calculation of the Exchange Value of the
Sacramento/Delta Greens Program:
Appraised Net Other Net Business
Value of + Assets and - Factor = Exchange
Real Estate(1) Liabilities(2) Adjustments(3) Value
-------------- -------------- -------------- --------
$ 2,000,000 $( 52,300) $( 732,500) $ 1,215,200
9
<PAGE>
- -------------------
(1) Reflects independent appraisal as of 1997.
(2) Includes cash in trust account, amounts due to National after the
Acquisition is completed, and property taxes due and payable at June 30,
1997. There is no mortgage debt on the Property.
(3) While each of the above positive factors permitted minor upward adjustments
to the Program's value, a significant cash requirement to complete final
engineering and plans, coupled with heavy historical Investor resistance to
advance funds to pay even the most basic costs, required a substantial
negative adjustment to the value of the Program Property in comparison with
the value of the other Programs' Properties.
ALLOCATION OF SHARES
The 1,577,285 shares of Company common stock being offered to Investors in
the Acquisition represent 80.16% of the Company's shares which will be
outstanding upon completion of the Acquisition. The remaining shares will be
held by management and other founders of the Company. Such shares will be
allocated among the five Programs pro rata in accordance with Exchange Values.
The Sacramento/Delta Greens Program will be allocated 121,250 shares.
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in the
applicable Program (taking into account assessments paid and unpaid, as well as
interest accrued to each Investor through the date beneficial ownership of the
Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Sacramento/Delta Greens Program with an adjusted
investment amount of $10,000 will receive 202 shares of Company stock.
The following table sets forth the amount owed by the original borrower to
the Program plus the amount of assessments paid by Investors at [AUGUST 15,
1997], appraised real estate values, exchange values, the number and percentage
of shares allocated to the Program, and the number of shares of the Company to
be held by founders after the Acquisition.
<TABLE>
<CAPTION>
Amount Real Estate No. of Shares % of Shares
Owed plus Appraised Exchange ALLOCATED Issued in
Name of Program Assessments Value Value Acquisition
--------------- ----------- ----------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 6,015,723 $ 2,000,000 $ 1,215,200 121,520 7.70%
</TABLE>
The founders of the Company include members of Company management, as well
as certain employees of National and consultants to the Company and the
Programs. The Company was formed, and shares were purchased by the founders,
prior to making the Acquisition proposed. The total number of shares to be
retained by the founders was determined by reviewing the fees previously
cancelled and to be cancelled, as well as the additional value being brought to
the Investors through the Acquisition. A total of 390,303 shares of Company
common stock was issued at the organization of the Company at $0.01 per share.
See "Dilution" at page __ of the Prospectus. If the Acquisition is completed,
the following table sets forth the fees which National and its principals have
cancelled, or will cancel:
10
<PAGE>
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------- ---------- ---------
Sacramento/Delta Greens $ 137,111 $ 500,000 $ 637,111
Oceanside 704,000 -0- 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point -0- 461,589 461,589
---------- ---------- ----------
TOTAL $ 946,111 $2,191,614 $3,137,725
---------- ---------- ----------
---------- ---------- ----------
If the shares to be retained by the founders had been allocated to the
founders from the Programs based on cancelled fees, 20.30% of the total shares
to be outstanding after the Acquisition (79,232) which will be held by the
founders of the Company would have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1996,
1995 and 1994, and for the six month period ending June 30, 1997.
<TABLE>
<CAPTION>
Actually
Actually Actually Actually Incurred Paid for
Incurred Paid for Incurred Paid for Incurred Paid for for Six Six
for Year Year for Year Year for Year Year Months Months
Ended Ended Ended Ended Ended Ended Ended Ended
Name of Program 12/31/94 12/31/94 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96 6/30/97(1) 6/30/97
- --------------- -------- -------- ----------- -------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 50,000 $ -0- $ 50,000 $ -0- $ 50,000 $ $ 25,000 $ 4,167
</TABLE>
- -------------------
(1) These amounts represent accrued servicing fees.
If the Acquisition had been completed during the above periods, National
would not have been entitled to receive any further servicing fees. The only
compensation National or any of its affiliates would have been entitled to
receive would have been from salaries payable to officers and employees of the
Company. No cash would have been available to pay bonuses or dividends.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and
during the six months ended June 30, 1997:
11
<PAGE>
<TABLE>
<CAPTION>
Prior to June 30,
Name of Program 1992 1992 1993 1994 1995 1996 1997 Total
- --------------- ---- ---- ---- ---- ---- ---- ---- -----
Sacramento/
Delta Greens
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $1,654,013 $ 343,750 $ 0 $ 0 $ 0 $ 0 $ 0 $1.997,763
</TABLE>
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- - "Financial Statements" at page F-1.
12
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/ PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
OCEANSIDE "TRUDY PAT" PROGRAM
As described in the accompanying Consent Solicitation Statement/Prospectus
("Prospectus"), American Family Holdings, Inc. (the "Company") is offering
shares of its stock in exchange for the assets, certain liabilities and business
activities owned by investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. For this proposed Acquisition, the Company
will issue an aggregate of $15,772,850 of shares of common stock at $10 per
Share. The stock will be listed for trading on the ___________ under the symbol
"___."
In each of the Programs, the Investors will vote on whether to approve the
Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF THE
FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1997 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
The Company is also offering $5,000,000 of units (consisting of one share
of common stock and one warrant to purchase two additional shares) at $10 each
exclusively to current investors in the Programs. NASD broker-dealers will
receive a commission totalling $0.70 per unit for any units sold with their
help. If all the units are sold with their help, the proceeds of the sale, net
of estimated expenses of $200,000, will be $4,450,000. If you want to
participate, subscriptions for units should be returned with your ballot.
Subscriptions will be accepted on a FIRST-COME-FIRST-SERVED BASIS.
________________________
This Supplement has been prepared to help the investors in the Oceanside
Program to understand how the Acquisition will affect them. If completed, the
effects of the Acquisition may be different for Investors in the other Programs.
A separate supplement has been prepared for each of the other Programs, copies
of which may be obtained, without charge, by writing to National Investors
Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport Beach, California
92660, Attention: Vivian Kennedy, or calling 1-800-590-7772.
Capitalized terms used in this Supplement and not defined herein have the
meaning given to them in the Prospectus. See "Glossary" at page __ of the
Prospectus.
<PAGE>
MATERIAL RISKS
A full description of the material risks of the Acquisition may be found on
pages [14] through [19] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
YOU WILL HAVE NO DISSENTERS' RIGHTS IN CONNECTION WITH THE ACQUISITION. If
you vote against the Acquisition, and it is approved, you will not be able to
object to the Acquisition and receive the appraised value of your
tenancy-in-common interest in your Program's assets. You will have no choice
other than to accept shares.
THE NATURE OF YOUR INVESTMENT WILL CHANGE. If the Acquisition is
completed, your investment will no longer be a tenancy-in-common interest in a
particular Program's Property. Instead, you will hold shares in an on-going,
publicly-traded real estate company whose assets may be changed by the Company's
management without your approval. You will be able to liquidate your investment
only by selling your shares on the _____________, and only if a trading market
exists, or in private transactions.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. The shares of the Company
have never been sold in a public securities market. If the shares trade, the
trading price may be less than the arbitrary $10 issuance price or the book
value of the Company's assets. The market price of the shares may be volatile
after the Acquisition if investors decide to sell a large number of the shares
shortly after the Acquisition.
THERE MAY BE CONFLICTS OF INTEREST IN NATIONAL'S STRUCTURING THE
ACQUISITION. Shares and compensation to be held or received after the
Acquisition by National, and by principals, employees and consultants of
National, the Programs and the Company have been determined by National and its
principals.
YOU DO NOT HAVE INDEPENDENT ADVISORS REPRESENTING YOU IN STRUCTURING THIS
TRANSACTION. Therefore, the terms of the Acquisition may be less favorable to
you and more favorable to National and its principals. If the Acquisition had
been negotiated by independent parties at arm's length, the principals of
National and the Company might have been given fewer shares. Additionally, the
allocation of shares might have been more favorable to one Program than another.
THERE MAY BE DIFFERENCES BETWEEN EXCHANGE VALUES AND REALIZABLE VALUES.
The exchange value of the Programs may not be what the properties would sell for
in a cash sale transaction. Appraisals reflect conditions in the second quarter
of 1997, and do not reflect subsequent events. Exchange values reflect
adjustments to appraised values described in "Background and Reasons for the
Acquisition - Determination of Acquisition Prices" at page __.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the Acquisition,
the properties will not be subject to any liens other than possible mechanics'
liens and property taxes owed. However, the Board of Directors could allow the
Company to borrow using the Company's real
2
<PAGE>
estate assets as security. If cash flow cannot cover debt repayment, the
Company could lose those assets to creditors.
THE BOARD OF DIRECTORS WILL HAVE THE ABILITY TO CHANGE INVESTMENT,
FINANCING AND OTHER POLICIES OF THE COMPANY WITHOUT SHAREHOLDER CONSENT. The
Board will determine major Acquisition, financing, debt and distribution
policies of the Company. The Board may amend or revise these policies as well
as the business plan without shareholder approval.
DISTRIBUTIONS WILL BE UNPREDICTABLE. After the Acquisition, you will not
receive any regular distributions. Instead, in the early years, the Board
intends to accumulate cash for working capital or other uses.
REAL ESTATE RISKS
THERE ARE SIGNIFICANT DELINQUENT PROPERTY TAXES. If delinquent property
taxes are not timely paid, the Company could lose one or more of the properties
to tax sales. Each of the Programs' properties is subject to the following
delinquent property taxes as of June 30, 1997: Sacramento/Delta Greens -
approximately $45,000; Oceanside - approximately $10,000; Yosemite/Ahwahnee
(combined) - approximately $596,000; and Mori Point - approximately $269,000.
Annual payments required for all the properties total approximately $386,700.
PERMITS TO DEVELOP CERTAIN PROPERTIES HAVE LAPSED OR HAVE NOT YET BEEN
OBTAINED. If needed permits for development are not obtained or reissued, the
business plan for the Company will have to be revised or abandoned.
COMPLIANCE WITH CONDITIONS IN EXISTING PERMITS AND APPROVALS MAY REQUIRE
CHANGES TO DEVELOPMENT PLANS. For example, the tentative tract map for the
Oceanside property requires that studies must be conducted to identify any
endangered species' habitat which may exist on the property. If any are
identified, changes to the tentative development plans will have to be made and
approved that will reduce or eliminate any damage to the habitat.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO FURTHER THE BUSINESS PLAN. Unless
funds from sale of the units or from sale of certain assets of the Programs
become available, the Company will not be able to proceed with its business plan
and properties might be lost to tax sales before sales to third parties can be
arranged. The Company will also need financing from other sources to complete
its plan. Financing sources are not predictable and interest rates or other
costs of financing may be prohibitive.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE OR
SACRAMENTO/DELTA GREENS PROPERTIES MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL
CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Changing market conditions may
increase the difficulty of selling the lots.
FEDERAL, STATE AND LOCAL LAW MAY REQUIRE EXPENSIVE HAZARDOUS SUBSTANCE
CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC IMPROVEMENTS.
3
<PAGE>
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY.
THERE ARE CERTAIN RISKS ASSOCIATED WITH THE CALIFORNIA MARKET. While
economic conditions are improving in California, its markets have been affected
by substantial fluctuations in local economic conditions, interest rates,
inflation, employment levels and regulations. California has also experienced
draught conditions, resulting in water conservation measures and rationing. In
the past, these conditions have caused local governments to restrict residential
development. California's climate and geology present risks of natural disaster
such as earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE OWED
$1,078,510 BY THE COMPANY. This represents accrued fees and expenses from the
Programs which National has not cancelled.
GOLF COURSE RISKS
THERE ARE INDUSTRY OPERATING RISKS, INCLUDING INCREASED COMPETITION,
SEASONALITY, WEATHER AND COURSE CONDITIONS. While no new golf courses have
opened near the Ahwahnee Golf Course, new courses could increase the competition
and reduce the rounds played. Seasonal variations may require the Company to
supplement revenue at the golf course to meet operating expenses. Weather can
negatively affect the turf grass and reduce the number of rounds played.
Inflationary costs may not be offset by increased dues. Also, golf's success
depends on discretionary spending by consumers, which may be vulnerable to
regional and economic conditions, as well as to pleasure or destination travel
preferences by visitors and tourists.
RESIDENTIAL DEVELOPMENT RISKS
THE COMPANY MAY BE AFFECTED BY MARKET RISKS AND COMPETITION. The market
for residential real estate is cyclical and the residential lot development
industry is highly competitive. If the demand for new lots does not keep pace
with competitive supply, our properties may be sold at a loss.
RESORT DESTINATION RISKS
THERE ARE RISKS ASSOCIATED WITH RESORT DEVELOPMENT. In addition to normal
real estate risks, financing is hard to obtain, and the lodging industry can be
unpredictable, seasonal and very competitive. Without additional financing or
capital, the Company will not be able to develop its resort projects as part of
its growth strategy.
TIMESHARE RISKS
- NEGATIVE PRESS SURROUNDING THE REMARKETING OF TIMESHARES MIGHT
NEGATIVELY IMPACT SALES AND OPERATIONS.
