<PAGE>
As filed with the Securities and Exchange Commission on May 12, 1998
Registration No. 333-37161
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 4
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 LLP
700 South Flower Street, 30th Floor
Los Angeles, California 90017
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<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
Item of Form S-4 Prospectus Caption or Location
---------------- ------------------------------
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; Shares
Eligible for Future Sale; Federal
Income Tax Consequences; Appraisals
and Fairness Opinion
5. Pro Forma Financial Information Prospectus Summary; Financial
Statements
6. Material Contracts with the Company Background and Reasons for the
being Acquired Acquisition; Interests of Certain
Persons in the Acquisition
7. Additional Information Required for
Reoffering by Persons and Partied
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
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
(continued)
Item of Form S-4 Prospectus Caption or Location
---------------- ------------------------------
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
<PAGE>
CONSENT SOLICITATION STATEMENT/PROSPECTUS
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. (the "Company") is offering shares of its
stock in exchange for the assets (including cash on hand), certain
liabilities and business activities owned by investors in five former "Trudy
Pat" programs managed by National Investors Financial, Inc. ("National").
For this proposed acquisition, the company will issue $[20,012,475] in the
form of [2,001,248] shares of common stock arbitrarily valued at $10 per
Share. The stock will be listed for trading on the ___________ under the
symbol "___." The purpose of the transaction is to consolidate the
operations of the programs, improve the ability to sell or obtain financing
for development of the programs' properties, and provide the investors with
liquidity for their investments.
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 _______, 1998 and expires at 5:00
p.m., pacific time, on __________, 1998 unless extended. Call 1-800-590-7772
with questions.
SPECIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - If a trading market develops, the initial trading price for the stock will
likely be substantially below the arbitrary value of $10 per share assigned
to the Company's shares for purposes of the acquisition. Thus, the value of
the shares you receive may be less than you might receive if the property of
your program were sold.
- - Principal stockholders of National and the executive officers of the
Company will hold approximately 18.23% of the Company's stock for which they
paid $0.01 per share and will receive annual cash compensation aggregating
$660,000 as officers and employees of the Company. National will be relieved
of its asset management obligations and will no longer earn asset management
fees of approximately $650,000 annually. However, the Company will still owe
National over $1,300,000 of accrued but unpaid fees and expenses.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event. If
so, National believes a tax loss is the probable result for most of you.
- - The Company must have additional cash to fund its proposed operations. If
it cannot obtain such funding from the sale of its securities or certain of
its properties, it will be no more successful than the programs have been
individually in completing the development of some or all of the properties.
You should study the "Risk Factors" beginning on page __.
(CONTINUED ON INSIDE COVER 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 _______________, 1998
OFFER OF ADDITIONAL STOCK TO INVESTORS
The Company is also offering $10,000,000 of units at $10 each. Each unit
consists of one share of common stock and one warrant to purchase two
additional shares. The offer is being made exclusively to current investors
in the programs. The offer is being made on a first-come, first-served basis
by separate prospectus which accompanies this prospectus.
<PAGE>
TABLE OF CONTENTS
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PROSPECTUS SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Summary Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . 1
Exchange Value/Allocation of Shares. . . . . . . . . . . . . . . . . . 5
Current Status of the Programs . . . . . . . . . . . . . . . . . . . . 6
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Experience of Management . . . . . . . . . . . . . . . . . . . . . . . 9
Organization Chart . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Alternatives to the Acquisition. . . . . . . . . . . . . . . . . . . . 10
Fairness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
National's Recommendation. . . . . . . . . . . . . . . . . . . . . . . 13
Benefits to National and Company Founders. . . . . . . . . . . . . . . 13
Summary of Business Plan . . . . . . . . . . . . . . . . . . . . . . . 14
Comparison of the Programs and the Company . . . . . . . . . . . . . . 15
Tax Consequences of Acquisition. . . . . . . . . . . . . . . . . . . . 17
Conflicts of Interest Related to the Acquisition . . . . . . . . . . . 18
Conditions to Acquisition. . . . . . . . . . . . . . . . . . . . . . . 19
Consequences if Acquisition Not Approved . . . . . . . . . . . . . . . 19
Delivery of Stock Certificates . . . . . . . . . . . . . . . . . . . . 20
Supplements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Consent Solicitation/Summary of Voting Procedures. . . . . . . . . . . 20
No Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . 21
No Right to Program Books and Records. . . . . . . . . . . . . . . . . 21
Concurrent Offering. . . . . . . . . . . . . . . . . . . . . . . . . . 21
Summary Financial Information. . . . . . . . . . . . . . . . . . . . . 22
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Risks of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . 24
The nature of your investment will change . . . . . . . . . . . . 24
The exchange value of the programs may not be the amount
you would net if the properties were sold in a cash sale
transaction . . . . . . . . . . . . . . . . . . . . . . . . . . 24
The shares may trade at prices substantially below the
arbitrarily determined exchange value of $10 per share. . . . . 25
There may be conflicts of interest in National's
structuring the acquisition . . . . . . . . . . . . . . . . . . 25
You do not have independent advisors representing you in
structuring this transaction. . . . . . . . . . . . . . . . . . 26
The transaction may not be tax-free . . . . . . . . . . . . . . . 26
The company may incur significant additional debt . . . . . . . . 27
The Board of directors will have the ability to change
investment, financing and other policies of the company
without shareholder consent . . . . . . . . . . . . . . . . . . 27
You will have no dissenters' rights in connection with
the acquisition . . . . . . . . . . . . . . . . . . . . . . . . 27
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The company has no operating history. . . . . . . . . . . . . . . 28
Your voting rights will change. . . . . . . . . . . . . . . . . . 28
Cash distribution policies will be changed. . . . . . . . . . . . 28
The method of management compensation will be changed . . . . . . 28
Holders of a majority of tenancy-in-common interest bind a
program . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
National's judgment regarding the conflicting
Yosemite/Ahwahnee appraisals may be incorrect which
means the exchange values for these properties may be
too low or too high . . . . . . . . . . . . . . . . . . . . . . 28
Real Estate Risks Associated with All Properties . . . . . . . . . . . 29
There are significant delinquent property taxes . . . . . . . . . 29
Units or certain assets must be sold to raise working capital . . 29
Federal, state and local environmental and other laws may
require expensive hazardous substance clean-up or removal
as well as expensive public improvements. . . . . . . . . . . . 29
If there is an uninsured loss, the company could lose its
investment, profits or cash flow from a property. . . . . . . . 29
The development of additional projects may occur. . . . . . . . . 30
The California economy has fluctuated broadly in the
past few years. . . . . . . . . . . . . . . . . . . . . . . . . 30
When the acquisition is completed, National and its
principals will be owed $1,381,881 by the company . . . . . . . 30
Real Estate Risks of Specific Properties . . . . . . . . . . . . . . . 30
Sacramento/Delta Greens . . . . . . . . . . . . . . . . . . . . . 30
Permits to develop the properties need to be obtained. . . . 30
Holding an inventory of residential lots at the
Sacramento/Delta Greens property may cause the company
to incur substantial carrying costs until the lots can
be sold. . . . . . . . . . . . . . . . . . . . . . . . . . 30
Risks of residential development . . . . . . . . . . . . . . 31
Additional specific risks. . . . . . . . . . . . . . . . . . 31
Oceanside Property. . . . . . . . . . . . . . . . . . . . . . . . 31
Holding an inventory of residential lots at the
Oceanside property may cause the company to incur
substantial carrying costs until the lots can be sold. . . 31
Risks of residential development . . . . . . . . . . . . . . 31
Additional specific risks. . . . . . . . . . . . . . . . . . 32
Yosemite/Ahwahnee Properties. . . . . . . . . . . . . . . . . . . 32
Permits to develop the timeshare aspect of the resort
have not yet been obtained . . . . . . . . . . . . . . . . 32
Risks affecting operation of a golf course . . . . . . . . . 32
Resort development is unpredictable for a variety of
reasons and could result in losses . . . . . . . . . . . . 32
Risks relating to timeshare operations . . . . . . . . . . . 33
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Risks relating to recreational vehicle park operations . . . 33
Additional specific risks. . . . . . . . . . . . . . . . . . 33
Mori Point Property . . . . . . . . . . . . . . . . . . . . . . . 33
Permits to develop the property have not yet been obtained . 33
Resort development is unpredictable for a variety of
reasons and could result in losses . . . . . . . . . . . . 34
Additional specific risks. . . . . . . . . . . . . . . . . . 34
Anti-Takeover Provisions and Limitation of Director Liability. . . . . 34
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 . . . . . . . . . . . 34
The Board is divided into three classes serving staggered
three year terms. . . . . . . . . . . . . . . . . . . . . . . . 34
There are restrictions on certain business combinations with
interested parties. . . . . . . . . . . . . . . . . . . . . . . 35
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. . . . . . . . . . . . 35
The Delaware law, as well as the charter documents, limit the
liability of directors and officers to shareholders . . . . . . 35
BACKGROUND AND REASONS FOR THE ACQUISITION. . . . . . . . . . . . . . . . . 36
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Management of the Programs since Foreclosure . . . . . . . . . . . . . 41
Efforts to Dispose of the Properties . . . . . . . . . . . . . . . . . 44
Alternatives to Acquisition. . . . . . . . . . . . . . . . . . . . . . 46
Comparison of Alternatives . . . . . . . . . . . . . . . . . . . . . . 49
Terms of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . 51
Calculation of Exchange Value. . . . . . . . . . . . . . . . . . . . . 52
Allocation of Shares among the Programs. . . . . . . . . . . . . . . . 54
Allocation of Shares among Investors . . . . . . . . . . . . . . . . . 56
Company Shares Held by Affiliates or Employees of National . . . . . . 57
Historical Compensation for Servicing, Asset and Property
Management/Effect of Acquisition . . . . . . . . . . . . . . . . . . 57
Historical Cash Distributions to Investors . . . . . . . . . . . . . . 58
Features of the Acquisition Considered by National . . . . . . . . . . 59
Conditions to the Acquisition. . . . . . . . . . . . . . . . . . . . . 61
Fairness in View of Conflicts of Interest. . . . . . . . . . . . . . . 64
Consequences if the Acquisition is Not Approved. . . . . . . . . . . . 65
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . 65
Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Appraisals and Fairness Opinion. . . . . . . . . . . . . . . . . . . . 66
Experience of Independent Valuator . . . . . . . . . . . . . . . . . . 67
</TABLE>
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DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
COMPARISON OF TENANCY-IN-COMMON INTERESTS AND SHARES. . . . . . . . . . . . 70
COMPARISONS OF PROGRAMS AND COMPANY . . . . . . . . . . . . . . . . . . . . 76
VOTING PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Time of Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Record Date and Outstanding Votes. . . . . . . . . . . . . . . . . . . 83
Approval Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Investor Ballot and Vote Required. . . . . . . . . . . . . . . . . . . 84
Investor Representations on Ballot . . . . . . . . . . . . . . . . . . 85
Revocability of Consent. . . . . . . . . . . . . . . . . . . . . . . . 85
Solicitation of Votes; Solicitation Expenses . . . . . . . . . . . . . 86
No Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . 86
No Right to Program Books and Records. . . . . . . . . . . . . . . . . 86
Issuance of Certificates for Acquisition Shares. . . . . . . . . . . . 86
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION AND CONFLICTS
OF INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Benefits to National . . . . . . . . . . . . . . . . . . . . . . . . . 87
Company Shares Owned by National's Principals and Other
Company Management . . . . . . . . . . . . . . . . . . . . . . . . . 87
Other Benefits to Shareholders of National . . . . . . . . . . . . . . 88
Lack of Independent Representation of Investors. . . . . . . . . . . . 88
Features Discouraging Potential Takeovers. . . . . . . . . . . . . . . 89
Allocation of Services and Expenses. . . . . . . . . . . . . . . . . . 89
Non-Arm's-Length Agreements. . . . . . . . . . . . . . . . . . . . . . 90
Competition with the Company from Other Programs Organized
by National. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION. . . . . . . . . . . . . . . . 90
Fiduciary Responsibility of National . . . . . . . . . . . . . . . . . 90
Indemnification of Officers and Directors of the Company . . . . . . . 91
Officers and Directors Insurance . . . . . . . . . . . . . . . . . . . 91
FORWARD-LOOKING STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 91
BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 92
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Business of the Company. . . . . . . . . . . . . . . . . . . . . . . . 92
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Consolidation of the Programs. . . . . . . . . . . . . . . . . . . . . 95
The Residential Development Industry . . . . . . . . . . . . . . . . . 96
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The Lodging and Recreation Industry. . . . . . . . . . . . . . . . . . 96
The Business Strategy. . . . . . . . . . . . . . . . . . . . . . . . . 100
The Consolidated Business Plan . . . . . . . . . . . . . . . . . . . . 100
Priority of Projects and Estimated Timetable . . . . . . . . . . . . . 106
Types of Borrowing Required. . . . . . . . . . . . . . . . . . . . . . 108
Impact of Interest Rates on the Company. . . . . . . . . . . . . . . . 109
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 110
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES . . . . . . . . . . . . . . . . 110
Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . . . 110
Financing Policies . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Miscellaneous Policies . . . . . . . . . . . . . . . . . . . . . . . . 111
Working Capital Reserves . . . . . . . . . . . . . . . . . . . . . . . 112
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
SELECTED FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 113
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Results of Operations - The Oceanside Program. . . . . . . . . . . . . 116
Results of Operations - The Yosemite/Ahwahnee Programs . . . . . . . . 117
Results of Operations - The Mori Point Program . . . . . . . . . . . . 117
Results of Operations - The Sacramento/Delta Greens Program. . . . . . 117
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . 118
Historical Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . 120
New Accounting Pronouncements. . . . . . . . . . . . . . . . . . . . . 120
MANAGEMENT FOLLOWING THE ACQUISITION. . . . . . . . . . . . . . . . . . . . 121
Executive Officers and Directors . . . . . . . . . . . . . . . . . . . 122
Directors and Executive Officers Compensation and Incentives . . . . . 125
Stock Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . 126
401(k) Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Employment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . 128
Limitation of Liability and Indemnification. . . . . . . . . . . . . . 129
PRIOR PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
SECONDARY MARKET FOR TENANCY-IN-COMMON INTERESTS. . . . . . . . . . . . . . 132
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PRINCIPAL SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . 132
Director and Officer Stock Ownership . . . . . . . . . . . . . . . . . 133
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Certain Shareholder Voting Requirements. . . . . . . . . . . . . . . . 135
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . 135
THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Offering of Acquisition Shares . . . . . . . . . . . . . . . . . . . . 135
Concurrent Offering. . . . . . . . . . . . . . . . . . . . . . . . . . 136
APPRAISALS AND FAIRNESS OPINION . . . . . . . . . . . . . . . . . . . . . . 136
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Experience of Independent Appraisers . . . . . . . . . . . . . . . . . 138
May 1997 Appraisals. . . . . . . . . . . . . . . . . . . . . . . . . . 138
The Mentor Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . 140
ConflictingYosemite/Ahwahnee Properties' Appraisals. . . . . . . . . . 140
On-Going Relationships . . . . . . . . . . . . . . . . . . . . . . . . 141
Updates/Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . 142
Qualification of the Acquisition as a Qualifying Section 351
Transaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Federal Income Tax Consequences of the Acquisition . . . . . . . . . . 145
Federal Income Tax Consequences to Investors After the
Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
REPORTS TO SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 147
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
FURTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
</TABLE>
vi
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
Page
----
<S> <C>
APPENDICES
Appendix 1 Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix 2 Selected Additional Appraisal Information. . . . . . . . . . A-2
Appendix 3 Prior Performance Schedules. . . . . . . . . . . . . . . . . A-3
ACCOMPANYING THE PROSPECTUS
- - PROGRAM SUPPLEMENT
- - OFFICIAL INVESTOR BALLOT
- - Instructions to Investors on How to Complete the Official Investor Ballot
</TABLE>
vii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARIZES MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS ELSEWHERE IN THIS PROSPECTUS.
THE PROPOSAL
From 1987 to 1993 National Investors Financial, Inc. ("National")
arranged loans secured by first trust deeds on real estate and sold
fractional, tenancy-in-common interests in such loans to investors. National
coined the term "Trudy Pat" as a shorthand description for the TRUST DEED
LOAN PARTICIPATION programs. Pursuant to servicing agreements with each
investor, National has collected and distributed principal and interest
payments, if any, on the "Trudy Pat" loans, acted to take title on behalf of
the investors where loans have gone into default, and managed the properties
after the defaults.
American Family Holdings, Inc., a Delaware corporation (the "company" or
"we"), was founded by the principals of National. It has offered to acquire
the properties and cash reserves of the five "Trudy Pat" programs named on
the cover page of this prospectus for an aggregate exchange value of
$[20,012,475] in the form of [2,001,248] shares of its common stock
arbitrarily valued at $10 per share. The exchange values assigned each
program may not be the price at which that program's property could be sold
to a willing buyer. However, it is reflective of National's estimate of the
amount that would be available for distribution to that program's investors
after taking into account other program assets, as well as all outstanding
obligations of the program.
The Sacramento/Delta Greens property is vacant land to be developed for
residential lots. The Oceanside property is vacant land which has been
developed into residential lots of which 137 have been sold and built on, and
111 remain to be build on and sold. The Yosemite/Ahwahnee properties include
a golf course facility, some developed recreational vehicle spaces, some
developed residential lots, and vacant land to be developed into additional
recreational vehicle spaces and timeshare units. The Mori Point property is
vacant land to be developed into a hotel conference center facility.
By voting for the acquisition of your property in exchange for shares of
the company, you will also be approving the transfer to the company of cash
reserves, if any, in your program derived from sale of properties or
assessments paid, as well as the use of the cash reserves by the company to
further its overall business plan and not for distributions or for any
particular property.
SUMMARY RISK FACTORS
The following is a summary of the potential disadvantages, adverse
consequences and risks of the acquisition. This summary is qualified in its
entirety by the more detailed discussion in the section entitled "Risk
Factors" contained in this prospectus beginning on page __.
THERE WILL BE A FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If
the acquisition is completed, there will be a change in the nature of the
investment of each investor from holding a tenancy-in-common interest in real
estate to holding shares in an on-going
<PAGE>
company, the assets of which may be changed from time to time without
approval of investors. If the acquisition is completed, investors will be
able to liquidate their investments only by selling their shares on the _____
or in private transactions, and they will not receive a return of their
investment in the form of liquidation proceeds through property sales. If
the acquisition is completed, investors will have an investment in an entity
that is larger than each of the programs and will thus lose relative voting
power.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL
SALES PRICE. Investors are subject to the risk that the exchange value of a
program does not reflect the price a program's assets might bring in a sale.
If the property of a program were to be sold, the net proceeds of the sale
and the amount finally distributed to an investor in that program may be more
or less than the exchange value. There is no assurance that the future value
of the shares will continue to be greater than the most recent appraised
value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may
trade at prices substantially below the arbitrarily determined exchange value
of $10 per share or historical book value of the company's assets. There is
no guaranty that a liquid trading market will develop for the shares, or be
sustained. If a trading market develops for the shares, the price of shares
after the acquisition will likely decrease below the exchange value per share
of $10 due to a potentially large number of shares that investors may sell
immediately after the acquisition.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of
interest. The principal shareholders and employees of National and the
company, will hold approximately 18.23% of the company's outstanding stock
for which they paid $0.01 per share. Other founding shareholders will hold
approximately 1.6]% of the company's outstanding stock for which they also
paid $0.01 per share. Thus, the investors' total ownership interests in the
programs' properties will be diluted by the equity interest in the company
held by the founders of the company. The principal stockholders of National,
and other executive officers of the company, will receive annual cash
compensation aggregating $660,000 as officers and employees of the company.
National will be relieved of its servicing and asset management obligations
and will no longer earn asset management or servicing related fees. However,
the company will still owe National over $1,300,000 of accrued but unpaid
fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote , and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
Messrs. Lasker and Orth will be required to devote some of their time to
other projects for which National acts as servicing agent and asset manager.
2
<PAGE>
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE THE
ACQUISITION ON BEHALF OF THE INVESTORS. Therefore, terms of the acquisition
may be less favorable to investors and more favorable to founders of the
company which included the principal shareholders of National than if the
acquisition had been subject to arm's-length negotiation. Had an independent
party negotiated on behalf of each program, the terms of the acquisition may
have been more favorable to certain or all of the programs and fewer shares
and less favorable employment contracts may have been received by the
founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to opine
conclusively on the taxability of the acquisition to investors. If the
acquisition is a taxable transaction, an investor would recognize gain or loss
in 1998 equal to the difference between the investor's tax basis in his interest
in a program property, and the number of shares of the company received valued
at $10 per share. If the acquisition is treated as taxable, National believes
most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the acquisition,
none of the properties will be subject to any liens other than for property
taxes. The board of directors could authorize borrowing by the company the debt
service for which may adversely affect the company's ability to make
distributions to shareholders. The company may incur full recourse debt which
exposes all of the assets of the company to repayment instead of limited
recourse debt which generally exposes specific properties for the repayment of
debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING
INVESTORS. 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.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long time. This means that shares in the company
are much riskier than ownership of shares of established companies. If the
company had been operating as if it owned the properties which it desires to
acquire, it would have experienced losses to date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE ACQUISITION
TAKES PLACE. Rather than being focused on a single property, the company will
be an infinite life entity focused on the management of at least five
properties. The effect of this on investors is two-fold. First, poor
performance of a particular property may affect the company's operations as a
whole regardless of the performance of the other properties. Second, there will
be no particular time when an investor can expect that a sale of any of the
properties will result in cash distributions to him or her.
3
<PAGE>
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes
or sales of a particular property. Those decisions will be made by the board
of directors or management. In addition, you will have an investment in an
entity that is larger than each of the programs and, thus, you will lose
relative voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, because of the borrowers' defaults there have
been no distributions from any of the programs, other than the Oceanside
program, in the past three years. Future cash distributions will be based on
the company's earnings and the decision of the board of directors to pay
dividends. Therefore, even if a property in which you formerly held an
interest were to perform well, there is no assurance that there would be cash
distributions to you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National
rendered asset and property management services to the programs subsequent to
the time when the original borrowers defaulted and the investors became
beneficial owners of the property. Compensation for these services was
earned in the form of asset management and property management fees in lieu
of the loan servicing fees that were earned before title was taken for the
benefit of investors. National is presently compensated for asset management
services at the rate of one percent of the principal amount originally
invested in each program which is the same rate it earned for loan servicing
before title to the properties was taken for the benefit of investors. In
addition to the one percent fee, additional compensation has been accrued for
property management services provided to the Oceanside ($800,000 accrued
since date of default; $-0- actually paid) and Yosemite/Ahwahnee ($498,535
accrued since date of default; $-0- actually paid) properties by officers and
employees of National in their capacities as officers of Oceanside
Development, Inc. and Ahwahnee Golf Course & Resort, Inc. In the future,
compensation will be paid to officers of the company in the form of salaries,
stock options and other benefits. These salaries and other forms of
compensation will be payable to management of the company even if one or more
of the properties acquired in the acquisition is subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE CONFLICTING YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THAT THE EXCHANGE VALUES FOR THOSE
PROPERTIES COULD BE TOO LOW OR TOO HIGH. Faced with two conflicting
appraisals for the Yosemite/Ahwahnee properties, to determine the appraised
values for these properties for purposes of determining their exchange
values, National's management used the lower amount presented in the October
1996 appraisal unless there was an intervening reason for accepting the
higher May 1997 valuation. If the values arrived at by National were too low
for either program, the program's exchange value would be too low and would
result in too few shares being allocated to that program in the acquisition.
Conversely, if the values arrived at by National were too high, the program
would receive too large an allocation of shares in the acquisition to the
detriment of the investors in the other programs.
4
<PAGE>
THERE WILL BE SIGNIFICANT REAL ESTATE RISKS ASSOCIATED WITH THE COMPLETION
OF THE COMPANY'S PROPOSED BUSINESS PLAN. These include
(i) the need to raise additional cash funds to pay delinquent property
taxes on each of the properties, as well as keeping those property taxes
current in the future (without needed cash, one or more properties may still
be lost at a tax sale at below market prices);
(ii) the need to pay for the costs associated with obtaining permits and
government approvals to develop the Mori Point and Sacramento/Delta Greens
properties (without such permits and approvals, such properties might have to
be sold at prices below May 1997 appraised values);
(iii) the cost of holding an inventory of residential lots at the
Oceanside (presently $30,000 per month) or Sacramento/Delta Greens (presently
$10,000 per month) properties; and
(iv) payment of over $1,300,000 accrued fees and expenses to National
and its principals which are not being forgiven in the acquisition.
Additionally, there are specific risks related to each of the programs'
properties more specifically described in "Risk Factors -- Real Estate Risks"
commencing at page __.
IT WILL BE DIFFICULT TO CHANGE MANAGEMENT DUE TO CERTAIN ANTI-TAKEOVER
PROVISIONS IN THE COMPANY'S CHARTER DOCUMENTS AND IN THE DELAWARE LAW. These
risks of management entrenchment include:
(i) the ability of the board of directors to cause the company to issue
additional shares or classes of shares which could dilute your voting power;
(ii) the fact that only one-third of the board of directors is elected each
year making it difficult for shareholders to quickly cause changes in
management;
(iii) restrictions on business combinations with holders of more than
15% of the outstanding voting stock of the company imposed by Delaware law; and
(iv) changes to the company's certificate of incorporation relating to
anti-takeover provisions requires a two-third approval vote.
For more details, see "Risk Factors -- Anti-Takeover Provisions and Limitation
of Director Liability" commencing at page __.
EXCHANGE VALUE/ALLOCATION OF SHARES
The programs' properties have been appraised by the independent
appraisers identified on page __. The exchange value for a program property
is its appraised value (adjusted by increasing the appraised value by a
program's cash reserves and other assets, and reducing it by program
liabilities net of fees to be cancelled by National or its affiliates as a
part of the acquisition) multiplied by the arbitrary price of $10 per share.
The exchange value of a program is not the price a program might receive if
it elected to sell its property now rather than
5
<PAGE>
participate in the acquisition proposed by the company. Net proceeds from
such a sale price might be higher or lower than the exchange value amount the
company is willing to pay. Due primarily to accrued liabilities of the
programs' investors, the exchange value for a property is lower than the
appraised value of a property used to determine the exchange value in all
cases except the Oceanside property. See "Background and Reasons for the
Acquisition -- Calculation of Exchange Value."
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 to the programs individually due
to the limitations of the current tenancy-in-common form of ownership of the
programs' properties.
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. Shares will be distributed to you in accordance with
your pro rata investment in a program (including interest accrued to you
through the date you took beneficial ownership of the property and any
assessments paid subsequent to that time) after adjusting the amounts to
account for voluntary advances made by some investors.
The following table shows investors (i) each program's exchange value,
(ii) the number and percentage of shares allocated to each program if the
acquisition is consummated, and (iii) the number of shares to be received per
$10,000 of investment in a particular program. The information is as of
December 31, 1997. [TO BE UPDATED TO THE MONTH END PRIOR TO THE FINAL PROSPECTUS
DATE]
<TABLE>
% of Total No. of
Shares to be Shares per
Outstanding $10,000 of
Exchange No. of Shares After the Outstanding
Name of Program Value Allocated(1) Acquisition(2) Investment
--------------- -------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Sacramento/Delta
Greens $ 1,936,501 193,650 7.76% 320
Oceanside 4,875,714 487,571 19.53 162
Yosemite/Ahwahnee I 3,205,666 320,567 12.84 354
Yosemite/Ahwahnee II 5,137,552 513,755 20.58 265
Mori Point 4,857,042 485,704 19.45 399
------------ --------- -----
TOTAL $ 20,012,475 2,001,248 80.16%
------------ --------- -----
------------ --------- -----
</TABLE>
- --------------
(1) Represents [9.68%], [24.36%], [16.02%], [25.67] and [24.27%], respectively,
of the shares to be issued to investors in the acquisition.
(2) 85.83% if all units offered to investors in the concurrent offering are
sold to investors. The other shares will be held by management and other
founders of the company.
CURRENT STATUS OF THE PROGRAMS
Each of the programs began as tenancy-in-common, secured loan arrangements.
Each of the properties that secured the loans was independently appraised. Due
to the borrowers'
6
<PAGE>
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. Based on investors' stated preferences, National's objective has
been to recover all, or a substantial portion, of the investors' principal if
the properties were sold. The significant decline in real estate values in
California in the early 1990s (especially for undeveloped land) has made
attaining this objective unattainable at this time.
The properties owe a significant amount of delinquent property taxes
totalling over $[1,082,000] all together as of December 31, 1997. In
addition, working capital is needed in order to position the properties for
sale on terms that might be approved by a majority of investors. Only the
Oceanside property has been self-sustaining through sales of lots and newly
constructed homes. Other than that, only the golf course and recreational
vehicle park portions of the Yosemite/Ahwahnee properties have any operating
cash flow and that is not enough to cover operating expenses much less
provide working capital needed to conceptually plan, comply with the
governmental permitting requirements and eventually construct other
improvements on the land. The programs' tenancy-in-common agreements contain
provisions for voluntary and mandatory assessments. Investors in different
programs responded in varying degrees in both types of assessments but, even
with mandatory assessments, all did not live up to the agreement. At the
least, investors have demonstrated a reluctance to provide adequate working
capital through a mandatory assessment process. This reluctance on the part
of investors to provide the necessary funding to maintain the properties, pay
for minimal expenses such as property taxes, and continue the predevelopment
approval process makes continuation of the status quo tenuous at best.
The Oceanside property may be able to be sold for cash at, or in excess
of, its May 1997 appraised value. The Sacramento/Delta Greens property may
also be sold for a cash price approximating its May 1997 value but National
believes that there will be more potential buyers if the final engineering
and permitting processes are completed at a cost of approximately $175,000.
Nevertheless, since the amount that might be realized on sale of either of
these properties is substantially less than the outstanding investment, the
sale of either of these properties at current prices will not yield all or a
substantial portion of the investors' money at this time.
Without an infusion of approximately $3,700,000 of capital, the
Yosemite/Ahwahnee properties cannot reach a point where they are developed
enough to eliminate losses from operations. For this reason, National made
the determination to use the lower October 1996 valuation unless there was
some significant intervening reason for accepting the May 1997 valuation for
the separate parcels. The May 1997 appraisal was used for the golf course
(because of improvements made after the October 1996 appraisal and increased
usage of the course) and recreational vehicle park (because of increased
sales after the October 1996 appraisal). The October 1996 appraisal was used
for the estate lots and for the balance of the land. Although a buyer may be
found at the assigned appraised value, this amount would not generate
sufficient funds to return all or a substantial portion of the investors'
money at this time.
7
<PAGE>
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, approximately $500,000 of 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. Although a buyer
may be found at the May 1997 appraised value, it is the opinion of National
that any buyer will insist that completion of a habitat conservation plan be
a condition of the closing of the sale. Even a sale at the May 1997
appraised value would not generate sufficient funds to return all of the
investors' money at this time.
Attempts have been made to sell or develop on a joint venture basis all
or portions of each of the properties. However, the offers have been
rejected by investors (in the case of Sacramento/ Delta Greens in 1994 and
Mori Point in 1996) or inadequate (in the case of Oceanside) or not
forthcoming at all (in the case of the Yosemite/Ahwahnee programs). See
"Background and Reasons for the Acquisition -- Efforts to Dispose of the
Properties." National continues to offer the Oceanside property for sale
directly to homebuilders in the area. The Sacramento/Delta Greens property
has been presented to several local area homebuilders in the last year
without yielding any significant negotiations toward a sale. National
continues to explore the possibility of selling this property, but, to date,
no brokers have been hired because National has the resources to identify
potential buyers for a project of this type. Although the estate lots have
been listed with a broker for sale, National has made no significant efforts
to interest potential buyers or joint venture partners in the
Yosemite/Ahwahnee properties as a package because it does not believe the
properties are ready for sale until further development of the recreational
vehicle spaces and planned timeshare program is complete. Joint venture
partners willing to become associated with the unwieldy tenancy-in-common
ownership structure which requires so many persons to approve any significant
action have been difficult to locate. Currently, the Yosemite/Ahwahnee
properties experience a steady negative cash flow which few, if any, buyers
are willing to accept. Only offers for certain of the estate lots have been
received. No offers have been received for the Yosemite/Ahwahnee properties
as a package. For a period of Year in 1992 to 1993, the Mori Point property
was listed with Grubb & Ellis, a reputable commercial broker. No offers were
received. The brokerage contract was not renewed, and no recent efforts have
been made to sell it because the investors instructed National to continue to
pursue obtaining the necessary governmental permits to develop a
hotel/conference center on the property.
The acquisition has been proposed because National and the company
believe that the properties, when combined and used or sold for their mutual
benefit instead of separately operated or sold, can be sold and/or developed
in a way that will increase the overall value available to investors. This
proposal provides an alternative way to achieve the investors' goal of
achieving a return of all or substantially all of their original principal.
While there can be no assurance that the company will achieve that goal for
the investors through its stock price, continuing to attempt to achieve the
investors' goals for each property separately does not appear to provide any
likelihood of achieving that objective. If the acquisition occurs, the
properties and assets belonging to the programs will all become assets of the
company, and you 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
8
<PAGE>
within their separate programs. However, it is not known what the market
price for the shares will be and therefore it cannot be known whether the
value of the shares allocated to each program will ever exceed the price that
the properties might bring in a cash sale. See "Background and Reasons for
the Acquisition -- Comparison of Alternatives" at page __.
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 and no operating history. 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.
EXPERIENCE OF MANAGEMENT
The key executive officers are David G. Lasker, James N. Orth, L.C.
"Bob" Albertson and Mark C. Kawanami. Each of these officers does not have
experience in operating or developing each type of property to be acquired by
the company. However, collectively, they have the necessary experience to
operate or develop, or supervise the operation or development of, each type
of property. Messrs. Lasker and Orth have been principally responsible for
management of the programs since title to the properties was obtained from
the original borrowers on behalf of the investors. Neither Mr. Lasker nor
Mr. Orth are experienced home builders. With regard to the proposed
activities at the Yosemite/Ahwahnee properties, they have been actively
involved in obtaining necessary permits and construction services,
recreational vehicle membership sales and site management, golf course
management and marketing, lot sales and timeshare studies. L.C. "Bob"
Albertson, the Executive Vice President of the company, has been involved as
an executive in all aspects of the home building industry for over 30 years.
In that time, he has used traditional financing arrangements, as well as
options and non-recourse seller financing, to acquire, and build residences
on, real estate. Mark Kawanami, Vice President of the company, has been
involved in the financial aspects of the residential real estate business for
over ten years. None of the officers have extensive experience in the
development, marketing and management of a recreational vehicle park or
timeshare products. See "Management Following the Acquisition" at page __
and "Prior Programs" at page __ for further information about the experience
of management.