4
<PAGE>
- MARKETING COSTS ARE HIGH RELATIVE TO SELLING PRICE WHICH CAN REDUCE OR
ELIMINATE PROFITS FROM THE SALE OF TIMESHARE INTERESTS.
- THERE ARE RELATIVELY MORE DEFAULTS AMONG TIMESHARE OWNERS WHEN THEY
BORROW TO BUY TIMESHARES COMPARED TO HOMEBUYERS WHO BORROW TO BUY A HOME. IF A
BUYER DEFAULTS, WE WOULD INCUR COSTS IN REMARKETING THE TIMESHARE.
- WE DO NOT HAVE AN EXCHANGE NETWORK TO ENHANCE MARKETING APPEAL. IF WE
CANNOT OFFER SUCH A NETWORK IN THE FUTURE, WE MAY BE AT A COMPETITIVE
DISADVANTAGE.
- THE TIMESHARE INDUSTRY IS EXTREMELY COMPETITIVE.
- WE MAY NOT BE ABLE TO SECURE DEVELOPMENT FINANCING ON ACCEPTABLE
TERMS.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the charter documents may restrict changes in control
of the Company's management. These provisions may make it more difficult or
expensive for another party to acquire and exercise control of the Company or to
change its management, even if that change would be beneficial to you. Some of
these provisions include:
1. THE BOARD'S ABILITY TO ISSUE PREFERRED SHARES WHICH COULD AFFECT YOUR
VOTING POWER AND TO ISSUE ADDITIONAL SHARES TO DISCOURAGE OR IMPEDE A MERGER OR
OTHER TRANSACTION THAT MAY BE IN YOUR BEST OR FINANCIAL INTEREST.
2. THE BOARD IS DIVIDED INTO THREE CLASSES SERVING STAGGERED THREE YEAR
TERMS. You may not be able to efficiently change control of the Company if you
believe that change would be in your best interests.
3. THERE ARE RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS WITH
INTERESTED PARTIES. There are restrictions on what interested parties can do
for three years, without the approval of the Board of Directors.
4. THE DELAWARE LAW, AS WELL AS THE CHARTER DOCUMENTS, LIMIT THE
LIABILITY OF DIRECTORS AND OFFICERS TO SHAREHOLDERS.
5. CHANGES TO THE COMPANY'S CERTIFICATE OF INCORPORATION WHICH COVER
ANTI-TAKEOVER PROVISIONS REQUIRE THE APPROVAL OF TWO-THIRDS OF THE COMPANY'S
VOTING STOCK.
EFFECT OF THE ACQUISITION
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE FOR
YOUR INVESTMENT IN THE PROGRAM AS ADJUSTED PER THE TERMS OF THE GOVERNING
AGREEMENTS.
- YOU MAY HAVE A LIQUID TRADING MARKET FOR YOUR SHARES. After the
Acquisition, shares will be listed on the ______________. If a trading market
exists, you will have the opportunity to liquidate all or some of those shares
at your preference.
5
<PAGE>
- YOU MAY HAVE MORE CONTROL OVER THE TIMING OF LIQUIDATING OF YOUR
INVESTMENT. You can control when you choose to take profits or losses. Under
the current Programs, you are required to abide by a majority vote to sell or
retain the property, regardless of whether or not the timing of the action or
the decision of the majority is consistent with your individual preferences.
- YOU WILL OWN SHARES IN A POOL OF ASSETS WHOSE DIVERSITY CAN MITIGATE
RISK AND INCREASE THE LIQUIDITY OF THE PROPERTIES. Your investment will be
spread over an initial asset base of four different real estate projects (the
two Yosemite/Ahwahnee Programs will be one project after the Acquisition).
- YOU WILL HAVE EXPERIENCED PROPERTY MANAGEMENT. We have hired and
intend to hire additional key real estate management professionals who are
experienced in real estate development, operation and construction.
- YOU WILL NO LONGER BE LIABLE FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
Acquisition, meaning your liability for mandatory assessments will cease.
- YOUR LIABILITY WILL BE LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the Programs, you are not
effectively insulated from personal liability based on operation of those
assets. As shareholders of a corporation, you will be.
- THE ASSETS OWNED BY THE COMPANY WILL NO LONGER BE SUBJECTED TO
SERVICING FEES. For all programs involved in the Acquisition, National will
stop earning servicing fees of approximately $650,000 per year and will forgive
a total of $946,111 of unpaid servicing fees if the Acquisition is approved.
Although the services of National are being replaced by a management team and
staff to run the Company, National believes that the cost of this new management
team will be modestly lower than the historical cost of National servicing the
programs on an individual basis.
- For further information about how the Acquisition will affect you and
the Program, see the following portions of the Prospectus:
- "Background and Reasons for the Acquisition" commencing at page
__.
- "Comparison of Tenancy-in-Common Interests and Shares" commencing
at page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
6
<PAGE>
FAIRNESS TO INVESTORS IN THE OCEANSIDE PROGRAM
From a financial point of view, National believes the terms of the
Acquisition are fair as a whole and to the investors in each of the Programs.
National based its determination on many factors, including:
- a better quality form of investment (shares of stock in a publicly
traded company);
- the exchange value offered to investors for their assets in comparison
with what National believes could be received on sale of the assets unless a
source of external financing for further development was available (which may
not be the case);
- the number of shares in the Company to be held by principals,
employees, and consultants of National, the Programs or the Company upon
completion of the Acquisition;
- the opportunity for each investor to vote for or against the
Acquisition;
- valuation of the real estate assets of the Program by an independent
appraiser; and
- the Fairness Opinion rendered by the independent valuation firm. See
"Background and Reasons for the Acquisition" at page __.
National reviewed the value you will receive in connection with the
Acquisition and compared it with what you might receive under the alternatives
to Acquisition. Despite the adjustments to appraised value to arrive at
exchange values, National concluded that the likely market value of the shares
of the Company would be higher in the long run than the value you would have
received if any of the alternatives to the Acquisition had been implemented.
See "Background and Reasons for the Acquisition -- Alternative to the
Acquisition" and "-- Recommendation of National and Fairness Determination" at
pages __ and __ of the Prospectus. Based on this comparison, National concluded
that the Acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE OF THE PROGRAM
The Exchange Value of the Program (as well as each of the other four
Programs) is essentially the consideration which the Company is offering in
exchange for the real estate assets, certain liabilities and business of the
Program. The value is reflected as a number of shares of the Company's common
stock (in the case of the Program, 530,310 shares) multiplied by an arbitrary
$10 per share value.
The starting point for determining the Exchange Value was the current "as
is" real estate value of the Program's Property. This value was estimated by
independent appraiser who conducted the appraisal on the Property according to
industry standards with the assumption that financing would be available to
permit the Property to attain its highest and best use. Then, the real estate
value was adjusted for
7
<PAGE>
- the net value of other assets and liabilities, and
- certain critical business factors which, in National's opinion, must
be considered in order to arrive at a fair, proper and meaningful Exchange Value
for each "Trudy Pat" Program in relation to the others in the context of the
Acquisition.
Certain business factors were considered "positive," and caused the Exchange
Value to be adjusted upward from the estimates contained in the real estate
appraiser's report. Likewise, certain factors were considered "negative," and
caused the Exchange Value to be adjusted downward from the estimates contained
in the real estate appraiser's report.
The following were considered the positive factors:
POTENTIAL LIQUIDITY FACTOR. The Potential Liquidity Factor of a Program is
measured by estimating the amount of cash that might be available through
financing of a Program's assets within a six month period following the
Effective Time and dividing that amount by the appraised real estate value.
POTENTIAL INVESTOR ASSESSMENT FACTOR. The Potential Investor Assessment
Factor of a Program is determined by estimating the average yearly amount that
National estimates that Investors in a particular Program would be able and
willing to invest in the Program in the form of mandatory assessments, based on
prior experience, and dividing that amount by the appraised real estate value.
QUICK-SALE FACTOR. The Quick-Sale Factor of a Program is determined by
estimating the amount of cash that might be available through a sale of Program
assets which could be liquidated within a six month period following the
Effective Time and dividing that amount by the appraised real estate value.
The following were considered the negative factors:
CASH REQUIREMENT FACTOR. The Cash Requirement Factor is determined by
estimating the average amount that is needed yearly to meet the average
reasonable and prudent financial needs of the Program and dividing that amount
by the appraised real estate value.
INVESTOR ASSESSMENT RESISTANCE FACTOR. The Investor Assessment Resistance
Factor is determined by estimating the difference between the average amount
that is needed yearly to meet the average reasonable and prudent financial needs
of the Program and the average amount that. based on prior experience, National
believes that Investors would be able and willing to invest in the Program in
the form of mandatory assessments (the numerator of the Potential Assessment
Resistance Factor described above). This amount is then divided by the
numerator of the Potential Investment Assessment Factor.
8
<PAGE>
TERM TO MAXIMUM/FULL REPAYMENT FACTOR. The Term to Maximum/Full Repayment
Factor is determined by the following chart:
TERM FACTOR
---- ------
0-6 months 0%
7-12 months 10%
13-18 months 20%
19-24 months 30%
25-30 months 40%
31-36 months 50%
and increasing 10% for every
additional six month period or part
thereof up to 100%.
The importance of each factor is unique. Therefore, each factor was
weighted as a percentage in determining the Exchange Value of each Program.
These weighted percentages were used to arrive at the Exchange Value of
each Program through the adjustment to the appraised real estate value by
multiplying the factor by the weight. The factors described above have been
assigned the following weights:
- Potential Liquidity Factor -- positive 20%
- Potential Investor Assessment Factor -- positive 50%
- Quick Sale Factor -- positive 10%
- Cash Requirement Factor -- negative 50%
- Investor Assessment Resistance Factor -- negative 75%
- Term to Maximum Repayment Factor -- negative 10%
See "Background and Reasons for the Acquisition -- Determination of
Exchange Value" at page __ of the Prospectus for more information about the
adjustment factors.
The following table summarizes the calculation of the Exchange Value of the
Oceanside Program:
Appraised Net Other Net Business
Value of + Assets and - Factor = Exchange
Real Estate(1) Liabilities(2) Adjustments(3) Value
-------------- -------------- -------------- -----
$ 3,700,000 $ 1,603,100 $ 0 $ 5,303,100
9
<PAGE>
- -----------
(1) Reflects independent appraisal as of 1997.
(2) Includes cash in trust account, amounts due to National after the
Acquisition is completed, and property taxes due and payable at June
30, 1997. There will be no mortgage debt on the Property if the
Acquisition is completed.
(3) This Property was unaffected by the business factor adjustments as its
assets are the nearest to realizing cash relative to the other
Programs' Properties.
ALLOCATION OF SHARES
The 1,577,285 shares of Company common stock being offered to Investors in
the Acquisition represent 80.16% of the Company's shares which will be
outstanding upon completion of the Acquisition. The remaining shares will be
held by management and other founders of the Company. Such shares will be
allocated among the five Programs pro rata in accordance with Exchange Values.
The Oceanside Program will be allocated 530,310 shares.
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in the
applicable Program (taking into account assessments paid and unpaid, as well as
interest accrued to each Investor through the date beneficial ownership of the
Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Oceanside Program with an adjusted investment
amount of $10,000 will receive 194 shares of Company stock.
The following table sets forth the amount owed by the original borrower to
the Program plus the amount of assessments paid by Investors at [AUGUST 15,
1997], appraised real estate values, exchange values, the number and percentage
of shares allocated to the Program, and the number of shares of the Company to
be held by founders after the Acquisition.
<TABLE>
<CAPTION>
Amount Real Estate % of Shares
Owed plus Appraised Exchange No. of Shares Issued in
Name of Program Assessments Value Value Allocated Acquisition
- --------------- ----------- ----- ----- --------- -----------
<S> <C> <C> <C> <C> <C>
Oceanside 27,325,000 3,700,000 5,303,100 530,310 33.62
</TABLE>
The founders of the Company include members of Company management, as well
as certain employees of National and consultants to the Company and the
Programs. The Company was formed, and shares were purchased by the founders,
prior to making the Acquisition proposed. The total number of shares to be
retained by the founders was determined by reviewing the fees previously
cancelled and to be cancelled, as well as the additional value being brought to
the Investors through the Acquisition. A total of 390,303 shares of Company
common stock was issued at the organization of the Company at $0.01 per share.
See "Dilution" at page __ of the Prospectus. If the Acquisition is completed,
the following table sets forth the fees which National and its principals have
cancelled, or will cancel:
10
<PAGE>
Name of Program To Be Previously Total
Cancelled Cancelled Cancelled
--------- --------- ---------
Sacramento/Delta Greens $ 137,111 $ 500,000 $ 637,111
Oceanside 704,000 (0-) 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point (0-) 461,589 461,589
----------- ----------- -----------
TOTAL $ 946,111 $ 2,191,614 $ 3,137,725
----------- ----------- -----------
----------- ----------- -----------
If the shares to be retained by the founders had been allocated to the
founders from the Programs based on cancelled fees, 22.44% of the total shares
to be outstanding after the Acquisition (87,428) would have been deemed
allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1996,
1995 and 1994, and for the six month period ending June 30, 1997.