ORGANIZATION CHART
After the acquisition, assuming none of the units is sold, 80.16% of the
company's outstanding shares will be owned by the investors and 19.84% will
be owned by the founders of the company. Management of the properties will
be coordinated through a to-be-formed wholly-owned subsidiary to be named
American Family Communities, Inc. Title to the properties will be held by,
and day-to-day operations will be conducted through four separate
wholly-owned subsidiaries of American Family Communities, Inc. The ownership
and organization of the company after the acquisition will be as follows:
9
<PAGE>
<TABLE>
<S> <C> <C> <C>
------------- ---------------- -------------- -------------
Yale Partnership J-Pat, L.P. Consultants
All Programs' for Growth and (controlled by and other
Investors Development, James Orth, a Employees of
L.P. principal of National or
(controlled by National) Company
David Lasker, a
principal of
National)
------------- ---------------- -------------- -------------
80.16% 8.01% 8.01% 3.82%
(85.83% if all (5.72% if all (5.72% if all (2.73% if all
units sold) units sold) units sold) units sold)
--------------------------------------------------------------------------
American Family Holdings, Inc.
--------------------------------------------------------------------------
100%
--------------------
American Family
Communities, Inc.(1)
--------------------
100%
-------------- ---------------- ---------------- -------------
Delta Greens Yosemite Woods Oceanside Homes, Mori Point
Homes, Inc.(2) Family Resort, Inc.(2) Destinations,
Inc.(2) Inc.(2)
-------------- ---------------- ---------------- -------------
</TABLE>
- ---------
(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.
ALTERNATIVES TO THE ACQUISITION
The alternatives to the acquisition that National considered were (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" and
"Comparison of Alternatives" at pages __ and __.
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. This determination is based on consideration of the following
positive and negative factors:
10
<PAGE>
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that
develops will be sustained;
- while the number of shares to be issued to reflect the exchange
value of a program is arbitrary, the trading price of such shares initially
is likely to be substantially below the $10 value arbitrarily assigned to
such shares. In our opinion, the exchange values offered to investors for
their assets allow for an equitable allocation of the [2,001,248] shares
among the programs. The disparity between exchange values and appraised
values results from adding the value of program cash reserves and other
assets, if any, to appraised values and deducting program liabilities
(principally accrued property taxes and other fees net of fees to be forgiven
by National);
- on completion of the acquisition the investors will hold over 80%
of the outstanding stock of the company while principals, employees, and
consultants of National will hold less than 20%. That 20% was purchased for
$.01 per share. National and its principals have forgiven, or will forgive
at the completion of the acquisition, over $3,000,000 of expenses and accrued
fees of which a total of approximately $1,700,000 was earned under the
servicing agreements after the loans defaulted and before the foreclosure
actions were completed. The balance was earned after the foreclosure for
asset management and property management services. However, the amount of
fees forgiven was only a minor factor in determining the number of shares of
the company to be held by its founders after the acquisition. See
"Background and Reasons for the Acquisition -- General -- Servicing and Asset
Management Fees" for details of the amounts earned, the amounts actually
paid, and the recipients of such post-foreclosure fees. National believes
that the amount paid for the asset and property management services is no
greater than the amount that a third party would charge;
- the valuation of the real estate assets of each of the programs by
the independent appraisers;
- the probability that the transaction will either be tax-free to
investors or most likely yield a tax loss. Either way, National believes
there will likely be no out-of-pocket tax cost to all, or the vast majority,
of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have
independent representation in the structuring of the acquisition, we believe
they have been counterbalanced by your opportunity to vote on the transaction
and the Fairness Opinion;
- while the programs were originally formed to have a two to four
year finite life and the investors expected to receive a return of their
investment from the original borrower, the company is an infinite life entity
which will not return the program investors' original investment based on a
sale or refinancing of the properties underlying the original programs.
However, after the borrowers defaulted on the "Trudy Pat" loans, the
investors became beneficial owners of the
11
<PAGE>
underlying properties with the need to complete development, manage or
otherwise ready the properties for sale. Those endeavors had no fixed
timetable and, thus, the finite life aspect of their original investments was
significantly changed. Therefore, the infinite life aspect of the company is
not viewed by National to be a material change from the investors' CURRENT
situation;
- the acquisition will cause fundamental changes in the individual
business plans of the programs. Rather than being focused on a single
property, the company will be focused on the management of at least five
properties. Thus, the poor performance of a particular property may affect
the company's operations as a whole regardless of the performance of the
other properties. Further, there will be no particular time when an Investor
can expect its interest to be automatically liquidated.
- investors will not be able to vote on changes to or dispositions of
a particular property or borrowing secured by a particular property. Those
decisions will be made by the Board of Directors or management. Further, as
investors in a larger entity, relative voting power will be diluted;
- future cash distributions will be based on the company's earnings
and a decision of the Board of Directors to pay dividends rather than on the
performance or sale of a particular property;
- investors voting against the acquisition will have no alternative
but to accept shares in the company if the acquisition is approved by holders
of a majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a
change in management which is not favored by the Board of Directors of the
company; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the shares
in the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __.
National reviewed the arbitrary value you will receive in connection
with the acquisition and compared it with what you might receive if (i) the
programs' properties were operated "as is," (ii) the programs' properties
were sold in a quick sale in three months or less, or (iii) the programs'
properties were sold at the appraised values used to determine the exchange
values. Based on that review, and even acknowledging that, initially, the
company's shares issued in the acquisition would likely trade substantially
below their arbitrary $10 issuance value, National believes that there is a
higher probability of realizing value from the programs' assets through the
acquisition than through the other alternatives. This belief is based on the
expectation that some financing opportunities will become available based on
the form of the entity and the time pressure associated with forced sales or
liquidation will be relieved. See "Background and Reasons for the
Acquisition -- Comparison to Alternatives" and "-- Recommendation of National
and Fairness Determination" at pages __ and __. Based on this comparison,
National concluded that the acquisition is financially fair.
12
<PAGE>
FAIRNESS OPINION
National hired Houlihan Valuation Advisers, 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 "Background and Reasons for the Acquisition --
Appraisals and Fairness Opinion" at page __.
NATIONAL'S RECOMMENDATION
While the acquisition was not negotiated at arms-length and National and
the principals of National will receive substantial 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 __.
BENEFITS TO NATIONAL AND COMPANY FOUNDERS
MANAGEMENT AND COMPANY FOUNDERS WILL OWN APPROXIMATELY 18.23% OF THE
COMPANY (APPROXIMATELY 14% IF ALL UNITS ARE SOLD IN THE CONCURRENT OFFERING).
These individuals paid $.01 per share for their company shares.
AFTER THE ACQUISITION, NATIONAL'S PRINCIPAL STOCKHOLDERS WILL CONTROL UP
TO APPROXIMATELY 16% OF THE STOCK IN THE COMPANY AND WILL RECEIVE SALARIES AS
OFFICERS OF THE COMPANY. David Lasker and James Orth, the principal
stockholders of National, will be President and Chief Executive officer,
respectively, of the company and entities they control will each own [8.01]%
of the company's outstanding shares ([5.72]% if all units are sold in the
concurrent offering). These shares are included in the shares described
above as being owned by management and company founders. Mr. Lasker and Mr.
Orth also will receive annual salaries of $180,000 plus stock options and
other benefits. See "Management Following the Acquisition -- Directors and
Executive Officers Compensation and Incentives" at page __ for additional
information about executive compensation for Messrs. Lasker and Orth.
AS A CONSEQUENCE OF THE ACQUISITION, THE INVESTORS WILL TERMINATE THE
SERVICING AGREEMENTS (ASSET MANAGEMENT ACTIVITIES) WITH NATIONAL FOR THE
PROGRAMS. Pursuant to these agreements, National provided loan servicing
prior to foreclosure and asset management services after foreclosure. This
will relieve National of its ongoing obligations under such agreements even
though National could have terminated those agreements unilaterally if it
elected to do so. See "Background and Reasons for the Acquisition -- General
- -- Servicing and Asset Management Fees" at page __ for details about the
various post-foreclosure services provided to investors by National.
THE COMPANY WILL OWE NATIONAL AND ITS PRINCIPALS AND EMPLOYEES
$1,381,881 OF ACCRUED BUT UNPAID ASSET MANAGEMENT AND PROPERTY MANAGEMENT
FEES AND EXPENSES DUE FROM THE PROGRAMS AFTER THE ACQUISITION. If the
company is successful, National will have the
13
<PAGE>
opportunity to receive the portion of its accrued but unpaid fees and
expenses which it has not forgiven.
SUMMARY OF BUSINESS PLAN
Our objective is to preserve as much of the investors' original
principal 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 (see accompanying
prospectus) 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.
RESIDENTIAL DEVELOPMENTS. We plan to 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 complete the permitting process and
start construction of single-family lots of the Sacramento/Delta Greens
project. Alternatively, we may sell the project in bulk to raise operating
funds. 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. Using some of such funds, we will also continue
to process the necessary approvals for the Mori Point asset which we believe
has the potential to attract hotel and conference center industry-oriented
joint venture partners or purchasers. In the future, 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 __.
14
<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.
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 fees
under the program agreements in the aggregate amount of approximately
$650,000 per year. As of December 31, 1997, the Programs have accrued fees
and advances due to National and its principals and employees of $[2,327,992].
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
$1,381,881 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.
15
<PAGE>
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,
principals and affiliates of National will control a maximum of 19.84% of the
voting shares (14.17% 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. You can vote on matters involving
collection, servicing and administration of your investment as well as
termination of the servicing agreement. 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. However, your relative
voting power will be reduced.
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 TREATMENT. The company will be taxed as a corporation. Currently,
the programs themselves are not taxpayers and file no program tax returns.
Prior to taking title to the properties, when income was allocated to a
program investor that was interest, National, as servicing agent, reported
such income to the IRS and the investors on Form 1099-INT. As
tenancy-in-common owners of the properties, the investors no longer receive
Forms-1099 from National, but are responsible for their pro rata share of any
income, gain, loss or deductions attributable to their program's properties.
If the company makes distributions to shareholders, it will report the
distributions on Form 1099-DIV whether or not they are taxable.
OVERHEAD AND EXPENSES. Overhead and expenses of the programs are the
responsibility of the investors to the extent the applicable program does not
generate sufficient cash flow to cover them. They are billed individually to
investors in the form of assessments. To date, only the Oceanside program
has been completely self-funding. Investors will have no direct
responsibility for company overhead and expenses. Initially, overhead and
expenses of the company will be derived from proceeds of the sale of the
units, if any, or the sale of one or more of the company's assets. Future
overhead and expenses will be funded from cash flow from operations.
DILUTION. Investors in each program have voting power based on their
percentage of the funds contributed to the program. Since five programs will
be consolidated into the company, each investor's voting power will be
substantially reduced.
BUSINESS PLANS. Each of the programs has a separate business plan as
follows:
16
<PAGE>
Sacramento/Delta Greens Finish permitting process, provide for
infrastructure and the first phase of home
construction. Approximately $3,000,000 of capital
needed, including $175,000 to complete the
engineering and permitting process.
Oceanside Continue to build and sell homes or sell existing
lots in bulk, plus acquire additional lots.
Approximately $700,000 of equity capital needed
plus $3,500,000 of construction funding.
Yosemite/Ahwahnee I & II Continue to operate golf course, expand
recreational vehicle park, construct timeshare
units, and market these products and services.
Approximately $3,700,000 of capital needed.
Mori Point Proceed with hotel/conference center entitlement
process which will require the preparation of a
mitigation plan to protect the habitat of an
endangered species. Approximately $500,000
capital needed.
The business plan of the company is to consolidate the programs' plans,
raise some or all of the capital necessary to accomplish those plans through
the sale of units, if possible, as well as build homes on, or sell, the
remaining Oceanside lots and perhaps the Sacramento/Delta Greens property.
The total capital needed is approximately $11,400,000 which exceeds the
maximum available working capital if all of the units offered in the
concurrent offering are sold. The balance will have to be derived from debt
financing, if available, sale of company assets, or joint venture partners.
The company believes the Yosemite/Ahwahnee properties have the greatest
profit potential. So, if working capital or debt financing were in short
supply, the company will concentrate its efforts on the Yosemite/Ahwahnee
properties.
DISTRIBUTIONS AND DIVIDENDS. As interest and principal was paid by the
borrowers, investors in the programs were entitled to distributions. As the
underlying properties of the programs are sold after title was taken on
default of the borrowers, investors in the programs will be entitled to
distributions of sale proceeds from programs in which they invested. The
company has no present plans to pay dividends to shareholders whether from
earnings or for the sale of properties. Dividends will be paid only when
declared by the board of directors.
TAX CONSEQUENCES OF ACQUISITION
The income tax consequences of the acquisition will depend primarily on
whether the acquisition qualifies for tax-free treatment under Section 351 of
the Internal Revenue Code. Arter & Hadden LLP, tax counsel to the company,
CANNOT PROVIDE CERTAINTY THAT THE ACQUISITION WILL BE A TAX-FREE TRANSACTION
TO THE PROGRAMS' INVESTORS.
Tax counsel is of the opinion that the acquisition will qualify as
tax-free if (i) the company is not an investment company (tax counsel is of
the opinion that the company is not) and (ii) collectively, the investors in
the programs control at least 80% of the outstanding shares
17
<PAGE>
of the company immediately after the acquisition (the facts do not provide
tax counsel with a basis upon which to opine that the 80% test is or is not
met).
The determination of whether the 80% test is met depends on whether
investors who subsequently dispose of shares acquired in the acquisition are
treated as not being holders "immediately after the acquisition." Neither
the company nor tax counsel is in a position to determine whether investors
who will acquire more than 80% but who later sell some of those shares will
or will not be deemed by the taxing authorities to have held those shares
"immediately after the acquisition." See "Federal Income Tax Consequences --
Qualification of the Acquisition as a Qualifying Section 351 Transaction" at
page __ for an in-depth analysis of the tax issues and the reasons tax
counsel is unable to provide a definitive opinion on this aspect of the
transaction.
If the acquisition is tax-free, tax counsel is of the opinion that no
gain or loss will be recognized by the company or, generally, by the
investors as a result of the acquisition. If the acquisition does not
qualify as a tax-free transaction, tax counsel is of the opinion that the
company will recognize no gain or loss in the acquisition, but an investor
will recognize gain or loss upon receipt of shares. That gain or loss will
be equal to the difference between the tax basis of the investor's interest
in the property transferred and the fair market value of the shares received
plus his or her share of any nondeductible liabilities to which the
properties are subject.
After the effective date, tax counsel is of the opinion that, as a
separate taxable entity, the company's taxable income will not flow through
to the investors for purposes of determining the investors' tax liabilities.
Distributions by the company to its shareholders will be taxable as a
dividend if the company has earnings and profits. Otherwise, distributions
will constitute non-taxable returns of capital to the extent of an investor's
tax basis in the shares and will be taxable gain to the extent the
distribution exceeds the tax basis.
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
- National will be relieved from its duties and related costs as
asset manager for the programs, thereby reducing its overhead and allowing it
to concentrate on other programs that it manages (see "Background and Reasons
for the Acquisition -- Servicing and Asset Management Fees" at page __ for
details of the post-foreclosure services provided by National);
- the amount of $1,381,881 which will remain owing to National and
its principal officers in their capacities as employees of ODI and AGCRI
after the acquisition;
- if the acquisition is completed, David Lasker and James Orth, the
principal stockholders of National, will receive some or all of the following
benefits: stock ownership in the company (up to 8.01% each), cash
compensation in the form of salaries ($180,000 per year each) subject to
annual increases and potential bonuses, stock options, potential incentive
compensation, and the right to participate in company-wide employee benefit
programs;
18
<PAGE>
- you did not have independent advisers representing you in
structuring the acquisition;
- neither the acquisition itself nor the employment agreements for
the officers of the company were negotiated at arm's-length;
- some persons will be employees of the company and National and will
not be able to devote 100% of their time to the company;
- certain provisions of the company's certificate of incorporation
and bylaws, as well as Delaware law, could be used by management of the
company to discourage or defeat efforts of third parties to take control of
the company; and
- the services of David Lasker and James Orth will be required by
National in order for National to continue its asset management
responsibilities to other programs not included in the acquisition.
For a complete discussion of these conflicts, see "Interests of Certain
Persons in the Acquisition and Conflicts of Interest" at page __ and
"Management Following the Acquisition" at page __.
CONDITIONS TO ACQUISITION
The principal non-waivable 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
If the acquisition is not approved, National will ask investors to
approve the sale of the assets of each program for the best price possible,
pay the then outstanding obligations of the investors in the programs, and
return any net proceeds of the sale to the program's investors. If no sale
acceptable to investors in a particular program can be arranged, and if
investors in that program do not provide sufficient additional funds in a
timely manner to pay property taxes and cover National's current and accrued
fees for asset and property management services, then, as permitted by the
servicing agreements, National will consider resigning. As a last resort,
National may determine that bankruptcy protection and liquidation may be in
the best interest of investors of a particular program. Under California
law, National is the investors' agent and has certain fiduciary duties. The
duties require National (i) to use reasonable care and diligence
19
<PAGE>
in managing the programs, (ii) not to compete with investors without full
disclosure and consent, and (iii) not to obtain an adverse interest to the
investors without full disclosure and consent. National does not believe
that any of the foregoing actions would breach its fiduciary duties to
investors. No sale can take place without the approval of holders of a
majority of the interests in any particular program. If no acceptable sale
is arranged and if the investors in a program fail to make sufficient
payments to keep the program financially viable, National will have done all
it can do to protect the interests of that program's investors.
DELIVERY OF STOCK CERTIFICATES
The company will mail your shares to you shortly after the acquisition
becomes effective.
SUPPLEMENTS
Included with this prospectus is a supplement designed to focus solely
on your program, and the impact of this proposed acquisition on investors in
your program. Please review it prior to completing your ballot.
CONSENT SOLICITATION/SUMMARY OF VOTING PROCEDURES
RECEIPT OF CONSENTS. We must receive your ballot by 11:59 p.m., Pacific
Time, on ____________, 1998 (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, ___________, 1998. 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:
<TABLE>
Outstanding Investment;
Name of Program Number of Votes
--------------- ---------------
<S> <C>
[12/31/97]
Sacramento/Delta Greens 6,038,716
Oceanside 27,100,000
Yosemite/Ahwahnee I 8,996,473
Yosemite/Ahwahnee II 19,344,964
Mori Point 12,420,000
</TABLE>
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. Based on amounts of "Trudy Pat"
tenancy-in-common interests purchased in each program, National has the
following votes in each of the programs: 3,118 Sacramento/Delta Greens;
2,082 Oceanside; 2,373 Yosemite/Ahwahnee I; 46,454 Yosemite/Ahwahnee II; and
5,279 in Mori Point. It will cast all of its votes in favor of the
acquisition.
20
<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 __________, 1998 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.
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.
INVESTOR'S REPRESENTATIONS. When you vote, you will be confirming to
the company that (i) you have received and reviewed the prospectus and the
applicable supplement, (ii) you understand that you will become a shareholder
in the company if the acquisition is completed, (iii) you have the power and
authority to vote as an investor, (iv) you understand that if you sign and
send in the ballot but do not indicate a vote, the ballot will be deemed to
have been voted IN FAVOR of the acquisition, and (v) if the acquisition is
completed, to the best of your knowledge, the company will acquire title to
your interest in the program's property free and clear of all liens and
adverse claims other than property taxes. By voting in favor of the
acquisition, you are also voting to terminate the tenancy-in-common
agreement with other investors in your program and the servicing agreement
with National. Termination of the servicing agreement relieves National of
any future liabilities or responsibilities to the program, but all amounts
owing to National under the servicing agreement after the acquisition will be
assumed by the company.
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
__.
NO RIGHT TO PROGRAM BOOKS AND RECORDS
You have no rights under your program's tenancy-in-common agreement or
your servicing agreement, or under federal or state law, to obtain a list of
the names and addresses of the other investors in your program or to inspect
other books and records of your program. If you wish to communicate with the
other investors in your program, upon receipt of the material you wish mailed
together with the amount of postage necessary to make such mailing, National
will promptly mail such communications to your program's investors.
CONCURRENT OFFERING
In addition to the Consent Solicitation, the company is simultaneously
offering up to 1,000,000 units at $10 per unit to be issued exclusively to
existing program investors. The
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<PAGE>
offering is a "best efforts" offering with no minimum number of units which
must be sold. There is no assurance that any proceeds will be received. No
sales can be completed unless 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 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.
If any funds are raised by the offering, they would be used to pay
offering expenses, acquisition expenses, property taxes due, and for working
capital, as detailed in the company's business plan. Any funds raised on
exercise of warrants would be used for working capital.
FOR ADDITIONAL INFORMATION ABOUT THE CONCURRENT OFFERING, SEE THE
PROSPECTUS WHICH ACCOMPANIES THIS CONSENT SOLICITATION STATEMENT AS A
SEPARATE DOCUMENT.
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 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.
22
<PAGE>
<TABLE>
Company Pro Forma The Acquisition Historical
----------------- ----------------------------------------------
Year Ended Years Ended
December 31, 1997 December 31
----------------- ----------------------------------------------
The Acquisition 1997 1996 1995
----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 5,193,012 $ 5,193,012 $ 6,213,299 $ 6,333,143
Cost of sales 4,081,530 4,081,530 5,224,186 5,346,735
------------ ----------- ----------- -----------
Gross profit 1,111,482 1,111,482 989,113 986,408
Expenses:
Selling, general and 5,005,566 3,781,566 3,436,719 2,033,496
administrative
Land write-down 1,299,651 1,299,651 845,000 -
Management fees 0 650,000 650,000 650,000
------------ ----------- ----------- -----------
Total expenses $ 6,305,217 $ 5,731,217 $ 4,931,719 $ 2,683,496
Net interest income 28,274 28,274 63,518 135,875
------------ ----------- ----------- -----------
Net loss (5,165,461) $(4,591,461) $(3,942,606) $(1,561,213)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Net loss per share (2.07) N/A N/A N/A
------------
------------
Average number of
shares outstanding [2,496,566] N/A N/A N/A
------------
------------
Balance Sheet Data:
Cash and cash equivalents 161,328 156,375 863,373 N/A
Total real estate 20,987,904 19,559,403 19,953,557 N/A
Total assets 25,085,663 23,596,673 25,869,260 N/A
Total debt 340,563 340,563 424,767 N/A
Total liabilities 5,012,699 5,958,810 4,415,241 N/A
Stockholders'/
owners' equity 20,072,964 17,637,863 21,454,019 N/A
Other Data:
Cash provided by operating
activities (1,586,022) (1,236,022) (616,257) 652,473
Cash used in investing
activities (163,264) (163,264) (186,211) (436,545)
Cash provided by financing
activities 691,102 691,102 642,815 115,311
</TABLE>
[NOTE THAT THE AVERAGE NUMBER OF SHARES OUTSTANDING WILL CHANGE AS WE
RECALCULATE EXCHANGE VALUES UNTIL WE GO EFFECTIVE. THAT'S WHY THEY ARE
BRACKETED.]
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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 THE SUPPLEMENT FOR YOUR PROGRAM. BEFORE COMPLETING THE
ACCOMPANYING BALLOT, YOU SHOULD ALSO CAREFULLY CONSIDER THE FOLLOWING RISKS,
WHICH APPLY TO ALL PROGRAMS AND THEIR INVESTORS.
IN THE FOLLOWING RISK FACTORS, AND ELSEWHERE IN THIS PROSPECTUS,
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 OPERATIONS OR 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
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. (Recent appraised values for the properties
were: Sacramento/Delta Greens - $2,000,000; Oceanside - $2,850,000;
Yosemite/ Ahwahnee I - $3,912,454; Yosemite/Ahwahnee II - $6,253,125; and
Mori Point -$5,500,000 for a total of $20,515,575). 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. At $10 per
share, the arbitrary value assigned to the company's shares is $[20,012,475]
even though the shares to be delivered to you in the acquisition will likely
trade initially at prices substantially below $10 per share. 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 EXCHANGE VALUE OF THE PROGRAMS MAY NOT BE THE AMOUNT YOU WOULD NET
IF THE PROPERTIES WERE SOLD IN A CASH SALE TRANSACTION. Appraisals reflect
conditions in the second quarter of 1997 (plus, for the Yosemite/Ahwahnee I
and II properties only, October 1996), and do not reflect subsequent events.
Exchange values reflect adjustments to appraised values described in
"Background and Reasons for the Acquisition -- Calculation of Exchange Value"
at page __. Since the shares you receive may initially trade at prices
substantially below the arbitrarily determined exchange value of $10 per
share, as a result of this transaction, you could wind up with less money in
the long-term than if your program's property is sold for cash. The exchange
value of the shares the owners of Sacramento/Delta Greens, Yosemite/Ahwahnee
I and II and Mori Point will receive will be less than the appraised values
of the properties used to calculate exchange values. At any point in time,
the value of those shares might not exceed the appraised values of the
properties used to calculate exchange values at any particular time in the
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<PAGE>
future. Because of its cash position, the owners of the Oceanside property
will receive shares whose exchange values are greater than the most recent
appraised value. However, there is no assurance that the future value of the
shares will continue to be greater than the most recent appraised value of
the property.
THE SHARES MAY TRADE INITIALLY AT PRICES SUBSTANTIALLY BELOW THE
ARBITRARILY DETERMINED EXCHANGE VALUE OF $10 PER SHARE. The shares have
never been sold in a public securities market. There is no guaranty that a
liquid trading market will develop, or be sustained, for the shares. If the
shares trade, the initial trading price is likely to be substantially less
than the arbitrary $10 issuance price or the book value of the company's
assets. The market price of the shares would likely be less after the
acquisition if investors decide to sell a large number of the shares shortly
after the acquisition. Therefore, the shares may be worth less than $10 in
the open market.
THERE WERE CONFLICTS OF INTEREST IN NATIONAL'S STRUCTURING THE
ACQUISITION. 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.
After the acquisition, the executive officers of the company, which
include the principal shareholders of National, will hold approximately
18.23% of the company's stock for which they paid $0.01 per share. Other
company founders will hold approximately 1.6% of the outstanding shares of
the company for which they also paid $0.01 per share. Therefore, the
investors' total ownership interests in the programs' properties will be
diluted by the equity interest in the company to be held by the founders of
the company. The executive officers of the company will receive annual cash
compensation aggregating $660,000. National will be relieved of its servicing
and property management obligations (and cease to earn associated fees of
approximately $650,000 per year), but the company will still owe National and
its affiliates over $1,300,000 of accrued but unpaid fees and expenses. In
addition, the founders of the company may not always have the ability to make
decisions for the company without thinking of the consequences to themselves.
Completion of the acquisition will relieve National from its duties,
including fiduciary duties, and related costs as servicing agent for each of
the programs. These duties will be assumed by the company. This will permit
National to focus on its duties to 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. As
a consequence, investors of a particular program that may be unhappy with the
manner in which the company manages the property that was in their program
will not be able to vote to change management without the agreement of
investors from the other programs.
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<PAGE>
Despite the potential conflicts of interest, none of National, the
company or their controlling persons, believe that such conflicts had any
material affect on their recommendation to investors on the acquisition.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include, among others, a
classified board of directors where only one-third of the directors are
elected in any given year and directors serve three year terms; directors may
only be removed for cause and only by the affirmative vote of holders of not
less than two-thirds of the voting power of all outstanding shares; and
amendments to the anti-takeover provisions of the charter documents may only
be effected by the affirmative vote of holders of not less than two-thirds of
the voting power of all outstanding shares. This means that, if a group of
investors are unhappy with management's performance, it will take several
years to change the board of directors or it will require them to obtain the
support of a significant number of additional shareholders in order to be
able to meet the two-thirds test to change the anti-takeover provisions of
the charter documents.
Messrs. Lasker and Orth, as well as certain other employees of National
who will become employees of the company, will be required to provide
on-going attention to the properties of five other projects for which
National acts as servicing agent and asset manager. As a consequence, from
time to time Messrs. Orth and Lasker will be required to devote attention to
matters not related to the business of the company.
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
__.
Despite the potential conflicts of interest, none of National, the
company or their controlling persons, believe that such conflicts had any
material affect on their recommendation to investors on the acquisition.
YOU DO NOT HAVE INDEPENDENT ADVISORS REPRESENTING YOU IN STRUCTURING
THIS TRANSACTION. The terms of the acquisition were not negotiated at
arm's-length and, therefore, 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. National
did not retain an unaffiliated representative to act on your behalf because
it, as your agent, has attempted to take action to protect your interests in
the property. Neither National nor the programs had additional funds to hire
a separate representative for you.
THE TRANSACTION MAY NOT BE TAX-FREE. The Federal income tax
consequences of the acquisition will depend primarily on whether the
acquisition qualifies as a Section 351 transaction under the Internal Revenue
Code of 1986, as amended. If the acquisition qualifies
26
<PAGE>
under Section 351, generally no gain or loss will be recognized by the
investors upon the receipt of shares in exchange their interest in the
properties. If the acquisition does not qualify under Section 351, investors
generally will recognize gain or loss. See "Federal Income Tax Consequences"
at page __. Among other requirements to qualify the acquisition under
Section 351, investors must be treated as owning 80% or more of the
outstanding shares of the company "immediately after the exchange." As
discussed in "Federal Income Tax Consequences - Qualification of the
Acquisition as a Section 351 Transaction - 1. General Rules," this
determination depends on whether investors who subsequently dispose of shares
are subject to the "step transaction doctrine" with respect to such
dispositions and their initial acquisition of the shares.
Neither the company nor counsel to the company is in a position to make
a determination as to whether investors who will acquire more than 80% of the
outstanding shares of the company will or will not be subject to the step
transaction doctrine. Consequently, counsel to the company is unable to
opine as to whether the acquisition qualifies under Section 351. However,
because (i) investors will acquire 80% or more of the shares in the
acquisition, and (ii) 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 the step transaction doctrine, the company intends to take
the position that the acquisition qualifies under Section 351. There can be
no assurance, however, that the IRS will not take a contrary position.
Investors should recognize that if a relatively small number of
investors subsequently dispose of their shares in transactions subject to the
step transaction doctrine, the acquisition will not qualify under Section 351.
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 liens imposed as a result of an aggregate of
approximately $1,082,000 in property taxes owed as of December 31, 1997.
However, the Board of Directors could allow the company to borrow using the
company's real estate assets as security. The more debt a company has, the
more of its cash flow is necessary to be used to pay down such debt. If cash
flow cannot cover debt repayment, the company could lose those assets to
creditors. If potential lenders or providers of equity believe that the
company has too much debt, further financing may become unavailable or
prohibitively expensive. There is no limitation on the amount of debt the
company may incur. 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 __.
YOU WILL HAVE NO DISSENTERS' RIGHTS IN CONNECTION WITH THE ACQUISITION.
If the acquisition is approved, investors in any of the programs who vote
against the acquisition will not be entitled to dissenters' or appraisal
rights under the tenancy-in-common agreement or the Delaware or
27
<PAGE>
California law. Thus, investors who do not approve of the acquisition have
no choice other than to accept shares in the company if the acquisition is
approved by holders of a majority of the tenancy-in-common interests in each
of the programs. See "Voting Procedures -- No Dissenter's Rights" at page __.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long time. This means that shares in the
company are much riskier than ownership of shares of established companies.
If the company had been operating as if it owned the properties which it
desires to acquire, it would have experienced losses to date.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes
or dispositions of a particular property. Those decisions will be made by
the board of directors or management. In addition, you will have an
investment in an entity that is larger than each of the programs and, thus,
you will lose relative voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, there have been no distributions from any of the
programs, other than the Oceanside program, in the past three years due to
the original borrowers' defaults. Future cash distributions will be based on
the company's earnings and the decision of the board of directors to pay
dividends. Therefore, even if a particular property were to perform well,
there is no assurance that there would be cash distributions to you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National
rendered asset management and property management services to the programs
subsequent to the time when the original borrowers defaulted and the
investors became beneficial owners of the property. In the future,
compensation will be paid to officers of the company in the form of salaries,
stock options and other benefits. These salaries and other forms of
compensation will be payable to management of the company even if one or more
of the properties acquired in the acquisition is subsequently sold.
HOLDERS OF A MAJORITY OF TENANCY-IN-COMMON INTEREST BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of the
outstanding interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE CONFLICTING YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THE EXCHANGE VALUES FOR THESE
PROPERTIES MAY BE TOO LOW OR TOO HIGH. As discussed in "Background and
Reasons for the Acquisition -- Exchange Values and Allocation of Shares to the
Programs" at page __, National reviewed the May 1997 appraisal of the
Yosemite/Ahwahnee properties which reflected an aggregate "as is" appraised
value of $20,916,000 ($8,050,000 for the Yosemite/Ahwahnee I property and
$12,866,000 for the Yosemite/ Ahwahnee II property) and the October 1996
appraisal which reflected an "as is" aggregate appraised value of $4,000,000
(adjusted by National to be $1,134,375 for the Yosemite/Ahwahnee I property
and $2,864,625 for the Yosemite/ Ahwahnee II property). However, an
appraisal of the Yosemite/ Ahwahnee Properties was also conducted in October
29
<PAGE>
1996, the results of which conflicted with the May 1997 appraisal. Based on
its review of both appraisals, National concluded that the Yosemite/Ahwahnee
I and II properties had values of $3,912,454 and $6,253,121, respectively.
National believes its approach was reasonable and has received an opinion
from Houlihan Valuation Advisors that the allocation of the shares among the
programs is fair based on National's conclusions as to appraised value.
However, if the values arrived at by National were too low for either
program, the program's exchange value would be too low and would result in
too few shares being allocated to that program in the acquisition.
Conversely, if the values arrived at by National were too high for either
program, that program would receive too large an allocation of shares in the
acquisition to the detriment of the investors in the other programs.
REAL ESTATE RISKS ASSOCIATED WITH ALL PROPERTIES
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 December 31, 1997:
Sacramento/Delta Greens -- approximately $45,000; Oceanside - approximately
$55,000 Yosemite/Ahwahnee (combined) - approximately $684,000; and Mori Point
- - approximately $298,000. Annual payments required for all the properties for
current taxes (including amounts currently due on five-year payment plans)
total approximately $248,000. In the case of Sacramento/Delta Greens and Mori
Point, National has entered into statutorily authorized 5-year payment plans
with the applicable taxing authorities. It plans to do the same with
Yosemite/Ahwahnee shortly.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $11,400,000 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 entire business plan. Additionally, if a minimum of
approximately $250,000 is not raised to pay current property tax liabilities,
then certain 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 programs nor
the company have received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be 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
29
<PAGE>
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.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. 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.
THE CALIFORNIA ECONOMY HAS FLUCTUATED BROADLY IN THE PAST FEW YEARS. We
presently conduct all of our business 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 $1,381,881 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 after the Acquisition, but
only from operating revenues or proceeds from the sale of assets, but not
from working capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SPECIFIC PROPERTIES
ALL OF THESE FACTORS CAN AFFECT OUR REVENUES, PROFITS AND DIVIDEND
DISTRIBUTIONS, IF ANY, AND THE VALUE OF YOUR INVESTMENT.
SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED. Construction of
the Sacramento/Delta Greens property will require the filing of a final map
and obtaining building permits from the city's real estate planning
authorities. The existing tentative map approval does not entitle the
property owner to build on the property. 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.
The longer this process takes, the longer it will be until revenue can be
generated by the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY 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. If the company chooses to build
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<PAGE>
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. This would mean a delay in
realizing cash from the business operations. The average carrying costs,
including property taxes, management and servicing related fees, for this
property has averaged approximately $10,000 per month over the past three
years.
RISKS OF RESIDENTIAL DEVELOPMENT. 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.