<TABLE>
<CAPTION>
Actually
Actually Actually Actually Incurred Paid for
Incurred Paid for Incurred Paid for Incurred Paid for for Six Six
for Year Year for Year Year for Year Year Months Months
Ended Ended Ended Ended Ended Ended Ended Ended
NAME OF PROGRAM 12/31/94 12/31/94 12/31/95 12/31/95 12/31/96 12/31/96 6/30/97 6/30/97
(1) (2) (1) (2) (1) (2) (1) (2)
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oceanside $492,000 $300,000 $492,000 $300,000 $492,000 $300,000 $246,000 $150,000
</TABLE>
- -------------------
(1) These amounts represent servicing fees and officer salaries for Oceanside
Development, Inc.
(2) These amounts represent servicing fees.
If the Acquisition had been completed during the above periods, National
would not have been entitled to receive any further servicing fees. The only
compensation National or any of its affiliates would have been entitled to
receive would have been from accrued salaries payable to officers and employees
of Oceanside Development, Inc. or from current salaries payable to officers and
employees of the Company. No cash would have been available to pay bonuses or
dividends.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and
during the six months ended June 30, 1997:
11
<PAGE>
<TABLE>
<CAPTION>
June 30,
Name of Program 1992 1993 1994 1995 1996 1997 Total
- --------------- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Oceanside
Principal $ 0 $ 0 $ 375,000 $ 900,000 $ 900,000 $ 450,000 $ 2,625,000
Interest $ 1,080,804 $ 3,145,869 $ 393,750 $ 0 $ 0 $ 0 $ 4,620,423
</TABLE>
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
12
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
YOSEMITE/AHWAHNEE I "TRUDY PAT" PROGRAM
As described in the accompanying Consent Solicitation Statement/Prospectus
("Prospectus"), American Family Holdings, Inc. (the "Company") is offering
shares of its stock in exchange for the assets, certain liabilities and business
activities owned by investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. For this proposed Acquisition, the Company
will issue an aggregate of $15,772,850 of shares of common stock at $10 per
Share. The stock will be listed for trading on the ___________ under the symbol
"___."
In each of the Programs, the Investors will vote on whether to approve the
Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF THE
FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1997 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
The Company is also offering $5,000,000 of units (consisting of one share
of common stock and one warrant to purchase two additional shares) at $10 each
exclusively to current investors in the Programs. NASD broker-dealers will
receive a commission totalling $0.70 per unit for any units sold with their
help. If all the units are sold with their help, the proceeds of the sale, net
of estimated expenses of $200,000, will be $4,450,000. If you want to
participate, subscriptions for units should be returned with your ballot.
Subscriptions will be accepted on a FIRST-COME-FIRST-SERVED BASIS.
This Supplement has been prepared to help the investors in the
Yosemite/Ahwahnee I Program to understand how the Acquisition will affect them.
If completed, the effects of the Acquisition may be different for Investors in
the other Programs. A separate supplement has been prepared for each of the
other Programs, copies of which may be obtained, without charge, by writing to
National Investors Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport
Beach, California 92660, Attention: Vivian Kennedy, or calling 1-800-590-7772.
Capitalized terms used in this Supplement and not defined herein have the
meaning given to them in the Prospectus. See "Glossary" at page __ of the
Prospectus.
<PAGE>
MATERIAL RISKS
A full description of the material risks of the Acquisition may be found on
pages [14] through [19] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
YOU WILL HAVE NO DISSENTERS' RIGHTS IN CONNECTION WITH THE ACQUISITION. If
you vote against the Acquisition, and it is approved, you will not be able to
object to the Acquisition and receive the appraised value of your tenancy-in-
common interest in your Program's assets. You will have no choice other than to
accept shares.
THE NATURE OF YOUR INVESTMENT WILL CHANGE. If the Acquisition is
completed, your investment will no longer be a tenancy-in-common interest in a
particular Program's Property. Instead, you will hold shares in an on-going,
publicly-traded real estate company whose assets may be changed by the Company's
management without your approval. You will be able to liquidate your investment
only by selling your shares on the _____________, and only if a trading market
exists, or in private transactions.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. The shares of the Company
have never been sold in a public securities market. If the shares trade, the
trading price may be less than the arbitrary $10 issuance price or the book
value of the Company's assets. The market price of the shares may be volatile
after the Acquisition if investors decide to sell a large number of the shares
shortly after the Acquisition.
THERE MAY BE CONFLICTS OF INTEREST IN NATIONAL'S STRUCTURING THE
ACQUISITION. Shares and compensation to be held or received after the
Acquisition by National, and by principals, employees and consultants of
National, the Programs and the Company have been determined by National and its
principals.
YOU DO NOT HAVE INDEPENDENT ADVISORS REPRESENTING YOU IN STRUCTURING THIS
TRANSACTION. Therefore, the terms of the Acquisition may be less favorable to
you and more favorable to National and its principals. If the Acquisition had
been negotiated by independent parties at arm's length, the principals of
National and the Company might have been given fewer shares. Additionally, the
allocation of shares might have been more favorable to one Program than another.
THERE MAY BE DIFFERENCES BETWEEN EXCHANGE VALUES AND REALIZABLE VALUES.
The exchange value of the Programs may not be what the properties would sell for
in a cash sale transaction. Appraisals reflect conditions in the second quarter
of 1997, and do not reflect subsequent events. Exchange values reflect
adjustments to appraised values described in "Background and Reasons for the
Acquisition - Determination of Acquisition Prices" at page __.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the Acquisition,
the properties will not be subject to any liens other than possible mechanics'
liens and property taxes owed. However, the Board of Directors could allow the
Company to borrow using the Company's real
2
<PAGE>
estate assets as security. If cash flow cannot cover debt repayment, the
Company could lose those assets to creditors.
THE BOARD OF DIRECTORS WILL HAVE THE ABILITY TO CHANGE INVESTMENT,
FINANCING AND OTHER POLICIES OF THE COMPANY WITHOUT SHAREHOLDER CONSENT. The
Board will determine major Acquisition, financing, debt and distribution
policies of the Company. The Board may amend or revise these policies as well
as the business plan without shareholder approval.
DISTRIBUTIONS WILL BE UNPREDICTABLE. After the Acquisition, you will not
receive any regular distributions. Instead, in the early years, the Board
intends to accumulate cash for working capital or other uses.
REAL ESTATE RISKS
THERE ARE SIGNIFICANT DELINQUENT PROPERTY TAXES. If delinquent property
taxes are not timely paid, the Company could lose one or more of the properties
to tax sales. Each of the Programs' properties is subject to the following
delinquent property taxes as of June 30, 1997: Sacramento/Delta Greens -
approximately $45,000; Oceanside - approximately $10,000; Yosemite/Ahwahnee
(combined) - approximately $596,000; and Mori Point - approximately $269,000.
Annual payments required for all the properties total approximately $386,700.
PERMITS TO DEVELOP CERTAIN PROPERTIES HAVE LAPSED OR HAVE NOT YET BEEN
OBTAINED. If needed permits for development are not obtained or reissued, the
business plan for the Company will have to be revised or abandoned.
COMPLIANCE WITH CONDITIONS IN EXISTING PERMITS AND APPROVALS MAY REQUIRE
CHANGES TO DEVELOPMENT PLANS. For example, the tentative tract map for the
Yosemite/Ahwahnee I property requires that studies must be conducted to identify
any endangered species' habitat which may exist on the property. If any are
identified, changes to the tentative development plans will have to be made and
approved that will reduce or eliminate any damage to the habitat.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO FURTHER THE BUSINESS PLAN. Unless
funds from sale of the units or from sale of certain assets of the Programs
become available, the Company will not be able to proceed with its business plan
and properties might be lost to tax sales before sales to third parties can be
arranged. The Company will also need financing from other sources to complete
its plan. Financing sources are not predictable and interest rates or other
costs of financing may be prohibitive.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE OR
SACRAMENTO/DELTA GREENS PROPERTIES MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL
CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Changing market conditions may
increase the difficulty of selling the lots.
FEDERAL, STATE AND LOCAL LAW MAY REQUIRE EXPENSIVE HAZARDOUS SUBSTANCE
CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC IMPROVEMENTS.
3
<PAGE>
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY.
THERE ARE CERTAIN RISKS ASSOCIATED WITH THE CALIFORNIA MARKET. While
economic conditions are improving in California, its markets have been affected
by substantial fluctuations in local economic conditions, interest rates,
inflation, employment levels and regulations. California has also experienced
draught conditions, resulting in water conservation measures and rationing. In
the past, these conditions have caused local governments to restrict residential
development. California's climate and geology present risks of natural disaster
such as earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE OWED
$1,078,510 BY THE COMPANY. This represents accrued fees and expenses from the
Programs which National has not cancelled.
GOLF COURSE RISKS
THERE ARE INDUSTRY OPERATING RISKS, INCLUDING INCREASED COMPETITION,
SEASONALITY, WEATHER AND COURSE CONDITIONS. While no new golf courses have
opened near the Ahwahnee Golf Course, new courses could increase the competition
and reduce the rounds played. Seasonal variations may require the Company to
supplement revenue at the golf course to meet operating expenses. Weather can
negatively affect the turf grass and reduce the number of rounds played.
Inflationary costs may not be offset by increased dues. Also, golf's success
depends on discretionary spending by consumers, which may be vulnerable to
regional and economic conditions, as well as to pleasure or destination travel
preferences by visitors and tourists.
RESIDENTIAL DEVELOPMENT RISKS
THE COMPANY MAY BE AFFECTED BY MARKET RISKS AND COMPETITION. The market
for residential real estate is cyclical and the residential lot development
industry is highly competitive. If the demand for new lots does not keep pace
with competitive supply, our properties may be sold at a loss.
RESORT DESTINATION RISKS
THERE ARE RISKS ASSOCIATED WITH RESORT DEVELOPMENT. In addition to normal
real estate risks, financing is hard to obtain, and the lodging industry can be
unpredictable, seasonal and very competitive. Without additional financing or
capital, the Company will not be able to develop its resort projects as part of
its growth strategy.
TIMESHARE RISKS
- NEGATIVE PRESS SURROUNDING THE REMARKETING OF TIMESHARES MIGHT
NEGATIVELY IMPACT SALES AND OPERATIONS.
4
<PAGE>
- MARKETING COSTS ARE HIGH RELATIVE TO SELLING PRICE WHICH CAN REDUCE OR
ELIMINATE PROFITS FROM THE SALE OF TIMESHARE INTERESTS.
- THERE ARE RELATIVELY MORE DEFAULTS AMONG TIMESHARE OWNERS WHEN THEY
BORROW TO BUY TIMESHARES COMPARED TO HOMEBUYERS WHO BORROW TO BUY A HOME. IF A
BUYER DEFAULTS, WE WOULD INCUR COSTS IN REMARKETING THE TIMESHARE.
- WE DO NOT HAVE AN EXCHANGE NETWORK TO ENHANCE MARKETING APPEAL. IF WE
CANNOT OFFER SUCH A NETWORK IN THE FUTURE, WE MAY BE AT A COMPETITIVE
DISADVANTAGE.
- THE TIMESHARE INDUSTRY IS EXTREMELY COMPETITIVE.
- WE MAY NOT BE ABLE TO SECURE DEVELOPMENT FINANCING ON ACCEPTABLE
TERMS.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the charter documents may restrict changes in control
of the Company's management. These provisions may make it more difficult or
expensive for another party to acquire and exercise control of the Company or to
change its management, even if that change would be beneficial to you. Some of
these provisions include:
1. THE BOARD'S ABILITY TO ISSUE PREFERRED SHARES WHICH COULD AFFECT YOUR
VOTING POWER AND TO ISSUE ADDITIONAL SHARES TO DISCOURAGE OR IMPEDE A MERGER OR
OTHER TRANSACTION THAT MAY BE IN YOUR BEST OR FINANCIAL INTEREST.
2. THE BOARD IS DIVIDED INTO THREE CLASSES SERVING STAGGERED THREE YEAR
TERMS. You may not be able to efficiently change control of the Company if you
believe that change would be in your best interests.
3. THERE ARE RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS WITH
INTERESTED PARTIES. There are restrictions on what interested parties can do
for three years, without the approval of the Board of Directors.
4. THE DELAWARE LAW, AS WELL AS THE CHARTER DOCUMENTS, LIMIT THE
LIABILITY OF DIRECTORS AND OFFICERS TO SHAREHOLDERS.
5. CHANGES TO THE COMPANY'S CERTIFICATE OF INCORPORATION WHICH COVER
ANTI-TAKEOVER PROVISIONS REQUIRE THE APPROVAL OF TWO-THIRDS OF THE COMPANY'S
VOTING STOCK.
EFFECT OF THE ACQUISITION
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE FOR
YOUR INVESTMENT IN THE PROGRAM AS ADJUSTED PER THE TERMS OF THE GOVERNING
AGREEMENTS.
- YOU MAY HAVE A LIQUID TRADING MARKET FOR YOUR SHARES. After the
Acquisition, shares will be listed on the ______________. If a trading market
exists, you will have the opportunity to liquidate all or some of those shares
at your preference.
5
<PAGE>
- YOU MAY HAVE MORE CONTROL OVER THE TIMING OF LIQUIDATING OF YOUR
INVESTMENT. You can control when you choose to take profits or losses. Under
the current Programs, you are required to abide by a majority vote to sell or
retain the property, regardless of whether or not the timing of the action or
the decision of the majority is consistent with your individual preferences.
- YOU WILL OWN SHARES IN A POOL OF ASSETS WHOSE DIVERSITY CAN MITIGATE
RISK AND INCREASE THE LIQUIDITY OF THE PROPERTIES. Your investment will be
spread over an initial asset base of four different real estate projects (the
two Yosemite/Ahwahnee Programs will be one project after the Acquisition).
- YOU WILL HAVE EXPERIENCED PROPERTY MANAGEMENT. We have hired and
intend to hire additional key real estate management professionals who are
experienced in real estate development, operation and construction.
- YOU WILL NO LONGER BE LIABLE FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
Acquisition, meaning your liability for mandatory assessments will cease.
- YOUR LIABILITY WILL BE LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the Programs, you are not
effectively insulated from personal liability based on operation of those
assets. As shareholders of a corporation, you will be.
- THE ASSETS OWNED BY THE COMPANY WILL NO LONGER BE SUBJECTED TO
SERVICING FEES. For all programs involved in the Acquisition, National will
stop earning servicing fees of approximately $650,000 per year and will forgive
a total of $946,111 of unpaid servicing fees if the Acquisition is approved.
Although the services of National are being replaced by a management team and
staff to run the Company, National believes that the cost of this new management
team will be modestly lower than the historical cost of National servicing the
programs on an individual basis.
- For further information about how the Acquisition will affect you and
the Program, see the following portions of the Prospectus:
- "Background and Reasons for the Acquisition" commencing at page __.
- "Comparison of Tenancy-in-Common Interests and Shares" commencing at
page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
6
<PAGE>
FAIRNESS TO INVESTORS IN THE YOSEMITE/AHWAHNEE I PROGRAM
From a financial point of view, National believes the terms of the
Acquisition are fair as a whole and to the investors in each of the Programs.
National based its determination on many factors, including:
- a better quality form of investment (shares of stock in a publicly
traded company);
- the exchange value offered to investors for their assets in comparison
with what National believes could be received on sale of the assets unless a
source of external financing for further development was available (which may
not be the case);
- the number of shares in the Company to be held by principals,
employees, and consultants of National, the Programs or the Company upon
completion of the Acquisition;
- the opportunity for each investor to vote for or against the
Acquisition;
- valuation of the real estate assets of the Program by an independent
appraiser; and
- the Fairness Opinion rendered by the independent valuation firm. See
"Background and Reasons for the Acquisition" at page __.
National reviewed the value you will receive in connection with the
Acquisition and compared it with what you might receive under the alternatives
to Acquisition. Despite the adjustments to appraised value to arrive at
exchange values, National concluded that the likely market value of the shares
of the Company would be higher in the long run than the value you would have
received if any of the alternatives to the Acquisition had been implemented.
See "Background and Reasons for the Acquisition -- Alternative to the
Acquisition" and "-- Recommendation of National and Fairness Determination" at
pages __ and __ of the Prospectus. Based on this comparison, National concluded
that the Acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE OF THE PROGRAM
The Exchange Value of the Program (as well as each of the other four
Programs) is essentially the consideration which the Company is offering in
exchange for the real estate assets, certain liabilities and business of the
Program. The value is reflected as a number of shares of the Company's common
stock (in the case of the Program, 200,788 shares) multiplied by an arbitrary
$10 per share value.
The starting point for determining the Exchange Value was the current "as
is" real estate value of the Program's Property. This value was estimated by
independent appraiser who conducted the appraisal on the Property according to
industry standards with the assumption that financing would be available to
permit the Property to attain its highest and best use. Then, the real estate
value was adjusted for
7
<PAGE>
- the net value of other assets and liabilities, and
- certain critical business factors which, in National's opinion, must
be considered in order to arrive at a fair, proper and meaningful Exchange Value
for each "Trudy Pat" Program in relation to the others in the context of the
Acquisition.
Certain business factors were considered "positive," and caused the Exchange
Value to be adjusted upward from the estimates contained in the real estate
appraiser's report. Likewise, certain factors were considered "negative," and
caused the Exchange Value to be adjusted downward from the estimates contained
in the real estate appraiser's report.
The following were considered the positive factors:
POTENTIAL LIQUIDITY FACTOR. The Potential Liquidity Factor of a Program is
measured by estimating the amount of cash that might be available through
financing of a Program's assets within a six month period following the
Effective Time and dividing that amount by the appraised real estate value.
POTENTIAL INVESTOR ASSESSMENT FACTOR. The Potential Investor Assessment
Factor of a Program is determined by estimating the average yearly amount that
National estimates that Investors in a particular Program would be able and
willing to invest in the Program in the form of mandatory assessments, based on
prior experience, and dividing that amount by the appraised real estate value.
QUICK-SALE FACTOR. The Quick-Sale Factor of a Program is determined by
estimating the amount of cash that might be available through a sale of Program
assets which could be liquidated within a six month period following the
Effective Time and dividing that amount by the appraised real estate value.
The following were considered the negative factors:
CASH REQUIREMENT FACTOR. The Cash Requirement Factor is determined by
estimating the average amount that is needed yearly to meet the average
reasonable and prudent financial needs of the Program and dividing that amount
by the appraised real estate value.
INVESTOR ASSESSMENT RESISTANCE FACTOR. The Investor Assessment Resistance
Factor is determined by estimating the difference between the average amount
that is needed yearly to meet the average reasonable and prudent financial needs
of the Program and the average amount that. based on prior experience, National
believes that Investors would be able and willing to invest in the Program in
the form of mandatory assessments (the numerator of the Potential Assessment
Resistance Factor described above). This amount is then divided by the
numerator of the Potential Investment Assessment Factor.
8
<PAGE>
TERM TO MAXIMUM/FULL REPAYMENT FACTOR. The Term to Maximum/Full Repayment
Factor is determined by the following chart:
Term Factor
---- ------
0-6 months 0%
7-12 months 10%
13-18 months 20%
19-24 months 30%
25-30 months 40%
31-36 months 50%
and increasing 10% for every
additional six month period or part
thereof up to 100%.
The importance of each factor is unique. Therefore, each factor was
weighted as a percentage in determining the Exchange Value of each Program.
These weighted percentages were used to arrive at the Exchange Value of
each Program through the adjustment to the appraised real estate value by
multiplying the factor by the weight. The factors described above have been
assigned the following weights:
- Potential Liquidity Factor -- positive 20%
- Potential Investor Assessment Factor -- positive 50%
- Quick Sale Factor -- positive 10%
- Cash Requirement Factor -- negative 50%
- Investor Assessment Resistance Factor -- negative 75%
- Term to Maximum Repayment Factor -- negative 10%
See "Background and Reasons for the Acquisition -- Determination of
Exchange Value" at page __ of the Prospectus for more information about the
adjustment factors.
The following table summarizes the calculation of the Exchange Value of the
Yosemite/Ahwahnee I Program:
Appraised Net Other Net Business
Value of + Assets and - Factor = Exchange
Real Estate(1) Liabilities(2) Adjustments(3) Value
-------------- -------------- -------------- -----------
$ 8,050,000 $(337,345) $(5,704,773) $2,007,882
9
<PAGE>
- -------------------------
(1) Reflects independent appraisal as of May 1997.
(2) Includes cash in trust account, amounts due to National after the
Acquisition is completed, and property taxes due and payable at June 30,
1997. There will be no mortgage debt on the Property if the Acquisition is
completed.
(3) While each of the above positive factors permitted minor upward adjustments
to the Program's value, a significant cash requirement to fund expansion of
the recreational vehicle park and to develop a timeshare program, steadily
increasing Investor resistance to assessments, anticipated negative cash
flow and significant delinquent property taxes combined to require a
substantial negative adjustment to the value of the Program's Property in
comparison with the value of the other Programs' Properties.
ALLOCATION OF SHARES
The 1,577,285 shares of Company common stock being offered to Investors in
the Acquisition represent 80.16% of the Company's shares which will be
outstanding upon completion of the Acquisition. The remaining shares will be
held by management and other founders of the Company. Such shares will be
allocated among the five Programs pro rata in accordance with Exchange Values.
The Yosemite/Ahwahnee I Program will be allocated 200,788 shares.
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in the
applicable Program (taking into account assessments paid and unpaid, as well as
interest accrued to each Investor through the date beneficial ownership of the
Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Yosemite/Ahwahnee I Program with an adjusted
investment amount of $10,000 will receive 224 shares of Company stock.
The following table sets forth the amount owed by the original borrower to
the Program plus the amount of assessments paid by Investors at [AUGUST 15,
1997], appraised real estate values, exchange values, the number and percentage
of shares allocated to the Program, and the number of shares of the Company to
be held by founders after the Acquisition.
<TABLE>
<CAPTION>
Amount Real Estate % of Shares
Owed plus Appraised Exchange No. of Shares Issued in
Name of Program Assessments Value Value Allocated Acquisition
--------------- ----------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Yosemite/AhwahneeI 8,982,429 8,050,000 2,007,882 200,788 12.73
</TABLE>
The founders of the Company include members of Company management, as well
as certain employees of National and consultants to the Company and the
Programs. The Company was formed, and shares were purchased by the founders,
prior to making the Acquisition proposed. The total number of shares to be
retained by the founders was determined by reviewing the fees previously
cancelled and to be cancelled, as well as the additional value being brought to
the Investors through the Acquisition. A total of 390,303 shares of Company
common stock was issued at the organization of the Company at $0.01 per share.
See "Dilution"
10
<PAGE>
at page __ of the Prospectus. If the Acquisition is completed, the following
table sets forth the fees which National and its principals have cancelled, or
will cancel:
<TABLE>
<CAPTION>
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------------- --------- ---------- ---------
<S> <C> <C> <C>
Sacramento/Delta Greens $ 137,111 $ 500,000 $ 637,111
Oceanside 704,000 (0) 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point 0 461,589 461,589
---------- ----------- -----------
TOTAL $ 946,111 $ 2,191,614 $ 3,137,725
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
If the shares to be retained by the founders had been allocated to the
founders from the Programs based solely on cancelled fees, 3.42% of the total
shares to be outstanding after the Acquisition (13,348) which will be held by
the founders of the Company would have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1996,
1995 and 1994, and for the six month period ending June 30, 1997.
<TABLE>
<CAPTION>
Actually
Actually Actually Actually Incurred Paid for
Incurred Paid for Incurred Paid for Incurred Paid for for Six Six
for Year Year for Year Year for Year Year Months Months
Ended Ended Ended Ended Ended Ended Ended Ended
Name of Program 12/31/94(1) 12/31/94 12/31/95(1) 12/31/95 2/31/96(1) 12/31/96(2) 6/30/97(1) 6/30/97(2)
- --------------- ----------- -------- ----------- -------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee I $ 65,000 $ 0 $ 84,051 $ 0 $ 150,800 $ 101,626 $ 75,400 $ 30,309
</TABLE>
- -------------------------
(1) These amounts represent servicing fees and salaries for officers and
employees of Ahwahnee Golf Course and Resort, Inc.
(2) These amounts represent servicing fees only.
If the Acquisition had been completed during the above periods, National
would not have been entitled to receive any further servicing fees. The only
compensation National or any of its affiliates would have been entitled to
receive would have been from accrued salaries payable to officers and employees
of Ahwahnee Golf Course and Resort, Inc. or as current salaries payable to
officers and employees of the Company. No cash would have been available to pay
bonuses or dividends.
11
<PAGE>
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and
during the six months ended June 30, 1997:
<TABLE>
<CAPTION>
Prior to June 30,
Name of Program 1992 1992 1993 1994 1995 1996 1997 Total
- --------------- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee I
Principal $ 45,000 $ 135,000 $ 103,085 $ 4,756 $ 0 $ 0 $ 0 $ 287,841
Interest $1,903,306 $ 920,794 $ 335,557 $ 0 $ 0 $ 0 $ 0 $3,159,657
</TABLE>
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
12
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/ PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
YOSEMITE/AHWAHNEE II "TRUDY PAT" PROGRAM
As described in the accompanying Consent Solicitation Statement/Prospectus
("Prospectus"), American Family Holdings, Inc. (the "Company") is offering
shares of its stock in exchange for the assets, certain liabilities and business
activities owned by investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. For this proposed Acquisition, the Company
will issue an aggregate of $15,772,850 of shares of common stock at $10 per
Share. The stock will be listed for trading on the ___________ under the symbol
"___."
In each of the Programs, the Investors will vote on whether to approve the
Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF THE
FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1997 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
The Company is also offering $5,000,000 of units (consisting of one share
of common stock and one warrant to purchase two additional shares) at $10 each
exclusively to current investors in the Programs. NASD broker-dealers will
receive a commission totalling $0.70 per unit for any units sold with their
help. If all the units are sold with their help, the proceeds of the sale, net
of estimated expenses of $200,000, will be $4,4650,000. If you want to
participate, subscriptions for units should be returned with your ballot.
Subscriptions will be accepted on a FIRST-COME-FIRST-SERVED BASIS.
---------------
This Supplement has been prepared to help the investors in the
Yosemite/Ahwahnee II Program to understand how the Acquisition will affect them.
If completed, the effects of the Acquisition may be different for Investors in
the other Programs. A separate supplement has been prepared for each of the
other Programs copies of which may be obtained, without charge, by writing to
National Investors Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport
Beach, California 92660, Attention: Vivian Kennedy, or calling 1-800-590-7772.
Capitalized terms used in this Supplement and not defined herein have the
meaning given to them in the Prospectus. See "Glossary" at page __ of the
Prospectus.