Sacramento/Delta Greens is a proposed residential developments and
represents over 8.4% of the assets of the company. Although there can be no
assurances, net revenues from Sacramento/Delta Greens may equal or exceed
$3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) finance engineering and endangered species studies
(estimated by management to cost approximately $124,800), (ii) finance
planning for final approvals (estimated by management to cost approximately
$51,700), and (iii) finance utilities and roads and the construction of homes
(estimated by management to cost approximately $3,000,000 on a phased basis).
Another risk is whether the lots to be developed will appeal to project
builders and whether home financing will be available. Finally, there is a
risk that the development and sale of lots or homes will be profitable.
ANY OF SUCH RISKS COULD MAKE THE PROPERTY, OR ANY PORTION OF IT,
UNSALABLE OR SIGNIFICANTLY REDUCE ITS VALUE TO A PROSPECTIVE PURCHASER.
OCEANSIDE PROPERTY
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE PROPERTY 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. 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. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged $10,000
per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. 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.
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<PAGE>
Oceanside is a proposed residential development and represent over 21.75%
of the assets of the company. Although there can be no assurances, net revenues
from Oceanside are expected to be in excess of $5,000,000 over the following 36
months.
ADDITIONAL SPECIFIC RISKS. There is a risk that enough investment money
may not be available to obtain a construction loan and begin construction of the
next tract of homes (estimated by management to be approximately $700,000 of
equity). There is also a risk that finished lots or completed homes will not be
marketable at a profit or that home financing will not be available at
affordable rates. There is also strong nearby competition.
ANY OF SUCH RISKS COULD MAKE THE PROPERTY, OR ANY PORTION OF IT, UNSALEABLE
OR SIGNIFICANTLY REDUCE ITS VALUE TO A PROSPECTUS PURCHASER.
YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE TIMESHARE ASPECT OF THE RESORT HAVE NOT YET BEEN
OBTAINED. The Yosemite/Ahwahnee property has a final map on 45 remaining single
family estate lots and a use permit for a 600 space recreational vehicle park.
Additional planned usage such as timeshare will require extensive county and
state approvals through the Departments of Real Estate and Housing and
Commercial Development.
RISKS AFFECTING OPERATION OF A GOLF COURSE. Increased competition,
seasonality, weather and course conditions will affect the operations of the
company. 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. All
of these factors could reduce the amount of money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity which may
attract potential timeshare purchasers in the future. At this time, the project
does not rely on the golf course for its revenue. National estimates that the
value of the golf course will be less than 5% of the assets of the company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. 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.
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The recreational vehicle park at Yosemite/Ahwahnee may generate as much as
ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or eliminate
profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then 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 and we may not be able to
secure development financing on acceptable terms.
Timeshare development is planned for Yosemite/Ahwahnee. Since the project
is not yet permitted for timeshare, there has been no allocation of assets.
Should timeshare be approved, the company anticipates that a significant portion
of the revenue of the company will be derived from sales of timeshare units,
possibly in excess of 25%.
RISKS RELATING TO RECREATIONAL VEHICLE PARK OPERATIONS. Risks relating to
recreational vehicle parks are substantially the same as those described above
for timeshare projects.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to (i) make up for the current cash drain from operations of the golf
course (estimated by management at approximately $150,000) annually, (ii)
construct an additional planned 100 recreational vehicle sites (estimated by
management to cost approximately $700,000), and (iii) obtain approvals for and
construction of the first group of timeshare units (estimated by management to
cost approximately $3,000,000). There are also a risk that the operation of
recreational vehicle sites, timeshares and golf course activities will not be
profitable.
ANY OF SUCH RISKS COULD MAKE THE PROPERTY, OR ANY PORTION OF IT, UNSALEABLE
OR SIGNIFICANTLY REDUCE ITS VALUE TO A PROSPECTUS PURCHASER.
MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY 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
applicable county or city real estate planning agencies is expensive and time
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<PAGE>
consuming. Mori Point had a specific plan and tentative map to build a
hotel/conference center which expired in 1991. These approvals must be
reinstated prior to construction on the property. Such reinstatement will be
complicated by the existence of two endangered species living on the property.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. 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. 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.
Mori Point represents over 20% of the assets of the company and, assuming
it is operated as a hotel/conference center, its revenues may exceed 20% of the
total revenues of the company upon completion of the project.
ADDITIONAL SPECIFIC RISKS. There is a risk that the city government will
not approve the property for its intended use. Capital to conduct engineering
and environmental studies in order to apply for and obtain approvals for its use
from the City is estimated to be approximately $500,000. Capital will also be
necessary for roads, utilities and other infrastructure costs prior to
construction. Finally, there is a risk that the proposed hotel/conference
center may not be profitable.
ANY OF SUCH RISKS COULD MAKE THE PROPERTY, OR ANY PORTION OF IT, UNSALEABLE
OR SIGNIFICANTLY REDUCE ITS VALUE TO A PROSPECTUS PURCHASER.
ANTI-TAKEOVER PROVISIONS AND LIMITATION OF DIRECTOR LIABILITY
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. These
provisions include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate of
incorporation, subject to the receipt of fair value, the Board of Directors may
issue shares in other classes or series and fix the rights, powers and
limitations associated with such shares. Although the Board of Directors has no
present intention of doing so, it could issue a class or series that could,
depending on its terms, impede a merger, tender offer or other transaction that
you might believe is in your best interest or in which you might receive a
premium for your shares over the then current market price. The issuance of
such shares could also dilute your voting power. See "Description of Shares" at
page __.
STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability to
change control of the company,
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even if you believe such a change is in your best interests. See
"Comparisons of Programs and Company -- Anti-Takeover Provisions" at page __.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's certificate
of incorporation, as well as Delaware law, prohibits certain business
combinations with owners of more than 15% o the outstanding voting stock of the
company ("interested stockholders") within the three year period immediately
prior to the date on which the interested stockholder became an interested
stockholder. These restrictions on certain business combinations may deter
potential purchasers who seek control of the company. See "Comparison of
Programs and Company -- Restrictions on Related Party Transactions and Business
Combinations" at page __.
SUPERMAJORITY VOTES. 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. This restriction also may deter potential purchasers
who seek control of the company. See "Comparisons of the Programs and the
Company -- Anti-Takeover Provisions" at page __.
In addition to the anti-takeover provisions, the Delaware law, as well as
the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections National
enjoys under the programs' servicing agreements and limit shareholders' claims
against management. See "Fiduciary Responsibility and Indemnification --
Limitation on Liability of Directors and Officers of the Company" at page __.
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<PAGE>
CAPITALIZED TERMS USED THROUGHOUT THE REST OF THIS PROSPECTUS AND IN THE
ACCOMPANYING SUPPLEMENT ARE DEFINED IN THE GLOSSARY LOCATED 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 each servicing agreement executed by each Investor, National
was to receive a loan servicing fee of one-twelfth of one percent of the initial
amount of the note amount per month.
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.)
SERVICING AND ASSET MANAGEMENT FEES. Pursuant to the servicing agreements,
National was entitled to an annual loan servicing fee of one percent of initial
amount of the loan. For this fee, National was to collect interest and
principal payments, remit them to the Investors net of National's fee and other
Program expenses, generally monitor the performance of the loans and keep the
Investors informed.
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<PAGE>
After the foreclosures, as disclosed to the Investors in each Program, in
order to assist the Investors in avoiding the confusion of tenancy-in-common
ownership of real estate by several hundred Investors or more, National
continued to manage the assets for the same one percent fee. Given the
complexity of the tenancy-in-common relationships involved in each Program, and
the amount of work involved in keeping Investors up-to-date and in planning for
the financing and development of the Properties, National believed the fee was
at least as reasonable as would be charged by third parties. The asset
management services were investor-related and include, but are not limited to,
identifying Investor objectives; maintaining compliance with Investor assessment
procedures; processing ownership transfers for Investors; communicating with
Investors in writing, by telephone and, occasionally, in person; planning,
coordinating and executing Investors' directives indicated by majority vote
(including the development and implementation of a plan to obtain liquidity for,
and enhance the value of, Investors' interest in the Programs' real estate); and
monitoring and supervising third party providers of services to the Programs.
After the Oceanside and Yosemite/Ahwahnee foreclosures, in addition to the
one percent asset management fee accrued by National, as disclosed to Investors,
officers of National (principally David Lasker and James Orth) performed
property management services for those programs in their capacities as officers
of the two operating companies established by National for the benefit of
Oceanside and Yosemite/Ahwahnee I and II Investors, Oceanside Development, Inc.
("ODI") and Ahwahnee Golf Course and Resort, Inc. ("AGCRI"). The property
management services and activities were property-specific and include, without
limitation, solicitation and engagement of entitlement and permit processing,
environmental, engineering, planning, architectural, construction, marketing,
appraisal, legal, accounting and other experts as needed for each project; due
diligence on potential service providers; assistance in presentations and
applications for approvals to governmental agencies; packaging and documenting
the status of a project for potential financing, sale or joint venture;
supervise and manage the operational activities for construction projects on the
Oceanside and Yosemite/Ahwahnee projects; and contract negotiations and
documentation. To the extent similar property specific services were provided
to the other Programs, they were provided without charge.
The following table sets forth for each of the Programs the servicing or
asset management fees National is entitled to receive pursuant to the servicing
agreements:
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<TABLE>
Initial Loan Annual Monthly
Program Amount Fee (1%) Fee (1/12 of 1%)
-------- -------------- --------- ----------------
<S> <C> <C> <C>
Sacramento/Delta Greens $ 5,000,000 $ 50,000 $ 4,167
Oceanside 30,000,000 300,000 25,000
Yosemite/Ahwahnee I 6,500,000 65,000 5,417
Yosemite/Ahwahnee II 13,500,000 135,000 11,250
Mori Point 10,000,000 100,000 8,333
</TABLE>
The following table sets forth for each of the Programs the unpaid
aggregate amount of asset management and property management fees accrued by
National and officers and employees of ODI and AGCRI after title to the
Properties was taken, loans to the Programs by National since that time,
allocated office expense of National during that time, the amount of such
fees to be forgiven, and the remaining fees to be owed to National and
officers and employees of ODI and AGCRI after the Acquisition:
<TABLE>
Allocated Total Remaining
Ownership Asset Property Loans to Office Amounts To Be Amount
Date Management(1)(2) Management(2)(3) Programs(4) Expense(5) Due Forgiven Owed
--------- ---------------- ----------------- ----------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta 3/93 $188,344 $ - $ - $ - $ 188,344 $137,111(6) $ 51,233(9)
Greens
Oceanside 11/93 - 800,000 - - 800,000 704,000(7) 96,000(10)
Yosemite/Ahwahnee I 9/95 33,794 166,178 35,611 45,000 280,587 35,000(7) 245,587(9)(10)
Yosemite/Ahwahnee II 9/95 67,597 332,557 71,222 90,000 561,176 70,000(7) 491,176(9)(10)
Mori Point 8/92 497,885 - - - 497,885 - 497,885(9)
Total $689,739 $1,298,535 $106,833 $135,000 $2,327,992 $946,111(8) $1,381,881
</TABLE>
- ----------------
(1) For Investor-related services as described above; payable to National.
(2) See "Historical Compensation for Servicing, Asset Management and Property
Management/Effect of Acquisition" at page __ for amounts which have been
paid.
(3) For property-related services as described above. These amounts are
payable to officers and employees of ODI and AGCRI.
(4) Loans were made by National to cover operating needs which assessments
paid by Investors did not cover.
(5) National allocated less than ten percent of its office overhead to the
Yosemite/Ahwahnee Programs in the aggregate.
(6) To be forgiven by National.
(7) To be forgiven by officers and employees of ODI and AGCRI.
(8) Prior to 1994, National forgave an aggregate of $2,191,614 of fees and
advances made, allocated $500,000 to Sacramento/Delta Greens, $406,158 to
Yosemite/Ahwahnee I, $823,867 to Yosemite/Ahwahnee II and $461,589 to
Mori Point.
(9) Owed to National.
(10) Owed to officers and employees of ODI and AGCRI.
ORIGINAL "TRUDY PAT" DISCLOSURE AND SALES EFFORTS. 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
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property used as security for the loan, type of property, value as appraised
by an independent qualified appraiser at the time of the initial funding of
the loan, 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 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. Pursuant to
these provisions, National has undertaken a property management function on
behalf of Investors after the defaults for which it or certain of its affiliates
have earned additional compensation. 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.
AMOUNTS FUNDED. 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. All of such offerings were completed
prior to the applicable loan defaults.
ORIGINAL APPRAISAL INFORMATION. At the time the "Trudy Pat" loans were
made, the Properties were appraised by independent appraisers obtained by the
borrowers. The appraisals were based on the borrowers' business plans. In
all cases, the "Trudy Pat" loans did not exceed 50% of the then current "as
is" appraised value for undeveloped land or, in the case of the Oceanside
Property which was a construction loan, 85% of "completed" appraised value
which was (and is) within standard construction loan parameters. The
following table sets forth the dates of the "Trudy Pat" loan appraisals, the
appraised values and the amount of the "Trudy Pat" loan.
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<TABLE>
Date of Appraised "Trudy Pat"
Program Appraisal Value Loan Amount
------- --------- --------- -----------
<S> <C> <C> <C>
Sacramento/Delta Greens 9/8/88 $ 10,530,000(1) $ 5,000,000
Oceanside 8/26/91(2) 82,170,000(2) 30,000,000
Yosemite/Ahwahnee I 3/22/89 13,080,000(1) 6,500,000
Yosemite/Ahwahnee II 3/25/90 15,460,000(1) 7,000.000
Yosemite/Ahwahnee II 9/20/92(3) 18,045,000(1) 6,500,000
Mori Point 4/9/90 22,100,000(1) 10,000,000
</TABLE>
- ----------------
(1) Undeveloped land.
(2) Construction loans. Appraisal updated on November 22, 1991.
(3) Appraisal updated at this time.
The differences between the appraised values at the time the "Trudy Pat"
loans were made in the late 1980s and early 1990s and the appraised values used
to determine Exchange Values are due to on market conditions, local economy,
competition, interest rates, costs of construction, comparable prices and other
factors taken into account by appraisers. According to the Urban Land
Institute, the Building Industry Association and the Federal Deposit Insurance
Corporation, the significant recession in the California economy between 1990
and 1995 was the primary cause of reduction in real estate values throughout the
State of California. That factor, along with the effects of some of the others,
caused the decrease in appraised values between the time of the "Trudy Pat" loan
appraisals and the appraisals used to determine Exchange Values.
APPRAISED VALUE AT OWNERSHIP DATES. Defaults occurred in each of the above
"Trudy Pat" loans and National took title to the Properties for the benefit of
the applicable investors. The following table sets forth for each of the
Programs the date title was obtained on behalf of Investors to the underlying
real estate ("Ownership Date"), the amount of unpaid principal at the Ownership
Date, the amount of unpaid interest at the Ownership Date, the appraised value
of such real estate at the Ownership Date, and the appraised value of the
Property used for purposes of calculating exchange values:
<TABLE>
As of Ownership Date
---------------------------------------
Unpaid Unpaid Appraised Value
Ownership Principal Accrued Appraised for Exchange
Program Date Balance Interest(1) Value(2) Value Calculations
------- --------- --------- ----------- --------- ------------------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens 3/93 $ 5,000,000(3) $ 425,000 $ 3,075,000 $ 2,000,000
Oceanside 11/93 30,000,000(3) 0(4) 6,484,000 2,850,000
Yosemite/Ahwahnee I 9/95 6,087,159 1,867,470 9,325,000 3,912,454
Yosemite/Ahwahnee II 9/95 13,321,463 4,067,007 10,816,000 6,253,121
Mori Point 8/92 10,000,000(3) 1,570,834 4,100,000 5,500,000
</TABLE>
- ----------------
(1) As of the Ownership Date.
(2) Each Property was appraised in May of 1997 to determine its value as of
the Ownership Date.
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(3) At Ownership Date, no principal had been paid on these loans as they were
structured to be interest only with a "balloon" payment at maturity.
Subsequent to foreclosure, $2,250,000 of principal was repaid to Oceanside
Investors.
(4) No delinquent interest at Ownership Date.
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."
--------------------
Since taking title to the Properties, based on Investors' stated
preferences, National's objective has been to recover all, or a substantial
portion, of the Investors' principal. In the present and recent past real
estate market in California, none of National's efforts in this regard have been
successful. See "-- Management of the Programs since Foreclosure" and "--
Efforts to Dispose of the Properties." After reviewing various alternatives
(see "-- Alternative to the Acquisition" and "-- Comparison of Alternatives"),
National initiated and structured the Acquisition. The proposed Acquisition
involves the purchase by the Company of the real estate assets of each of the
Programs, the other assets of each of the Programs including cash reserves and
the assumption of certain liabilities of each of the Programs. The Company
proposes to use its Common Stock arbitrarily valued at $10 per share. See "--
Calculation of Exchange Value" and "Allocation of Shares Among the Programs."
Except as described in this Prospectus, no contacts have been received from
any third parties regarding an acquisition of the assets of any of the Programs,
or a combination or merger of any of the Programs.
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.
An appraisal of the Property's value was not obtained at the time title was
taken; however, in May 1997, National obtained appraisals to determine the
Property's value as of May 1997 and as of the date title to the Property was
taken. 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 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 has been redesigned
to include approximately 465 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
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<PAGE>
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. In 1994, a proposed joint venture was considered
and approved by Investors with a real estate developer located in Sacramento.
The agreement provided for payment of $6,400 per lot for each of the 596
lots planned at that time that was built on and sold (or a total of
$3,814,400) plus 50% of the profits derived from home sales. The transaction
was never concluded because of the developer's failure to fulfill its
obligations under the agreement. The agreement was terminated in 1995. No
brokers were used in this transaction. However, because of market conditions
through 1996, most builders in the area were attracted to real estate
projects that already had finished lots. National has not sought financing
from third party sources for the pre-construction costs, as such a loan, if
available at all to a tenant-in-common group, would have exposed the
Investors to loss of the Property unless a builder could be found to become
financially involved in the Property's development. National believes that
the Sacramento market for entry-level 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. See "--
Efforts to Dispose of the Properties" and "-- Alternatives to Acquisition"
for a discussion of alternatives considered for this Program by National.
Since foreclosure, National has considered continuing operation of the
Property (and, indeed, has operated, or planned for the operation of, the
Property prior to the proposed Acquisition) and sale of the Property for an
amount sufficient to repay the Investors. In addition, National continues to
consider, but has made no recommendations with respect to, prompt liquidation or
bankruptcy reorganization of the Program. National views liquidation or
bankruptcy as alternatives of last resort.
OCEANSIDE PROGRAM. Funding for the Oceanside Program was completed in
stages commencing in November 1991. The final stage of funding (amounting to
approximately $6,374,000) was completed in April 1993. In November 1993, due to
a default in the loan determined by the borrower's admission that funds intended
to be used to pay subcontractors had been diverted to corporate overhead,
National succeeded in obtaining the borrower's agreement to grant the ownership
of the Oceanside Properties to Oceanside Development, Inc. ("ODI"), a
corporation formed to hold title to, and manage, the Oceanside Property on
behalf of the Oceanside Investors. An appraisal of the Property's value was not
obtained at the time title was taken; however, in May 1997, National obtained
appraisals to determine the Property's value as of May 1997 and as of the date
title to the Property was taken. An experienced and reputable homebuilder was
hired and, through 1997, a total of 114 homes in the Encore tract have been
built and sold for a total of approximately $18,000,000, net of building costs
and selling expenses. The builder obtained traditional construction loans for
30 of these homes from a bank. The rest were initially built from investor
funds without the need for construction financing. An additional 23 lots were
sold at the end of 1997 to that homebuilder for approximately $593,000 net of
selling expenses plus a $50,000 unsecured note due in October 1998. These funds
are being used to pay for project-related expenses and offering costs.
Principal and interest in the aggregate amount of approximately $7,000,000 have
also been returned to Investors.
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<PAGE>
There are an additional 111 lots available on which homes can be built on
the Symphony tract, but an estimated $700,000 of equity is needed to qualify for
a traditional construction loan. National does not believe that equity is
available from the Investors. National has attempted to sell, and will continue
its efforts to sell, the Symphony tract to homebuilders in the area. 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. See "-- Efforts to Dispose of the Properties" and
"-- Alternatives to Acquisition" for a discussion of alternatives considered for
this Program by National.
Since foreclosure, National has considered continuing operation of the
Property (and, indeed, has operated, or planned for the operation of, the
Property prior to the proposed Acquisition) and sale of the Property for an
amount sufficient to repay the Investors. In addition, National continues to
consider, but has made no recommendations with respect to, prompt liquidation or
bankruptcy reorganization of the Program. National views liquidation or
bankruptcy as alternatives of last resort.
YOSEMITE/AHWAHNEE PROGRAMS. Title to the Yosemite/Ahwahnee Programs'
Properties was obtained in September 1995. An appraisal of the Property's value
was not obtained at the time title was taken; however, in May 1997, National
obtained appraisals to determine the Property's value as of May 1997 and as of
the date title to the Property was taken. 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.
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
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<PAGE>
fund the negative cash flow from operations. National has attempted to
obtain conventional financing for the project without success due to the fact
that no title company would provide a lender's policy of title insurance for
the loan because of the tenancy-in-common relationship among the Investors
holding beneficial ownership of the Property. National 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. See "-- Efforts to Dispose of the
Properties" and "-- Alternatives to Acquisition" for a discussion of
alternatives considered for this Program by National.
Since foreclosure, National has considered continuing operation of the
Properties (and, indeed, has operated, or planned for the operation of, the
Properties prior to the proposed Acquisition) and sale of the Properties for an
amount sufficient to repay the Investors. In addition, National continues to
consider, but has made no recommendations with respect to, prompt liquidation or
bankruptcy reorganization of the Programs. National views liquidation or
bankruptcy as alternatives of last resort.
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. An appraisal of the
Property's value was not obtained at the time title was taken; however, in May
1997, National obtained appraisals to determine the Property's value as of May
1997 and as of the date title to the Property was taken. 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 approximately $500,000 in order to conduct the necessary
environmental studies and mitigation of habitat losses 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. Since funds are not available to
further define the use to which the Property may be put, National has not
attempted to obtain pre-construction financing. Assuming such financing would
be available under the present tenant-in-common structure, there would be no
potential source for repayment of such loan other than the Investors. 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. See
"-- Efforts to Dispose of the Properties" and "-- Alternatives to Acquisition"
for a discussion of alternatives considered for this Program by National.
44
<PAGE>
Since foreclosure, National has considered continuing operation of the
Property (and, indeed, has operated, or planned for the operation of, the
Property prior to the proposed Acquisition) and sale of the Property for an
amount sufficient to repay the Investors. In addition, National continues to
consider, but has made no recommendations with respect to, prompt liquidation or
bankruptcy reorganization of the Program. National views liquidation or
bankruptcy as alternatives of last resort.
EFFORTS TO DISPOSE OF THE PROPERTIES
SACRAMENTO/DELTA GREENS PROGRAM. Subsequent to foreclosure on the Property
in 1993, the project manager 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. However, in 1994, National negotiated for, and
received, a purchase offer and joint venture proposal from a real estate company
located in San Mateo, California, both of which were rejected by the Investors
because of the net amount of approximately $3,000,000 was considered too low and
the five year time period over which the consideration was to be paid was
considered too long. No brokers were engaged. More recently, during the first
half of 1997, National informally presented the Property to several large
homebuilders with presence in the Sacramento area. 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. In the second quarter of 1997, on behalf of the
Oceanside Program, National began the process of marketing the Symphony tract
lots on an "as-is" basis. No brokers were used in the marketing effort as
National has adequate knowledge of the builders in the area likely to be
interested. Through National, those efforts resulted in a preliminary offer
from a major homebuilder to buy the Symphony tract in bulk for approximately
$41,000 per lot, 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 asserted that the cost to finish the lots
would be about $42,000 per lot instead of its original estimate of approximately
$26,000 per lot for such costs and attempted to negotiate the price down to
approximately $25,500 per lot, $15,000 less than the preliminary offer. Before
selling expenses and closing costs, that price per lot would have yielded
$2,830,500, approximately $20,200 less than the May 1997 appraised value. Based
on advice from consultants, National believed the potential buyer's estimate of
costs to finish the lots was too high. Thereafter, the sale escrow was
cancelled. Subsequent to the Acquisition of the assets of the Oceanside
Program, the Company may 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 in mid-1996 for approximately $50,000 per lot to current owners of
contiguous lots. For working capital purposes, in February 1998, National
negotiated the sale of twelve of the estate lots to the independent project
manager for the Yosemite/Ahwahnee Properties for $255,100 ($21,250 per lot)
before closing costs. The Programs have the option to repurchase the lots prior
to January 1, 2001 for an aggregate of
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$300,000 for which a monthly option payment of approximately $4,100 is
required. The disparity in lot prices between the 1996 sales and the 1998
sales is based on the value of contiguous lots to existing homeowners to
protect their homes and the fact that the 1998 sale was a bulk sale designed
to provide working capital for the Programs. Although the estate lots were
listed with local brokers, no further offers were forthcoming and the
listings have been allowed to expire. 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.
There have been no other recent sales efforts.
MORI POINT PROGRAM. After foreclosing, in 1993 the Property was listed for
sale with a national commercial brokerage firm to no avail. In January 1996,
the Investors were offered a joint venture opportunity with an Orange
County-based property developer that National negotiated on their behalf.
Holders of a majority of the tenancy-in-common interests voted to turn down
the proposal because they did not want to risk losing the Property which the
developer had proposed be put up as collateral for a loan to further develop
the Property. There have been no recent efforts to sell the Property because
of the entitlement work that needs to be done before the Property's appraised
value could be realized through an orderly sale process. National continues
to seek possible joint venture development arrangements for the Property but
no proposals have been received.
-------------
Except as described above, there have been no offers during the last 18
months for the merger, consolidation, or combination of any of the programs or
for an acquisition of any of the Programs' assets. Thus, 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 return
the investment to any of the Programs' Investors. National is aware of no
alternative which would yield such a return. While some Investors in one or
more of the Programs may be willing to sell at a substantial loss, based on
National's contacts with the Investors in each of a Programs, National believes
that a majority of such Investors are not willing to sell at a substantial loss.
National has determined that, if the assets of the Programs are
consolidated, the funds that can be generated from the sale of units and one or
more of the Properties can be used to finance the continued development and
expansion of the Company. National believes the Company can be operated in such
a way as to permit the possibility of a greater return to all of the Investors
in the various Programs than they could receive on liquidation at the present
time. 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.
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
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<PAGE>
Programs in an orderly manner or in a bankruptcy liquidation, and (iii) a
reorganization of the Programs in a bankruptcy proceeding. In the context of
analyzing a continuation of each Program, National considered the difficulties
involved in selling the Properties described above in "-- Efforts to Dispose of
the Properties," and the difficulties in obtaining outside financing described
above in "-- Management of the Properties Since Foreclosure."
Set forth below is the discussion of the alternatives to the Acquisition
considered by National. In addition to the alternatives described below, in the
course of managing the Properties, prior to determining that the Acquisition
should be proposed to Investors, National reviewed and, where sufficiently
specific, placed before applicable Program Investors for a vote, opportunities
to sell certain of the Properties, opportunities for certain of the Programs to
enter joint venture arrangements, and financing alternatives for the Properties.
These are discussed earlier under the captions "-- Management of the Programs
since foreclosure" and "-- Efforts to Dispose of the Properties." Neither
National nor the Company is aware of any factors not discussed in this
Prospectus that materially and adversely affect the value of the Shares to be
received in the Acquisition for purposes of comparisons to 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 individual Investors to 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; (vi) access to capital for the Programs would be
limited primarily to Investor assessments; and (vii) without further
infusions of funds from Investors, each of the Properties could be lost in
tax sales for delinquent property taxes.
The capital needed to finish lots and provide for the infrastructure is
necessary 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
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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, AND COULD RESULT IN THE LOSS OF SOME OF THE PROPERTIES IN TAX
SALES FOR DELINQUENT PROPERTY TAXES.
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.
The following table sets forth the appraised values used to calculate
Exchange Values, estimated liabilities and closing costs at ten percent of
appraised values, net cash from a sale of appraised values, unpaid principal and
unrepaid assessments and advances (out-of-pocket cash), and the cash loss that
would result from a sale at appraised values.
<TABLE>
Appraised Value Estimated Unpaid Principal
Used to Calculate Liabilities and Net Cash Plus Assessments Cash Loss
Name of Program Exchange Value(1) Closing Costs(2) from Sale Paid(4) from Sale
- ---------------- ----------------- ---------------- ------------ ---------------- --------------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 2,000,000 $ 400,610 $ 1,599,390 $ 5,625,860 $ (4,026,470)
Oceanside 2,850,000 (3) 3,886,714 27,100,000 (23,213,286)
Yosemite/Ahwahnee I 3,912,454 1,133,032 2,779,422(4) 7,079,176 (4,299,754)(4)
Yosemite/Ahwahnee II 6,253,121 1,810,882 4,442,239(4) 15,188,140 (10,745,901)(4)
Mori Point 5,500,000 1,192,958 4,307,042 10,607,595 (6,300,553)
</TABLE>
- ----------------
(1) Appraisals were conducted in May 1997. However, an appraisal of the
Yosemite/ Ahwahnee Properties was also conducted in October 1996, the
results of which conflicted with the May 1997 appraisal. However, an
appraisal of the Yosemite/ Ahwahnee Properties was also conducted in
October 1996, the results of which conflicted with the May 1997 appraisal.
(2) Net of book other assets. Includes estimated brokerage commissions,
estimated escrow, title policy, legal and other closing costs at 10% of
sale price; plus amounts due to National, affiliates of National and other
service providers for unpaid servicing and property management fees and/or
expenses advanced.
(3) Net other assets of $2,593,403 minus liabilities and closing costs is a
positive $1,036,714.
(4) If the Yosemite/Ahwahnee Properties could be sold for their May 1997
appraised values of $8,050,000 and $12,866,000, respectively (which
National believes to be unlikely in the near future due to the time and
costs required to develop the Properties), less liabilities, amounts due
National and estimated closing costs of ten percent, the sale of the
Yosemite/Ahwahnee I Property would yield net total cash of approximately
$6,468,213 and a cash loss of approximately $610,963, and the sale of the
Yosemite/Ahwahnee II Property would yield net total cash of approximately
$10,323,830 and a cash loss of approximately $4,864,310.
(4) Reflects unpaid principal at Ownership Date plus assessments and advances
paid through December 31, 1997.
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A sale at such discounts would be contrary to National's and the Investors'
objectives to return all, or a significant portion, of the Investors' principal.
While 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, and (iv) the complete liquidation of the Programs would
assure the recognition of capital gains or losses by Investors depending on
whether the selling price of the Properties is more or 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 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. Based on these determinations, National made no effort to further
quantify the advantages and disadvantages of a reorganization proceeding under
the Bankruptcy Laws.
COMPARISON OF ALTERNATIVES
To assist the Investors in evaluating the Acquisition, National compared
consideration to be received by Investors in each of the Programs in the
Acquisition per $10,000 of Adjusted Outstanding Investment to (i) value to
Investors if the Programs are operated "as is," (ii) sale of the Properties at
appraised values used in determining the Exchange Values and distributing sale
proceeds net of outstanding Program Investors' obligations, (iii) liquidation of
the applicable Program's assets outside of bankruptcy and (iv) recognizing that,
initially, the Shares would likely trade substantially below the arbitrarily
determined $10 per share assigned to the Shares for purposes of the Acquisition,
a range of market values for the Shares, assuming completion of the Acquisition,
based on 75% and 50% of the Company's valuation of its Shares for purposes of
the Acquisition. A bankruptcy liquidation or reorganization was not included in
National's final comparison of alternatives because of National's belief that,
due to the costs of bankruptcy administration, such a liquidation or
reorganization would be more expensive if supervised by a Bankruptcy Court than
if not. Since the value of the consideration for alternatives to the
Acquisition is dependent upon varying market conditions, no assurance can be
given that the range of estimated values indicated establishes the highest or
lowest possible values. However, National believes that it analyzed the
alternatives in good faith and that such analysis establishes a reasonable
framework for comparison.
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The results of this comparative analysis are summarized in the table set
forth below. No assurance can be given that estimated values would be realized
through any of the designated alternatives. These estimated values are based on
certain assumptions that relate, among other things, to (i) securities market
conditions and factors affecting the value of securities of real estate
companies, (ii) National's estimate of the value of the Properties if they
continue to be operated "as is," (iii) National's estimates of the selling price
of each of the Program's Properties, assuming a liquidation sale, that is, a
sale in three months or less, and (iv) selling costs in such a liquidation.
Actual results may vary from those set forth below based on numerous factors,
including those listed above, as well as interest rate fluctuations, general
conditions in securities or real estate markets, tax law changes, supply and
demand for properties similar to those owned by the Programs, the manner in
which the Properties might be sold and changes in availability of capital to
finance acquisition of real property. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ESTIMATED IN THE FOLLOWING TABLE AS A RESULT OF A VARIETY
OF FACTORS, INCLUDING THOSE DISCUSSED IN "RISK FACTORS."
<TABLE>
Sale at Market Value of Shares Received in
Appraised Acquisition per $10,000 of
Exchange Values(2) Net of Liquidation Operated "As Assumed Outstanding Investment
Value per Program Debts Value per Is" Value per Assuming Shares Trade at
$10,000 of per $10,000 of $10,000 of $10,000 of ----------------------------------
Adjusted Adjusted Adjusted Adjusted 75% of 50% of
Outstanding Outstanding Outstanding Outstanding Exchange Exchange
Program Investment(1) Investment Investment(3) Investment(4) Value(5) Value (5)
-------- ------------- ---------- ------------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 3,195 $ 2,639 $ 1,154 $ 1,154 $ 2,396 $ 1,597
Oceanside 1,624 1,294 1,294 1,294 1,218 812
Yosemite/Ahwahnee I 3,542 3,071 1,126 1,126 2,657 1,771
Yosemite/Ahwahnee II 2,646 2,288 839 839 1,985 1,323
Mori Point 3,988 3,536 1,504 1,504 2,991 1,994
</TABLE>
- ----------------
(1) Exchange Value is the Company's value assigned to each of the Programs.
EXCEPT IN THE CASE OF THE OCEANSIDE PROPERTY, EXCHANGE VALUE IS LESS THAN
THE APPRAISED VALUE USED TO DETERMINE EXCHANGE VALUE BECAUSE Exchange
Value takes into account other Program assets, as well as obligations of
the Program Investors, which would have to be paid out of sale proceeds.
Such obligations were not taken into account in the appraisals. Exchange
Value is represented by Company shares of common stock arbitrarily valued
at $10 per share for purposes of the Acquisition.
(2) Except for the Oceanside Property, without additional capital infusion,
National does not believe the Programs' Properties are currently salable at
the appraised values used to determine Exchange Values. The amount set
forth in this column reflects the amount an Investor would receive per
$10,000 of their Adjusted Outstanding Investment if the Property were sold
at this appraised value after deducting from sale proceeds, closing costs
and commissions of ten percent, accrued but unpaid property taxes and other
Program net liabilities at December 31, 1997.
(3) For this purpose, except for the Oceanside Property, National assumed that
the Properties could be sold within three months at a value equal to 50% of
the appraised value used to compute Exchange Values, then deducting all the
same costs and net liabilities. Notwithstanding the generally improving
real estate market in California, except for the Oceanside Property, due to
the amount of capital needed to bring the Programs' Properties to their
highest and best use, National believed it would take that sort of discount
to attract a
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<PAGE>
buyer in three months. Based on recent experience, National believed it
could sell the Oceanside Property at its May 1997 appraised value in three
months.