<PAGE>
MATERIAL RISKS
A full description of the material risks of the Acquisition may be found on
pages [14] through [19] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
YOU WILL HAVE NO DISSENTERS' RIGHTS IN CONNECTION WITH THE ACQUISITION. If
you vote against the Acquisition, and it is approved, you will not be able to
object to the Acquisition and receive the appraised value of your
tenancy-in-common interest in your Program's assets. You will have no choice
other than to accept shares.
THE NATURE OF YOUR INVESTMENT WILL CHANGE. If the Acquisition is
completed, your investment will no longer be a tenancy-in-common interest in a
particular Program's Property. Instead, you will hold shares in an on-going,
publicly-traded real estate company whose assets may be changed by the Company's
management without your approval. You will be able to liquidate your investment
only by selling your shares on the _____________, and only if a trading market
exists, or in private transactions.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. The shares of the Company
have never been sold in a public securities market. If the shares trade, the
trading price may be less than the arbitrary $10 issuance price or the book
value of the Company's assets. The market price of the shares may be volatile
after the Acquisition if investors decide to sell a large number of the shares
shortly after the Acquisition.
THERE MAY BE CONFLICTS OF INTEREST IN NATIONAL'S STRUCTURING THE
ACQUISITION. Shares and compensation to be held or received after the
Acquisition by National, and by principals, employees and consultants of
National, the Programs and the Company have been determined by National and its
principals.
YOU DO NOT HAVE INDEPENDENT ADVISORS REPRESENTING YOU IN STRUCTURING THIS
TRANSACTION. Therefore, the terms of the Acquisition may be less favorable to
you and more favorable to National and its principals. If the Acquisition had
been negotiated by independent parties at arm's length, the principals of
National and the Company might have been given fewer shares. Additionally, the
allocation of shares might have been more favorable to one Program than another.
THERE MAY BE DIFFERENCES BETWEEN EXCHANGE VALUES AND REALIZABLE VALUES.
The exchange value of the Programs may not be what the properties would sell for
in a cash sale transaction. Appraisals reflect conditions in the second quarter
of 1997, and do not reflect subsequent events. Exchange values reflect
adjustments to appraised values described in "Background and Reasons for the
Acquisition - Determination of Acquisition Prices" at page __.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the Acquisition,
the properties will not be subject to any liens other than possible mechanics'
liens and property taxes owed. However, the Board of Directors could allow the
Company to borrow using the Company's real
2
<PAGE>
estate assets as security. If cash flow cannot cover debt repayment, the
Company could lose those assets to creditors.
THE BOARD OF DIRECTORS WILL HAVE THE ABILITY TO CHANGE INVESTMENT,
FINANCING AND OTHER POLICIES OF THE COMPANY WITHOUT SHAREHOLDER CONSENT. The
Board will determine major Acquisition, financing, debt and distribution
policies of the Company. The Board may amend or revise these policies as well
as the business plan without shareholder approval.
DISTRIBUTIONS WILL BE UNPREDICTABLE. After the Acquisition, you will not
receive any regular distributions. Instead, in the early years, the Board
intends to accumulate cash for working capital or other uses.
REAL ESTATE RISKS
THERE ARE SIGNIFICANT DELINQUENT PROPERTY TAXES. If delinquent property
taxes are not timely paid, the Company could lose one or more of the properties
to tax sales. Each of the Programs' properties is subject to the following
delinquent property taxes as of June 30, 1997: Sacramento/Delta Greens -
approximately $45,000; Oceanside - approximately $10,000; Yosemite/Ahwahnee
(combined) - approximately $596,000; and Mori Point - approximately $269,000.
Annual payments required for all the properties total approximately $386,700.
PERMITS TO DEVELOP CERTAIN PROPERTIES HAVE LAPSED OR HAVE NOT YET BEEN
OBTAINED. If needed permits for development are not obtained or reissued, the
business plan for the Company will have to be revised or abandoned.
COMPLIANCE WITH CONDITIONS IN EXISTING PERMITS AND APPROVALS MAY REQUIRE
CHANGES TO DEVELOPMENT PLANS. For example, the tentative tract map for the
Yosemite/Ahwahnee II property requires that studies must be conducted to
identify any endangered species' habitat which may exist on the property. If
any are identified, changes to the tentative development plans will have to be
made and approved that will reduce or eliminate any damage to the habitat.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO FURTHER THE BUSINESS PLAN. Unless
funds from sale of the units or from sale of certain assets of the Programs
become available, the Company will not be able to proceed with its business plan
and properties might be lost to tax sales before sales to third parties can be
arranged. The Company will also need financing from other sources to complete
its plan. Financing sources are not predictable and interest rates or other
costs of financing may be prohibitive.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE OR
SACRAMENTO/DELTA GREENS PROPERTIES MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL
CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Changing market conditions may
increase the difficulty of selling the lots.
FEDERAL, STATE AND LOCAL LAW MAY REQUIRE EXPENSIVE HAZARDOUS SUBSTANCE
CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC IMPROVEMENTS.
3
<PAGE>
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY.
THERE ARE CERTAIN RISKS ASSOCIATED WITH THE CALIFORNIA MARKET. While
economic conditions are improving in California, its markets have been affected
by substantial fluctuations in local economic conditions, interest rates,
inflation, employment levels and regulations. California has also experienced
draught conditions, resulting in water conservation measures and rationing. In
the past, these conditions have caused local governments to restrict residential
development. California's climate and geology present risks of natural disaster
such as earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE OWED
$1,078,510 BY THE COMPANY. This represents accrued fees and expenses from the
Programs which National has not cancelled.
GOLF COURSE RISKS
THERE ARE INDUSTRY OPERATING RISKS, INCLUDING INCREASED COMPETITION,
SEASONALITY, WEATHER AND COURSE CONDITIONS. While no new golf courses have
opened near the Ahwahnee Golf Course, new courses could increase the competition
and reduce the rounds played. Seasonal variations may require the Company to
supplement revenue at the golf course to meet operating expenses. Weather can
negatively affect the turf grass and reduce the number of rounds played.
Inflationary costs may not be offset by increased dues. Also, golf's success
depends on discretionary spending by consumers, which may be vulnerable to
regional and economic conditions, as well as to pleasure or destination travel
preferences by visitors and tourists.
RESIDENTIAL DEVELOPMENT RISKS
THE COMPANY MAY BE AFFECTED BY MARKET RISKS AND COMPETITION. The market
for residential real estate is cyclical and the residential lot development
industry is highly competitive. If the demand for new lots does not keep pace
with competitive supply, our properties may be sold at a loss.
RESORT DESTINATION RISKS
THERE ARE RISKS ASSOCIATED WITH RESORT DEVELOPMENT. In addition to normal
real estate risks, financing is hard to obtain, and the lodging industry can be
unpredictable, seasonal and very competitive. Without additional financing or
capital, the Company will not be able to develop its resort projects as part of
its growth strategy.
TIMESHARE RISKS
- NEGATIVE PRESS SURROUNDING THE REMARKETING OF TIMESHARES MIGHT
NEGATIVELY IMPACT SALES AND OPERATIONS.
4
<PAGE>
- MARKETING COSTS ARE HIGH RELATIVE TO SELLING PRICE WHICH CAN REDUCE OR
ELIMINATE PROFITS FROM THE SALE OF TIMESHARE INTERESTS.
- THERE ARE RELATIVELY MORE DEFAULTS AMONG TIMESHARE OWNERS WHEN THEY
BORROW TO BUY TIMESHARES COMPARED TO HOMEBUYERS WHO BORROW TO BUY A HOME. IF A
BUYER DEFAULTS, WE WOULD INCUR COSTS IN REMARKETING THE TIMESHARE.
- WE DO NOT HAVE AN EXCHANGE NETWORK TO ENHANCE MARKETING APPEAL. IF WE
CANNOT OFFER SUCH A NETWORK IN THE FUTURE, WE MAY BE AT A COMPETITIVE
DISADVANTAGE.
- THE TIMESHARE INDUSTRY IS EXTREMELY COMPETITIVE.
- WE MAY NOT BE ABLE TO SECURE DEVELOPMENT FINANCING ON ACCEPTABLE
TERMS.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the charter documents may restrict changes in control
of the Company's management. These provisions may make it more difficult or
expensive for another party to acquire and exercise control of the Company or to
change its management, even if that change would be beneficial to you. Some of
these provisions include:
1. THE BOARD'S ABILITY TO ISSUE PREFERRED SHARES WHICH COULD AFFECT YOUR
VOTING POWER AND TO ISSUE ADDITIONAL SHARES TO DISCOURAGE OR IMPEDE A MERGER OR
OTHER TRANSACTION THAT MAY BE IN YOUR BEST OR FINANCIAL INTEREST.
2. THE BOARD IS DIVIDED INTO THREE CLASSES SERVING STAGGERED THREE YEAR
TERMS. You may not be able to efficiently change control of the Company if you
believe that change would be in your best interests.
3. THERE ARE RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS WITH
INTERESTED PARTIES. There are restrictions on what interested parties can do
for three years, without the approval of the Board of Directors.
4. THE DELAWARE LAW, AS WELL AS THE CHARTER DOCUMENTS, LIMIT THE
LIABILITY OF DIRECTORS AND OFFICERS TO SHAREHOLDERS.
5. CHANGES TO THE COMPANY'S CERTIFICATE OF INCORPORATION WHICH COVER
ANTI-TAKEOVER PROVISIONS REQUIRE THE APPROVAL OF TWO-THIRDS OF THE COMPANY'S
VOTING STOCK.
EFFECT OF THE ACQUISITION
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE FOR
YOUR INVESTMENT IN THE PROGRAM AS ADJUSTED PER THE TERMS OF THE GOVERNING
AGREEMENTS.
- YOU MAY HAVE A LIQUID TRADING MARKET FOR YOUR SHARES. After the
Acquisition, shares will be listed on the ______________. If a trading market
exists, you will have the opportunity to liquidate all or some of those shares
at your preference.
5
<PAGE>
- YOU MAY HAVE MORE CONTROL OVER THE TIMING OF LIQUIDATING OF YOUR
INVESTMENT. You can control when you choose to take profits or losses. Under
the current Programs, you are required to abide by a majority vote to sell or
retain the property, regardless of whether or not the timing of the action or
the decision of the majority is consistent with your individual preferences.
- YOU WILL OWN SHARES IN A POOL OF ASSETS WHOSE DIVERSITY CAN MITIGATE
RISK AND INCREASE THE LIQUIDITY OF THE PROPERTIES. Your investment will be
spread over an initial asset base of four different real estate projects (the
two Yosemite/Ahwahnee Programs will be one project after the Acquisition).
- YOU WILL HAVE EXPERIENCED PROPERTY MANAGEMENT. We have hired and
intend to hire additional key real estate management professionals who are
experienced in real estate development, operation and construction.
- YOU WILL NO LONGER BE LIABLE FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
Acquisition, meaning your liability for mandatory assessments will cease.
- YOUR LIABILITY WILL BE LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the Programs, you are not
effectively insulated from personal liability based on operation of those
assets. As shareholders of a corporation, you will be.
- THE ASSETS OWNED BY THE COMPANY WILL NO LONGER BE SUBJECTED TO
SERVICING FEES. For all programs involved in the Acquisition, National will
stop earning servicing fees of approximately $650,000 per year and will forgive
a total of $946,111 of unpaid servicing fees if the Acquisition is approved.
Although the services of National are being replaced by a management team and
staff to run the Company, National believes that the cost of this new management
team will be modestly lower than the historical cost of National servicing the
programs on an individual basis.
- For further information about how the Acquisition will affect you and
the Program, see the following portions of the Prospectus:
- "Background and Reasons for the Acquisition" commencing at
page __.
- "Comparison of Tenancy-in-Common Interests and Shares" commencing
at page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
6
<PAGE>
FAIRNESS TO INVESTORS IN THE YOSEMITE/AHWAHNEE II PROGRAM
From a financial point of view, National believes the terms of the
Acquisition are fair as a whole and to the investors in each of the Programs.
National based its determination on many factors, including:
- a better quality form of investment (shares of stock in a publicly
traded company);
- the exchange value offered to investors for their assets in comparison
with what National believes could be received on sale of the assets unless a
source of external financing for further development was available (which may
not be the case);
- the number of shares in the Company to be held by principals,
employees, and consultants of National, the Programs or the Company upon
completion of the Acquisition;
- the opportunity for each investor to vote for or against the
Acquisition;
- valuation of the real estate assets of the Program by an independent
appraiser; and
- the Fairness Opinion rendered by the independent valuation firm. See
"Background and Reasons for the Acquisition" at page __.
National reviewed the value you will receive in connection with the
Acquisition and compared it with what you might receive under the alternatives
to Acquisition. Despite the adjustments to appraised value to arrive at
exchange values, National concluded that the likely market value of the shares
of the Company would be higher in the long run than the value you would have
received if any of the alternatives to the Acquisition had been implemented.
See "Background and Reasons for the Acquisition -- Alternative to the
Acquisition" and "-- Recommendation of National and Fairness Determination" at
pages __ and __ of the Prospectus. Based on this comparison, National concluded
that the Acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE OF THE PROGRAM
The Exchange Value of the Program (as well as each of the other four
Programs) is essentially the consideration which the Company is offering in
exchange for the real estate assets, certain liabilities and business of the
Program. The value is reflected as a number of shares of the Company's common
stock (in the case of the Program, 395,519 shares) multiplied by an arbitrary
$10 per share value.
The starting point for determining the Exchange Value was the current "as
is" real estate value of the Program's Property. This value was estimated by
independent appraiser who conducted the appraisal on the Property according to
industry standards with the assumption that financing would be available to
permit the Property to attain its highest and best use. Then, the real estate
value was adjusted for
7
<PAGE>
- the net value of other assets and liabilities, and
- certain critical business factors which, in National's opinion, must
be considered in order to arrive at a fair, proper and meaningful Exchange Value
for each "Trudy Pat" Program in relation to the others in the context of the
Acquisition.
Certain business factors were considered "positive," and caused the Exchange
Value to be adjusted upward from the estimates contained in the real estate
appraiser's report. Likewise, certain factors were considered "negative," and
caused the Exchange Value to be adjusted downward from the estimates contained
in the real estate appraiser's report.
The following were considered the positive factors:
POTENTIAL LIQUIDITY FACTOR. The Potential Liquidity Factor of a Program is
measured by estimating the amount of cash that might be available through
financing of a Program's assets within a six month period following the
Effective Time and dividing that amount by the appraised real estate value.
POTENTIAL INVESTOR ASSESSMENT FACTOR. The Potential Investor Assessment
Factor of a Program is determined by estimating the average yearly amount that
National estimates that Investors in a particular Program would be able and
willing to invest in the Program in the form of mandatory assessments, based on
prior experience, and dividing that amount by the appraised real estate value.
QUICK-SALE FACTOR. The Quick-Sale Factor of a Program is determined by
estimating the amount of cash that might be available through a sale of Program
assets which could be liquidated within a six month period following the
Effective Time and dividing that amount by the appraised real estate value.
The following were considered the negative factors:
CASH REQUIREMENT FACTOR. The Cash Requirement Factor is determined by
estimating the average amount that is needed yearly to meet the average
reasonable and prudent financial needs of the Program and dividing that amount
by the appraised real estate value.
INVESTOR ASSESSMENT RESISTANCE FACTOR. The Investor Assessment Resistance
Factor is determined by estimating the difference between the average amount
that is needed yearly to meet the average reasonable and prudent financial needs
of the Program and the average amount that. based on prior experience, National
believes that Investors would be able and willing to invest in the Program in
the form of mandatory assessments (the numerator of the Potential Assessment
Resistance Factor described above). This amount is then divided by the
numerator of the Potential Investment Assessment Factor.
8
<PAGE>
TERM TO MAXIMUM/FULL REPAYMENT FACTOR. The Term to Maximum/Full Repayment
Factor is determined by the following chart:
Term Factor
---- ------
0-6 months 0%
7-12 months 10%
13-18 months 20%
19-24 months 30%
25-30 months 40%
31-36 months 50%
and increasing 10% for every
additional six month period or part
thereof up to 100%.
The importance of each factor is unique. Therefore, each factor was
weighted as a percentage in determining the Exchange Value of each Program.
These weighted percentages were used to arrive at the Exchange Value of
each Program through the adjustment to the appraised real estate value by
multiplying the factor by the weight. The factors described above have been
assigned the following weights:
- Potential Liquidity Factor -- positive 20%
- Potential Investor Assessment Factor -- positive 50%
- Quick Sale Factor -- positive 10%
- Cash Requirement Factor -- negative 50%
- Investor Assessment Resistance Factor -- negative 75%
- Term to Maximum Repayment Factor -- negative 10%
See "Background and Reasons for the Acquisition -- Determination of
Exchange Value" at page __ of the Prospectus for more information about the
adjustment factors.
The following table summarizes the calculation of the Exchange Value of the
Yosemite/Ahwahnee II Program:
Appraised Net Other Net Business
Value of + Assets and - Factor = Exchange
Real Estate(1) Liabilities(2) Adjustments(3) Value
-------------- -------------- -------------- ---------
$12,866,000 $(504,590) $(8,406,224) $3,955,186
9
<PAGE>
- -------------------------
(1) Reflects independent appraisal as of May 1997.
(2) Includes cash in trust account, amounts due to National after the
Acquisition is completed, and property taxes due and payable at June 30,
1997. There will be no mortgage debt on the Property if the Acquisition is
completed.
(3) While each of the above positive factors permitted minor upward adjustments
to the Program's value, a significant cash requirement to fund expansion of
the recreational vehicle park and to develop a timeshare program, steadily
increasing Investor resistance to assessments, anticipated negative cash
flow and significant delinquent property taxes combined to require a
substantial negative adjustment to the value of the Program's Property in
comparison with the value of the other Programs' Properties.
ALLOCATION OF SHARES
The 1,577,285 shares of Company common stock being offered to Investors in
the Acquisition represent 80.16% of the Company's shares which will be
outstanding upon completion of the Acquisition. The remaining shares will be
held by management and other founders of the Company. Such shares will be
allocated among the five Programs pro rata in accordance with Exchange Values.
The Yosemite/Ahwahnee II Program will be allocated 395,519 shares.
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in the
applicable Program (taking into account assessments paid and unpaid, as well as
interest accrued to each Investor through the date beneficial ownership of the
Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Yosemite/Ahwahnee II Program with an adjusted
investment amount of $1,000 will receive 203 shares of Company stock.
The following table sets forth the amount owed by the original borrower to
the Program plus the amount of assessments paid by Investors at [AUGUST 15,
1997], appraised real estate values, exchange values, the number and percentage
of shares allocated to the Program, and the number of shares of the Company to
be held by founders after the Acquisition.
<TABLE>
<CAPTION>
Amount Real Estate % of Shares
Owed plus Appraised Exchange No. of Shares Issued in
Name of Program Assessments Value Value Allocated Acquisition
--------------- ----------- ----- ----- --------- -----------
<S> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II 19,450,567 12,866,000 3,955,186 395,519 25.08
</TABLE>
The founders of the Company include members of Company management, as well
as certain employees of National and consultants to the Company and the
Programs. The Company was formed, and shares were purchased by the founders,
prior to making the Acquisition proposed. The total number of shares to be
retained by the founders was determined by reviewing the fees previously
cancelled and to be cancelled, as well as the additional value being brought to
the Investors through the Acquisition. A total of 390,303 shares of Company
common stock was issued at the organization of the Company at $0.01 per share.
See "Dilution"
10
<PAGE>
at page __ of the Prospectus. If the Acquisition is completed, the following
table sets forth the fees which National and its principals have cancelled, or
will cancel:
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------------- --------- --------- ---------
Sacramento/Delta
Greens $ 137,111 $ 500,000 $ 637,111
Oceanside 704,000 (0) 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point (0) 461,589 461,589
---------- ---------- ----------
TOTAL $ 946,111 $2,191,614 $3,137,725
---------- ---------- ----------
---------- ---------- ----------
If the shares to be retained by the founders had been allocated to the
founders from the Programs based on cancelled fees, 39.13% of the total shares
to be outstanding after the Acquisition (152,726) which will be held by the
founders of the Company would have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1996,
1995 and 1994, and for the six month period ending June 30, 1997.
<TABLE>
<CAPTION>
Actually
Actually Actually Actually Incurred Paid for
Incurred Paid for Incurred Paid for Incurred Paid for for Six Six
for Year Year for Year Year for Year Year Months Months
Ended Ended Ended Ended Ended Ended Ended Ended
Name of Program 12/31/94(1) 12/31/94 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96(2) 6/30/97(1) 6/30/97(2)
- --------------- ---------- -------- ---------- -------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II
$ 135,000 $ 0 $ 174,569 $ 0 $ 313,200 $ 211,069 $ 156,600 $ 62,948
</TABLE>
- -------------------------
(1) These amounts represent servicing fees and salaries for officers and
employees of Ahwahnee Golf Course and Resort, Inc.
(2) These amounts represent servicing fees.
If the Acquisition had been completed during the above periods, National
would not have been entitled to receive any servicing fees. The only
compensation National or any of its affiliates would have been entitled to
receive would have been from accrued salaries payable to officers and employees
of Ahwahnee Golf Course and Resort, Inc., or as current salaries payable to
officers and employees of the Company. No cash would have been available to pay
bonuses or dividends.
11
<PAGE>
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and
during the six months ended June 30, 1997:
<TABLE>
<CAPTION>
Prior to June 30,
Name of Program 1992 1992 1993 1994 1995 1996 1997 Total
--------------- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II
Principal $ 20,000 $ 60,000 $ 68,264 $ 10,273 $ 0 $ 0 $ 0 $ 158,537
Interest $ 592,498 $1,153,352 $ 688,303 $ 0 $ 0 $ 0 $ 0 $2,434,153
</TABLE>
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
12
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/ PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
MORI POINT "TRUDY PAT" PROGRAM
As described in the accompanying Consent Solicitation Statement/Prospectus
("Prospectus"), American Family Holdings, Inc. (the "Company") is offering
shares of its stock in exchange for the assets, certain liabilities and business
activities owned by investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. For this proposed Acquisition, the Company
will issue an aggregate of $15,772,850 of shares of common stock at $10 per
Share. The stock will be listed for trading on the ___________ under the symbol
"___."
In each of the Programs, the Investors will vote on whether to approve the
Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF THE
FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1997 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
The Company is also offering $5,000,000 of units (consisting of one share
of common stock and one warrant to purchase two additional shares) at $10 each
exclusively to current investors in the Programs. NASD broker-dealers will
receive a commission totalling $0.70 per unit for any units sold with their
help. If all the units are sold with their help, the proceeds of the sale, net
of estimated expenses of $200,000, will be $4,450,000. If you want to
participate, subscriptions for units should be returned with your ballot.
Subscriptions will be accepted on a FIRST-COME-FIRST-SERVED BASIS.
-------------------------------
This Supplement has been prepared to help the investors in the Mori Point
Program to understand how the Acquisition will affect them. If completed, the
effects of the Acquisition may be different for Investors in the other Programs.
A separate supplement has been prepared for each of the other Programs, copies
of which may be obtained, without charge, by writing to National Investors
Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport Beach, California
92660, Attention: Vivian Kennedy, or calling 1-800-590-7772.
Capitalized terms used in this Supplement and not defined herein have the
meaning given to them in the Prospectus. See "Glossary" at page __ of the
Prospectus.
<PAGE>
MATERIAL RISKS
A full description of the material risks of the Acquisition may be found
on pages [14] through [19] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
YOU WILL HAVE NO DISSENTERS' RIGHTS IN CONNECTION WITH THE ACQUISITION.
If you vote against the Acquisition, and it is approved, you will not be able
to object to the Acquisition and receive the appraised value of your
tenancy-in-common interest in your Program's assets. You will have no choice
other than to accept shares.
THE NATURE OF YOUR INVESTMENT WILL CHANGE. If the Acquisition is
completed, your investment will no longer be a tenancy-in-common interest in a
particular Program's Property. Instead, you will hold shares in an on-going,
publicly-traded real estate company whose assets may be changed by the Company's
management without your approval. You will be able to liquidate your investment
only by selling your shares on the _____________, and only if a trading market
exists, or in private transactions.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. The shares of the Company
have never been sold in a public securities market. If the shares trade, the
trading price may be less than the arbitrary $10 issuance price or the book
value of the Company's assets. The market price of the shares may be volatile
after the Acquisition if investors decide to sell a large number of the shares
shortly after the Acquisition.
THERE MAY BE CONFLICTS OF INTEREST IN NATIONAL'S STRUCTURING THE
ACQUISITION. Shares and compensation to be held or received after the
Acquisition by National, and by principals, employees and consultants of
National, the Programs and the Company have been determined by National and its
principals.
YOU DO NOT HAVE INDEPENDENT ADVISORS REPRESENTING YOU IN STRUCTURING THIS
TRANSACTION. Therefore, the terms of the Acquisition may be less favorable to
you and more favorable to National and its principals. If the Acquisition had
been negotiated by independent parties at arm's length, the principals of
National and the Company might have been given fewer shares. Additionally, the
allocation of shares might have been more favorable to one Program than another.
THERE MAY BE DIFFERENCES BETWEEN EXCHANGE VALUES AND REALIZABLE VALUES.
The exchange value of the Programs may not be what the properties would sell for
in a cash sale transaction. Appraisals reflect conditions in the second quarter
of 1997, and do not reflect subsequent events. Exchange values reflect
adjustments to appraised values described in "Background and Reasons for the
Acquisition - Determination of Acquisition Prices" at page __.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the Acquisition,
the properties will not be subject to any liens other than possible mechanics'
liens and property taxes owed. However, the Board of Directors could allow the
Company to borrow using the Company's real
2
<PAGE>
estate assets as security. If cash flow cannot cover debt repayment, the
Company could lose those assets to creditors.
THE BOARD OF DIRECTORS WILL HAVE THE ABILITY TO CHANGE INVESTMENT,
FINANCING AND OTHER POLICIES OF THE COMPANY WITHOUT SHAREHOLDER CONSENT. The
Board will determine major Acquisition, financing, debt and distribution
policies of the Company. The Board may amend or revise these policies as well
as the business plan without shareholder approval.
DISTRIBUTIONS WILL BE UNPREDICTABLE. After the Acquisition, you will not
receive any regular distributions. Instead, in the early years, the Board
intends to accumulate cash for working capital or other uses.