(4) Since the Investors in each of the Programs appear to National to be
unwilling to provide sufficient capital to complete the proposed
development of the Programs' Properties, the Properties cannot be developed
according to the original business plans. Thus, the Operated "As Is" value
assumes that Investors in each Program would put up only sufficient
additional funds to avoid losing the Property for property tax
delinquencies. Since none of the Properties has positive cash flow,
National believes that the Operated "As Is" value for a Property does not
exceed its liquidation value. Thus, for purposes of the comparison,
National assumed that the Operated "As Is" value and liquidation value were
the same for all Properties.
(5) There are no real estate companies which are publicly-traded with an asset
base similar to that which the Company will have if the Acquisition is
completed. Thus, there is no comparable market information from which to
extrapolate a possible market value for the Company's stock at any period
after the completion of the Acquisition. Therefore, solely for purposes of
the comparison, National arbitrarily assumed that, for a period of six
months after the Acquisition, the Company's stock would trade at 75% to
Exchange Value (or $7.50 per Share) and at 50% of Exchange Value (or $5.00
per Share).
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
wholly-owned 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
51
<PAGE>
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.
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 __________, 1998 (approximately five business days after the planned date for
tabulation of the votes of Investors in each Program (the "Effective Time").
CALCULATION OF EXCHANGE VALUE
Shares in the Company will be allocated among the Programs pro rata in
accordance with Exchange Values. The Exchange Value of a Program is its
appraised value plus the book value of other assets at [DECEMBER 31, 1997] minus
liabilities at [DECEMBER 31, 1997] and plus the amount of accrued fees and
expenses to be forgiven by National as part of the Acquisition in the form of
Company Shares arbitrarily valued at $10 per Share. For purposes of the
Sacramento/Delta Greens, Oceanside and Mori Point Programs, the appraised value
is at May 1997. For purposes of the Yosemite/Ahwahnee I and II Programs,
appraised values were derived by National through a reconciliation of the May
1997 appraisal and the October 1996 appraisal. See "Appraisals and Fairness
Opinion -- Conflicting Yosemite/Ahwahnee Properties' Appraisals."
National also considered allocating the Shares among the Programs in
accordance with only May 1997 appraised values, and pursuant to an adjustment to
May 1997 appraised values system designed to reflect the greater liquidity of
the Oceanside Property, the need for, and availability of, working capital to
accomplish the business plans of the Programs, and the expected resistance of
Investors in the various Programs to assessments to provide working capital that
could not be borrowed. Allocating the Acquisition Shares based exclusively on
May 1997 appraised values was deemed inappropriate because (i) the
Yosemite/Ahwahnee Properties
52
<PAGE>
had an October 1996 appraisal with a significantly lower valuation, causing
National, the Company's auditors and the Independent Valuator to conclude
that the May 1997 appraisal was too high and (ii) considering only the
appraised values of the real estate did not take into account other assets,
liabilities and fees due to National for the Programs. The adjusted May 1997
appraised value system was discarded as being too subjective and too
difficult to explain to Investors. Further, it did not produce results
materially different from the method selected.
Exchange Values were determined as of [DECEMBER 31, 1997]. [ULTIMATELY, AS
OF A DATE WITHIN 30 DAYS OF THE PROSPECTUS DATE.] The Exchange Values of the
Programs do not necessarily reflect the aggregate price at which Company Shares
received in the Acquisition may be sold, nor are they based solely on the
Appraised Value of the real estate assets of each Program. See "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.
The adjusted appraised value was selected for purposes of allocating the
Company's Shares offered for the Properties because National and the Company
believe that it most accurately reflects the relative values of the Programs to
each other. The following table summarizes the calculation of the Exchange
Value of each of the Programs:
<TABLE>
Appraised
Value of Real Net Other Assets and
Name of Program Estate(1) + Liabilities(2) = Exchange Value(3)
--------------- --------- -------------- -----------------
<S> <C> <C> <C>
Sacramento/Delta $ 2,000,000 $ (63,499) $ 1,936,501
Greens
Oceanside 2,850,000 2,025,714 4,875,714
Yosemite/Ahwahnee I 3,912,454 (706,787) 3,205,666
Yosemite/Ahwahnee II 6,253,121 (1,115,570) 5,137,552
Mori Point 5,500,000 (642,958) 4,857,042
</TABLE>
- ----------------
(1) Reflects independent appraisals as of May 1997. However, an appraisal of
the Yosemite/ Ahwahnee Properties was also conducted in October 1996, the
results of which conflicted with the May 1997 appraisal. National's
management compared each appraiser's treatment of the distinct portions of
the Yosemite/Ahwahnee properties. Due to the negative cash flow of the
Project, National made the determination to use the lower October 1996
valuation unless there was some significant intervening reason for
accepting the May 1997 valuation. In the case of the golf course portion,
the May 1997 appraisal seemed more reasonable since there were significant
improvements to the course from the October 1996 appraisal date and the
number of golf rounds played had improved. Similarly, sales in the
recreational vehicle park increased substantially after the date of the
October 1996 appraisal, so the May 1997 appraised value was considered more
applicable. Although the estate lots were listed for sale, there were no
buyers forthcoming during the period from the October 1996 appraisal date
through the May 1997 appraisal date, so the lesser value determined by the
October 1996 appraisal was used. The balance of the land is held for
future development and, since there are no plans for development nor are
there government permits to do so, the lesser October 1996 valuation was
considered more applicable.
53
<PAGE>
(2) The following table quantifies the asset and liabilities adjustments to
appraised values made in determining a Property's Exchange Value as of
December 31, 1997.
<TABLE>
Book Assets Book Liabilities To Be Forgiven Net Other Assets
Name of Program (12/31/97)* (12/31/97)* + Amounts - and Liabilities
--------------- ----------- ---------------- ------- ---------------
<S> <C> <C> <C> <C>
Sacramento/Delta Greens $ 108,627 $ (309,237) $137,111 $ (63,499)
Oceanside 2,593,408 (1,271,694) 704,000 2,025,714
Yosemite/Ahwahnee I 602,891 (1,344,678) 35,000 (706,787)
Yosemite/Ahwahnee II 963,576 (2,149,146) 70,000 (1,115,570)
Mori Point 239,911 (882,869) 0 (642,958)
</TABLE>
* See balance sheets of each Program in the accompanying financial
statements for details of book assets and book liabilities. 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) As set forth in the table under "-- Alternatives to Acquisition --
Liquidation of the Programs" the potential cash returns to Investors if the
Properties could be sold for the appraised values used to calculate the
Exchange Value are as follows: Sacramento/Delta Greens, $1,599,390;
Oceanside, $3,886,714; Yosemite/Ahwahnee I, $2,788,422; Yosemite/Ahwahnee
II, $4,442,239; and Mori Point, $4,307,042. In the unlikely event that
the Yosemite/Ahwahnee Properties could be sold at May 1997 appraised
values, the potential cash returns to Investors would be $6,428,213 for
Yosemite/Ahwahnee I and $10,323,830 for Yosemite/Ahwahnee II. In all
cases, a cash loss would result.
(4) Rounding may result in sums not adding.
As of the date of this Prospectus, neither National nor the Company
knows of any material change in the prospects or financial performance of any
of the Programs which will materially affect the value of the Shares to be
received by Investors in the Acquisition, the values assigned to the Programs
for purposes of comparison to the alternatives, or the fairness of the
Acquisition to the Investors.
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.
ALLOCATION OF SHARES AMONG THE PROGRAMS
The total number of Shares issued in the Acquisition will be equal to
the aggregate Exchange Value of the Programs divided by the arbitrary price
of $10. The number of Shares allocable to each Program will be determined by
multiplying the number of 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.
As of ___________, 1998, the following table shows Investors (i) the
Amount Owed Plus Assessments which is the aggregate amount of the unpaid
balance of the loan owed to a Program by the original borrower plus accrued
but unpaid interest on such balance as of the Ownership Date of a Property
plus all amounts paid by Investors pursuant to mandatory assessments plus
54
<PAGE>
voluntary advances, (ii) appraised real estate values, (iii) Exchange Values
and (iv) the number and percentage of Shares allocated to each Program are:
<TABLE>
% of Total
Adjustments to Shares to be
Amount Real Estate Real Estate Outstanding
Owed plus Appraised Appraised Exchange No. of Shares After the
Name of Program Assessments(1) Value(2) Value(3) Value Allocated(4) Acquisition(5)(6)
- --------------- -------------- -------- -------- ----- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 6,038,716 $ 2,000,000 $ (63,499) $ 1,936,501 193,650 7.76%
Oceanside 27,100,000 2,850,000 2,025,714 4,875,714 487,571 19.53
Yosemite/Ahwahnee I 8,996,473 3,912,454 (706,787) 3,205,666 320,567 12.84
Yosemite/Ahwahnee II 19,344,964 6,253,121 (1,115,570) 5,137,552 513,755 20.58
Mori Point 12,420,000 5,500,000 (642,958) 4,857,042 485,704 19.45
----------- ----------- ----------- --------- -----
TOTAL $73,900,153 $20,515,575 $20,012,475 2,001,248 80.16%
----------- ----------- ----------- --------- -----
----------- ----------- ----------- --------- -----
</TABLE>
- -------------
(1) The tenancy-in-common agreements for each of the Programs provide that the
servicing agent for the loan (National) may make mandatory assessments on
the Investors to cover the operational costs of the Program. Investors may
also make voluntary advances under the tenancy-in-common agreements to make
up for mandatory assessments which have not been paid by other Investors.
As of [DECEMBER 31, 1997], the following mandatory assessments and
voluntary advances have been paid to the Programs and are included in
Amount Owed Plus Assessments.
<TABLE>
Mandatory Voluntary
Name of Program Assessments Advances
--------------- ----------- --------
<S> <C> <C>
Sacramento/Delta Greens 538,970 86,890
Oceanside -0- -0-
Yosemite/Ahwahnee I 926,560 120,188
Yosemite/Ahwahnee II 1,853,941 155,230
Mori Point 549,380 58,215
</TABLE>
(2) Appraisals were conducted in May 1997. However, an appraisal of the
Yosemite/Ahwahnee Properties was also conducted in October 1996, the
results of which conflicted with the May 1997 appraisal. See footnote (1)
to the table under "-- Calculation of Exchange Value" for the method used
to determine appraised value of the Yosemite/Ahwahnee Properties. See
"Appraisals and Fairness Opinion -- Conflicting Yosemite/Ahwahnee
Properties' Appraisals."
(3) The adjustments were made by the Company to add back to the real estate
appraised values the book value of other program assets at [DECEMBER 31,
1997] to reduce that number by program liabilities at [DECEMBER 31, 1997],
and to add back liabilities to National to be forgiven by National as part
of the Acquisition. See " -- Calculation of Exchange Value" at page __
for details as to the adjustments.
(4) Represents [9.68%], [24.36%], [16.02%], [25.67%] and [24.27%],
respectively, of the shares to be issued in the Acquisition.
(5) 85.83% if all units are sold to investors. The other shares will be held
by management and other founders of the company.
(6) 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
55
<PAGE>
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 [495,318] shares of Company common
stock has been issued prior to the date of this Prospectus 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:
<TABLE>
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------------- --------- --------- ---------
<S> <C> <C> <C>
Sacramento/Delta Greens(a) $137,111 $ 500,000 $ 637,111
Oceanside(a) 704,000 -0- 704,000
Yosemite/Ahwahnee I(a) 35,000 72,158 107,158
Yosemite/Ahwahnee II(a) 70,000 1,157,867 1,227,867
Mori Point(a) -0- 461,589 461,589
-------- ---------- ----------
TOTAL $946,111 $2,191,614 $3,137,725
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
- ---------------
(a) The shares to be retained by the founders were not allocated to the
founders based on cancelled fees. However, if they had been so allocated
from the Programs based on cancelled fees,
(i) 20.30% of the total shares to be owned by the founders after
Acquisition ([100,550] shares) which will be held by the founders
of the Company would have been deemed allocated from the
Sacramento/Delta Greens Program.
(ii) 22.44% of the total shares to be owned by the founders after the
Acquisition ([111,149] shares) which will be held by the founders
of the Company would have been deemed allocated from the Oceanside
Program.
(iii) 3.42% of the total shares to be owned by the founders after the
Acquisition ([16,940] shares) which will be held by the founders
of the Company would have been deemed allocated from the
Yosemite/Ahwahnee I Program.
(iv) 39.13% of the total shares to be owned by the founders after the
Acquisition ([193,818] shares) which will be held by the founders
of the Company would have been deemed allocated from the
Yosemite/Ahwahnee II Program.
(v) 14.71% of the total shares to be owned by the founders after the
Acquisition ([72,861] shares) which will be held by the founders
of the Company would have been deemed allocated from the Mori Point
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 constitute a reasonable basis for allocating the Shares among
all of the Programs.
56
<PAGE>
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. 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. As of the date of
this Prospectus, neither National nor the Company knows of any material change
in the prospects or financial performance of any of the Programs which will
materially affect the value of the Shares to be received by Investors in the
Acquisition, the values assigned to the Programs for purposes of comparison to
the alternatives, or the fairness of the Acquisition to the Investors.
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. None of the Company's founders
hold interests in any of the Programs' Properties. At December 31, 1997,
National's investments were $3,118 in the Sacramento/Delta Greens Program;
$2,082 in the Oceanside Program; $2,373 in the Yosemite/Ahwahnee I Program;
$46,454 in the Yosemite/Ahwahnee II Program; and $5,279 in the Mori Point
Program. In the Acquisition, National will receive an aggregate of 1,817
Shares, reflecting 97 Shares, 41 Shares, 95 Shares, 1,383 Shares and 200
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, [400,014] Shares, or
16.02% of the outstanding Shares of the Company assuming none of the units
are sold or 11.42% 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.
57
<PAGE>
HISTORICAL COMPENSATION FOR SERVICING, ASSET AND PROPERTY MANAGEMENT/EFFECT
OF ACQUISITION
The following table sets forth the servicing fees, asset management and
property management fees accrued by National and officers and employees, as
well as actually paid, during the years ended December 31, 1997, 1996, 1995
and 1994. See the second table under "-- General -- Servicing and Asset
Management Fees" at page __ for information about the fees earned by National
and officers and employees of ODI and AGCRI AFTER the date title to the
Programs' Properties was taken for the benefit of Investors. In the case of
the Oceanside Program, had any compensation been paid, it would have been
from annual salaries payable to the officers and employees of ODI. In the
case of the Yosemite/Ahwahnee I and II Programs, compensation to National
would have been from servicing fees through September 1995, and asset
management fees thereafter, as well as salaries payable to the officers and
employees AGCRI and for a portion of its general and administrative overhead
costs.
<TABLE>
Incurred Actually Incurred Actually Incurred Actually Actually
for Year Paid for for Year Paid for for Year Paid for Incurred for Paid for
Ended Year Ended Ended Year Ended Ended Year Ended Year Ended Year Ended
Name of Program 12/31/94 12/31/94 12/31/95 12/31/95 12/31/96 12/31/96 12/31/97 12/31/97
--------------- -------- -------- -------- -------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 50,000 $ -0- $ 50,000 $ -0- $ 50,000 $ -0- $ 50,000 $ 8,267
Oceanside 492,000 300,000 492,000 300,000 492,000 300,000 444,000 300,000
Yosemite/Ahwahnee I 65,000 10,000 84,051 -0- 150,800 101,626 148,439 60,700
Yosemite/Ahwahnee II 135,000 -0- 174,569 -0- 313,200 211,069 248,157 123,998
Mori Point 100,000 -0- 100,000 -0- 100,000 -0- 100,000 27,333
-------- -------- -------- -------- ---------- ----------- -------- --------
Totals $842,000 $310,000 $906,620 $300,000 $1,106,000 $ 612,695 $990,596 $520,298
-------- -------- -------- -------- ---------- ----------- -------- --------
-------- -------- -------- -------- ---------- ----------- -------- --------
</TABLE>
If the Acquisition had been completed during the above periods, National
would not have been entitled to receive any further servicing, asset or
property management fees and officers and employees of ODI and AGCRI would
not have been entitled to any separate compensation from the Company. 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.
Based on original "Trudy Pat" loan amounts, the following table sets
forth the compensation, including employees of ODI and AGCRI, that would have
been allocable to the Programs had the Acquisition been completed during the
four years ended December 31, 1994, 1995, 1996 and 1997.
<TABLE>
Original Loan
Name of Program Amount 1994 1995 1996 1997
--------------- ------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 5,000,000 $ 115,739 $ 115,238 $ 115,283 $ 115,283
Oceanside 30,000,000 284,739 284,739 284,739 284,739
Yosemite/Ahwahnee I 6,500,000 187,189 187,189 187,189 187,189
Yosemite/Ahwahnee II 13,500,000 312,375 312,375 312,375 312,375
Mori Point 10,000,000 283,676 283,676 283,676 283,676
----------- ---------- ---------- ---------- ----------
Total $65,000,000 $1,181,000 $1,181,000 $1,181,000 $1,181,000
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
</TABLE>
58
<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 Year ended December 31, 1997:
<TABLE>
Prior to
Name of Program 1992 1992 1993 1994 1995 1996 1997 Total
--------------- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $1,654,013 $ 343,750 $ 0 $ 0 $ 0 $ 0 $ 0 $1,997,763
Oceanside
Principal $ 0 $ 0 $ 0 $375,000 $900,000 $900,000 $675,000 $2,850,000
Interest $ 0 $1,080,804 $3,145,869 $393,750 $ 0 $ 0 $ 0 $4,620,423
Yosemite/Ahwahnee I
Principal $ 45,000 $ 135,000 $ 103,085 $ 0 $ 0 $ 0 $ 0 $ 283,085
Interest $1,903,306 $ 920,794 $ 335,557 $ 4,756 $ 0 $ 0 $ 0 $3,164,413
Yosemite/Ahwahnee II
Principal $ 20,000 $ 60,000 $ 68,264 $ 0 $ 0 $ 0 $ 0 $ 148,264
Interest $ 592,498 $1,153,352 $ 688,303 $ 10,273 $ 0 $ 0 $ 0 $2,444,426
Mori Point
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $1,354,708 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $1,354,708
</TABLE>
FEATURES OF THE ACQUISITION CONSIDERED BY NATIONAL
National believes that the Acquisition is the best way to obtain a
maximum recovery by Investors in each of the Programs. In reaching this
conclusion, National considered the following positive and negative factors:
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 potential
liquidity to the Investors for all or some of their Shares if a trading
market develops. There is no guaranty that a liquid trading market will
develop for the shares or that it will be sustained. 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.
Investors should be aware, however, that initially the shares are likely to
trade at prices substantially below the arbitrary $10 per share assigned to
them for purposes of the Acquisition.
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 currently
59
<PAGE>
and recognize the losses that would be generated by such sales. If the
Programs could be liquidated by selling off the Properties at the appraised
values used to calculate Exchange Values, such sales would result in
substantial cash losses to the Investors in each of the Programs. See table
at "-- Alternatives to Acquisition; Liquidation of the Programs." However,
no particular group of Investors will have the ability to control the timing
of the sale of a particular property as they do under the current program
structure. Instead, all Investors will be required to rely on the decisions
of management regarding the sale of a Property. Management's decisions will
affect cash available for distribution.
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. The Company, however, will need to be successful
or show potential for success in order to induce, if available, capital
sources to enter into transactions with it. Even in such cases, the cost of
such capital may be high.
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. However, the poor performance of a
particular Property may, nevertheless, negatively affect the performance of
the Company even if all the other Properties are performing well.
Historically, all of the properties have operated at a loss. In order for
the company to be successful, it must obtain external financing or sell
certain of its assets to raise cash for operations.
EXPERIENCE OF MANAGEMENT. In addition to Mr. Lasker and Mr. Orth, the
Company has employed L.C. "Bob" Albertson, Jr. and Mark K. Kawanami, both of
whom have expertise in real estate development, operation and construction.
While members of management have gained experience in the operation of golf
courses and recreational vehicle parks through the operation of the
Yosemite/Ahwahnee properties, they do not have extensive experience in
timeshare or resort development, marketing or operations. While none has
operated a corporation with a business plan similar to that of the Company,
Mr. Albertson has 11 years' experience as the President of a division of a
public corporation and 25 years experience in the real estate development and
homebuilding industry, Mr. Kawanami has held senior financial officer
positions in real estate development corporations for six years, and Messrs.
Lasker and Orth have managed the corporate affairs of National for 12 years.
See "Management Following the Acquisition."
60
<PAGE>
MODEST INCREASE IN MANAGEMENT COMPENSATION. National considered that
the total of salaries to be payable to the Company's officers and other
employees exceeds the total payable to National and its affiliates for
servicing and property management services ($1,181,000 as opposed to $969,000
both of which include the payroll for the Ahwahnee Country Club). The
increase was not viewed as significant since the original servicing fees were
based on loan servicing and later, asset management, both of which are less
labor-intensive than property development and property management.
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. However
the Company will be required to obtain additional financing from other
sources in order for its business plan to be successful.
LIMITATION OF INVESTOR LIABILITY. As beneficial owners of the assets
and businesses of the Programs, Investors currently are not effectively
insulated from personal liability based on the operation of those assets.
Thus, if an accident occurred, the damages of which were not wholly covered
by insurance, the individual Investors could be liable for the balance of the
damages. As shareholders of a corporation, there will be no such risk of
liability.
NO CONTROL OVER TIMING OF SALE OF A PARTICULAR PROPERTY. No particular
group of Investors will have the ability to control the timing of the sale of
a particular property as they do under the current program structure.
Instead, all Investors will be required to rely on the decisions of
management regarding the sale of a Property. Management's decisions will
affect cash available for distribution.
PROCEEDS FROM SALE OF PROPERTIES. If a Property is sold or refinanced,
the proceeds will be used by the Company to further the business plan of the
Company. Presently, if a Program Property is sold in its entirety, the
proceeds would go to applicable Investors directly as a return of their
investment.
ACQUISITION COULD TRIGGER TAXATION OF INVESTORS. Participation in the
Acquisition may be a taxable event for Investors. However, National intends
to treat the transaction as a tax-free transaction. To the extent that the
Acquisition is determined to be taxable, National believes most Investors
would be required to report tax losses. On the other hand, there generally
would be no taxable event to Investors as the Programs are currently
structured until the Program Property was sold. At such time, the amount
returned to Investors would result in either a tax loss or gain depending
upon how much of the original investment was returned.
CASH DISTRIBUTIONS. Currently, if a Property was sold, an Investor
would be entitled to a distribution of the proceeds of such sale net of costs
of sale and accrued liabilities. After the Acquisition, an Investor's
distributions will be dependent upon the earnings of the Company and a
decision of the board of directors to make distributions in the form of
dividends. An Investor will not automatically receive distributions upon the
sale of any particular Property.
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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 among the Programs; 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. These
conditions may not be waived. 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
While the Acquisition was not negotiated at arm's-length and National
and its principals will receive substantial benefits from it, 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.
There can be no assurance that the market value of the Shares will
ultimately be higher than the expected proceeds from liquidation. It is
likely that the Shares will trade substantially below the arbitrary value of
$10 per share assigned to them in the foreseeable future. Also, if many
Investors were to sell the Shares immediately after the Acquisition was
completed, the price of the Shares could drop even more significantly. In
proposing the Acquisition, National examined the alternatives discussed in
"-- Alternatives to Acquisition." Maintaining the current structure of each
of the Programs, as well as a prompt liquidation of each of the Programs,
were 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) the possibility of increasing the value of the Company
to permit the Investors who elect not to sell their Shares promptly a chance
to obtain a better return than a liquidation of their Property would yield
today.
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 and other assets 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, a review of the financial
condition and performance of the Programs and the terms of the servicing
agreements and the tenancy-in-common agreements for each of the Programs.
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More specifically, National's determination of financial fairness was
based on a consideration of the following positive and negative factors:
- the Shares offer an opportunity for individual Investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the Shares will have any liquidity, or that any liquid market that
develops will be sustained;
- while the number of Shares to be issued to reflect the Exchange
Value of a Program is arbitrary, the trading price of such Shares initially
is likely to be substantially below the $10 value arbitrarily assigned to
such Shares. In National's opinion, the Exchange Values offered to Investors
for their assets allow for an equitable allocation of the [2,001,248] Shares
among the Programs. The disparity between Exchange Values and appraised
values results from adding Program cash reserves to appraised values,
deducting Program accrued property taxes and other fees net of fees to be
forgiven by National;
- on completion of the Acquisition the Investors will hold over 80%
of the outstanding stock of the Company while principals, employees, and
consultants of National will hold less than 20%. That 20% was purchased for
$.01 per share. National and its principals have forgiven, or will forgive
at the completion of the Acquisition, over $3,000,000 of expenses and accrued
fees of which a total of $1,400,000 was earned for asset management and
property management services and expenses after the ownership dates of the
Properties. National believes that the amount paid for the services is no
greater than the amount that a third party would charge. The number of
Shares of the Company retained by the founders was not determined based on
fees forgiven by National or its affiliates. Prior to receiving the Fairness
Opinion, National believed that the Company's founders should hold
approximately 20% of the Shares after the Acquisition in order to properly
incentivize such persons with a significant, but not controlling, interest in
the Company;
- the valuation of the real estate assets of each of the Programs by
the independent appraisers;
- the probability that the transaction will either be tax-free to
Investors or, at most, yield a tax loss. Either way, National believes there
will likely be no out-of-pocket tax cost to all, or the vast majority, of
Investors;
- while conflicts of interest exist in the structuring of the
Acquisition, the issuance of Shares to the founders of the Company and the
determination of management compensation and while Investors did not have
independent representation in the structuring of the Acquisition, National
believes they have been counterbalanced by the Investors' opportunity to vote
on the transaction and the Fairness Opinion;
- while the Programs were originally formed to have a two to four
year finite life and the Investors expected to receive a return of their
investment from the original borrower, the Company is an infinite life entity
which will not return the Program Investors' original investment based on
sale or refinancing of the properties underlying the original Programs.
However, after the borrowers defaulted on the "Trudy Pat" loan, the Investors
became beneficial owners of the underlying properties with the need to
complete development, manage or
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otherwise ready the properties for sale. That significantly changed the
finite life aspect of their original investments. Therefore, the infinite
life aspect of the Company is not viewed by National to be a material change
from the Investors' CURRENT situation;
- the Acquisition will cause fundamental changes in the individual
business plans of the Programs. Rather than being focused on a single
Property, the Company will be focused on the management of at least five
Properties. Thus, the poor performance of a particular Property may affect
the Company's operations as a whole regardless of the performance of the
other Properties. Further, there will be no particular time when an Investor
can expect its interest to be automatically liquidated;
- Investors' voting rights will change. Investors will not be able
to vote on changes to or dispositions of a particular Property or borrowing
secured by a particular Property. Those decisions will be made by the Board
of Directors or management. In addition, due to the number of Investors in
the Company, a particular Investor's relative voting power will decline;
- Cash distribution policies will be changed. There have been no
distributions from any of the Programs, other than the Oceanside Program, in
the past three years due to the original borrower's defaults. Future cash
distributions will be based on the Company's earnings and the decision of the
board of Directors to pay dividends. Even if a particular Property were to
perform well, there is no assurance that there will be cash distributions;
- Holders of the majority of tenancy-in-common interests in a
particular Program can bind the Program, and Investors that vote against the
Acquisition will not be able to object to the Acquisition if a majority of
the Investors in all of the Programs approve the Acquisition; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the Shares
in the Acquisition and not the amount of the consideration paid to Program
Investors in the Acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __.
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 non-waivable
conditions set 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. See
"-- Calculation of Exchange Value" and "Appraisals and Fairness Opinion."
Other than as described in this Prospectus, for purposes of determining
fairness to Investors, neither National nor the Company is aware of any
factor or uncertainty that may materially affect the value of the Shares to
be received by Investors in the acquisition.
All of the above factors were used as support for National's belief that
the Acquisition is fair, substantively and procedurally. No special emphasis
was assigned to any of the factors.
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National believes that there are no material differences in the fairness
analysis for any particular Program in comparison with any other.
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 (see "Risk Factors -- Risks of the Acquisition"),
(ii) the principal shareholders of National may realize substantial economic
benefits upon completion of the Acquisition (see "Management Following the
Acquisition --Directors and Executive Officers Compensation and Incentive"),
and (iii) National's relief from on-going obligations under the servicing
agreements with respect to each of the Programs (such relief is not
susceptible to meaningful quantification except to the extent that National
may be able to reduce its overhead allocated to the asset management for the
Programs). It should be noted that, prior to 1994, National forgave
$2,191,614 of fees for the performance of servicing agent, as well as asset
and property management-related activities, and will forgive an additional
$946,111 of similar fees upon the successful completion of the Acquisition.
It should be further noted that, while the number of Shares to be retained by
the founders was not based on the amount of fees forgiven, 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 fees 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 selling expenses and fees due to National, to
the Investors in the respective Programs. If the Acquisition is not
approved, National will likely resign as servicing agent for each of the
Programs unless a sale can be consummated in less than three months. As a
last resort, National may determine that bankruptcy protection and
liquidation may be in the best interests of one or more of the 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
The transaction will be accounted for as a purchase by the accounting
acquiror, the Company, of all of the investment programs. As such, the
assets and liabilities of the investment programs being acquired will be
recorded at their fair values, while the assets and
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liabilities of the Company will remain at their historical costs. The
Company has been treated as the accounting acquiror due to its shareholder
group holding a greater interest in the Company, subsequent to the
Acquisition, than any other shareholder group involved in the Acquisition
COSTS AND EXPENSES
Costs and expenses incurred in connection with the Acquisition will be
allocated to the Programs on a pro rata basis in accordance with their
relative Exchange Values, whether or not the Acquisition is consummated. If
the Acquisition fails, such liabilities will remain owing for ultimate
repayment at the sale of the applicable Property. The following is a
statement of ESTIMATED costs and expenses that have been or are likely to be
incurred by the Programs and the Company in connection with the Acquisition.
[COST ALLOCATION PENDING FINAL EXCHANGE VALUE CALCULATION. TOTAL COSTS ARE
ESTIMATED TO APPROXIMATELY $1,024,000.]
<TABLE>
Sacramento/ Yosemite/ Yosemite/
Delta Greens Oceanside Ahwahnee I Ahwahnee II Mori Point Total
------------ --------- ---------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Accounting $ $ $ $ $ $
Audit
Appraisal
Legal
Fairness opinion
Exchange fees
SEC filing fees
Printing
Mailing/copying
Investment banking/
consulting
Meeting and travel
Solicitation fees
Miscellaneous
------------- --------- ---------- ----------- ---------- ---------
Total $ $ $ $ $ $
------------- --------- ---------- ----------- ---------- ---------
------------- --------- ---------- ----------- ---------- ---------
</TABLE>
APPRAISALS AND FAIRNESS OPINION
APPRAISALS. National engaged separate independent real estate appraisal
firms named at page __ to provide independent appraisals of the value of the
real estate in each Program. The appraisers were selected for their
knowledge of the real estate conditions in the four areas in which the
Programs' Properties are located. See "Appraisals and Fairness Opinion" for
information about the appraisers and the appraisals. Although National
received independent appraisals, it used its own judgment as to various
portions of conflicting appraisals received on the Yosemite/Ahwahnee I and
II Properties in order to determine the appraised value for those Properties.
The disparity between Exchange Values and appraised values results from
adding Program cash reserves to appraised values and deducting Program
accrued property taxes and other accrued obligations net of fees to be
forgiven by National.
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National also engaged Houlihan Valuation Advisers, a well-known and
reputable independent valuation company (the "Independent Valuator"), to
determine the fairness of the allocation of shares in connection with the
Acquisition. The Independent Valuator did not pass upon the procedures used
by National and the Company to determine the fairness of the Acquisition.
The Independent Valuator has rendered a Fairness Opinion (attached as
Appendix 1 to this Prospectus) to the effect that the transaction, including
the allocation of Shares among the Programs, as well as the number of Shares
to be held by management and founders of the Company, is fair to Investors
from a financial point of view. See "Appraisals and Fairness Opinion --
Fairness Opinion."
FAIRNESS OPINION
GENERAL. The Independent Valuator was engaged by National to analyze
certain aspects of the Acquisition and has delivered its written
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.
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.
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
years ended December 31, 1996 and 1997; (v) the offering materials related to
the "Trudy Pat" loans on the Properties; and (vi) 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
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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.
ANALYSIS AND CONCLUSIONS. On behalf of the Investors in each of the
Programs, National requested that the Independent Valuator opine as to the
fairness, from a financial point of view, of the allocation of Shares
pursuant to the Acquisition, inclusive of Shares to be held or controlled by
principals of National, employees of National and the Company, as well as
consultants to certain of the Properties and National.
The Independent Valuator's analysis began with a determination of the
enterprise value of each of the Programs on a stand alone basis. The
enterprise value of most entities whose primary business purpose is owning
real estate is determined based on the adjusted book value (or net asset
value) approach. Therefore, the Independent Valuator deemed this to be a
reasonable methodology for determining the enterprise value of each of the
Oceanside, Mori Point, Yosemite/Ahwahnee I and II, and Sacramento/Delta
Greens Programs on a stand alone basis. In the adjusted book value approach,
the estimated current market value of individual assets and liabilities are
substituted for their carrying value on the Programs' financial statements
(or book value). The enterprise value is the resulting value of the equity
after subtracting liabilities from the market value of assets.
To determine the current net asset value of each of the Programs, the
Independent Valuator relied on the Appraisals to represent the market value
of the respective properties, except in the case of the Yosemite/Ahwahnee I
and II properties, wherein the Independent Valuator relied upon management's
reconciliation of the two existing appraisals. In either case, the
Independent Valuator assumed, without independent analysis or verification,
that the property values thus derived were representative of the current fair
market values of the respective properties. In determining net asset value,
the Independent Valuator used the book value as of December 31, 1997 for most
of the non-real estate assets. This was considered reasonable because the
majority of these assets consist of cash, restricted cash, accounts
receivable, notes receivable or amounts due from affiliates, which are
relatively liquid and worth approximately their book value. With respect to
property and equipment (excluding real estate), no appraisals were provided
to the Independent Valuator. Management believes the book value of property
and equipment to be reasonably indicative of its market value. Deferred
membership selling expense (an asset) and deferred revenues (a liability)
which appear on the balance sheet of the Yosemite/Ahwahnee Programs as of
December 31, 1997 were eliminated because these assets have no market value.
Liabilities (except for deferred revenues) were subtracted out at book value.
In the net asset value calculation, liabilities were not reduced by the
estimated amounts to be forgiven by National. Using the aforementioned
methodology, the resulting net asset values as of December 31, 1997 were as
follows (rounded to the nearest $000): $3,700,000 for Oceanside (or 19.2% of
the combined net asset value); $3,171,000 for Yosemite/Ahwahnee I (or 16.5%
of the combined net asset value); $5,710,00 for Yosemite/Ahwahnee II (or
29.7% of the combined net asset value); $4,847,000 for Mori Point (or 25.2%
percent of the combined net
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asset value); and $1,799,000 for Sacramento/Delta Greens (or 9.4% of the
combined net asset value).