REAL ESTATE RISKS
THERE ARE SIGNIFICANT DELINQUENT PROPERTY TAXES. If delinquent property
taxes are not timely paid, the Company could lose one or more of the properties
to tax sales. Each of the Programs' properties is subject to the following
delinquent property taxes as of June 30, 1997: Sacramento/Delta Greens -
approximately $45,000; Oceanside - approximately $10,000; Yosemite/Ahwahnee
(combined) - approximately $596,000; and Mori Point - approximately $269,000.
Annual payments required for all the properties total approximately $386,700.
PERMITS TO DEVELOP CERTAIN PROPERTIES HAVE LAPSED OR HAVE NOT YET BEEN
OBTAINED. If needed permits for development are not obtained or reissued, the
business plan for the Company will have to be revised or abandoned.
COMPLIANCE WITH CONDITIONS IN EXISTING PERMITS AND APPROVALS MAY REQUIRE
CHANGES TO DEVELOPMENT PLANS. For example, the tentative tract map for the Mori
Point property requires that studies must be conducted to identify any
endangered species' habitat which may exist on the property. If any are
identified, changes to the tentative development plans will have to be made and
approved that will reduce or eliminate any damage to the habitat.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO FURTHER THE BUSINESS PLAN. Unless
funds from sale of the units or from sale of certain assets of the Programs
become available, the Company will not be able to proceed with its business plan
and properties might be lost to tax sales before sales to third parties can be
arranged. The Company will also need financing from other sources to complete
its plan. Financing sources are not predictable and interest rates or other
costs of financing may be prohibitive.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE OR
SACRAMENTO/DELTA GREENS PROPERTIES MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL
CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Changing market conditions may
increase the difficulty of selling the lots.
FEDERAL, STATE AND LOCAL LAW MAY REQUIRE EXPENSIVE HAZARDOUS SUBSTANCE
CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC IMPROVEMENTS.
3
<PAGE>
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY.
THERE ARE CERTAIN RISKS ASSOCIATED WITH THE CALIFORNIA MARKET. While
economic conditions are improving in California, its markets have been affected
by substantial fluctuations in local economic conditions, interest rates,
inflation, employment levels and regulations. California has also experienced
draught conditions, resulting in water conservation measures and rationing. In
the past, these conditions have caused local governments to restrict residential
development. California's climate and geology present risks of natural disaster
such as earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE
OWED $1,078,510 BY THE COMPANY. This represents accrued fees and expenses from
the Programs which National has not cancelled.
GOLF COURSE RISKS
THERE ARE INDUSTRY OPERATING RISKS, INCLUDING INCREASED COMPETITION,
SEASONALITY, WEATHER AND COURSE CONDITIONS. While no new golf courses have
opened near the Ahwahnee Golf Course, new courses could increase the competition
and reduce the rounds played. Seasonal variations may require the Company to
supplement revenue at the golf course to meet operating expenses. Weather can
negatively affect the turf grass and reduce the number of rounds played.
Inflationary costs may not be offset by increased dues. Also, golf's success
depends on discretionary spending by consumers, which may be vulnerable to
regional and economic conditions, as well as to pleasure or destination travel
preferences by visitors and tourists.
RESIDENTIAL DEVELOPMENT RISKS
THE COMPANY MAY BE AFFECTED BY MARKET RISKS AND COMPETITION. The market
for residential real estate is cyclical and the residential lot development
industry is highly competitive. If the demand for new lots does not keep pace
with competitive supply, our properties may be sold at a loss.
RESORT DESTINATION RISKS
THERE ARE RISKS ASSOCIATED WITH RESORT DEVELOPMENT. In addition to normal
real estate risks, financing is hard to obtain, and the lodging industry can be
unpredictable, seasonal and very competitive. Without additional financing or
capital, the Company will not be able to develop its resort projects as part of
its growth strategy.
TIMESHARE RISKS
- NEGATIVE PRESS SURROUNDING THE REMARKETING OF TIMESHARES MIGHT
NEGATIVELY IMPACT SALES AND OPERATIONS.
4
<PAGE>
- MARKETING COSTS ARE HIGH RELATIVE TO SELLING PRICE WHICH CAN REDUCE
OR ELIMINATE PROFITS FROM THE SALE OF TIMESHARE INTERESTS.
- THERE ARE RELATIVELY MORE DEFAULTS AMONG TIMESHARE OWNERS WHEN THEY
BORROW TO BUY TIMESHARES COMPARED TO HOMEBUYERS WHO BORROW TO BUY A HOME. IF A
BUYER DEFAULTS, WE WOULD INCUR COSTS IN REMARKETING THE TIMESHARE.
- WE DO NOT HAVE AN EXCHANGE NETWORK TO ENHANCE MARKETING APPEAL. IF
WE CANNOT OFFER SUCH A NETWORK IN THE FUTURE, WE MAY BE AT A COMPETITIVE
DISADVANTAGE.
- THE TIMESHARE INDUSTRY IS EXTREMELY COMPETITIVE.
- WE MAY NOT BE ABLE TO SECURE DEVELOPMENT FINANCING ON ACCEPTABLE
TERMS.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the charter documents may restrict changes in control
of the Company's management. These provisions may make it more difficult or
expensive for another party to acquire and exercise control of the Company or to
change its management, even if that change would be beneficial to you. Some of
these provisions include:
1. THE BOARD'S ABILITY TO ISSUE PREFERRED SHARES WHICH COULD AFFECT YOUR
VOTING POWER AND TO ISSUE ADDITIONAL SHARES TO DISCOURAGE OR IMPEDE A MERGER OR
OTHER TRANSACTION THAT MAY BE IN YOUR BEST OR FINANCIAL INTEREST.
2. THE BOARD IS DIVIDED INTO THREE CLASSES SERVING STAGGERED THREE YEAR
TERMS. You may not be able to efficiently change control of the Company if you
believe that change would be in your best interests.
3. THERE ARE RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS WITH
INTERESTED PARTIES. There are restrictions on what interested parties can do
for three years, without the approval of the Board of Directors.
4. THE DELAWARE LAW, AS WELL AS THE CHARTER DOCUMENTS, LIMIT THE
LIABILITY OF DIRECTORS AND OFFICERS TO SHAREHOLDERS.
5. CHANGES TO THE COMPANY'S CERTIFICATE OF INCORPORATION WHICH COVER
ANTI-TAKEOVER PROVISIONS REQUIRE THE APPROVAL OF TWO-THIRDS OF THE COMPANY'S
VOTING STOCK.
EFFECT OF THE ACQUISITION
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE FOR
YOUR INVESTMENT IN THE PROGRAM AS ADJUSTED PER THE TERMS OF THE GOVERNING
AGREEMENTS.
- YOU MAY HAVE A LIQUID TRADING MARKET FOR YOUR SHARES. After the
Acquisition, shares will be listed on the ______________. If a trading market
exists, you will have the opportunity to liquidate all or some of those shares
at your preference.
5
<PAGE>
- YOU MAY HAVE MORE CONTROL OVER THE TIMING OF LIQUIDATING OF YOUR
INVESTMENT. You can control when you choose to take profits or losses. Under
the current Programs, you are required to abide by a majority vote to sell or
retain the property, regardless of whether or not the timing of the action or
the decision of the majority is consistent with your individual preferences.
- YOU WILL OWN SHARES IN A POOL OF ASSETS WHOSE DIVERSITY CAN MITIGATE
RISK AND INCREASE THE LIQUIDITY OF THE PROPERTIES. Your investment will be
spread over an initial asset base of four different real estate projects (the
two Yosemite/Ahwahnee Programs will be one project after the Acquisition).
- YOU WILL HAVE EXPERIENCED PROPERTY MANAGEMENT. We have hired and
intend to hire additional key real estate management professionals who are
experienced in real estate development, operation and construction.
- YOU WILL NO LONGER BE LIABLE FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
Acquisition, meaning your liability for mandatory assessments will cease.
- YOUR LIABILITY WILL BE LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the Programs, you are not
effectively insulated from personal liability based on operation of those
assets. As shareholders of a corporation, you will be.
- THE ASSETS OWNED BY THE COMPANY WILL NO LONGER BE SUBJECTED TO
SERVICING FEES. For all programs involved in the Acquisition, National will
stop earning servicing fees of approximately $650,000 per year and will forgive
a total of $946,111 of unpaid servicing fees if the Acquisition is approved.
Although the services of National are being replaced by a management team and
staff to run the Company, National believes that the cost of this new management
team will be modestly lower than the historical cost of National servicing the
programs on an individual basis.
- For further information about how the Acquisition will affect you and
the Program, see the following portions of the Prospectus:
- "Background and Reasons for the Acquisition" commencing at page
__.
- "Comparison of Tenancy-in-Common Interests and Shares"
commencing at page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
6
<PAGE>
FAIRNESS TO INVESTORS IN THE MORI POINT PROGRAM
From a financial point of view, National believes the terms of the
Acquisition are fair as a whole and to the investors in each of the Programs.
National based its determination on many factors, including:
- a better quality form of investment (shares of stock in a publicly
traded company);
- the exchange value offered to investors for their assets in
comparison with what National believes could be received on sale of the assets
unless a source of external financing for further development was available
(which may not be the case);
- the number of shares in the Company to be held by principals,
employees, and consultants of National, the Programs or the Company upon
completion of the Acquisition;
- the opportunity for each investor to vote for or against the
Acquisition;
- valuation of the real estate assets of the Program by an independent
appraiser; and
- the Fairness Opinion rendered by the independent valuation firm. See
"Background and Reasons for the Acquisition" at page __.
National reviewed the value you will receive in connection with the
Acquisition and compared it with what you might receive under the alternatives
to Acquisition. Despite the adjustments to appraised value to arrive at
exchange values, National concluded that the likely market value of the shares
of the Company would be higher in the long run than the value you would have
received if any of the alternatives to the Acquisition had been implemented.
See "Background and Reasons for the Acquisition -- Alternative to the
Acquisition" and "-- Recommendation of National and Fairness Determination" at
pages __ and __ of the Prospectus. Based on this comparison, National concluded
that the Acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE OF THE PROGRAM
The Exchange Value of the Program (as well as each of the other four
Programs) is essentially the consideration which the Company is offering in
exchange for the real estate assets, certain liabilities and business of the
Program. The value is reflected as a number of shares of the Company's common
stock (in the case of the Program, 329,148 shares) multiplied by an arbitrary
$10 per share value.
The starting point for determining the Exchange Value was the current "as
is" real estate value of the Program's Property. This value was estimated by
independent appraiser who conducted the appraisal on the Property according to
industry standards with the assumption that financing would be available to
permit the Property to attain its highest and best use. Then, the real estate
value was adjusted for
7
<PAGE>
- the net value of other assets and liabilities, and
- certain critical business factors which, in National's opinion, must
be considered in order to arrive at a fair, proper and meaningful Exchange Value
for each "Trudy Pat" Program in relation to the others in the context of the
Acquisition.
Certain business factors were considered "positive," and caused the Exchange
Value to be adjusted upward from the estimates contained in the real estate
appraiser's report. Likewise, certain factors were considered "negative," and
caused the Exchange Value to be adjusted downward from the estimates contained
in the real estate appraiser's report.
The following were considered the positive factors:
POTENTIAL LIQUIDITY FACTOR. The Potential Liquidity Factor of a Program
is measured by estimating the amount of cash that might be available through
financing of a Program's assets within a six month period following the
Effective Time and dividing that amount by the appraised real estate value.
POTENTIAL INVESTOR ASSESSMENT FACTOR. The Potential Investor Assessment
Factor of a Program is determined by estimating the average yearly amount that
National estimates that Investors in a particular Program would be able and
willing to invest in the Program in the form of mandatory assessments, based on
prior experience, and dividing that amount by the appraised real estate value.
QUICK-SALE FACTOR. The Quick-Sale Factor of a Program is determined by
estimating the amount of cash that might be available through a sale of Program
assets which could be liquidated within a six month period following the
Effective Time and dividing that amount by the appraised real estate value.
The following were considered the negative factors:
CASH REQUIREMENT FACTOR. The Cash Requirement Factor is determined by
estimating the average amount that is needed yearly to meet the average
reasonable and prudent financial needs of the Program and dividing that amount
by the appraised real estate value.
INVESTOR ASSESSMENT RESISTANCE FACTOR. The Investor Assessment Resistance
Factor is determined by estimating the difference between the average amount
that is needed yearly to meet the average reasonable and prudent financial needs
of the Program and the average amount that. based on prior experience, National
believes that Investors would be able and willing to invest in the Program in
the form of mandatory assessments (the numerator of the Potential Assessment
Resistance Factor described above). This amount is then divided by the
numerator of the Potential Investment Assessment Factor.
8
<PAGE>
TERM TO MAXIMUM/FULL REPAYMENT FACTOR. The Term to Maximum/Full Repayment
Factor is determined by the following chart:
Term Factor
---- ------
0-6 months 0%
7-12 months 10%
13-18 months 20%
19-24 months 30%
25-30 months 40%
31-36 months 50%
and increasing 10% for
every additional six
month period or part
thereof up to 100%.
The importance of each factor is unique. Therefore, each factor was
weighted as a percentage in determining the Exchange Value of each Program.
These weighted percentages were used to arrive at the Exchange Value of
each Program through the adjustment to the appraised real estate value by
multiplying the factor by the weight. The factors described above have been
assigned the following weights:
- Potential Liquidity Factor -- positive 20%
- Potential Investor Assessment Factor -- positive 50%
- Quick Sale Factor -- positive 10%
- Cash Requirement Factor -- negative 50%
- Investor Assessment Resistance Factor -- negative 75%
- Term to Maximum Repayment Factor -- negative 10%
See "Background and Reasons for the Acquisition -- Determination of
Exchange Value" at page __ of the Prospectus for more information about the
adjustment factors.