When comparing the relative share of stand alone net asset value as shown
above to the relative allocation of shares among the Programs in connection
with the Acquisition, the Mori Point and Sacramento/Delta Greens allocations
are very close (25.2% versus 24% for Mori Point and 9.4% versus 9.6% for
Sacramento/Delta Greens). On the other hand, relative percentage in the
Acquisition (24.1%) is approximately 490 basis points higher than its stand
along net asset value would indicate and Yosemite/Ahwahnee I and II's (at
42.3%) are combined 390 basis less than their combined stand along net asset
value would indicate.
However, when the potential synergies among the Programs based on the
business plan of the Company after the Acquisition are considered, the
Independent Valuator felt that the fact that Oceanside will receive a premium
to its stand along net asset value while Yosemite/Ahwahnee I and II will
receive a discount is very reasonable. In this regard, the Independent
Valuator reviewed the two feasibility studies for the Yosemite/Ahwahnee I and
II properties, as well as the Sacramento/Delta Greens feasibility study. The
Yosemite/Ahwahnee studies indicate that the development of the property as a
mixed use resort, with primary emphasis on the sale of time share units, is
feasible and could be expected to generate significant positive cash flow
over the next several years. However, additional investment in
infrastructure will be required before the project will become cash flow
positive. The feasibility study for the Sacramento/Delta Greens property
indicates that residential development on the property is feasible based on
expected home prices and absorption rates in spite of the fact that the
property is located near a high crime area which will impact selling prices.
While no feasibility study was prepared for the Mori Point property, the real
estate appraisal prepared for the property was performed on the basis of
expected returns from a hotel conference center development, which was the
concluded highest and best use. However, substantial additional funding will
be required to bring that project to fruition.
Unlike the other programs whose properties require substantial
additional capital in order to realize their development potential, the
Oceanside program has been generating positive cash flow. Its property is
also the most liquid. Therefore, while the impact of this liquidity on the
overall equity allocation is inherently subjective and difficult to quantify,
the Independent Valuator believes that the 490 basis point premium to net
asset value to be received by Oceanside in connection with the Acquisition is
reasonable because of the value that its liquidity contributes to the overall
business plan the Company is expected to undertake after the acquisition.
This premium is further supported by the fact that there is a possibility
that the Oceanside Property could be sold for more than its appraised value.
On the other hand, the fact that the Yosemite/Ahwahnee I and II Programs will
collectively receive approximately 390 basis points less than what they would
receive purely on the basis of stand along net asset value is justified
because these Programs will require the largest amount of funding to be fully
developed and have been operating on a negative cash flow basis (which
management estimates to be currently approximately $25,000 per month). Since
the negative cash flow will continue for some period of time after the
Acquisition is consummated, at least a portion of the 390 basis point
differential relates to the transfer of the responsibility for the operating
deficit from Yosemite/Ahwahnee I and II Programs to the Company.
With respect to the 495,318 Founders Shares (as that term is defined in
the Fairness Opinion), the Independent Valuator was primarily concerned with
the 400,014 shares to be issued to the family limited partnerships under the
control of David Lasker and James Orth. For analytical purposes, the
Independent Valuator considered these shares as consideration for three
separate items. The first represents consideration for the approximately
$946,000 forgiveness of indebtedness, which equates to 94,611 shares based
upon an assumed price of $10 per share. The second component relates to the
consideration for Messrs. Lasker and Orth in connection with their
responsibilities as officers of the Company. The Independent Valuator assumed
this number of shares would be approximately 50,000 shares, which represents
the approximate amount of shares to be issued to Mr. Albertson on the basis
of arm's length negotiations. The remaining 205,403 shares, or 8.23% of the
total shares to be issued in connection with the Acquisition, represents
consideration for the role of Messrs. Lasker and Orth in structuring and
completing the Acquisition, which is reasonable given the fact that the
transaction they have
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structured should, among other things, enhance the Investors' liquidity more
than enough to offset the dilution resulting from the issuance of the shares.
Even though there is no guarantee that an active market will develop for the
Company's shares, when compared with likely discounts for lack of
marketability in excess of 30 percent for their current ownership interests
(based on historical studies), the Investors' liquidity should be expected to
be increased significantly.
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.
In connection with preparing the Fairness Opinion, the Independent
Valuator was not engaged to, and consequently did not, prepare any written
report or compendium of its analysis for internal or external use beyond the
analysis set forth in Appendix 1. The Independent Valuator did not deliver
any additional written summary of its analysis.
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.
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
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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.
<TABLE>
Differing Factor Tenancy-in-Common Interests Shares
- ---------------- --------------------------- ------
<S> <C> <C>
GENERAL BUSINESS Each of the Programs commenced The business of all five of the Programs
as opportunities to participate will be consolidated into the Company. The
in a loan secured by to-be-improved Company has broader investment objectives
real property. The Programs are not which will include the sale or completion
seeking to make additional loans or of the projects originally undertaken by
purchase new properties. 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.
DURATION The Programs were originally The Company will have perpetual life. It
structured to have the loans repaid intends to operate indefinitely and it has no
over two to four years. plans to liquidate assets to make returns of
capital to Investors.
DISTRIBUTIONS AND The Programs were initially designed The initial policy of the Company will be to
DIVIDENDS to yield regular interest payments to preserve its cash resources for growth and
the Investors and to have the internal development and, thus, the Company does
principal of the various loans repaid not plan to make dividend distributions in the
in accordance with their respective foreseeable future. The Board of Directors has
terms, usually two to four years. the discretion to determine whether or not and
when to declare and pay dividends and the amount
thereof.
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<PAGE>
TAXATION The Programs are not tax payers and The Company will be taxed as a corporation and
file no tax returns. Prior to the file corporate income tax returns. Distributions
Ownership Date, interest income to shareholders will be reported to the IRS and
distributed to Investors was reported applicable state taxing authorities on Form 1099-DIV
to the IRS and applicable state whether or not such distributions are taxable.
taxing authorities on Form 1099-INT.
As tenancy-in-common owners of the
Properties, the Investors no longer
receive Form-1099 from National, but
are responsible for their pro rata
share of any income, gain, loss or
deductions attributable to their
Program's Properties.
OVERHEAD AND Overhead and expenses of the Programs Investors will have no direct responsibility for
EXPENSES are the responsibility of the company overhead and expenses. Initially, overhead
Investors to the extent the and expenses of the Company will be derived from
applicable Program does not generate proceeds of the sale of the units, if any, and the
sufficient cash flow to cover them. sale of one or more of the Company's assets. Future
They are billed individually to overhead and expenses will be funded from cash flow
investors in the form of assessments. from operations.
To date, only the Oceanside program
has been self-funding.
MANAGEMENT The business and affairs of each of The business and affairs of the Company are managed
the Programs are managed by National by the officers of the Company under the direction of
pursuant to the applicable servicing the Board of Directors. The Board of Directors will
agreement. National may be ultimately be divided into three classes serving
terminated as the servicing agent by staggered three year terms. One-third of the Board of
the vote of holders of a majority of Directors will be elected annually by holders of the
the interests of a particular Shares to serve for three year terms. Directors can be
Program. removed from office by the affirmative vote of the holders
of at least a majority of the then-outstanding Shares.
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<PAGE>
FIDUCIARY DUTIES None of the Programs are Officers and Directors of the Company are subject to the
partnerships and, thus, National does Delaware common law which imposes fiduciary duties of
not have the common law fiduciary care, loyalty, good faith and fair dealing on the
duties that it would have if it were officers and directors of the Company.
the general partner of a partnership.
However, as an agent, National has
fiduciary-like duties to Investors to
use reasonable 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.
VOTING RIGHTS Under the tenancy-in-common Under the Charter Documents of the Company, the Shareholders
agreements of each of the Programs, have voting rights with respect to (i) election of Directors;
the Investors have voting rights with (ii) the sale or disposition of all or substantially all of
respect to collection, servicing and the assets of the Company at any one time; (iii) the merger
administration of the Outstanding or consolidation of the Company; (iv) the dissolution of the
Investment of the Programs, as well Company; and (v) certain anti-takeover provisions. Each
as termination of the applicable Share entitles its holder to cast one vote on each matter
servicing agreement. Each holder of presented to holders of Shares. Approval of any matter
a tenancy-in-common interest is submitted to holders of Shares generally requires the
entitled to vote on each matter affirmative vote of holders of a majority of the outstanding
presented to the Investors of a shares, however, amendments to the anti-takeover provisions
particular Program. Approval of any of the Certificate of Incorporation of the Company require a
matter submitted to the Investors in two-thirds vote.
a particular Program requires
approval of holders of a majority of
the tenancy-in-common interests of
that Program.
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.
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<PAGE>
REDEMPTION The tenancy-in-common interests are The Shares are not redeemable. The Shares can be sold on
not redeemable. Investors in a the ________________ if an active trading market exists.
particular Program may only receive
a return of their investment upon the
repayment of the applicable note or
other liquidation of all or part of
the assets of the Program.
VOTING DILUTION Investors in each Program have voting Since five programs will be consolidated into the Company,
power based on their percentage of each investor's voting power will be substantially reduced.
the funds contributed to the
Program.
LIQUIDATION In the event of the liquidation of a Upon liquidation of the Company, the Shareholders will be
RIGHTS particular Program, the assets of the entitled to share ratably in any assets remaining after
Program remaining after satisfaction the satisfaction of obligations to creditors and any
of all debts and liabilities of the liquidation preferences on any Preferred Stock that may
Program, the satisfaction of expenses be then outstanding.
of liquidation of the assets of the
Program and the establishment of a
reasonable reserve in connection
therewith are distributed to 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 owning at least a majority of
DISSOLUTION tenancy-in-common interests in a the outstanding shares in the Company is sufficient to
particular Program may vote to compel cause the dissolution of the Company.
the sale of the Program's assets with
the result that the Program will be
dissolved.
LIMITED LIABILITY As tenancy-in-common owners of the Shareholders are not generally liable for obligations
assets of the Programs, the Investors of the Company.
are NOT effectively insulated from
personal liability based on operation
of those assets.
74
<PAGE>
LIQUIDITY AND There is no organized secondary The Shares will be freely transferable and it is a
MARKETABILITY market for the tenancy-in-common condition to the consummation of the Acquisition that
interests held by Investors. Thus, the Shares be approved for listing on the
trading in the tenancy-in-common ________________.
interests is sporadic and occurs
solely through private transactions.
RESTRICTIONS ON There are certain restrictions on None.
TRANSFER transfer of the tenancy-in-common
interests.
CONTINUITY OF None of the Programs are designed to The Charter Documents provide for perpetual existence.
EXISTENCE have perpetual existence.
FINANCIAL REPORTS None of the Programs are subject to The Company will be subject to the reporting
the reporting requirements of the requirements of the Exchange Act and will file annual
Exchange Act. However, National, and quarterly reports. The Company currently intends
without obligation to do so, has to provide annual and quarterly reports to its
endeavored to provide the Investors Shareholders.
in each of the Programs with regular
reports about such Programs'
respective activities.
PAYMENTS TO National is entitled to fees and While National and its Affiliates will hold Shares of
NATIONAL AND reimbursement of expenses for the Company, the only form of compensation paid to
ITS AFFILIATES services it renders to each of the some of such persons will be pursuant to their
Programs pursuant to the servicing employment agreements or otherwise. ONLY $1,381,881
agreements. 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 shareholders rights to bring
RIGHTS Outstanding Investment in a Program derivative actions when the officers or Directors of the
must vote to terminate the servicing Company have failed to institute an action to recover
agreement between National and the damages and class actions to recover damages. Shareholders
Program Investors. may also have rights to bring actions in federal court to
enforce federal rights.
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<PAGE>
INSPECTION OF Holders of tenancy-in-common Under Delaware law, each Shareholder has the right, subject
BOOKS AND RECORDS interests in a Program have no to certain reasonable standards, to obtain from the Company
contractual right to inspect books from time to time upon reasonable written demand for any
and records maintained by National purpose reasonably related to the Shareholder's interest as
with regard to a Program. However, a Shareholder of the Company, certain information regarding
as the servicing agent for the the status of the business, affairs and financial condition
Investors, National permits them to of the Company. Pursuant to Rule 14a-7 under the Exchange
review such books and records on Act, the Shareholders will have the right to obtain a list
reasonable notice. of Shareholders from the Company whenever the Company
solicits proxies or consents.
</TABLE>
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.
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<PAGE>
FORM OF ORGANIZATION
PROGRAM
None of the Programs are organized business entities such as corporations,
partnerships or business trusts. Each commenced as an opportunity to
participate in a loan secured by to-be-improved real 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 consequences of a Program and the reporting thereof.
COMPANY
The Company is a Delaware corporation formed for the purpose of acquiring the
Programs' Properties, as well as investing in and managing other real estate
opportunities. The Company will be taxed as a corporation.
LENGTH OF INVESTMENT
PROGRAM
An investment in any of the Programs originally was presented to Investors as
an opportunity to take a tenancy-in-common participation in a loan secured by
real property. As such, the investments were finite in length with the
expectation that Investors' investments were to be returned, with interest,
within a two to four year period.
COMPANY
Unlike the Programs, the Company intends to continue its operations for an
indefinite time period and the Company has no specific plans for the
disposition of assets acquired through the Acquisition or subsequent
acquisitions. The Company is allowed to retain net sale or refinancing
proceeds for new investments, capital expenditures, working capital reserves
or other appropriate purposes.
NATURE OF INVESTMENT
PROGRAM
Since the respective Ownership Date of each of the Programs, the Investors in
such Programs have been the beneficial owners (as tenants-in-common) of the
assets and the businesses of the respective Programs. Actual title to the
Properties is held by various entities acting as agents for the Investors in
the several Programs.
COMPANY
The Shares constitute equity interests in the Company. Each Shareholder will
be entitled to its pro rata share of distributions made with respect to the
Shares. The distributions payable to Shareholders are not fixed in amount and
are only paid when declared by the Board of Directors. The Company has no
present plans to pay distributions.
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<PAGE>
PROPERTIES AND DIVERSIFICATION
PROGRAM
The investment portfolio of each of the Programs is limited to the assets
acquired as of the applicable Ownership Date, as well as such additional
assets as may have been 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.
COMPANY
The Company is authorized to own and acquire the Programs' Properties, make
other investments and issue additional equity and debt securities to acquire
additional assets.
ADDITIONAL EQUITY AND DILUTION
PROGRAM
None of the Programs are authorized to raise additional funds other than
through the assessment/advance process prescribed by the applicable
tenancy-in-common agreement. Therefore, except to the extent that existing
Investors in a particular Program pay mandatory assessments or make voluntary
advances, no dilution of an Investor's interest in the Program can occur.
COMPANY
The Board of Directors may, in its discretion, issue additional equity
securities. The Company may sell additional equity from time to time to
increase its available capital. The issuance of additional equity securities
may result in a dilution of the interests of the Shareholders.
BORROWING POLICIES
PROGRAM
Except to the extent authorized by vote of Investors owning a majority of the
tenancy-in-common interests in the loan to the original borrower, none of the
Programs is authorized to borrow funds necessary, appropriate or advisable to
conduct its business and affairs. Without such a majority vote, the only
additional funds which the Programs may raise comes from mandatory
assessments from, or voluntary advances by, existing Investors.
COMPANY
The Company is permitted to borrow, on a secured or unsecured basis, funds to
advance its business without limits. No shareholder vote is required.
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<PAGE>
RESTRICTIONS ON RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS
PROGRAM
None of the applicable servicing agreements or tenancy-in-common agreements
for the Programs restrict any of the Programs from entering into business
transactions with National or its affiliates.
COMPANY
Under Delaware law, transactions between the Company and one or more of its
directors or officers, or between the Company or any affiliate of a director
or officer, are not void or 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 affiliate of such
person, within the three year period immediately prior to the date on which
such stockholder became an interested stockholder.
79
<PAGE>
MANAGEMENT CONTROL AND RESPONSIBILITY
PROGRAM
National acts as servicing agent for each of the Programs pursuant to
servicing agreements entered into with each of the Investors in each Program.
Pursuant to the servicing agreements, National is essentially invested with
management authority to conduct the business of each of the Programs. The
servicing agreements are terminable on 30 days' written notice, provided that
the Investors do not have the power to terminate the servicing agreements
unless and until all amounts owed to National thereunder have been paid in
full. National does not need to seek re-election but instead serves unless
removed by the Investors, which is generally an extraordinary event.
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."
COMPANY
The Board of Directors has exclusive control over the Company's business and
affairs subject only to the restrictions in the Charter Documents.
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. See
"Fiduciary Responsibility." The Shareholders have greater control over the
management of the Company than the Investors have over the Programs because
members of the Company's Board of Directors are elected by the Shareholders.
80
<PAGE>
MANAGEMENT LIABILITY AND INDEMNIFICATION
PROGRAM
Pursuant to the servicing agreements, National is indemnified and held
harmless by the Investors from and against any and all liabilities for acts
or omissions performed in the course of its activities as servicing agent,
except as to such liabilities caused or contributed to, in whole or in part,
by any gross negligence or willful misconduct on the part of National or its
Agents.
COMPANY
The Company's Directors are not personally liable for ordinary liabilities of
the Company. The Charter Documents provide that a Director's liability for
breach of fiduciary duty is limited to the full extent allowable under
Delaware law. The Charter Documents and Delaware law provide indemnification
rights to Directors and officers who act in good faith, and in a manner
reasonably believed to be in or not opposed to 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."
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<PAGE>
ANTI-TAKEOVER PROVISIONS
PROGRAM
Changes in management of any of the Programs can be effected only by removal
of National as the servicing agent by holders of a majority of the
Outstanding Investment in such Programs. This would be an extraordinary
event.
COMPANY
The Charter Documents contain a number of provisions that may have the effect
of delaying or discouraging a hostile takeover of the Company. These
provisions include, among others, (i) the power of the Board of Directors to
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 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."
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<PAGE>
VOTING RIGHTS
PROGRAM
Holders of a majority of the Outstanding Investment in each Program may
control decisions respecting the collection, servicing and administration of
such Outstanding Investment. Otherwise, investors in the Programs have no
voting rights.
COMPANY
The Company's Board of Directors consists of three classes. Shareholders are
entitled to elect one class of the Company's Board of Directors at each
annual meeting of the Company. In addition, 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
As tenants-in-common in the respective programs, the Investors are not
effectively insulated from personal liability. Pursuant to the
tenancy-in-common agreements, Investors are susceptible to mandatory
assessments.
COMPANY
Under Delaware law, Shareholders will not be liable for Company debts or
obligations. Upon issuance, the Shares will be fully paid and non-assessable.
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 _____________, 1998, unless such date is extended by the Company in
its sole discretion. The 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.
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<PAGE>
<TABLE>
[AT 12/31/97] Number of Votes
Number of Votes Required for
Number of Held of Record Approval of
Program Investors Acquisition
------- --------- --------------- ---------------
<S> <C> <C> <C>
Sacramento/Delta 332 6,038,716 3,015,359
Greens
Oceanside 1,755 27,100,000 13,550,001
Yosemite/Ahwahnee I 426 8,996,473 4,498,237
Yosemite/Ahwahnee II 837 19,344,964 9,672,483
Mori Point 486 12,420,000 6,210,001
</TABLE>
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. Based on amounts of "Trudy Pat" tenancy-in-common interests purchased
in each program, National has the following votes in each of the programs:
3,118 Sacramento/Delta Greens; 2,082 Oceanside; 2,373 Yosemite/ Ahwahnee I;
46,454 Yosemite/Ahwahnee II; and 5,279 in Mori Point. It will cast all of its
votes in favor of the acquisition.
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 ________________ [60 DAYS FROM THE DATE OF FIRST MAILING THE PROSPECTUS
OR PROPOSED ACQUISITION DATE], 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.
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
84
<PAGE>
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.
INVESTOR REPRESENTATIONS ON BALLOT
When voting, an Investor will be confirming to the company that (i)
it has received and reviewed the Prospectus and the applicable Supplement, (ii)
it understands that it will become a shareholder in the Company if the
acquisition is completed, (iii) it has the power and authority to vote as an
Investor, (iv) it understands that if it signs the Ballot but does not indicate
a vote, the Ballot will be deemed to have been voted IN FAVOR of the
Acquisition, and (v) if the Acquisition is completed, to the best of the
Investor's knowledge, the Company will acquire title to its interest in the
Programs' Property free and clear of all liens and adverse claims other than
property taxes. By voting in favor of the Acquisition, an Investor is
concurrently voting to terminate the tenancy-in-common agreement with other
Investors in its Program and the servicing agreement with National. Termination
of the servicing agreement relieves National of any future liabilities or
responsibilities to the Program, but all amounts owing to National under the
servicing agreement which have not been cancelled by National will be assumed by
the Company.
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.
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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 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.
NO RIGHT TO PROGRAM BOOKS AND RECORDS
Investors have no rights under a Program's tenancy-in-common
agreement or servicing agreement, or under federal or state law, to obtain a
list of the names and addresses of the other Investors in a Program. If an
Investor wishes to communicate with the other Investors in a Program, upon
receipt of the material an Investor wishes mailed together with the amount of
postage necessary to make such mailing, National will promptly mail such
communications to a Program's Investors.
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 Shares to which such Investor is entitled.
If any certificate representing 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.
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<PAGE>
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 allocation of Shares is fair to the Investors,
National and the Company engaged Houlihan Valuation Advisers, the Independent
Valuator, to render the Fairness Opinion and the independent appraisers named on
page __ to independently determine the value of the Properties. The conflicts
of interest are summarized below.
BENEFITS TO NATIONAL
The benefits of the Acquisition for National primarily reside in the
relief from its duties, including fiduciary duties, and related costs as asset
manager for the Programs that are acquired by the Company. Asset management for
the Programs will no longer be necessary. This benefit is not susceptible to
meaningful quantification but it will reduce National's overhead for managing
the programs that have not paid National's asset management fees. 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 Sacramento/Delta Greens,
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. See
"Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for information about compensation to be received
by the identified persons for management services.
Upon completion of the Acquisition, National can focus on its duties
on other projects for which it serves and performs the functions of 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.
COMPANY SHARES OWNED BY NATIONAL'S PRINCIPALS AND OTHER COMPANY MANAGEMENT
Family partnerships controlled by David G. Lasker and James N. Orth
(the shareholders of National) presently own, in the aggregate, [400,014] shares
of the Company's Common Stock. That represents over 75% of the Company's
outstanding stock. On the basis of a $10 per share
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value, such shares would be deemed to have a value of $[4,000,140]. They paid,
out-of-pocket, $0.01 per share for the stock. See the table set forth in
Note (a) to Note 6 to the table set forth in "Background and Reasons for the
Acquisition -- Allocation of Shares Among the Programs." After the
Acquisition, these family partnerships will each control 8.01% of the
Company's outstanding stock (5.72% if all the units are sold).
In addition, in the formation period of the Company, L.C. Albertson,
Jr., Executive Vice President of the Company, and Mark K. Kawanami, Vice
President of the Company, have purchased 54,118 and 1,000 shares, respectively,
at $0.01 per share. Mr. Albertson will control [2.17]% ([1.55]% if all the
units are sold) of the Company's outstanding stock after the Acquisition, and
Mr. Kawanami will control less than one percent.
OTHER BENEFITS TO SHAREHOLDERS OF NATIONAL
In addition to the Shares of the Company to be beneficially owned by
Mr. Lasker and Mr. Orth, they will receive the following additional economic
benefits if the Acquisition is completed:
<TABLE>
Mr. Lasker Mr. Orth
---------- --------
<S> <C> <C>
$ 180,000 $ 180,000
Annual salary
Bonus 2% of pre-tax 2% of pre-tax
profits, if any profits, if any
Additional Discretionary Bonus(1) up to 50% of up to 50% of
salary salary
Stock Options(2) 30,000 30,000
Participation in Company
employee benefit plans yes yes
5-year employment contract(3) yes yes
</TABLE>
- ----------------
(1) If certain budgeted performance attained.
(2) 10,000 to be issued at the completion of the Acquisition exercisable at $10
per share; 10,000 to be issued on the first anniversary of the Acquisition;
and 10,000 to be issued on the second anniversary of the Acquisition. The
last two groups are exercisable at market value on date of grant.
(3) See "Management Following the Acquisition -- Employment Agreements."
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS
The independent appraisers have independently determined the value of the
Properties. National and the Company have used their respective judgment to
reconcile the disparity between the October 1996 and May 1997 appraisals of the
Yosemite/Ahwahnee Properties in arriving at the Exchange Values for the
Yosemite/Ahwahnee I and II Programs. See "Background and Reasons for the
Acquisition -- Calculation of Exchange Value" and "Appraisals and Fairness
Opinion -- Conflicting Yosemite/Ahwahnee Properties' Appraisals." Houlihan
Valuation Advisors, the Independent Valuator, has provided the Fairness Opinion.
Neither the Company nor National has retained any outside representatives to act
solely on
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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, due to cost factors,
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 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. There is
no way to quantify what such differences might have been.
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 verification from Houlihan Valuation Advisors 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
In addition to Messrs. Lasker and Orth, other employees of National who
will become employees of the Company currently provide investor relations,
accounting and office administration 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
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consummated, these 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. At this time, the allocation of services
between the Company and National's other programs is not susceptible to
meaningful quantification.
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.
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.
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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.
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.
FORWARD-LOOKING STATEMENTS
THE COMPANY (OR ITS REPRESENTATIVES) 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,
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ADVANTAGES THAT ARE EXPECTED TO BE REALIZED BY THE ACQUISITION, ESTIMATES OF
REAL ESTATE VALUES, ESTIMATES OF POTENTIAL FINANCIAL RESULTS FROM OPERATIONS
OR FROM SALES OF REAL ESTATE, PRO FORMA FINANCIAL RESULTS 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. IN ADDITION TO THE "RISK
FACTORS," INTERNAL AND EXTERNAL FACTORS SUCH AS, BUT NOT LIMITED TO, THE
FOLLOWING MAY ADVERSELY AFFECT SUCH FORWARD-LOOKING STATEMENTS: (I) EXPECTED
GREATER AVAILABILITY OF FINANCING TO THE COMPANY MAY NOT MATERIALIZE; (II)
COMPETITIVE PRESSURES MAY INCREASE SIGNIFICANTLY; (III) THERE MAY BE
UNEXPECTED COSTS OR OTHER DIFFICULTIES RELATING TO THE CONSOLIDATION OF THE
BUSINESS PLAN; (IV) CHANGES IN THE INTEREST RATE ENVIRONMENT MAKE FINANCING
MORE DIFFICULT OR IMPOSSIBLE; (V) GENERAL ECONOMIC CONDITIONS DETERIORATE
RESULTING IN, AMONG OTHER THINGS, A DETERIORATION OF REAL ESTATE VALUES; (VI)
LEGISLATIVE OR REGULATORY CHANGES ADVERSELY AFFECTING THE COMPANY'S BUSINESS;
AND (VII) CHANGES IN THE SECURITIES MARKETS. ACCORDINGLY, FORWARD-LOOKING
STATEMENTS SHOULD NOT BE RELIED UPON AS A PREDICTION OF ACTUAL RESULTS.
EXCEPT TO THE EXTENT REQUIRED TO KEEP THIS PROSPECTUS FROM BEING MATERIALLY
MISLEADING WHILE THE OFFERING IS OPEN OR TO COMPLY WITH EXCHANGE ACT
REPORTING REQUIREMENTS, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE
PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
BUSINESS AND PROPERTIES
THE COMPANY
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 to-be-formed 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
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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 or add value to the
Company in accordance with its overall business plan. Some of such
properties could be properties owned by tenants-in-common lenders in other
programs sponsored by National. 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. In making such acquisitions, to the extent possible, the
Company will attempt to use shares of its common stock for some or all of the
purchase price. This would result in a dilution of the voting power of
then-existing investors in the Company.
Some of the risks which the Company may face if it makes the
acquisitions described above include, but are not limited to: (a) the
professional service fees and financing costs which the Company would incur
to complete such acquisitions; (b) significant competition from other
resort-oriented, extended-stay oriented, leisure-oriented, and residential
properties; (c) lack of management experience in operating such businesses to
the extent that experienced personnel cannot be acquired at the time of the
acquisition; (d) dilution of Investors' voting rights to the extent that the
Company's common stock is used for such acquisitions; and (e) costs of
on-going compliance with applicable government regulation of consumer
finance, real estate brokerage or telecommunications activities. Any of such
risks, together with additional risks which may be identified in the future,
could prevent the Company from accomplishing potential future acquisitions.
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. They are presently managed by National for the Investors pursuant
to servicing agreements which entitle National to receive an annual servicing
fee equal to one percent of the original principal amount of the applicable
"Trudy Pat" loan. Upon completion of the Acquisition, the Company, through its
subsidiaries, will own four Properties which are described below.
SACRAMENTO/DELTA GREENS PROPERTY. The Sacramento/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. Except for property tax liens, the Property is
unencumbered
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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
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 consists of one remaining tract
of 111 residential lots known as the "Symphony" tract. 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.
In addition to a property tax lien, the Property is presently encumbered by
a first lien in the amount of $27,100,000 which is held by National 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, 23 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 property tax lien and 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 property tax lien and 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.
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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
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. Except for a property tax lien, 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. National believes 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 separate 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 individual
Programs 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
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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
The Company anticipates that the demand for unimproved land will increase
in the near future and that unimproved properties with entitlements, ready for
physical improvements, will be in 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 while conserving cash,
the Company may utilize options to buy land (generally requiring a payment that
is a small fraction of the purchase price to hold the property pending
financing). Such payment usually is applied to the purchase price. It will
fund additional acquisitions whenever possible with non-recourse seller
financing which does not require a full payment of the purchase price
immediately. The risk of securing the availability of property through the use
of options is that the Company will be unable to exercise the option and lose
the option payment. The risk of seller non-recourse financing is the potential
loss of the property, loss of the downpayment and loss of funds spent on
development if there is a default on the loan by the Company.
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
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("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 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.
According to the same sources, 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.
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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. 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 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. All of
the above information is derived from publications of the California Travel
Parks Association.
THE TIMESHARE INDUSTRY
THE MARKET. According to an American Resort Development Association
("ARDA") study, 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
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- 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 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 ARDA, 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 represent 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.
According to ARDA, 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, but 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, and it is not a one-for-one trade.
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THE BUSINESS STRATEGY
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 and the units offered in the
concurrent offering to create the necessary cash flow and capital to do so.
The Company does not currently own or operate any timeshare or recreational
vehicle resort properties. After the Acquisition, the Company will own the
Yosemite/Ahwahnee Programs and their assets. On behalf of Investors in those
Programs, National currently operates a 54 site recreational vehicle park and
is expanding the park with the addition of another 100 sites. Additionally,
National is investigating the feasibility of future timeshare facilities on
the site as well.
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 $161,000 of
liquidity if none of the units are sold in the separate offering being conducted
currently with this Consent Solicitation, and approximately $8,900,000 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. If one or more
Properties have to be sold by the Company at a substantial discount from the
original "Trudy Pat" loan amount to raise cash for Company operations, which
would enhance overall shareholder value, the Company believes such a sale would
make sense and will attempt it. Although National attempted to develop the
Properties after foreclosure, except for the Oceanside Program, the other
Programs generally were faced with obstacles which National
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was not able to overcome. The principal obstacle was the inability to obtain
project financing secured by the Properties from third party lenders due to
the unwillingness of California title insurance companies to provide lenders'
policies of title insurance when title was beneficially held by such a large
number of tenants-in-common. In addition, potential joint venture partners
found dealing with the tenancy-in-common ownership structure of the Programs
to be unattractive. The inability to obtain third party financing and the
unwillingness of Program Investors to provide sufficient additional equity
capital meant that National, on behalf of the Programs, could not proceed to
obtain necessary permits and approvals from applicable real estate regulatory
authorities without which continued development could not proceed.
Furthermore, particularly in the case of the Yosemite/Ahwahnee Properties,
lack of adequate financing prevented a more aggressive marketing of the golf
course and recreational vehicle portions of the Properties, as well as a
slowdown in the sale of the estate lots. The Company and National believe
that these disadvantages will disappear when the Properties are owned by a
single corporation.
If the Company attains liquidity from the sale of units or certain of the
Properties, and if management is correct in its belief that third party
financing would become available to the Company through the Acquisition (which
eliminates the tenancy-in-common form of ownership), it will then conduct the
following activities in such a manner so as to maximize positive cash flow in
the most expeditious way. If such liquidity is not attained, the Company's
business plan will likely be no more successful than the individual Programs
have been since their respective Ownership Dates.
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 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. If the Company is unable to obtain such approvals, the
construction of homes will not be possible and sale of the Property in bulk at a
price below that which would be obtainable if the Property were developed into
homes would be necessary to move the Property off the Company's books.
The material risks associated with the development of the
Sacramento/Delta Greens Property are (i) as of [DECEMBER 31, 1997],
approximately $[45,000] of property taxes are owed for the current year and
for the fourth payment of a 5-year payment plan and must be kept current in
order to avoid loss of the Property for delinquent taxes; (ii) funds must be
available to cover
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the delinquent property taxes, as well as costs of obtaining final map
approval from the City of Sacramento and construction of necessary roads and
utilities, finished lots, model homes and the first phase of production
homes; (iii) a substantial sales and marketing effort will be necessary to
sell homes constructed on the Property if a bulk sale of the lots is not
made; (iv) the Property is located in a lower income residential area that
has had a reputation as a high crime area; and (v) increasing government fees
and assessments for streets, schools, parks and other infrastructure
requirements could increase the cost of lots to the Company thereby
increasing the sales price of the lots which will delay market absorption.
Real estate values in the area of the Property have improved in 1997.
However, the Property is located in the South Sacramento area which is primarily
populated with lower income residents. The general population of the Sacramento
area has been growing in recent years, indicating that housing demand should
continue to improve. However, there can be no assurance that the Company will
be able to develop the Property in a manner that is ultimately profitable.
There are currently 230 active subdivisions in the Sacramento market.
Eleven of those are within ten miles of the Property and are designed to provide
single-family housing at a cost comparable to that proposed for the Property.
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. If the Company conducts the
buildout, it is estimated that approximately $700,000 of equity financing will
be required plus approximately $3,500,000 of construction financing. The
Company believes that the latter should be available from traditional
construction lenders.
Assuming that a potential buyer for the entire Symphony tract cannot be
located promptly, the risks associated with pursuing the buildout of the
Symphony Tract are (i) rising governmental fees and assessments may increase the
cost of construction; (ii) construction financing would be required to complete
the buildout and unpredictable financing costs could increase the cost of
construction; (iii) the Property could be lost in a tax sale if units are not
sold in the accompanying offering or certain assets are not sold by the Company
in order to meet its working capital (including any delinquent property taxes)
needs; (iv) competition in the area; and (v) approximately $55,000 of current
property taxes must be provided for.
The Property is located in the eastern portion of Oceanside, California.
It is primarily a bedroom community for employment centers in Southern Orange
County and San Diego County, California. According to the California State
Employment Development Department, the unemployment rate in both of those
counties has declined. The number of housing units under construction in the
Oceanside area has been improving since 1995.
Competition for lots and new homes in the area of the Property is strong.
The principal competition is from large homebuilders (such as Centex, Kaufman &
Broad Homes, Lennar Homes, and Greystone Homes) which are able to initiate
expensive and broad-based marketing campaigns. There are three directly
competing tracts and approximately 14 total projects offering homes of
comparable quality and price within a ten mile radius of the Property.
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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 100 more. Revenue from
membership sales and dues is expected to continue to increase in 1998 based on
investing an additional amount of about $700,000 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 a year before construction can begin. An initial investment of
approximately $3,000,000 will be required to begin timeshare construction and an
aggressive marketing program. If the Company is unable to obtain necessary
permits to develop the timeshare aspect of the Property, it will not be able to
go forward with such development and a potentially significant future source of
revenue will be lost.
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.
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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 principal risks involved in the Yosemite/Ahwahnee Properties are (i) as
of December 31, 1997, approximately $654,000 of property taxes are delinquent
and must be brought current or a statutory five-year payment plan must be
arranged with the County of Madera to avoid loss of the Properties for
delinquent property taxes; (ii) the need for substantial working capital to
operate and develop the recreational vehicle facility, the proposed timeshare
development, and the golf course facility; (iii) assuming that working capital
is available to accomplish the business plan, high marketing costs could
adversely affect profitability; (iv) due to the remote location and the resort
nature of the project, financing costs for development will be less readily
available and likely more expensive than financing costs for traditional
residential development projects in more heavily populated areas; and (v)
permits to develop the proposed timeshare aspects of the Property must be
obtained or that aspect of the Company's business plan will have no chance for
success.
The Company believes that the economic outlook for the golf course
operation is favorable. Given its proximity to Yosemite National Park and the
fact that the nearest comparable golf facility is approximately 15 miles away,
the Company expects that, with proper marketing, the use of the golf course will
increase. With regard to the recreational vehicle facility and the proposed
timeshare project, given its location in the much travelled, highly desirable
area near Yosemite Park, the Company believes that with proper marketing it will
be able to attract users of resort property to either the recreational vehicle
facility or the proposed timeshare units. Presently, California has a strong
economy with relatively low unemployment. The income demographics for the
products being offered at the Yosemite/Ahwahnee Properties range from $35,000 to
over $50,000 annually, and, according to the California Travel Parks
Association, there are 5,100,000 households in California with incomes over
$35,000 and 3,100,000 households in California with incomes exceeding $50,000.
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
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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. If the Company were to
move forward to construct the hotel/conference center, it is estimated that
approximately $40,000,000 of external funding would be required. If the
Company is unable to obtain such permits, the development of a
hotel/conference center in the Property (and the location of potential joint
venture partners for such development) will not be possible. That will
result in the need to sell the Property at a price below the Property's value
if it could be developed into a hotel/conference center in order to remove
the Property from the Company's books.
The material risks associated with the development of the Mori Point
Property are (i) potential loss of the Property for delinquent property taxes
which, as of December 31,1997, amount to $298,000, of which approximately
$142,000 are due in April 1998, unless funds can be generated to keep current
on the payment plan for delinquent property taxes worked out with the local
taxing authority; (ii) the Tentative Tract Map and Specific Plan for the
Property have expired and new entitlements must be processed which is costly
and time-consuming; (iii) two endangered species are located on the Property
requiring the preparation of an acceptable plan to mitigate disruption of
their habitats and there is no assurance that acceptable mitigation plans can
be proposed; (iv) if an acceptable mitigation plan cannot be developed, the
Property will have little value to the Company and it will be difficult to
sell at any cost; and (v) if the necessary permits to develop the Property
can be obtained, there is no assurance that the Company will be able to
successfully develop the Property into a hotel/conference center or find a
partner to assist in such project.
The Property is oceanfront property in the town of Pacifica, California,
located approximately ten miles from downtown San Francisco and five miles from
San Francisco International Airport. The San Francisco Bay Area has enjoyed an
economic boom for the last few years and it is on the cutting edge of the
emerging knowledge-based economy in the United States. The Bay Area is a
favorite destination for both tourists and conventioneers. It is desired for
its scenery, restaurants, mild climate, and varied types of entertainment.
The following table, based on information contained in the May 1997
appraisal of the Mori Point Property by PKF Consulting, provides a summary of
the current primary and second competition of the proposed executive conference
center for Mori Point.
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<TABLE>
Property Number of Rooms Amenities
-------- --------------- ---------
<S> <C> <C>
Primary Competition
Seascape Resort - Aptos 164 A, B, C, D
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 2,297
</TABLE>
- -------------
A - Restaurant
B - Meeting Rooms
C - Swimming Pool
D - Exercise Room
Estimated year-end 1996 occupancy level for the primary competition for a
Mori Point hotel/conference center was 67.8%; the secondary competitive market's
performance was at a higher occupancy level of 83.3% for the same period.
PRIORITY OF PROJECTS AND ESTIMATED TIMETABLE
If adequate working capital is available from the sale of units, the
Company will bring delinquent property taxes current and begin work on all of
the Properties promptly after the Acquisition is completed. If adequate working
capital is not raised from a sale of units, the Company plans to sell one or
more of the Sacramento/Delta Greens, Oceanside or Mori Point Properties to raise
such working capital. Sale prices for Sacramento/Delta Greens and Mori Point
may be below the appraised values used to determine the Exchange Values because
of the need to obtain governmental and approvals prior to their development.
The Company believes the Oceanside Property is salable because National
continues to discuss sale of the Property with interested potential buyers. The
Company believes both Sacramento/Delta Greens and Mori Point can be sold at
prices that would not be approved by the respective Programs' Investors.
Efforts to find such sales were never conducted by National because of the
Investors' desire to receive as nearly a full return of principal as possible.
While such prices might not have been attractive to the Programs' Investors,
they could provide needed cash capital to move the Company forward.
Approximately $11,400,000 would be required for the Company to obtain the
necessary permits and complete the development activities for all of the
Properties, except for construction financing required to actually build a
hotel/conference center on the Mori Point Property and construction financing
for the remaining tract of the Oceanside Property. The Company is concurrently
attempting to raise $10,000,000 from the sale of units in the Company to
existing Investors. Any funds from such offering would be focused on the
development of the Yosemite/Ahwahnee Properties as the Company considers the
Yosemite/Ahwahnee Properties to
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have the most potential for a long-term profits. Thus, in an environment with
limited working capital, any costs for the development or construction of any
of the other Properties would assume lesser priority in order to maximize the
potential of the Yosemite/Ahwahnee Properties.
If enough funds are raised from the sale of the units to fulfill the
Yosemite/Ahwahnee Properties' initial requirements (approximately $3,700,000),
the balance of the offering proceeds would be applied to the Sacramento/Delta
Greens, Mori Point and Oceanside Properties, in that order.
The Company plans on financing as many of the costs of the Properties as
possible from third party lenders or by entering into joint venture development
agreements with third parties. There are currently no committed sources of
external financing or prospective joint venture partners. However, as stated
above, the Company believes that third party lenders will be more willing to
provide financing where it can obtain title insurance which was not generally
available in the tenancy-in-common ownership structure. To the extent that
external sources of financing or joint venture partners are not available on
reasonable terms, the Company plans to sell one or more of the Sacramento/Delta
Greens, Oceanside or Mori Point Properties to raise operating capital.
The Company proposes to finance development of each of the Properties in
the following order of priority and manner:
YOSEMITE/AHWAHNEE PROPERTIES. Amount needed: $3,700,000. Funds would
come first from the unit offering proceeds. Balance, if any, from third party
financing, if available, or from sale of one or more of the Oceanside,
Sacramento/Delta Greens or Mori Point Properties.
SACRAMENTO/DELTA GREENS. Amount needed: initially, $175,000 to complete
the permitting and approval process. If the Company conducts the construction
of the homes, approximately $3,000,000 of capital will be needed for the
permitting, approvals, infrastructure and to build the initial phase of homes.
Funds for the permitting process would come first from unit offering proceeds, a
joint venture partner, or from sale of the Oceanside Property, with construction
funding to come from a traditional third party construction lender.
MORI POINT. Amount needed: initially: $500,000 to complete the
permitting and approval process. If the Company conducts the construction of
the hotel/conference center, approximately $3,000,000 of equity plus
approximately $40,000,000 of construction financing. Funds to complete the
permitting process would come from unit offering proceeds, a joint venture
partner in return for a profit participation, or sale of Oceanside or the
Sacramento/Delta Greens Properties. Funds for the equity portion would also
come from those sources. Construction funds would come from traditional
construction lenders, perhaps with the assistance of a joint venture partner.
OCEANSIDE. Amount needed: initially, approximately $700,000 to provide
equity for the construction of the infrastructure and the first phase of homes,
with approximately $3,500,000 construction financing coming from traditional
construction lenders. Such lenders were available when the Encore tract was
being built. The $700,000 would come from unit offering proceeds,
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joint venture partners, or, as a last resort, sale of the Sacramento/Delta
Greens or Mori Point Properties
Cash flow from operations cannot be counted upon to provide funding for the
continued development of the Programs Properties. Cash flow from sales of
Properties, such as a potential of approximately $3,000,000 from the sale of the
remaining Oceanside lots, would constitute a source for such financing. Except
for operating costs and property tax payments, the Company does not anticipate
any other capital or cash commitments. Pending property taxes will be brought
current, including applicable interest, from the proceeds of the unit offering.
Pursuant to statute, the Company will either enter into (in the case of the
Yosemite/Ahwahnee Properties) or succeed to (in the case of the other
Properties) payment plans which permit back property taxes to be paid over a
five year period. To the extent that cash capital is not available to make
timely payments under such plans, the Company believes that the Properties can
be sold at amounts in excess of property taxes that are due.
The Company's plans for the development of the Yosemite/Ahwahnee Properties
currently targets mid-1998 for the completion of 100 additional recreational
vehicle sites and the readiness of the initial timeshare units for sale.
Thereafter, additional recreational vehicle sites and timeshare units will be
built from cash flow. If funds are available either from external sources or
the unit offering, the Company estimates that the Sacramento/Delta Greens
Property will involve approximately three years to complete the permitting
process, construction and sell out to homebuyers or other builders in the area.
The Mori Point permitting process will require up to two years. Assuming
necessary permits to develop a hotel/conference center are obtained, a sale of
the Property or its development with a joint venture partner will be solicited.
The construction and sale of the remaining 111 lots and homes on the Oceanside
Property will take approximately two years if a bulk sale to another developer
is not sooner arranged. THERE IS NO ASSURANCE THAT THE ABOVE ESTIMATED
TIMETABLES FOR ANY OF THE PROPERTIES CAN BE MET.
TYPES OF BORROWING REQUIRED
The Company has not sought any financing, and will not commence the search
for financing unless and until the Acquisition is successfully completed. At
that time, the Company anticipates that it will seek infrastructure financing
and construction financing. Infrastructure financing is designed to provide
borrowed funds to construct roads, install utilities and other things necessary
for a Property to function in the manner anticipated. For example, a
residential development requires the installation of roads, sidewalks, sewer
lines, water lines, and power lines for it to be able to function as a
community. The principal risks involved in infrastructure financing involve the
cost (usually higher for infrastructure loans than construction or permanent
financing loans) and the risk that there will be no replacement financing in the
form of construction or permanent loans available when the loan is due resulting
in a default.
Construction loans involve the financing necessary to actually build a
proposed project once the infrastructure is in place. As with infrastructure
financing, it is secured by the real estate meaning the failure to generate
sales or operating cash flow sufficient to pay the loans will result in a
default and a potential loss of the land which has been provided as collateral.
While
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less risky than infrastructure loans, construction loans usually bear a
higher interest rate than permanent loans do. See "-- Impact of Interest
Rates on the Company."
IMPACT OF INTEREST RATES ON THE COMPANY
The Company intends to use traditional construction loan financing for the
buildout of the lots and homes on its Sacramento/Delta Greens and Oceanside
Properties, as well as for the construction of the timeshare units beyond the
initial models. If interest rates rise during the construction of and prior to
the sell out of the completed homes, then the prices of the homes would have to
be increased or the Company would have to absorb the increased cost and
associated decrease in profits. If prices are increased, some buyers may be
priced out of the market in, which case the Properties would have less potential
buyers and could suffer from a decline in volume of homes sold. In addition,
the sale of homes is dependent on adequate and competitive buyer financing.
Higher interest rates for potential homebuyers will result in a decrease and
velocity of homes sold. The Company may also consider some infrastructure
financing, for roads and utilities, for the Sacramento/Delta Greens Property.
If that occurs, then higher interest rates will negatively affect the
profitability of the Property. A falling interest rate environment will have
the opposite effect on these two Properties.
The Company intends to use its working capital to perform the planning,
engineering and other approval work for the Mori Point Property. It also
intends to use working capital and internally generated funds to finalize the
construction of an additional 100 recreational vehicle sites, as well as the
initial costs for the timeshare approvals and initial model construction for the
Yosemite/Ahwahnee Properties. In these cases, a rising or falling interest rate
environment will have little or no direct affect on those Properties. If the
Company decides later to use a construction loan to build the initial timeshare
models, then a change in interest rates will have the same affect as stated
above relative to the construction of the Sacramento/Delta Greens and Oceanside
Properties.
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.
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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
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. Some of such properties could be properties owned
by tenant-in-common lenders in other programs sponsored by National. 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. In making
such acquisitions, to the extent possible, the Company will attempt to use
shares of its common stock for some or all of the purchase price. This would
result in a dilution of the voting power of then-existing investors in the
Company.
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
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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.
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. The Board has not established any maximum debt limit for
the Company, although it intends to act prudently in borrowing funds for Company
operations.
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
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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.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
[DECEMBER 31], 1997 after giving effect to the completion of the Acquisition.
<TABLE>
[DECEMBER 31], 1997
-------------------
Pro Forma
Acquisition
-----------
<S> <C>
DEBT:
Capital lease obligations $ 340,563
-----------
Total debt 340,563
STOCKHOLDERS' EQUITY:
Common Stock(1) 2,497
Additional paid-in capital(1) 20,070,467
Accumulated deficit(2) -
-----------
Total stockholders' equity 20,072,964
-----------
Total capitalization $20,413,527
-----------
-----------
</TABLE>
- ---------------
(1) Gives pro forma effect to the Acquisition and the conversion of investor
interests into common stock ownership in the Company.
DILUTION
Assuming completion of the Acquisition, the following table sets forth on a
pro forma basis as of December 31, 1997, with respect to the founders,
consultants and existing Program Investors, a comparison of the number and
percentage of Shares purchased and cash or other consideration paid and the
average price per share.
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<TABLE>
Acquisition
--------------------------------------------------------
Shares Purchased Total Consideration Average
Price per
Number Percent Number Percent Share
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Founders and
Consultants 495,318 20% $ 951,064(1) 5% $1.92
Program Investors 2,001,248 80 19,066,364 95 9.53
--------- --- ----------- --- -----
Total 2,496,566 100% $20,017,428 100% $8.02
</TABLE>
- ----------------
(1) Amount consists of $4,953 of cash and $946,111 of fees that have been
incurred since 1994 that will be forgiven by National and its principals
upon the successful completion of the Acquisition.
SELECTED FINANCIAL INFORMATION
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.
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<TABLE>
Company Pro Forma The Acquisition Historical
----------------- ----------------------------------------------
Year Ended Years Ended
December 31, 1997 December 31
----------------- ----------------------------------------------
The Acquisition 1997 1996 1995
----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 5,193,012 $ 5,193,012 $ 6,213,299 $ 6,333,143
Cost of sales 4,081,530 4,081,530 5,224,186 5,346,735
----------- ----------- ----------- -----------
Gross profit 1,111,482 1,111,482 989,113 986,408
Expenses:
Selling, general and
administrative 5,005,566 3,781,566 3,436,719 2,033,496
Land write-down 1,299,651 1,299,651 845,000 -
Management fees 0 650,000 650,000 650,000
----------- ----------- ----------- -----------
Total expenses $ 6,305,217 $ 5,731,217 $ 4,931,719 $ 2,683,496
Net interest income 28,274 28,274 63,518 135,875
----------- ----------- ----------- -----------
Net loss (5,165,461) $(4,591,461) $(3,942,606) $(1,561,213)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share (2.07) N/A N/A N/A
-----------
-----------
Average number of shares
outstanding [2,496,566] N/A N/A N/A
-----------
-----------
Balance Sheet Data:
Cash and cash
equivalents 161,328 156,375 863,373 N/A
Total real estate 20,987,904 19,559,403 19,953,557 N/A
Total assets 25,085,663 23,596,673 25,869,260 N/A
Total debt 340,563 340,563 424,767 N/A
Total liabilities 5,012,699 5,958,810 4,415,241 N/A
Stockholders'/owners' equity 20,072,964 17,637,863 21,454,019 N/A
Other Data:
Cash provided by
operating activities (1,586,022) (1,236,022) (616,257) 652,473
Cash used in
investing activities (163,264) (163,264) (186,211) (436,545)
Cash provided by
financing activities 691,102 691,102 642,815 115,311
</TABLE>
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<TABLE>
The Acquisition Historical The Acquisition Historical
--------------------------------------- ----------------------------------
Years Ended Years Ended
December 31 December 31
--------------------------------------- ----------------------------------
1997 1996 1995 1997 1996 1995
----------- ----------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Program Investment Program
Data Data
OCEANSIDE MORI POINT
Cash and cash Cash and cash
equivalents $ 145,072 $ 660,207 $ N/A equivalents $ 7,204 $ 39,032 $ N/A
Real estate 3,322,329 3,219,920 N/A Real estate 4,100,000 4,100,000 N/A
Total assets 5,443,408 7,938,216 N/A Total assets 4,339,911 4,139,032 N/A
Total debt - 3,910 N/A Total debt - - N/A
Total liabilities 1,271,694 1,207,402 N/A Total liabilities 882,869 807,514 N/A
Total owners' equity 4,171,714 6,730,814 N/A Total owners' equity 3,457,042 3,331,518 N/A
Revenues 4,290,850 5,490,180 5,920,600 Revenues - - -
Gross margin 461,868 515,020 624,859 Gross margin - - -
Net Loss 1,857,850 548,675 367,219 Net Loss 279,448 189,125 146,867
AHWAHNEE SACRAMENTO/DELTA
GREENS
Cash and cash Cash and cash
equivalents $ - $ 101,551 $ N/A equivalents $ 4,099 $ 62,583 $ N/A
Real estate 10,137,074 10,404,135 N/A Real estate 2,000,000 2,230,000 N/A
Total assets 11,704,727 11,499,429 N/A Total assets 2,108,627 2,292,583 N/A
Total debt 340,563 420,857 N/A Total debt - - N/A
Total liabilities 3,495,010 2,141,259 N/A Total liabilities 309,237 259,066 N/A
Total owners' equity 8,209,717 9,358,130 N/A Total owners' equity 1,799,390 2,033,517 N/A
Revenues 902,162 723,119 412,543 Revenues - - -
Gross margin 649,614 474,093 361,549 Gross margin - - -
Net Loss 2,059,368 2,078,604 915,537 Net Loss 394,796 1,062,684 131,590
</TABLE>
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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 YEAR ENDED DECEMBER 31, 1997 TO 1996
For the year ended December 31, 1997, the net loss amounted to $1,857,850
compared to a net loss of $548,675 for the year ended December 31, 1996. The
change of results are primarily from the following factors: a decrease in
revenue of $1,199,330, which has been offset by a decrease in cost of sales of
$1,146,678, an increase in selling, general and administrative expenses of
$171,725 and a writedown in the real estate inventory of $1,069,651.
Revenues decreased in 1997 by $1,199,330 or 22% as compared to 1996. The
decrease was caused by 11 less homes being sold in 1997 as compared to 1996,
which has been partially offset by an increase in the average selling price of
each home of approximately five percent. This increase in average price is
principally due to the recovery in the California real estate market in 1997.
In addition, the company sold the remaining two undeveloped phases of the Encore
project during 1997.
Cost of sales decreased in 1997 by $1,146,678 or 23% as compared to 1996
primarily due to the decrease in the number of houses sold discussed above.
Selling, general and administrative expenses increased $171,725 (20%) due
to an increase in the sales incentives provided on houses sold during 1997 as
compared to 1996. The increase is also due to increases in salaries and wages
and consulting fees paid to employees and consultants in 1997 compared to 1996.
Based on the net proceeds received from the sale of the remaining inventory
lots during 1997, the Program wrotedown its real estate inventory to its
estimated fair value resulting in a $1,069,651 charge against income during the
year ended December 31, 1997.
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RESULTS OF OPERATIONS - THE YOSEMITE/AHWAHNEE PROGRAMS
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
For the year ended December 31, 1997, the net loss amounted to $2,059,368,
compared to a net loss of $2,078,604 for the year ended December 31, 1996. The
change of results is primarily from the following factors: an increase in
revenues of $179,043 which has been offset by an increase in selling, general
and administrative expenses of $136,466 and an increase in interest expense of
$19,819.
The increase in revenues of $179,043 (25%) 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 year ended December 31, 1996, as well as
an increase of $85,615 of recreational vehicle memberships during 1997.
The increase in selling, general and administrative expenses of $136,466
(6%) is a result of the increased operations of the golf course and the
increased recreational vehicle membership sales effort during 1997 as compared
to 1996.
RESULTS OF OPERATIONS - THE MORI POINT PROGRAM
COMPARISON OF YEAR ENDED DECEMBER 31, 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 $190,348 for the
year ended December 31,1996 to $281,034 at December 31, 1997, an increase of
$90,686. The operating expenses primarily consist of property taxes and
consulting fees related to feasibility studies performed on the property.
Property tax expense increased by $26,405 due to an increase in the assessed
property value, while consulting fees significantly increased as the Program
explored various development and entitlement options for the property.
Management fees were consistent for both years at $100,000 per year. These fees
were for the management and administration of the property.
RESULTS OF OPERATIONS - THE SACRAMENTO/DELTA GREENS PROGRAM
COMPARISON OF YEAR ENDED DECEMBER 31, 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 decreased from $169,649 for the
year ended December 31, 1996 to $115,620 at December 31, 1997, a decrease of
$54,029. The difference is a result of the employment of consultants during
1997 to perform studies related to the proposed development of the property.
Management fees were consistent for both years at $50,000 per year.
Due to a decrease of approximately 35% in the median prices of homes in the
communities surrounding Sacramento/Delta Greens during 1996 and a decrease in
the number homes zoned for this property during 1997, impairment losses of
$845,000 and $230,000 were
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recorded on the property's financial statements during the periods presented.
Originally, 596 homes were zoned for this property, while 534 homes are
currently zoned for this property.
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Acquisition on a pro forma basis as of December 31,
1997, the Company will have approximately $161,000 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 Acquisition, which if fully subscribed would result in net
proceeds of approximately $8,900,000.
In addition to the methods discussed above, the Company anticipates
creating additional liquidity through the following methods on an as needed
basis:
(a) Obtain additional mortgage debt against the Properties: At December
31, 1997, the Company had no debt and approximately $1,082,000 of delinquent
property taxes levied against its real estate, some of which is being paid
pursuant to statutorily permitted 5-year payment plans. Based on its lack of
significant leverage, the Company believes that some liquidity can be generated
through additional borrowings, if necessary. The Company believes that mortgage
debt will be available to it, when it was not available to National on behalf of
the Programs, because of the elimination of the tenancy-in-common ownership
structure. This will make available lenders' policies of title insurance which
are not available under the current structure.
(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. In
conjunction with this strategy, the remaining 23 parcels of the Encore property,
a development within the Oceanside Program, were sold during October 1997 for
net proceeds of $593,115. Except for the Oceanside Property which, based on
recent negotiations, the Company believes to be readily salable at approximately
the appraised value used to calculate Exchange Values, the Company believes that
the sale of the Sacramento/Delta Greens or Mori Point Properties would be
possible in bulk at prices discounted from the May 1997 appraisal values but for
more than the property taxes due.
(c) Reduce development capital needs through joint venture arrangements:
The Company believes that, due to the elimination of the tenancy-in-common
ownership structure which was cumbersome for potential partners, it will be able
to 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:
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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 $3,700,000 of funding
for this development phase which would last for approximately 6 years. The
source of funds is intended to be proceeds of the unit offering, third party
financing or sale of one of the Oceanside, Sacramento/Delta Greens or Mori Point
Properties. 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
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
approximately 465 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
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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
The Oceanside Program continued its development and sale of houses on the
Encore site during 1997 and decided to sell the remaining 23 undeveloped lots on
its Encore site at the end of 1997. This sale caused a decrease in the number
of houses sold by the Program from 30 in 1996 to 19 in 1997 and was the
significant factor causing the decrease in cash flows from operations of
$1,002,238 in 1996 to $297,288 in 1997. The Program continued limited
development of the Symphony site during 1996 and 1997 and repaid the line of
credit utilized to build houses on the Encore site during 1997.
THE YOSEMITE/AHWAHNEE PROGRAM
The Yosemite/Ahwahnee Programs experienced significant cash outflows from
operations during 1996 and 1997 due to the property of the Programs being in a
very early stage of development. As the property continues to progress toward
being fully developed, the amount of operational cash outflows should decrease
as a larger customer base will utilize current and future resort amenities.
These operational outflows, as well as the minimal expenditures made by the
Programs to expand the recreational vehicle park of the property, were funded by
contributions from current investors of the Programs.
THE MORI POINT AND SACRAMENTO/DELTA GREENS PROGRAMS
The Mori Point and Sacramento/Delta Greens Programs continued to explore
opportunities for development of their real estate assets during 1996 and 1997.
The expenditures made to investigate various development opportunities were paid
for by contributions from current investors of each Program.
NEW ACCOUNTING PRONOUNCEMENTS
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
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AND IN CONDENSED FINANCIAL STATEMENTS of interim periods issued to shareholders.
It also requires 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.
Statements of Financial Accounting Standards No. 132 "Employees'
Disclosures about Pensions and Other Postretirement Benefits" issued by the FASB
is effective for financial statements with fiscal years beginning after December
15, 1997. Earlier application is encouraged. The new standard standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable. The adoption of SFAS No. 132 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
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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 will establish further 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. Until
modified by the directors, the Company will follow the policies on investments
and borrowings set forth in this Prospectus.
The Company believes that its management has the requisite real estate
experience to fulfill the Company's business plan. While none of the officers
have extensive experience in the development, marketing and management of
timeshares, Messrs. Lasker and Orth have developed familiarity with the
operating aspects by participating in the management of the Yosemite/Ahwahnee
Properties. To the extent a property needs skills not possessed by management,
or cannot be efficiently provided by management, consultants will be hired to
provide those skills and services.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
Director Term
Name Age Position Expires(1)
- ---- --- -------- ----------
<S> <C> <C> <C>
David G. Lasker 52 Co-Chairman of the Board, 2000
President and Chief Financial
Officer
James N. Orth 51 Co-Chairman of the Board, 2000
Chief Executive Officer and
Secretary
L.C. "Bob" Albertson, Jr. 54 Executive Vice President of 1999
the Company and President and
Chief Executive Officer of
American Family Communities,
Inc., Director
Mark K. Kawanami 34 Vice President N/A
Charles F. Hanson 61 Director 1999
Dudley Muth 58 Director 1998
James G. LeSieur, III 56 Director 1998
</TABLE>
(1) Elected in 1997.
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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 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 a division
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 1996 to 1997, he was Corporate Controller for California
Pacific Homes, Inc. From 1995 to 1996, he was Director of Finance and
Administration for Creative Design Consultants, Inc. From 1991 to 1995, he
was Assistant Treasurer/Assistant Controller for A-M/Greystone Homes. After
leaving
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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 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 The 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.
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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 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. Until the
Committee is established, the Independent Directors will serve as the
Compensation Committee.
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>
Annual Common Stock
Name Position Salary(1) Options
- ---- -------- --------- -------
<S> <C> <C> <C>
David G. Lasker* Co-Chairman of the Board, $180,000 30,000(2)
President and Chief
Financial Officer
James N. Orth Co-Chairman of the Board, $180,000 30,000(2)
Chief Executive Officer
and Secretary
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L.C. "Bob" Albertson, Jr. Executive Vice President $200,000 30,000(2)
and Director of the
Company; President and
Chief Executive Officer of
American Family
Communities, Inc.,
Director
Mark K. Kawanami Vice President of the $100,000 5,000(2)
Company; 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) 10,000 to be issued upon completion of the Acquisition to Messrs. Lasker,
Orth and Albertson and 10,000 additional options to be issued to each of
them on the first and second anniversaries 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.
Messrs. Lasker, Orth and Albertson may exercise options for 3,333 shares
immediately. Mr. Kawanami's options will be issued upon completion of the
Acquisition and he may exercise options for 1,250 shares immediately. They
are exercisable at $10 per Share. Options issued at later dates will be
exercisable at market value on the date of issuance.
(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. The number of options is determined by formula for the
Independent Directors.
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 7,500 shares of Common Stock
pursuant to the Stock Incentive Plan. The term of each of such options will be
ten years from the date of grant and they will be exercisable one year after the
date of grant 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." Except for those options, the Company does not plan to grant
options under the Stock Incentive Plan until after the first year of operations.
NO CRITERIA FOR ISSUANCE OF OPTIONS OR RESTRICTED STOCK HAVE YET BEEN
DEVELOPED BY THE COMPENSATION COMMITTEE. There is no maximum number of options
that a single individual may receive.
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)
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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 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, Mr. Albertson for a term of three years, and Mr.
Kawanami for a term of one year, each subject to automatic one year extensions
unless terminated. The agreements provide for signing bonuses of $25,000 each
for Messrs. Lasker, Orth and Albertson and for initial annual salary
compensation as follows: Messrs. Lasker and Orth, each $180,000; Mr. Albertson
$200,000; and Mr. Kawanami $100,000. Each of the agreements for Messrs. Lasker
and Orth provides for annual increases of the greater of ten percent per annum
or the increase in the consumer price index for the metropolitan area in which
Newport Beach, California, is located and Mr. Albertson's provides for annual
salary increases of $25,000 per year for the second and third years of his
agreement. In addition, the salaries may be raised at the discretion of the
Board
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upon recommendation of the Compensation Committee. No criteria other than
prudent stewardship of Company resources exist for the exercise of such
discretion. Each agreement also contains provisions for discretionary bonus
consideration and a fixed bonus equal to two percent of pre-tax profits in the
case of Messrs. Orth, Lasker and Albertson, and up to 20% of base salary for Mr.
Kawanami. In addition, Messrs. Lasker, Orth and Albertson may receive
discretionary bonuses of up to 50% of base salary if certain to-be-budgeted
financial results are exceeded. 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.
Each agreement also provides for certain salary and benefit continuance for six
months if the officer is permanently disabled; and, provides for a severance
payment in the amount of 2.99 times for Messrs. Lasker, Orth and Albertson, and
.5 times for Mr. Kawanami, 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 for Messrs. Lasker, Orth and Albertson, and no more
than six equal monthly installments for Mr. Kawanami. 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 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
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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.
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.
PRIOR PROGRAMS
None of the executive officers of the Company have participated in the
operation of an entity with similar objectives to those of the Company, although
each of such officers has skills and experience in one or more of the types of
property to be acquired and operated by the Company. See "Management Following
the Acquisition -- Executive Officers and Directors" for biographical
information about the executive officers.
In the last ten years, National sponsored 12 programs which offered
tenancy-in-common interests in loans secured by real estate located in
California. Nine of such programs were public programs having raised more than
$100,000,000 from more than 6,000 investors and three were private programs.
The total amount of money raised from the private offerings was approximately
$900,000 from a total of 72 investors. Loans were made to developers of 11
California properties. One-half of one percent of the loans were made to
developers of shopping centers, approximately 30% to developers of mixed use
projects (commercial and residential) and approximately 70% to developers of
residential properties. All of the properties involved previously undeveloped
land. Of the amount loaned, approximately $13,000,000 was distributed back to
investors (all from public programs and none from private programs). Of the 12
lending programs, ten eventually were defaulted upon by the borrowers and two
paid the lender/investors in full. In each of the programs where borrowers
defaulted and National did not replace the borrower with another entity,
possession of the applicable property was taken through National's efforts and
the investors became the tenant-in-common owners of the properties through
trusts established for their benefit by National. Where possible, National is
in the process of trying to bring these properties to a point where they can be
sold or otherwise return as much as possible to the investors.
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None of the 12 tenancy-in-common lending programs had investment objectives
similar to those of the Company.
The names of the programs are: 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,
Cypress Lakes "Trudy Pat" Program (located in Contra Costa County, California),
Joshua Ranch "Trudy Pat" Program (located in Palmdale, California), Arciero-
Diamond Ridge "Trudy Pat" Program (located in Diamond Bar, California),
Esperanza "Trudy Pat" Program (located in Victorville, California), Stacey Rose
"A" "Trudy Pat" Program (located in Victorville, California), Stacey Rose "B"
"Trudy Pat" Program (located in Victorville, California), and Franklin Meadows
"Trudy Pat" Program (located in Sacramento, California). None of such programs
have been required to file reports with the Commission.
Only the Yosemite/Ahwahnee Properties and the Cypress Lakes property have
been acquired through foreclosure in the past three years. Detailed information
regarding the Yosemite/Ahwahnee Properties may be found at "Business and
Properties -- Properties -- Yosemite/Ahwahnee Properties." The Cypress Lakes
property consists of approximately 660 acres which were intended to be developed
into an 18-hole golf course along with 1,330 residential units.
In National's opinion, the principal adverse business development which
caused 10 of the 12 "Trudy Pat" loans to default was the precipitous decline of
the value of real estate throughout California brought about by the economic
recession that commenced in California in the early 1990s. The decline in real
estate values changed the economics of the projects planned by the developers so
that they were no longer able to project profitability for themselves. Further,
the availability of traditional financing for construction was significantly
reduced due to (i) the savings and loan association failures of the late 1980s
and (ii) bank regulatory requirements which tightened the availability of credit
generally and substantially increased the amount of equity required as a
prerequisite to obtaining a real estate development loan.
With real estate values down and the availability of credit substantially
reduced, the "Trudy Pat" borrowers elected to cut their losses, default on the
loans and turn the Properties over to the lender/Investors. This decision
resulted in the Investors in the various Programs becoming tenancy-in-common
beneficial owners of the real estate which secured the loans. This economic
reality was not unique to the Programs.
Certain prior performance schedules are included in Appendix at the back of
this Prospectus as Appendix 3. Schedule A shows, as of December 31, 1997,
general information about funds raised by the only program the offering for
which closed in the last three years. Schedule B shows, as of December 31,
1997, compensation paid to National or its affiliates by the eleven "Trudy Pat"
programs which have not been completed. Schedule C shows, as of December 31,
1997, the annual operating results of the eight "Trudy Pat" programs the
offering for which closed in the last five years. Schedule D shows general
information about the one program that was completed within the last five years.
See also "Background and Reasons for the Acquisition -- Historical Compensation
for Servicing, Asset
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and Property Management/Effect of Acquisition" and "-- Historical Cash
Distributions to Investors" for further information about compensation paid to
National and its affiliates and distributions to Investors in the Programs.