The following table summarizes the calculation of the Exchange Value of
the Mori Point Program:
Appraised Net Other Net Business
Value of + Assets and - Factor = Exchange
Real Estate(1) Liabilities(2) Adjustments(3) Value
----------- ----------- ------------ ------
$ 5,500,000 $( 623,518) $( 1,585,000) $ 3,291,482
9
<PAGE>
- -----------------
(1) Reflects independent appraisal as of May 1997.
(2) Includes cash in trust account, amounts due to National after the
Acquisition is completed, and property taxes due and payable at June 30,
1997. There is no mortgage debt on the Property.
(3) While each of the above positive factors permitted minor upward
adjustments to the Program's value, a significant cash requirement to fund
the required environmental studies and to complete the land planning,
engineering and architectural plans in order to reinstate the specific
plan and tentative tract map for a hotel/conference center in addition to
significant delinquent property taxes all combined to require a
substantial negative adjustment to the value of the Program's Property.
ALLOCATION OF SHARES
The 1,577,285 shares of Company common stock being offered to Investors in
the Acquisition represent 80.16% of the Company's shares which will be
outstanding upon completion of the Acquisition. The remaining shares will be
held by management and other founders of the Company. Such shares will be
allocated among the five Programs pro rata in accordance with Exchange Values.
The Mori Point Program will be allocated 329,148 shares
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in the
applicable Program (taking into account assessments paid and unpaid, as well as
interest accrued to each Investor through the date beneficial ownership of the
Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Mori Point Program with an adjusted investment
amount of $10,000 will receive 270 shares of Company stock.
The following table sets forth the amount owed by the original borrower to
the Program plus the amount of assessments paid by Investors at [AUGUST 15,
1997], appraised real estate values, exchange values, the number and percentage
of shares allocated to the Program, and the number of shares of the Company to
be held by founders after the Acquisition.
10
<PAGE>
<TABLE>
<CAPTION>
Amount Real Estate No. Of Shares % of Shares
Owed plus Appraised Exchange Allocated Issued in
Name of Program Assessments Value Value ---------- Acquisition
---------------- ------------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
Mori Point $ 12,240,744 $ 5,500,000 $ 3,291,482 329,148 20.87
</TABLE>
The founders of the Company include members of Company management, as well
as certain employees of National and consultants to the Company and the
Programs. The Company was formed, and shares were purchased by the founders,
prior to making the Acquisition proposed. The total number of shares to be
retained by the founders was determined by reviewing the fees previously
cancelled and to be cancelled, as well as the additional value being brought to
the Investors through the Acquisition. A total of 390,303 shares of Company
common stock was issued at the organization of the Company at $0.01 per share.
See "Dilution" at page __ of the Prospectus. If the Acquisition is completed,
the following table sets forth the fees which National and its principals have
cancelled, or will cancel:
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
---------- --------- ----------
Sacramento/Delta Greens $ 137,111 $ 500,000 $ 637,111
Oceanside 704,000 -0- 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point -0- 461,589 461,589
--------- ----------- -----------
TOTAL $ 946,111 $2,191,614 $3,137,725
--------- ----------- -----------
--------- ----------- -----------
If the shares to be retained by the founders had been allocated to the
founders from the Programs based on cancelled fees, 14.71% of the total shares
to be outstanding after the Acquisition (57,414) which will be held by the
founders of the Company would have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1996,
1995 and 1994, and for the six month period ending June 30, 1997.
<TABLE>
<CAPTION>
Actually
Actually Actually Actually Incurred Paid for
Incurred Paid for Incurred Paid for Incurred Paid for for Six Six
for Year Year for Year Year for Year Year Months Months
Ended Ended Ended Ended Ended Ended Ended Ended
Name of Program 12/31/94(1) 12/31/94 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96 6/30/97(1) 6/30/97
- --------------- ----------- --------- ----------- --------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mori Point $ 100,000 $ -0- $ 100,000 $ -0- $ 100,000 $ -0- $ 50,000 $ -0-
</TABLE>
11
<PAGE>
- ------------
(1) These amounts represent accrued servicing fees.
If the Acquisition had been completed during the above periods, National
would not have been entitled to receive any servicing fees. The only
compensation National or any of its affiliates would have been entitled to
receive would have been from yearly salaries payable to officers and employees
of the Company. No cash would have been available to pay bonuses or dividends.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS
No cash distributions made to Investors in any of the years ended December
31, 1992, 1993, 1994, 1995 and 1996 or during the six months ended June 30,
1997. Prior to 1992, $1,354,708 in interest was distributed to Investors.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
12
<PAGE>
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
Item 20 Indemnification of Directors and Officers
Pursuant to the Registrant's Certificate of Incorporation and By-Laws and
pursuant to Section 145 of the Delaware General Corporation Law, directors,
officers and agents of the Registrant are entitled to indemnification for their
actions in respect of the Registrant to the fullest extent permitted by Delaware
law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to officers, directors and controlling persons of the
Registrant pursuant to such provisions, or otherwise, the Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Item 21 Exhibits and Financial Statement Schedules
1.1 Form of Wholesaling Agreement between the Company and L.H.
Friend, Weinress, Frankson & Presson, Inc.*
1.2 Form of Selling Agreement between the Company and participating
broker-dealers*
2.1 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Mori Point Property*
2.2 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Oceanside Property*
2.3 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Yosemite/Ahwahnee I and II Property*
2.4 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Delta Greens Property*
3.1 Certificate of Incorporation of American Family Holdings, Inc.*
3.2 Certificate of Amendment of Certificate of Incorporation before
the Issuance of Stock*
3.3 By-Laws of American Family Holdings, Inc.*
4.1 Pages 1 through 4 of the Certificate of Incorporation of the
Company Filed as Exhibit 3.1 above defining the rights of
security holders are incorporated herein by this reference*
4.2 American Family Holdings, Inc. Warrant to Purchase Shares of
Common Stock*
5.1 Opinion of Arter & Hadden regarding legality of Shares*
10.1 Form of Employment Agreement of David Lasker**
10.2 Form of Employment Agreement of James Orth**
II-1
<PAGE>
10.3 Form of Employment Agreement of L.C. "Bob" Albertson, Jr.**
10.4 1997 Stock Option and Incentive Plan for Officers, Independent
Directors and Employees of American Family Holdings, Inc. and
Affiliates*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Arter & Hadden as counsel contained in Exhibit 5.1*
23.2 Consent of BDO Seidman, LLP as independent accountants*
23.3 Consent of Houlihan Valuation Advisers*
23.4 Consent of David E. Lane, Inc. (re Delta Greens appraisal)*
23.5 Consent of Boznanski and Company (re Oceanside appraisal)*
23.6 Consent of Arnold Associates (re Yosemite/Ahwahnee appraisals)*
23.7 Consent of PKF Consulting (re Mori Point appraisal)*
23.8 Consent of The Mentor Group, Inc. (re Yosemite/Ahwahnee
appraisal)*
23.9 Consent of BDO Seidman, LLP as independent accountants (re
Amendment No. 1)
24.1 Power of Attorney (see signature page)*
27 Financial Data Schedule*
99.1 Appraisal Report "Delta Greens" Residential Subdivision,
Sacramento, California, value dated as of May 9, 1997*
99.2 Appraisal of Ahwahnee Golf Course and Resort, Madera County,
California, value dated as of May 1, 1997*
99.3 Complete, Self-Contained Appraisal 23 Finished Residential Lots
Being a Part of "Encore," Oceanside, California, value dated as
of March 31, 1997*
99.4 Complete, Self-Contained Appraisal Partially Finished Residential
Land 111 Residential Lots, "Symphony," Oceanside, California,
value dated as of May 15, 1997*
99.5 Appraisal of Fee Simple Estate in a 104.98 Acre Parcel Designated
for Hotel Development, Located at Mori Point in Pacific,
California, value dated as of May 1, 1997*
99.6 Appraisal of Ahwahnee Resort and Country Club, value dated
October 10, 1996*
* Previously filed
** To be filed by amendment
Item 22 Undertakings
(a) Item 512 Undertakings.
(i) The undersigned Registrant hereby undertakes:
(A) to file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
II-2
<PAGE>
(1) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(2) to reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement; and
(3) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(B) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the official BONA
FIDE offer thereof.
(C) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(ii) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of competent jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) Other Part II, Form S-4, Undertakings.
(i) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the Prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first-class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the date of the request.
II-3
<PAGE>
(ii) The undersigned Registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and the
Program being acquired involved therein, that was not the subject to and
included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Newport Beach, State of California, on November
5, 1997.
AMERICAN FAMILY HOLDINGS, INC.
By /s/ David G. Lasker
------------------------
David G. Lasker,
Co-Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Co-Chairman of the Board, November 5, 1997
President, Chief Financial
/s/ David G. Lasker Officer and Chief Accounting
- -------------------- Officer
David G. Lasker
Co-Chairman of the Board, November 5, 1997
/s/ James N. Orth Chief Executive Officer and
- -------------------- Secretary
James N. Orth
Executive Vice President and November 5, 1997
L.C. Bob Albertson, Jr.* Director
- ------------------------
L.C. Bob Albertson, Jr.
Charles F. Hanson* Director November 5, 1997
- ------------------------
Charles F. Hanson
Dudley Muth* Director November 5, 1997
- ------------------------
Dudley Muth
II-5
<PAGE>
JOHN G. LESIEUR, III* Director November 5, 1997
- -----------------------
John G. LeSieur, III
*By /s/ DAVID G. LASKER
------------------------------------
David G. Lasker, Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
1.1 Form of Wholesaling Agreement between the Company and L.H.
Friend, Weinress, Frankson & Presson, Inc.*
1.2 Form of Selling Agreement between the Company and participating
broker-dealers*
2.1 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Mori Point Property*
2.2 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Oceanside Property*
2.3 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Yosemite/Ahwahnee I and II Property*
2.4 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Delta Greens Property*
3.1 Certificate of Incorporation of American Family Holdings, Inc.*
3.2 Certificate of Amendment of Certificate of Incorporation before
the Issuance of Stock*
3.3 By-Laws of American Family Holdings, Inc.*
4.1 Pages 1 through 4 of the Certificate of Incorporation of the
Company Filed as Exhibit 3.1 above defining the rights of
security holders are incorporated herein by this reference*
4.2 American Family Holdings, Inc. Warrant to Purchase Shares of
Common Stock*
5.1 Opinion of Arter & Hadden regarding legality of Shares*
10.1 Form of Employment Agreement of David Lasker**
10.2 Form of Employment Agreement of James Orth**
10.3 Form of Employment Agreement of L.C. "Bob" Albertson, Jr.**
10.4 1997 Stock Option and Incentive Plan for Officers, Independent
Directors and Employees of American Family Holdings, Inc. and
Affiliates*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Arter & Hadden as counsel contained in Exhibit 5.1*
23.2 Consent of BDO Seidman, LLP as independent accountants*
23.3 Consent of Houlihan Valuation Advisers*
23.4 Consent of David E. Lane, Inc. (re Delta Greens appraisal)*
23.5 Consent of Boznanski and Company (re Oceanside appraisal)*
23.6 Consent of Arnold Associates (re Yosemite/Ahwahnee appraisals)*
23.7 Consent of PKF Consulting (re Mori Point appraisal)*
23.8 Consent of The Mentor Group, Inc. (re Yosemite/Ahwahnee
appraisal)*
23.9 Consent of BDO Seidman, LLP as independent accountants (re
Amendment No. 1)
24.1 Power of Attorney (see signature page)*
27 Financial Data Schedule*
<PAGE>
99.1 Appraisal Report "Delta Greens" Residential Subdivision,
Sacramento, California, value dated as of May 9, 1997*
99.2 Appraisal of Ahwahnee Golf Course and Resort, Madera County,
California, value dated as of May 1, 1997*
99.3 Complete, Self-Contained Appraisal 23 Finished Residential Lots
Being a Part of "Encore," Oceanside, California, value dated as
of March 31, 1997*
99.4 Complete, Self-Contained Appraisal Partially Finished Residential
Land 111 Residential Lots, "Symphony," Oceanside, California,
value dated as of May 15, 1997*
99.5 Appraisal of Fee Simple Estate in a 104.98 Acre Parcel Designated
for Hotel Development, Located at Mori Point in Pacific,
California, value dated as of May 1, 1997*
99.6 Appraisal of Ahwahnee Resort and Country Club, value dated
October 10, 1996*
* Previously filed
** To be filed by amendment
<PAGE>
EXHIBIT 23.9
CONSENT OF INDEPENDENT AUDITORS
To the Stockholders and Directors of
American Family Holdings, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-4 of our report dated September 5, 1997,
relating to the financial statement of American Family Holdings, Inc., as of
August 31, 1997; and our reports dated May 27, 1997 relating to the financial
statements of the Oceanside Program, the Yosemite/Abwahnee Program, the Mori
Point Program and the Sacramento/Delta Greens Program for each of the two
years in the period ended Decemeber 31, 1996, which are contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN LLP
/s/ BDO SEIDMAN LLP
Los Angeles, California
NOVEMBER 5, 1977