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>
Percent of All
Name and Address Common Stock Voting Shares Outstanding, Assuming
---------------- ------------ -----------------------------------
Acquisition
Acquisition Completed and All
Completed Only Units Sold
-------------- -----------------
<S> <C> <C> <C>
Yale Partnership for Growth
and Development, L.P.(1) [200,007] 8.01% 5.72%
4220 Von Karman Avenue
Suite 110
Newport Beach, CA 92660
J-Pat, L.P.(2) [200,007] 8.01% 5.72%
4220 Von Karman Avenue
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>
Percent Percent of Class
of Class if if Acquisition Common
Common Acquisition Completed and Stock Percent
Name/Position Stock Completed Only All Units Sold Options of Class
------------- ----- -------------- -------------- ------- --------
<S> <C> <C> <C> <C> <C>
David G. Lasker, President, Chief Financial
Officer and Director(2) [200,007] 8.01% 5.72% 10,000(1) 23.53%
James Orth, Chief Executive Officer,
Secretary and Director(3) [200,007] 8.01% 5.72% 10,000(1) 23.53%
L.C. "Bob" Albertson, Jr. Executive Vice
President, Director 54,118 2.17% 1.55% 10,000(1) 23.53%
Mark K. Kawanami 1,000 .04% .03% 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 [455,132] 18.23% 13.02% 42,500 100.00%
</TABLE>
- -------------
(1) Messrs. Lasker, Orth and Albertson each may exercise options to purchase
3,333 shares presently, and Mr. Kawanami, 1,250 shares. In addition, each
of Messrs. Lasker, Orth and Albertson will be issued 10,000 options on the
first anniversary of the Acquisition and 10,000 options on the second
anniversary of the Acquisition.
(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.
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
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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 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
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<PAGE>
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
Subject to the conditions set forth in this Prospectus, the Company is
offering to Investors in the Programs an aggregate of [2,001,248] 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,
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<PAGE>
<TABLE>
If your Adjusted Outstanding You will receive the following
Investment is $10,000 in number of Acquisition Shares
------------------------ ----------------------------
<S> <C>
Sacramento/Delta Greens 320
Oceanside 162
Yosemite/Ahwahnee I 354
Yosemite/Ahwahnee II 265
Mori Point 399
</TABLE>
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.
CONCURRENT OFFERING
In addition to the Consent Solicitation, the company is simultaneously
offering up to 1,000,000 units at $10 per unit to be issued exclusively to
existing program investors. The offering is a "best efforts" offering with no
minimum number of units which must be sold. There is no assurance that any
proceeds will be received. No sales can be completed unless 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 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.
If any funds are raised by the offering, they would be used to pay offering
expenses, acquisition expenses, property taxes due, and for working capital, as
detailed in the company's business plan. Any funds raised on exercise of
warrants would be used for working capital.
FOR ADDITIONAL INFORMATION ABOUT THE CONCURRENT OFFERING, SEE THE
PROSPECTUS WHICH ACCOMPANIES THIS CONSENT SOLICITATION STATEMENT AS A SEPARATE
DOCUMENT.
APPRAISALS AND FAIRNESS OPINION
GENERAL
Exchange Values were determined as of _________, 1998 [THE MONTH-END BEFORE
MAILING OF THIS PROSPECTUS] 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
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<PAGE>
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; however, due to the significant disparity between the May 1997 and the
October 1996 appraised values of the Yosemite/Ahwahnee I and II Properties,
management of National and the Company had to reconcile those appraisals to
arrive at Exchange Values for the Yosemite/Ahwahnee I and II Properties. See
"-- Conflicting Yosemite/Ahwahnee Properties' Appraisals" for adjustments to
the appraised values of the Yosemite/Ahwahnee Properties that were made to
arrive at those Exchange Values. Such appraised values were determined for the
Programs by the following appraisers:
<TABLE>
Name, Address of Appraisers
Name of Program and Date of Appraisal
--------------- ---------------------
<S> <C>
Sacramento/Delta Greens David E. Lane, Inc.
9851 Horn Road, Suite 150
Old Mills Winery Office Park
Sacramento, California 95827
Date: May 1997
Oceanside Boznanski & Company
283 North Rampart Street
Suite A
Orange, California 92868
Date: May 1997
Yosemite/Ahwahnee I and II Arnold Associates
751 West 18th Street
Post Office Box 272
Merced, California 95341
Date: May 1997
and
Name, Address of Appraisers
Name of Program and Date of Appraisal
--------------- ---------------------
The Mentor Group, Inc.
4333 Park Terrace Drive
Suite 200
Westlake Village, California 91361
Date: October 1996
Mori Point PKF Consulting
425 California Street
San Francisco, California 94104
Date: May 1997
</TABLE>
The aggregate appraised values of the assets covered by all appraisals (as
the Yosemite/Ahwahnee appraisals were reconciled by National and the Company) is
$20,515,575.
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<PAGE>
The above appraisers were selected because of their respective reputations
and experience in appraising the value of real estate of the type involved. In
addition, in the cases of Arnold Associates and Boznanski & Company, the
original borrowers had used these companies for the appraisals delivered to the
lenders (Investors) at the time the original "Trudy Pat" loan was made.
National felt their prior experience with the Yosemite/Ahwahnee Properties and
the Oceanside Property, respectively, might provide some cost savings to their
respective Programs.
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 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 Fairness
Opinion is 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. The
Independent Valuator has no obligation to update its Fairness Opinion. Neither
National nor the Company plans to request an update at present. There is no
contract, agreement or understanding between National or the Company on the one
hand and the Independent Valuator on the other hand regarding any future
engagement.
The Fairness Opinion is discussed in detail in "Background and Reasons for
the Acquisition -- Appraisals and Fairness Opinion."
EXPERIENCE OF INDEPENDENT APPRAISERS
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 for many years.
National believes that each of the independent appraisers is recognized among
such appraiser's 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.
MAY 1997 APPRAISALS
On behalf of the Programs, National engaged the independent appraisers
identified in "-- General" above in the Spring of 1997 to appraise the "as is,"
highest and best use, value of the real estate portfolio of the applicable
Program. Each of the independent appraisers has consented to reference to 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
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<PAGE>
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 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.
See Appendix 2 for definitions of these appraisal methods.
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.
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:
<TABLE>
Real Estate "As Is" Ownership Date Real Estate
Name of Program Value Conclusion(1) Value Conclusions
--------------- ------------------- --------------------------
<S> <C> <C>
Sacramento/Delta Greens $ 2,000,000 $ 3,075,000
Oceanside 2,850,000 6,484,000(2)
Yosemite/Ahwahnee I and II 20,916,000 19,641,000
Mori Point 5,500,000 4,100,000
-------------- -------------
TOTAL $ 31,266,000 $ 33,300,000
-------------- -------------
-------------- -------------
</TABLE>
- ----------------
(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) Since the Ownership Date, a significant number of lots have been sold.
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.
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<PAGE>
See Appendix 2 for a discussion of the assumptions, limitations and
qualifications of the appraisals.
THE MENTOR APPRAISAL
In the Fall of 1996, National hired The Mentor Group, Inc. ("Mentor") to
appraise the "highest and best use" value of the Yosemite/Ahwahnee Properties as
a guide for planning purposes. 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. 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.
In conducting the appraisal, representatives of The Mentor Group 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 the appraiser performed
site inspections on the real estate of each of the Programs in the Fall of 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.
The appraiser then estimated the value of the real estate of the
Yosemite/Ahwahnee Properties based on the approaches to valuation described
above.
CONFLICTING YOSEMITE/AHWAHNEE PROPERTIES' APPRAISALS
Faced with the significant disparity between the Yosemite/Ahwahnee
valuation conclusions of The Mentor Group and Arnold Associates, in order to
arrive at an Exchange Value for the Yosemite/Ahwahnee Properties, National used
its judgment regarding the two appraisals as follows:
First, with regard to the Ahwahnee Country Club portion of the combined
Properties, National judged the Arnold Associates appraisal as more reasonable
due to substantial improvements to the golf course and a doubling in the number
of golf course rounds played since the Mentor appraisal. Thus, the Arnold
appraisal of $4,480,000 for this portion of the Properties was used to determine
the aggregate value for purposes of calculating Exchange value.
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<PAGE>
Second, with regard to the Ahwahnee recreational vehicle park portion,
National accepted the Arnold Associates appraisal as more reasonable due to the
significant increase in membership sales from approximately 50 to over 150 since
the Mentor appraisal. Thus, the Arnold appraisal of $3,886,000 for this portion
of the Properties was used to determine the aggregate appraised value for
purposes of calculating Exchange Value.
Third, with regard to Phase I of the Ahwahnee Country Club Estate lots and
the balance of the land, National accepted the conservative Mentor appraisals of
$530,000 and $1,269,575, respectively, as more reasonable due to the time and
costs required to develop these parcels.
Fourth, the aggregate revised appraisal was allocated between the
Yosemite/Ahwahnee I and II Programs in accordance with the Property held by each
Program. National deemed this allocation reasonable because the portions of the
Property allocated to each Program could be reconciled to the appraisals. This
allocation yielded a revised appraised value of $3,912,454 to the
Yosemite/Ahwahnee I Property and $6,253,121 to the Yosemite/Ahwahnee II
Property.
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"
loans. National and 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.
UPDATES/CHANGES
None of the appraisers have any obligation to update their appraisals and,
at present, neither National nor the Company plan to obtain updates. 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.
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, the Income Tax Regulations,
judicial decisions, current positions of the
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<PAGE>
Treasury Department and the Internal Revenue 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 consultation by Investors with
their own tax advisors.
No advance rulings have been or will be obtained from the Service with
respect to any aspect of the Acquisition. Counsel to the Company, Arter &
Hadden LLP, is unable to give an opinion as to whether the Acquisition
transaction will be a tax-free or taxable transaction. Counsel has delivered
its opinion to the Company to the effect that the discussion under "Federal
Income Tax Consequences" accurately reflects the law as of the date of this
Prospectus. No other opinion of counsel has been or will be obtained with
respect to any tax aspect of the Acquisition. Unlike an advance ruling,
counsel's opinion is not binding on the Service and provides no assurance that
the Service will not challenge an Investor's or the Company's tax treatment of
the Acquisition. In the event of such 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. The
adverse consequences might not be the same for all Investors.
Upon receipt of a written request, a copy of the opinion will be
transmitted promptly, without charge, by the Company. Requests should be
addressed to Vivian Kennedy, National Investors Financial, Inc. 4220 Von Karman
Avenue, Suite 110, Newport Beach, California 92660.
INVESTORS ARE URGED TO 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 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.
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The Acquisition will qualify under Section 351 if (i) the Company is
not an "investment company," and (ii) collectively, the Investors in the
Programs who transfer 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 in Section 351 transfers will not invalidate the Acquisition from
qualifying as a Section 351 transaction. See, e.g., Revenue Ruling 77-449,
1977-2 C.B. 110.
(a) INVESTMENT COMPANY. The Acquisition will not qualify under
Section 351 if the Company is an "investment company" as defined in Section
351(e). Counsel to the Company is of the opinion that the Company is not an
investment company for this purpose.
(b) CONTROL. The Investors (all of whom will transfer property or
cash to the Company in exchange for Shares) must be in "control" of the Company
immediately after the exchange. 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 the 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.
(c) IMMEDIATELY AFTER THE EXCHANGE. The Investors also must be in
control of the Company "immediately after the exchange." This 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 and
is subject to the 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 concern raised by the possible application of the
step transaction doctrine to the Acquisition is that it may cause a sufficient
number of Investors, who will own 80% or more of the outstanding Shares on the
Effective Date, to be treated as owning less than 80% "immediately after the
exchange." This may occur if Investors in transactions CONTEMPLATED BY THEM ON
THE EFFECTIVE DATE dispose of Shares after the Effective Date. 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
Investor is not treated as holding his Shares "immediately after the exchange."
If, as a result of the application of this doctrine, a sufficient number of
Investors are not treated as holding their Shares "immediately after the
exchange," the Acquisition would not qualify under Section 351. 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
test:
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(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. Unlike the end result test, the mutual
interdependence test focuses on the relationships of the steps, not merely on
the end result.
(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.
2. APPLICATION TO THE ACQUISITION. The potential application of the step
transaction doctrine to Investors' acquisitions and subsequent dispositions of
their Shares depends on the specific facts and circumstances with respect to
each Investor who disposes of Shares. Neither the Company nor counsel to the
Company is in a position to make a determination as to whether Investors who
acquire at least 80% of the Shares will or will not be subject to the step
transaction doctrine. Consequently, counsel to the Company is unable to opine
as to whether the Acquisition qualifies under Section 351. However, because (i)
Investors will acquire 80% or more of the Shares in the Acquisition, and (ii)
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, the Company intends to take the
position that the Acquisition qualifies under Section 351. There can be no
assurance, however, that the Service will not take a contrary position.
Investors should recognize that if a relatively small number of Investors
subsequently dispose of their Shares in transactions subject to the step
transaction doctrine, the Acquisition will not qualify under Section 351.
Investors will acquire [80.16]% of the Shares of no units are sold, and will
acquire 85.83% of the Shares if all of the units are sold. See "Prospectus
Summary -- Exchange Value/Allocation of Shares." Accordingly, depending on the
number of units sold, if any, if Investors dispose of more than [0.17]% to more
than [5.84] % of the Shares in transactions subject to the step transaction
doctrine, the Acquisition will not qualify under Section 351. Conversely, if
Investors who acquire 80% or more of the Shares are not subject to the step
transaction doctrine, counsel to the Company is of the opinion that the
Acquisition will qualify under Section 351.
FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION
1. TAX CONSEQUENCES TO INVESTORS OF A SECTION 351 TRANSACTION. If the
Acquisition qualifies under Section 351, 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 transfers a Property to the Company in exchange
for Shares. Sections 357(b) and 357(c) provide special gain recognition rules
if one or more properties subject to liabilities are contributed to a
corporation for the principal purpose of tax avoidance or for other than a bona
fide business purpose, or if such liabilities exceed the tax basis of the
contributed
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<PAGE>
properties. Because of the nature and amount of the liabilities which will
be assumed by the Company, 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 equal the sum of the tax basis of his
interests in the 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
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 if his interests in the Properties are
held by him as capital assets or Section 1231(b) assets. An Investor's
interests in the 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 SECTION 351
TRANSACTION. If the Acquisition qualifies under Section 351, 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 Properties on the Effective Date will equal the sum of the tax
bases of the Investors in the Properties 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 ("tack") 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 for cash. 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
warrant 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 UNDER SECTION
351. As discussed above, the Company intends to report the Acquisition as a
qualifying under Section 351. However, if for any reason the Acquisition does
not qualify, the tax consequences will include the following:
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<PAGE>
(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
transferred by the Programs. The amount of gain or loss will equal the
difference between the tax basis of his interests in the Properties on the
Effective Date and his amount realized in the Acquisition. The amount realized
generally will equal 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 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
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 his tax basis in 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
146
<PAGE>
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 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 Consequences," will be passed upon for the Company by
Arter & Hadden LLP, Los Angeles, California.
147
<PAGE>
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 Statements 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 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 Statements 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
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<PAGE>
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.
"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, member or partner of any Person specified in (iii) above is an
officer, director, member or partner.
"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 price in the form of Shares, valued at $10 per
Share, by the Company, that the Company is willing to pay for the assets,
liabilities and business of a Program
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for purposes of allocating Shares among the Programs in the Acquisition.
Exchange Value of a Program is calculated as follows: appraisal value of
real estate plus book value of other assets minus liabilities plus the amount
of accrued fees and expenses to be forgiven by National and its affiliates 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.
"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" or "Service" 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.
"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.
"Person" means any natural person, partnership, corporation, limited
liability company, association or other legal entity.
"Program" means any one of the following: Sacramento/Delta Greens Program,
Mori Point Program, Oceanside Program, Yosemite/Ahwahnee I Program or
Yosemite/Ahwahnee II
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<PAGE>
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.
"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_ [60 DAYS FROM THE DATE THE
PROSPECTUS IS MAILED] and (ii) such later dates as may be selected by the
Company.
"Trudy Pat" means trust deed loan 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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<PAGE>
FINANCIAL STATEMENTS
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRO FORMA COMBINED FINANCIAL INFORMATION:
Pro Forma Combined Balance Sheet as of December 31, 1997 . . . . . . F-3
Notes to Pro Forma Combined Balance Sheet . . . . . . . . . . . . . . F-4
Pro Forma Combined Statement of Operations for the year
ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Pro Forma Combined Statement of Operations . . . . . . . . . F-7
AMERICAN FAMILY HOLDINGS, INC.
Report of Independent Certified Public Accountants. . . . . . . . . . F-9
Balance Sheet as of December 31, 1997 . . . . . . . . . . . . . . . . F-10
Notes to Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . F-11
THE OCEANSIDE PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . . F-13
Balance Sheet as of December 31, 1997 . . . . . . . . . . . . . . . . F-14
Statements of Operations for two years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . F-15
Statements of Owners' Equity for two years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . F-16
Statements of Cash Flows for two years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . F-17
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-18
THE YOSEMITE/AHWAHNEE PROGRAMS
Report of Independent Certified Public Accountants. . . . . . . . . . F-22
Balance Sheet as of December 31, 1997 . . . . . . . . . . . . . . . . F-23
Statements of Operations for two years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . F-24
Statements of Owners' Equity for two years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . F-25
Statements of Cash Flows for two years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . F-26
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-27
THE MORI POINT PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . . F-33
Balance Sheet as of December 31, 1997 . . . . . . . . . . . . . . . . F-34
Statements of Operations for two years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . F-35
Statements of Owners' Equity for two years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . F-36
Statements of Cash Flows for two years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . F-37
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-38
THE SACRAMENTO/DELTA GREENS PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . . F-41
Balance Sheet as of December 31, 1997 . . . . . . . . . . . . . . . . F-42
Statements of Operations for two years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . F-43
Statements of Owners' Equity for two years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . F-44
Statements of Cash Flows for two years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . F-45
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-46
</TABLE>
F-1
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED BALANCE SHEET
The following unaudited Pro Forma Combined Balance Sheet as of December
31, 1997 and the Pro Forma Combined Statement of Operations for the year ended
December 31, 1997 have been prepared to reflect the 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
(collectively, "The Acquisition"). The unaudited Pro Forma Balance Sheet has
been prepared as if The Acquisition had been consummated as of December 31,
1997. The unaudited Pro Forma Statement of Operations for the year ended
December 31, 1997 has been prepared as if The Acquisition occurred at the
beginning of the period 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-2
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31, 1997
------------------------------------------------------------
The Pro Forma Pro Forma
Company Programs(1) Adjustments Combined
------- ----------- ----------- --------
<S> <C> <C> <C> <C>
THE ACQUISITION
ASSETS:
Real estate, net. . . . . . . . . . . . . $ - $ 19,559,403 $ 1,428,501(2) $ 20,987,904
Cash and cash equivalents . . . . . . . . 3,901 156,375 1,052(4) 161,328
Restricted cash . . . . . . . . . . . . . - 1,421,670 - 1,421,670
Notes receivable. . . . . . . . . . . . . - 403,028 403,028
Goodwill. . . . . . . . . . . . . . . . . - - 55,536(4) 1,079,057
Property and equipment. . . . . . . . . . - 385,151 385,151
Deferred membership selling expense . . . - 538,993 - 538,993
Other assets. . . . . . . . . . . . . . . - 108,532 108,532
Due from affiliate. . . . . . . . . . . . - 1,023,521 (1,023,521)(5) -
Deferred acquisition costs. . . . . . . . 1,023,521 (1,023,521)(3) -
----------- ------------ ------------
Total assets. . . . . . . . . . . . . . 1,027,422 23,596,673 25,085,663
----------- ------------ ------------
----------- ------------ ------------
LIABILITIES:
Deferred membership revenue . . . . . . . - 1,181,577 1,181,577
Capital lease obligations . . . . . . . . - 340,563 340,563
Accounts payable and other liabilities. . - 2,108,678 2,108,678
Due to affiliate. . . . . . . . . . . . . 1,023,521 2,327,992 (1,023,521)(5) 1,381,881
(946,111)(4)
----------- ------------ ------------
Total liabilities . . . . . . . . . . . 1,023,521 5,958,810 5,012,699
----------- ------------ ------------
----------- ------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock. . . . . . . . . . . . . . . 391 0 2,001 (2) 2,497
Additional paid-in-capital. . . . . . . . 3,510 0 105 (4)
Accumulated deficit . . . . . . . . . . . - - (19,064,363)(2) (20,070,467)
Owners' equity. . . . . . . . . . . . . . - 17,637,863 1,002,594 -
----------- ------------ ------------
Total stockholders' equity. . . . . . . 3,901 17,637,863 (17,637,863)(2) 20,072,964
----------- ------------ ------------
Total liabilities and
stockholders' equity. . . . . . . . . 1,027,422 23,596,673 25,085,663
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
F-3
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED BALANCE SHEETS
PRO FORMA ADJUSTMENTS
These pro forma adjustments reflect the completion of the Acquisition. The
following sets forth the adjustments:
(1) Reflects the historical combined balance sheets of the Programs as of
December 31, 1997.
(2) To record the fair market value of the stock issued to the investment
programs being acquired in conjunction with the Acquisition in accordance
with the following schedule:
<TABLE>
<S> <C>
Net book value of Programs $ 17,637,863
Add: Excess of real estate appraised value over book value 1,428,501(a)
Fair value of assets acquired and stock issued in Acquisition 19,066,364
Less: Fair value of stock issued (2,001)
-------------
Net increase to additional paid-in-capital and accumulated
deficit $ 19,064,363
-------------
-------------
</TABLE>
(a) The carrying value of all non-real estate assets and liabilities are
deemed to approximate their fair values at the time of the Acquisition.
Due to the majority of the Company's shares and options being owned by the
original shareholders of the Company subsequent to the Acquisition, this
entity is considered the acquiror in the transaction. The transaction will
be consummated by issuing 2,001,248 shares of common stock of the Company,
valued at $9.53 per share, to the investors in the Programs. The value
per share of the Company's common stock is based on the following
calculations:
<TABLE>
<S> <C>
Fair value of net assets acquired in Acquisition $ 19,066,364
divided by the number of shares issued 2,001,248
-------------
Fair value per common share $ 9.53
-------------
-------------
</TABLE>
This excess purchase price is principally due to the appraised value of
the land held by the Mori Point Program being $1,400,000 greater than its
carrying value on the program's historical financial statements. Although
the appraised value of the land held by Oceanside Program is approximately
$470,000 less than its current book value, management has assumed that the
fair value of the land approximates its book value based upon offers to
buy the property received subsequent to the preparation of the appraisial.
(3) To reclass the various professional fees incurred to consummate the
transaction ($1,023,521) to goodwill. As the value of the consideration
given to the program investors and the Company is equal to the fair value
of assets received, no goodwill other than the costs of the acquisitions
should be recorded.
(4) To reflect the issuance of 105,215 shares of common stock of the Company to
the Company's founders and consultants in conjunction with the Acquisition
recorded as its fair market value of $9.53 per share. The fair value of
these shares less the cash paid for them, have been allocated between the
forgiveness of the amount owed by the Programs to the founders ($946,111)
and the cost of organizing the transaction ($55,536). The forgiveness of
accrued expenses upon successful completion of the Acquisition is
summarized by the following:
<TABLE>
<CAPTION>
Sacramento/
Ahwahnee ODI Mori Point Delta Greens TOTAL
--------- --- ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Total fees and advances
due to National $ 841,763 $ 800,000 $ 497,885 $ 188,344 $ 2,327,992
Amounts forgiven by National 105,000 704,000 - 137,111 946,111
---------- ---------- ---------- ---------- ------------
Total due to National
after Acquisition $ 736,763 $ 96,000 $ 497,885 $ 51,233 $ 1,381,881
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
</TABLE>
(5) To eliminate intercompany receivables and payables.
F-4
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED BALANCE SHEETS
(6) Segment Information
American Family Holdings, Inc. ("American") has two reportable segments:
vacation and leisure resort properties and residential home properties.
The vacation and leisure resort property is used to generate revenue
through a recreational vehicle membership plan, as well as a golf course
and resort operation. The residential home properties segment derives its
revenue from the development and sales of residential housing and lots.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
<TABLE>
SEGMENT ASSETS DECEMBER 31, 1997
Vacation and Residential Home
Leisure Resort Development All Other Total
-------------- ---------------- --------- -----
<S> <C> <C> <C> <C>
Segment Assets 13,733,228 5,443,408 7,848,538 25,025,174
RECONCILIATION OF ASSETS
Total assets for reportable segments 25,025,174
Cash 4,953
Goodwill 1,079,057
Elimination of receivables from
corporate headquarters (1,023,521)
-----------
Consolidated total assets after
adjustments 25,085,663
-----------
-----------
</TABLE>
F-5
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The pro forma combined statements of operations presented below reflect
the acquisition as previously described as if it 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>
Year Ended December 31, 1997
--------------------------------------
Pro Forma Pro Forma
Programs(1) Adjustments Combined
----------- ------------ ----------
<S> <C> <C> <C>
THE ACQUISITION
Revenues . . . . . . . . . . . . . $ 5,193,012 $ $ 5,193,012
Cost of sales. . . . . . . . . . . 4,081,530 4,081,530
----------- -----------
Gross profit . . . . . . . . . . . 1,111,482 1,111,482
Selling, general and
administrative . . . . . . . . . 3,781,566 350,000(2) 5,005,566
650,000(3)
224,000(4)
Land write down. . . . . . . . . . 1,299,651 1,299,651
Management fees. . . . . . . . . . 650,000 (650,000)(3) 0
----------- -----------
Total expenses . . . . . . . . . . 5,731,217 6,305,217
----------- -----------
Interest income (expense). . . . . 28,274 28,274
----------- -----------
Net income (loss). . . . . . . . . (4,591,461) (5,165,461)
----------- -----------
----------- -----------
Net loss per
common share(5). . . . . . . . . (2.07)
-----------
-----------
</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, 1997.
(2) To reflect the replacement of National as asset manager of the investment
programs with the new management structure of the Company:
<TABLE>
Year Ended
December 31, 1997
-----------------
<S> <C>
Officers and staff salaries to be included in selling, general and
administration after Acquisition $ 806,000
Officers salaries included in selling, general and administration
prior to Acquisition $(456,000)
---------
Pro forma adjustment to selling, general and administration $ 350,000
---------
---------
</TABLE>
(3) To reflect the cancellation of the servicing agreements between National
and the investment programs and the reclass of this associated overhead to
administrative expenses.
(4) To amortize goodwill arising from the Acquisition over its estimated useful
life of 5 years.
(5) Net loss per share is based on 2,496,566 weighted average number of shares
outstanding and does not include any warrants to be issued in conjunction
with the company's units offering.
(6) Segment Information
American Family Holdings, Inc. ("American") has two reportable segments:
vacation and leisure resort properties and residential home properties.
The vacation and leisure resort property is used to generate revenue
through a recreational vehicle membership plan, as well as a golf course
and resort operation. The residential home properties segment derives its
revenue from the development and sales of residential housing.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. However, in the
calculation of the pro forma loss for these segments, American officers
salaries, management fees and acquisition expenses were excluded.
DECEMBER 31, 1997
<TABLE>
Vacation and Residential Home
Leisure Resort Development All Other Total
-------------- ----------- --------- -----
<S> <C> <C> <C> <C>
Revenues 902,162 4,290,850 5,193,012
Segment profit/(loss) (1,795,368) (1,665,850) (674,243) (4,135,461)
</TABLE>
F-7
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(6) Segment Information (continued)
<TABLE>
PROFIT OR LOSS RECONCILIATION DECEMBER 31, 1997
<S> <C>
Total profit or loss for reportable segments (4,135,461)
Adjustment for expenses not included in segment loss:
Officers salaries (806,000)
Amortization of goodwill (224,000)
----------
Total pro forma loss after adjustments (5,165,461)
----------
----------
</TABLE>
F-8
<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 December 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 December 31, 1997 in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-9
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Cash 3,901
Deferred acquisition costs 1,023,521
---------
Total assets 1,027,422
---------
---------
LIABILITIES
Due to affiliate 1,023,521
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 - 390,103 391
Additional paid in capital 3,510
---------
Total stockholders' equity 3,901
---------
Total liabilities and stockholders' equity 1,027,422
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-10
<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 1,000,000 shares of common stock
and warrants (the "Units") 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.
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:
<TABLE>
Shares of
Investment Program Common Stock
- ------------------ ------------
<S> <C>
Oceanside 487,572
Yosemite/Ahwahnee I and II 834,322
Mori Point 485,704
Sacramento/Delta Greens 193,650
---------
2,001,248
</TABLE>
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.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs represent costs incurred by the Company in
conjunction with the acquisition of the net assets of investment programs and
the units offering described above. If the transaction is not successfully
completed, these costs will be expensed. Upon a successful completion of the
transaction, these costs will be allocated between (i) goodwill and (ii)
additional paid-in-capital, based on the relative value of the stock issued
in the acquisition and offering.
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 within two
years of the change of control event.
F-11
<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 7,500 shares of Common Stock
pursuant to the Stock Incentive Plan. The term of each of such options will be
10 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-12
<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, 1997,
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, 1997. 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, 1997, and the results of operations and
cash flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-13
<PAGE>
THE OCEANSIDE PROGRAM
BALANCE SHEET
<TABLE>
December 31,
1997
------------
<S> <C>
ASSETS:
Cash and cash equivalents $ 145,072
Restricted cash 1,421,670
Note receivable (Note 7) 50,000
Real estate property held for sale (Note 6) 3,322,329
Property and equipment, net (Note 3) 14,093
Other assets 46,597
Due from affiliate (Note 1) 443,647
----------
Total assets $5,443,408
----------
----------
LIABILITIES:
Accounts payable $ 274,664
Due to affiliate (Note 4) 800,000
Accrued expenses and other liabilities 197,030
----------
Total liabilities 1,271,694
COMMITMENTS AND CONTINGENCIES (Note 4)
OWNERS' EQUITY:
Owners' Equity 4,171,714
----------
Total liabilities and owners' equity $5,443,408
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
Year Ended December 31,
1997 1996
----------- ----------
<S> <C> <C>
REVENUES FROM HOME SALES $ 4,290,850 $5,490,180
COST OF HOME SALES 3,828,982 4,975,160
----------- ----------
GROSS PROFIT 461,868 515,020
EXPENSES:
Selling, general and administrative 1,014,712 842,987
Real estate inventory writedown (Note 7) 1,069,651 -
Related party management fees (Note 4) 300,000 300,000
----------- ----------
Total expenses 2,384,363 1,142,987
Interest income 64,645 79,292
----------- ----------
Net income (loss) $(1,857,850) $ (548,675)
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
Amount
-----------
<S> <C>
Balance January 1, 1996 $ 8,179,489
Capital distributions (900,000)
Net loss for the year (548,675)
-----------
Balance December 31, 1996 6,730,814
Capital distributions (701,250)
Net loss for the year (1,857,850)
-----------
Balance December 31, 1997 $ 4,171,714
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,857,850) $ (548,675)
Adjustments net loss to cash provided
by (used in) operating activities:
Depreciation and amortization 12,584 3,352
Real estate inventory writedown 1,069,651 -
Increase (decrease) from changes in:
Restricted cash 358,471 326,089
Note receivable (50,000)
Real estate inventory 1,161,508 1,155,537
Other assets (21,631) (24,120)
Due from affiliate (443,647) -
Accounts payable (311,104) 286,196
Accrued expenses and other liabilities 379,306 (196,141)
----------- -----------
Net cash provided by (used in) operating
activities 297,288 1,002,238
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (4,854) (17,600)
Additions to real estate property held for sale (102,409) (96,462)
----------- -----------
Net cash used in investing activities (107,263) (114,062)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds 1,821,560 3,600,000
Line of credit repayments (1,825,470) (3,596,090)
Contributions (distributions) (701,250) (900,000)
----------- -----------
Net cash provided by (used in)
financing activities (705,160) (896,090)
----------- -----------
Net increase (decrease) in cash and cash
equivalents (515,135) (7,914)
Cash and cash equivalents at beginning of period 660,207 668,121
----------- -----------
Cash and cash equivalents at end of period $ 145,072 $ 660,207
----------- -----------
----------- -----------
Cash paid during the period for interest $ 4,272 $ 9,526
----------- -----------
----------- -----------
</TABLE>
Interest capitalized for the year ended December 31, 1996 and 1997 were $14,939
and $4,536.
See accompanying notes to financial statements.
F-17
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
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. The first lien was kept intact after the date of grant to protect the
investors' interests in the underlying property during its development. As the
investors' interests are to be converted to common stock in conjunction with a
proposed acquisition of the Program, the underlying protection of the lien is no
longer needed and will be extinguished as part of the acquisition. 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 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, which consist of Oceanside Development, Inc. and Oceanside
Development, LLC, and do not include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), 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
1,000,000 units, which consists 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.
In conjunction with the contemplated transactions, the Program is currently
capitalizing the associated costs and recording these costs as due from the
American. These costs are currently shown as deferred acquisition costs on the
books of American. These costs will, however, be allocated against a ratio of
the proceeds received from the units offering and the value of the shares given
to the program investors in exchange for their undivided tenant-in-common
interests after the completion of both transactions.
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, 1997 was $1,421,670.
F-18
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1997, the Oceanside Development had
111 lots classified as property held for sale.
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. Examples of indicators of impairment include
a significant decrease in the market value of an asset, a significant change in
the extent or manner in which an asset is used or a significant adverse change
in legal or business factors that could affect the value of an asset. Assets
held for sale are to be carried at the lower of cost or fair value less the
costs to sell.
The estimation process in determining the fair 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.
F-19
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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, 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:
<TABLE>
December 31
1997
--------
<S> <C>
Office and computer equipment $ 5,787
Furniture and fixtures 25,145
--------
30,932
Less accumulated depreciation (16,839)
--------
$ 14,093
--------
--------
</TABLE>
NOTE 4. 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 and $300,000 for the years ended December 31, 1996 and 1997.
Additionally, the Program accrued compensation expense of $192,000 and $192,000
for the years ended December 31, 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 as of December 31, 1997 was $800,000.
F-20
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4. 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.
NOTE 5. 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 6. 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.
NOTE 7. REAL ESTATE INVENTORY WRITEDOWN
In October 1997, the Program sold the remaining lots on the Encore project
for $650,000, which included a note receivable of $50,000. This note bears
interest at 10% per annum and is due the earlier of (i) the close of escrow of
the last Encore lot sold by the purchaser or (ii) one year. All capitalized
construction costs incurred on the related lots in excess of the consideration
received have been written off in the current year.
F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Yosemite/Ahwahnee I and
II "Trudy Pat" Programs (the "Yosemite/Ahwahnee Programs") (as defined in
Note 1) as of December 31, 1997, 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, 1997. 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, 1997, and the results of
operations and cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-22
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
BALANCE SHEET
<TABLE>
December 31,
1997
------------
<S> <C>
ASSETS:
Real estate and improvements (Note 3) $10,137,074
Notes receivable (Note 4) 353,028
Property and equipment, net (Note 5) 371,058
Deferred membership selling expense (Note 11) 538,993
Other assets 61,935
Due from affiliate (Note 1) 242,639
-----------
Total assets $11,704,727
-----------
-----------
LIABILITIES:
Capital lease obligations (Note 6) 340,563
Accounts payable 303,400
Due to affiliate (Note 7) 841,763
Accrued property taxes (Note 7) 683,558
Accrued expenses and other liabilities 144,149
Deferred revenues (Note 11) 1,181,577
-----------
Total liabilities 3,495,010
COMMITMENTS AND CONTINGENCIES (NOTE 7)
OWNERS' EQUITY:
Owners' Equity 8,209,717
-----------
Total liabilities and
owners' equity $11,704,727
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF OPERATIONS
<TABLE>
Year Ended December 31,
----------------------------
1997 1996
----------- ----------
<S> <C> <C>
REVENUES
Golf course operations $ 765,167 $ 571,778
Sale of RV memberships 136,995 51,380
Sale of developed lots - 99,961
----------- -----------
Total revenues 902,162 723,119
COST OF SALES
Golf course operations 252,548 165,836
Developed lots - 83,190
----------- -----------
Total cost of sales 252,548 249,026
GROSS PROFIT 649,614 474,093
EXPENSES:
Selling, general and administrative 2,470,201 2,333,735
Related party management fees (Note 7) 200,000 200,000
----------- -----------
Total expenses 2,670,201 2,533,735
Interest income(expense) (38,781) (18,962)
----------- -----------
Net loss $(2,059,368) $(2,078,604)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
Balance January 1, 1996 10,295,663
Capital contributions 1,141,111
Net loss for the year (2,078,604)
-----------
Balance December 31, 1996 9,358,170
Capital contributions 910,915
Net loss for the period (2,059,368)
-----------
Balance December 31, 1997 $ 8,209,717
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended December 31,
---------------------------
1997 1996
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,059,368) $ (2,078,604)
Adjustments net loss to cash
provided by (used in) operating activities:
Cost of developed lots sold - 83,190
Depreciation and amortization 381,299 336,229
Increase (decrease) from changes in:
Other assets (114,023) (264,478)
Due from affiliate (242,639) -
Accounts payable 92,661 172,210
Accrued expenses and
other liabilities 622,226 304,920
Net deferral of sales revenues and selling expenses 443,673 198,910
----------- ------------
Net cash used in operating activities (876,171) (1,247,623)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment - (48,899)
Additions to real estate (56,001) (23,250)
----------- ------------
Net cash provided by (used in)
investing activities (56,001) (72,149)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease repayments (80,294) (67,088)
Contributions 910,915 1,141,111
----------- ------------
Net cash provided by (used in)
financing activities 830,621 1,074,023
----------- ------------
Net increase (decrease) in
cash and cash equivalents (101,551) (245,749)
Cash and cash equivalents
at beginning of period 101,551 347,300
----------- ------------
Cash and cash equivalents
at end of period $ - $ 101,551
----------- ------------
----------- ------------
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
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. The first liens were kept
intact after the foreclosure to protect the investors' interests in the
underlying property during its development. As the investors' interests are
to be converted to common stock in conjunction with a proposed acquisition of
the Programs, the underlying protection of the liens are no longer needed and
will be extinguished as part of the acquisition. 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. The
Company obtained an appraisal as of the date of foreclosure, 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 fair market 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,
which consist of Ahwahnee Golf Course and Resort, Inc., National Investors Land
Holding Trust VII and National Investors Land Holding Trust IX, and do not
include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), 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 will offer a maximum of 1,000,000 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.
In conjunction with the contemplated transactions, the Program is currently
capitalizing the associated costs and recording these costs as due from the
American. These costs are currently shown as deferred acquisition costs on the
books of American. These costs will, however, be allocated against a ratio of
the proceeds received from the units offering and the value of the shares given
to the program investors in exchange for their undivided tenant-in-common
interests after the completion of both transactions.
F-27
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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.
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. Examples of indicators of impairment include
a significant decrease in the market value of an asset, a significant change in
the extent or manner in which an asset is used or a significant adverse change
in legal or business factors that could affect the value of an asset.
The estimation process in determining the fair 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. The Program sells these recreational vehicle memberships to members
on a timeshare plan. The length of this plan ranges from the length of the
remaining lifetime of the primary member to the lifetimes of the primary member,
the primary member's child and the primary member's grandchild. The membership
rights include the use of the recreational vehicle park and facilities. The
only restriction to the membership is that members may only use the recreational
vehicle park for a maximum of seven days at a time with a minimum of seven days
between visits. These revenues are recognized into income on a straight-line
basis over the expected life of the memberships sold, which approximates 10
years. In addition, costs directly related to the sale of such memberships are
deferred and recognized as selling expenses over this same amortization period.
F-28
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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, 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:
<TABLE>
December 31,
1997
-------------
<S> <C>
Land $ 8,114,645
Land improvements 1,890,656
Buildings and improvements 820,783
-----------
10,826,084
Less accumulated depreciation (689,010)
-----------
$10,137,074
-----------
-----------
</TABLE>
F-29
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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
$24,950 as of December 31, 1997. As of December 31, 1997, a total of $324,502
of the notes receivable balance is expected to be collected after one year. The
total allowance for doubtful accounts as of December 31, 1997 is $41,073.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
December 31,
1997
------------
<S> <C>
Capital lease equipment $ 505,998
Furnitures and fixtures 25,349
Machinery and equipment 37,033
---------
568,380
Less accumulated depreciation (192,322)
---------
$ 371,058
---------
---------
</TABLE>
NOTE 6. CAPITAL LEASE OBLIGATIONS
Future minimum rental payments under noncancellable capital leases as of
December 31, 1997 were as follows:
<TABLE>
Amount
-------
<S> <C>
1998 120,923
1999 113,893
2000 113,893
2001 59,184
-------
Total minimum lease payments 407,893
Amount representing interest 67,330
-------
Present value of minimum lease payments 340,563
-------
-------
</TABLE>
F-30
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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
and $200,000 for the years ended December 31, 1996 and 1997. Additionally, the
Programs accrued compensation expense of $264,000 and $264,000 for the years
ended December 31, 1996 and 1997 payable to senior management of the Company,
who are also principals of National. Total accrued and unpaid management fees
and compensation as of December 31, 1997 were $841,763.
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 $683,558 as of December 31,
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, 1996 and 1997, the Company entered into
capital lease obligations of $298,572 and $0.
F-31
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 11. DEFERRED REVENUE AND MEMBERSHIP SELLING EXPENSES
Deferred revenue consists of amounts deferred in conjunction with the sales
of campground memberships. Components of the changes in deferred membership
selling expenses and deferred membership sales revenue are as follows:
<TABLE>
December 31,
------------------------
1997 1996
---------- --------
<S> <C> <C>
Deferred Selling Expenses:
Deferred selling expenses, beginning of year $ 263,508 $ 0
Expenses deferred 338,627 292,787
Expenses recognized (63,142) (29,279)
---------- --------
Net change 275,485 263,508
---------- --------
Deferred selling expenses, end of year $ 538,993 $263,508
---------- --------
---------- --------
Deferred Revenue:
Deferred revenue, beginning of year $ 462,419 $ 0
Revenue deferred 856,153 513,799
Revenue recognized (136,995) (51,380)
---------- --------
Net change 719,158 462,419
---------- --------
Deferred Revenue, end of year $1,181,577 $462,419
---------- --------
---------- --------
</TABLE>
F-32
<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,
1997, 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, 1997.
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, 1997, and the results of operations and
cash flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-33
<PAGE>
THE MORI POINT PROGRAM
BALANCE SHEET
<TABLE>
December 31,
1997
------------
<S> <C>
ASSETS:
Land $4,100,000
Cash and cash equivalents 7,204
Due from affiliate (Note 1) 232,707
----------
Total assets $4,339,911
----------
----------
LIABILITIES:
Due to affiliate (Note 3) $ 497,885
Accrued property taxes (Note 3) 298,369
Accrued expenses 86,615
----------
Total liabilities $ 882,869
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 3,457,042
----------
Total liabilities and
owners' equity $4,339,911
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
Year Ended December 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
EXPENSES:
Selling, general and administrative $ 181,034 $ 90,348
Related party management fees (Note 3) 100,000 100,000
--------- ---------
Total expenses 281,034 190,348
Interest income 1,586 1,223
--------- ---------
Net loss $(279,448) $(189,125)
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
Total
----------
<S> <C>
Balance January 1, 1996 3,318,333
Capital contributions 202,310
Net loss for the year (189,125)
----------
Balance December 31, 1996 3,331,518
Capital contributions 404,972
Net loss for the period (279,448)
----------
Balance December 31, 1997 $3,457,042
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended December 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(279,448) $(189,125)
Increase (decrease) from changes in:
Due from affiliate (232,707) -
Accrued expenses 75,355 25,847
--------- ---------
Net cash used in operating activities (436,800) (163,278)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 404,972 202,310
--------- ---------
Net cash provided by financing activities 404,972 202,310
Net increase (decrease) in cash and cash
equivalents (31,828) 39,032
Cash and cash equivalents at beginning
of period 39,032 -
--------- ---------
Cash and cash equivalents at end of period $ 7,204 $ 39,032
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
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 accounts of the
Program, which consists of the Mori Point Land Holding Trust, and do not
include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), 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 will offer a maximum of 1,000,000 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.
In conjunction with the contemplated transactions, the Program is currently
capitalizing the associated costs and recording these costs as due from the
American. These costs are currently shown as deferred acquisition costs on the
books of American. These costs will, however, be allocated against a ratio of
the proceeds received from the units offering and the value of the shares given
to the program investors in exchange for their undivided tenant-in-common
interests after the completion of both transactions.
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.
F-38
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LAND
Land is carried at cost. 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. Examples of
indicators of impairment include a significant decrease in the market value of
an asset, a significant change in the extent or manner in which an asset is used
or a significant adverse change in legal or business factors that could affect
the value of an asset.
The estimation process in determining the fair 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.
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
and $100,000 for the years ended December 31, 1996 and 1997. Total accrued and
unpaid management fees as of December 31, 1997 was $497,885.
F-39
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. 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 $298,369 as of December 31,
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-40
<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, 1997, 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, 1997. 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, 1997, and the results of
operations and cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-41
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
BALANCE SHEET
<TABLE>
December 31,
1997
------------
<S> <C>
ASSETS:
Land $2,000,000
Cash and cash equivalents 4,099
Due from affiliate (Note 1) 104,528
----------
Total assets $2,108,627
----------
----------
LIABILITIES:
Accounts payable $ 25,641
Due to affiliate (Note 3) 188,344
Accrued property taxes (Note 3) 45,502
Accrued expenses 49,750
----------
Total liabilities 309,237
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 1,799,390
----------
Total liabilities and owners' equity $2,108,627
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
Year Ended December 31,
------------------------
1997 1996
--------- -----------
<S> <C> <C>
EXPENSES:
Selling, general and administrative $ 115,620 $ 169,649
Land write-down (Note 5) 230,000 845,000
Related party management fees (Note 3) 50,000 50,000
--------- -----------
Total expenses 395,620 1,064,649
Interest income 824 1,965
--------- -----------
Net income (loss) $(394,796) $(1,062,684)
--------- -----------
--------- -----------
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
Total
-----------
<S> <C>
Balance January 1, 1996 2,833,629
Capital contributions 262,572
Net loss for the year (1,062,684)
-----------
Balance December 31, 1996 2,033,517
Capital contributions 160,669
Net loss for the year (394,796)
-----------
Balance December 31, 1997 $ 1,799,390
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended December 31,
------------------------
1997 1996
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(394,796) $(1,062,684)
Adjustment to reconcile net income
(loss) to net cash provided by (used in)
operating activities -
Real estate property write-down 230,000 845,000
Increase (decrease) from changes in:
Due from affiliate (104,528) -
Accounts payable (4,283) 29,924
Accrued expenses 54,454 (19,834)
--------- -----------
Net cash provided by (used in)
operating activities (219,153) (207,594)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 160,669 262,572
--------- -----------
Net cash provided by financing activities 160,669 262,572
--------- -----------
Net increase (decrease) in cash and cash
equivalents (58,484) 54,978
Cash and cash equivalents at beginning
of period 62,583 7,605
--------- -----------
Cash and cash equivalents at end of period $ 4,099 $ 62,583
--------- -----------
--------- -----------
Cash paid during the period for interest $ - $ -
--------- -----------
--------- -----------
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
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,
which consists of the Sacramento/Delta Greens Land Holding Trust, and do not
include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), 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
1,000,000 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.
In conjunction with the contemplated transactions, the Program is currently
capitalizing the associated costs and recording these costs as due from the
American. These costs are currently shown as deferred acquisition costs on the
books of American. These costs will, however, be allocated against a ratio of
the proceeds received from the units offering and the value of the shares given
to the program investors in exchange for their undivided tenant-in-common
interests after the completion of both transactions.
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.
F-46
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LAND
Land is carried at cost. 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. Examples of
indicators of impairment include a significant decrease in the market value of
an asset, a significant change in the extent or manner in which an asset is used
or a significant adverse change in legal or business factors that could affect
the value of an asset.
The estimation process in determining the fair 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.
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 and $50,000 for the years ended December 31, 1996 and
1997. Total accrued and unpaid management fees as of December 31, 1997 was
$188,344.
F-47
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. 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 $45,502 as of December 31,
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
In 1993, 596 lots were approved and appraised at a value of $5,159 per lot.
Based on an appraisal done in May 1997, the appraised value of the land had
decreased in 1996 by approximately 27% due to a decline in economic conditions
of the Sacramento/Delta Greens surrounding area, which resulted in the writedown
of the cost of the land of $845,000. Due to a decrease in zoning of the lots to
534 in 1997, a $230,000 writedown in the cost of the land was recorded during
the year ended December 31, 1997.
F-48
<PAGE>
APPENDICES
Appendix 1 Fairness Opinion
Appendix 2 Selected Additional Appraisal Information
Appendix 3 Prior Performance Schedules
<PAGE>
APPENDIX 1
[Form of Fairness Opinion]
_________ __, 1998
Boards of Directors of National Investors Financial, Inc.,
and American Family Holdings, Inc., and each of the Investors in the
following:
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
Ladies and Gentlemen:
We understand that a transaction is contemplated (the "Transaction") whereby
a newly formed company, American Family Holdings, Inc. (the "Company"), will
purchase the real estate (the "Properties"), other assets, liabilities and
business activities 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 [529,037] shares of common stock, represented by 216,867
shares each to two partnerships controlled by the principals of National and
95,313 total shares issued to employees of National and the Company, and
consultants to certain of the programs (collectively, the "Founders'
Shares"). As consideration for the purchase of the programs, the Company
will issue shares of common stock (the "Shares") to the respective Investors
in the following amounts: [193,650] Shares to the Sacramento/Delta Greens
Investors (representing [7.76] percent of the total shares outstanding after
the issuance of the Shares), [485,704] Shares to the Mori Point Investors
(representing [19.45] percent of the total Shares outstanding after the
issuance of the Shares), [487,571] shares to the Oceanside Investors
(representing [19.53] percent of the total Shares outstanding after the
issuance of the Shares), [320,567 Shares to the Yosemite/Ahwahnee I Investors
(representing [12.84] percent of the total Shares outstanding after the
issuance of the Shares) and [513,755] Shares to the Yosemite/Ahwahnee II
Investors (representing [20.58] percent of the total Shares outstanding after
the issuance of the Shares). In connection with the Transaction, it is
anticipated that the Company's common stock will be listed for public sale on
the ____________ under the symbol ________. The Company will also commence an
offering of additional common shares to the Investors in the aggregate amount
of up to $10,000,000, at a
A1.1
<PAGE>
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 80
percent of the Company's stock price 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 Transaction, on a fully diluted basis
inclusive of the Founders' Shares, from a financial point of view, to the
Investors in each of Sacramento/Delta Greens, Mori Point, Oceanside,
Yosemite/Ahwahnee I and Yosemite/Ahwahnee II. Our Opinion is limited to the
allocation of Shares to the Investors in connection with the Transaction.
Therefore, we have not performed an analysis of, and express no opinion with
respect to, the proposed price of $10 per Unit. In addition, 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 programs 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 _______, 1998;
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");
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,
A1.2
<PAGE>
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 home builder,
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);
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 two years ended December 31,
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 programs for the time periods covered in accordance with
generally accepted accounting principles consistently 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 programs
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.
A1.3
<PAGE>
Furthermore, at your request, we have not negotiated the Transaction or
advised you with respect to alternatives to it.
Our analysis began with a determination of the enterprise value of each of
the Programs on a stand alone basis. The enterprise value of most entities
whose primary business purpose is owning real estate is determined based on
the adjusted book value (or net asset value) approach. Therefore, we deemed
this to be a reasonable methodology for determining the enterprise value of
each of the Oceanside, Mori Point, Yosemite/Ahwahnee I and II, and Delta
Greens programs on a stand alone basis. In the adjusted book value approach,
the estimated current market value of individual assets and liabilities are
substituted for their carrying value on the programs' financial statements
(or book value). The enterprise value is the resulting value of the equity
after subtracting liabilities from the market value of assets.
To determine the current net asset value of each of the programs, we relied
on the Appraisals to represent the market value of the respective Properties,
except in the case of the Yosemite/Ahwahnee I and II Properties, wherein we
relied upon management's reconciliation of the two existing appraisals. In
either case, we assumed, without independent analysis or verification, that
the property values thus derived were representative of the current fair
market values of the respective Properties. In determining net asset value,
we used the book value as of December 31, 1997 for most of the non-real
estate assets. This was considered reasonable because the majority of these
assets consist of cash, restricted cash, accounts receivable, notes
receivable or amounts due from affiliates, which are relatively liquid and
worth approximately their book value. With respect to property and equipment
(excluding real estate), no appraisals were provided to us. Management
believes the book value of property and equipment to be reasonably indicative
of its market value. Deferred membership selling expense (an asset) and
deferred revenues (a liability) which appear on the balance sheet of the
Yosemite/Ahwahnee II program as of December 31, 1997 were eliminated because
these assets have no market value. Liabilities (except for deferred
revenues) were subtracted out at book value. In our net asset value
calculation, we did not reduce the liabilities by the estimated amounts to be
FORGIVEN by National. Using the aforementioned methodology, the resulting
net asset values as of December 31, 1997 were as follows (rounded to the
nearest $000): $3,700,000 for Oceanside (or 19.2 percent of the combined net
asset value); $3,171,000 for Yosemite/Ahwahnee I (or 16.5 percent of the
combined net asset value); $5,710,000 for Yosemite/Ahwahnee II (or 29.7
percent of the combined net asset value); $4,847,000 for Mori Point (or 25.2
percent of the combined net asset value); and $1,799,000 for Sacramento/Delta
Greens (or 9.4 percent of the combined net asset value).
When comparing the relative share of stand alone net asset value as shown
above to the relative allocation of shares among the Programs in connection
with the Transaction, the Mori Point and Sacramento/Delta Greens
allocations are very close (25.2 percent versus 24.0 percent for Mori Point
and 9.4 percent versus 9.6 percent for Sacramento/Delta Greens). On the other
hand, Oceanside's relative percentage in the Transaction (24.1 percent) is
approximately 490 basis points higher than its stand alone net asset value
would indicate and Yosemite/Ahwahnee I and II's (at 42.3 percent) are a
combined 390 basis points less than their combined stand alone net asset
value would indicate.
However, when the potential synergy among the programs based on the business
plan of the Company after the Acquisition are considered the Independent
Valuator felt that the fact that Oceanside will receive a premium to its stand
alone net asset value while Yosemite/Ahwahnee I and II will receive a
discount is very reasonable. In this regard, we reviewed the two feasibility
studies for the Yosemite/Ahwahnee I and II properties, as well as the Delta
Greens feasibility study. The Yosemite/Ahwahnee studies indicate that the
development of the Property as a mixed use resort, with primary emphasis on
the sale of time
A1.4
<PAGE>
share units, is feasible and could be expected to generate significant
positive cash flow over the next several years. However, additional
investment in infrastructure will be required before the project will become
cash flow positive. The feasibility study for the Delta Greens Property
indicates that residential development on the Property is feasible based on
expected home prices and absorption rates in spite of the fact that the
Property is located near a high crime area which will impact selling prices.
While no feasibility study was prepared for the Mori Point Property, the real
estate appraisal prepared for the Property was performed on the basis of
expected returns from a hotel conference center development, which was the
concluded highest and best use. However, substantial additional funding will
be required to bring that project to fruition.
Unlike the other programs whose properties require substantial additional
capital in order to realize their development potential, the Oceanside
program has been generating positive cash flow. Its property is also the
most liquid. Therefore, while the impact of this liquidity on the overall
equity allocation is inherently subjective and difficult to quantify, we
believe that the 490 basis point premium to net asset value to be received by
Oceanside in connection with the Transaction is reasonable because of the
value that its liquidity contributes to the overall business plan the Company
is expected to undertake after the acquisition. This premium is further
supported by the fact that there is a possibility that the Oceanside Property
could be sold for more than its appraised value. On the other hand, the fact
the Yosemite/Ahwahnee I and II Programs will collectively receive
approximately 390 basis points less than what they would receive purely on
the basis of stand alone net asset value is justified because these Programs
will require the largest amount of funding to be fully developed and have
been operating on a negative cash flow basis (which management estimates to
be currently approximately $25,000 per month). Since the negative cash flow
will continue for some period of time after the Transaction is consummated, at
least a portion of the 390 basis point differential relates to the transfer
of the responsibility for the operating deficit from the Yosemite/Ahwahnee I
and II Programs to the Company.
With respect to the [495,318] Founders Shares, we were primarily concerned
with the [400,014] Shares to be issued to the family limited partnerships
under the control of David Lasker and James Orth. For analytical purposes,
we considered these shares as consideration for three separate items. The
first represents consideration for the approximately $946,000 FORGIVENESS of
indebtedness, which equates to 94,611 Shares based upon an assumed price of
$10 per Share. The second component relates to the consideration for Messrs.
Lasker and Orth in connection with their responsibilities as officers of the
Company. We assumed this number of shares would be approximately 50,000
Shares, which represents the approximate amount of shares to be issued to Mr.
Albertson on the basis of arm's length negotiations. The remaining 205,403
Shares, or _____ percent of the total Shares to be issued in connection with
the Acquisition, represents consideration for the role of Messrs. Lasker and
Orth in structuring and completing the Acquisition, which is reasonable given
the fact that the transaction they have structured should, among other
things, enhance the Investors' liquidity more than enough to offset the
dilution resulting from the issuance of the Shares. Even though there is no
guarantee that an active market will develop for the Company's Shares, when
compared with likely discounts for lack of marketability in excess of 30
percent for their current ownership interests (based on historical studies),
the Investors' liquidity should be expected to be increased significantly.
A1.5
<PAGE>
Based on the foregoing, and in reliance thereon, it is our opinion that the
allocation of the Shares pursuant to the Transaction, on a fully diluted
basis 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 Transaction. This Opinion
is delivered to you subject to the conditions, scope of engagement,
limitations and understandings set forth in this Opinion and subject to the
understanding that the obligations of HVA in the Transaction 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
A1.6
<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.)
<TABLE>
<S> <C> <C>
Sales Comparison Approach(1) $2,134,000
Land Residual Approach(2) 2,403,000
Discounted Cash Flow(3) 1,815,000
Conclusion of "as is" value $2,000,000
----------
----------
</TABLE>
Heaviest reliance was placed on the Sales Comparison Approach
because the Property is undeveloped and generates no revenue.
Material Assumptions
- As of the 1993 date of value the property was approved for 596
lots, including 144 duplexes.
- As of the 1997 date of value the property is approved for 534
lots, all single family.
- Physical and economic conditions as of the 1993 date of value
were as reported in the appraisal. No inspection or investigation was made
in 1993.
- Assumptions particular to cash flow analysis
- A sell-out, or absorption, period of ten years.
- A base paper lot value of $7,500 for small groups of lots, with
step-up increases of $500 per lot per year - as many option or phased sales
are usually arranged (last year is at $12,000 per lot).
- Lots sold in groups of two phases per year in numerical order,
using the current tentative map of 534 lots.
- Commission and marketing of 5%, as limited sales agreements are
envisioned.
- Real estate taxes based on an interpolated value of $2,000,000,
times the combined 1.5% tax and levies rate, with the declining total value
of the remaining lots increased by 2% annually.
A2.1
<PAGE>
- Miscellaneous costs, such as insurance and overhead, of 1% of
sales.
- A discount rate of 20%.
OCEANSIDE PROGRAM (Boznanski & Company)
SYMPHONY 111 lots
<TABLE>
<S> <C> <C>
Sales Comparison Approach(1) $2,636,000 - $3,164,000
Land Residual Approach(4) 2,850,000
Conclusion of "as is" value $2,850,000
----------
----------
</TABLE>
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)
<TABLE>
<S> <C> <C>
Discounted Cash Flow(3) $5,300,000
Ground Rent Capitalization Approach(5) 6,000,000
Sales Comparison Approach(1) 5,400,000
Conclusion of "as is" value $5,500,000
----------
----------
</TABLE>
Material Assumption
- The project will be open by January 1, 2001.
- Assumes a sell out of ten years
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
<TABLE>
<S> <C> <C>
Sales Comparison Approach(1) $5,400,000
Income Approach(6) 4,810,000
Cost Approach(7) 6,270,000
Conclusion of "as is" value $4,480,000*
-----------
-----------
</TABLE>
* 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.
A2.2
<PAGE>
Material Assumption
- Stabilized income and rounds played.
RV PARK
<TABLE>
<S> <C> <C>
Sales Comparison Approach(1) $3,886,000
Cost Approach(7) 3,986,000
Conclusion of "as is" value $3,886,000
----------
----------
</TABLE>
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.
<TABLE>
<S> <C>
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
</TABLE>
In each of the last 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.
Valuation qualification for the Estates: Changes in concept and
realignment of Road 621 could change density and possibly trigger additional
wildlife habitat easement acreage.
YOSEMITE/AHWAHNEE I AND II (MENTOR)
Utilizing a sales comparison approach(1) for the undeveloped land
and a cost approach(7) for the balance of the Properties, in October 1996,
The Mentor Group, Inc. appraisal valued the
<TABLE>
<S> <C> <C>
Country Club Estates ("as is") $ 530,000
Remaining Real Estate
Land 1,895,000
Buildings 1,025,000
Land Improvements 541,200
Conclusion of "as is" value $4,000,000
----------
----------
</TABLE>
At the time of the appraisal, The Mentor Group did not adopt the income
capitalization approach for the golf course portion because it was not
projected to be profitable in the near future and needed considerable
expenditures to be operational. The sales comparison approach was not used
for the golf course portion because there were no comparable sales.
- ---------------
(1) The SALES COMPARISON APPROACH produces an estimate of value by comparing
the sales and/or listings of similar properties in the same area as the
subject property or in competing areas. This technique is used to indicate
the value established by informed buyers and sellers in the market.
A2.3
<PAGE>
(2) In a LAND RESIDUAL ANALYSIS, a simple deduction is applied to an estimated
finished-lot price that a homebuilder could afford to pay in the
neighborhood.
(3) A DISCOUNTED CASH FLOW ANALYSIS is used to value vacant land that has the
potential for development for a use when that use represents the likely
highest and best use of the land.
(4) The OCEANSIDE RESIDUAL LAND analysis includes two separate scenarios. The
first utilizes a finished land value estimate, and the second utilizes a
finished product (land plus home plus site improvements) as a basis from
which to back out all necessary costs to arrive at the finished values.
(5) The GROUND RENT APPROACH is particularly appropriate for special use
properties such as hotels, where there is not a sufficient number of truly
comparable land sales to accurately estimate the value of the site using
the sales comparison approach. Ground rent is the amount paid for the
right to use and occupy the land according to the terms of a ground lease.
It corresponds to the value of the land owner's interest in the land, the
lease fee interest.
(6) The INCOME CAPITALIZATION APPROACH is based on an estimate of the subject
property's possible net operating income. The net operating income is
capitalized to arrive at an indication of value from the standpoint of an
investment. This method measures the present worth of anticipated future
benefits (net income) derived from the property.
(7) The COST APPROACH considers the current cost of reproducing or replacing a
property, less accrued depreciation in the property. A summation of the
market value of the land assumed vacant and reproduction cost new of the
improvements provides an indication of the total value of the property.
A2.4
<PAGE>
General Appraisal Assumptions
1. SACRAMENTO/DELTA GREENS PROGRAM
- The legal description, dimensions, and areas used herein are assumed
to be correct.
- Title to the property is assumed to be free and clear of any liens or
encumbrances, and to be merchantable title, unless otherwise specified herein.
- No responsibility is assumed for matters that are legal in nature.
- Information furnished by the appraiser by others has been reviewed and
analyzed and is believed to be reasonably accurate, but cannot be guaranteed.
- Unless otherwise specified herein, it is assumed that there are no
adverse subsurface conditions, particularly those relating to soil-bearing
capacity.
- Unless otherwise stated in this report: The existence of hazardous
material, which may or may not be present on the property, was not observed
by the appraiser. The appraiser has no knowledge of the existence of such
materials on or in the property. The appraiser, however, is not qualified to
detect such substances. He presence of substances such as asbestos, radon
urea-formaldehyde foam insulation, or other potentially hazardous materials
may affect the value of the property. The value estimate is predicated on
the assumption that there is no such material on or in the property that
would cause a loss in value. No responsibility is assumed for any such
conditions, or for any expertise or engineering knowledge required to
discover them.
2. OCEANSIDE PROGRAM
- That the vesting and legal description furnished this appraiser are
correct.
- That measurements and areas furnished by others are correct. No
survey has been made for the purpose of the appraisal.
- That the maps and exhibits found in this report are provided for
reader reference purposes only. No guarantee as to accuracy is expressed or
implied.
- That the property is appraised as if free and clear of liens and that
the title is good and marketable.
- That no guarantee is made as to the corrections of estimates or
opinions furnished by others which have been used in making this appraisal.
- That no liabilities be assumed on account of inaccuracies in such
estimates or opinions.
- That no liability is assumed on account of matters of a legal nature
affecting this property, such as title defects, liens, encroachments,
overlapping boundaries, etc.
A2.5
<PAGE>
- Unless otherwise stated in this report, the existence of hazardous
material, which may or may not be present on the property, was not observed
by the appraiser. The appraiser has no knowledge of the existence of such
materials on or in the property. The appraiser, however, is not qualified to
detect such substances such as asbestos, urea-formaldehyde foam insulation,
or other potentially hazardous materials may affect the value of the
property. The value estimate is predicated on the assumption that there is
no such material on or in the property that would cause a loss in value. No
responsibility is assumed for any such conditions, or for any expertise or
engineering knowledge required to discover them the client is urged to
retain an expert in this field, if desired.
- It is assumed that there are no hidden or unapparent conditions of the
property, subsoil, or structures that render it more or less valuable. No
responsibility is assumed for such conditions or for arranging for
engineering studies that may be required to discover them.
3. MORI POINT
- The appraiser assumes no responsibility for economic, physical or
demographic factors which may affect or alter the opinions in this report if
said economic, physical or demographic factors were not present as of the
date of the letter of transmittal accompanying this report. The appraiser is
not obligated to predict future political, economic or social trends.
- In preparing the report, the appraiser was required to rely on
information furnished by other individuals or found in previously existing
records and/or documents. Unless otherwise indicated, such information is
presumed to be reliable. However, no warranty, either express or implied, is
given by the appraiser for the accuracy of such information and the appraiser
assumes no responsibility for information relied upon later found to have
been inaccurate.
- No opinion as to the title of the subject property is rendered. Data
related to ownership and legal description was obtained from the attached
title report records and is considered reliable. Title is assumed to be
marketable and free and clear of all liens, encumbrances, easements and
restrictions except those specifically discussed in the report. The property
is appraised assuming it to be under responsible ownership and competent
management, and available for its highest and best use.
- The appraiser assumes no responsibility for hidden or unapparent
conditions of the property, subsoil, ground water or structures that render
the subject property more or less valuable. No responsibility is assumed for
arranging for engineering, geologic or environmental studies that may be
required to discover such hidden or unapparent conditions.
- The appraiser has not been provided any information regarding the
presence of any material or substance on or in any portion of the subject
property or improvements thereon, which material or substance possesses or
may possess toxic, hazardous and/or other harmful and/or dangerous
characteristics. Unless otherwise stated in the report, the appraiser did not
become aware of the presence of any such material or substance during the
appraiser's inspection of the subject property. However, the appraiser is
not qualified to investigate or test for the presence of such materials or
substances. The presence of such materials or substances may
A2.6
<PAGE>
adversely affect the value of the subject property. The value estimated in
this report is predicted on the assumption that no such material or substance
is present on or in the subject property or in such proximity thereto that it
would cause a loss in value. The appraiser assumes no responsibility for the
presence of any such substance or material on or in the subject property, nor
for any expertise or engineering knowledge required to discover the presence
of such substance or material. Unless otherwise stated, this report assumes
the subject property is in compliance with all federal, state and local
environmental laws, regulations and rules.
- Unless otherwise stated, the subject property is appraised assuming it
to be in full compliance with all applicable zoning and land use regulations
and restrictions.
- Unless otherwise stated, the property is appraised assuming that all
required licenses, permits, certificates, consents or other legislative
and/or administrative authority from any local, state or national government
or private entity or organization have been or can be obtained or renewed for
any use on which the value estimate contained in this report is based.
- No engineering survey has been made by the appraiser. Except as
specifically stated, data relative to size and area of the subject property
was taken from sources considered reliable and no encroachment of the subject
property is considered to exist.
- It is assumed that the utilization of the land and/or improvements is
within the boundaries or property described herein and that there is no
encroachment or trespass.
- It is assumed that the utilization of the land and/or improvements is
within the boundaries or property described herein and that there is no
encroachment or trespass.
4. YOSEMITE/AHWAHNEE I AND II (Arnold)
- No responsibility is assumed for the legal description or for matters
including legal or title considerations. Title to the property is assumed to
be good and marketable unless otherwise stated. The property is assumed to
be available for its highest and best use.
- The property is appraised free and clear of any or all liens or
encumbrances unless otherwise stated.
- Responsible ownership and competent property management are assumed.
- The information furnished by others is believed to be reliable.
However, no warranty is given for its accuracy.
- The appraiser assumes no responsibility for economic or physical
factors occurring after the date of value which may affect the opinions
herein stated. The projections included in this report are subject to
changes in future conditions that cannot be accurately predicted by the
appraiser and could affect the future income or value projections.
- No engineering survey has been made by the appraiser. Except as
specifically stated, data relative to size and area were taken from sources
considered reliable. The plot plans
A2.7
<PAGE>
and illustrative material in this report are included only to assist the
reader in visualizing the property.
- That there are no hidden or unapparent conditions of the property,
subsoil, or structures that render it more or less valuable. No
responsibility is assumed for such conditions or for arranging for
engineering studies that may be required to discover them.
- That there is full compliance with all applicable federal, state, and
local environmental regulations and laws unless noncompliance is stated,
defined, and considered in the appraisal report.
- That unless otherwise stated in this report, the existence of
hazardous material, which may or may not be present on the property, was not
observed by the appraiser. The appraiser has no knowledge of the existence
of such materials on or in the property. The appraiser however, is not
qualified to detect such substances. The presence of any potentially
hazardous materials or substances may affect the value of the property. The
value estimate is predicated on the assumption that there are no such
materials or substances on or in or under the property that would cause a
loss in value. No responsibility is assumed for any such conditions, or for
any expertise or engineering knowledge required to discover them.
- That all applicable zoning and use regulations and restrictions have
been complied with, unless a nonconformity has been stated, defined, and
considered in the appraisal report.
- That all required licenses, certificates of occupancy, consents, or
other legislative or administrative authority from any local, state, or
national government or private entity organization have been or can be
obtained or renewed for any use on which the value estimate contained in this
report is based.
- That the utilization of the land and improvements is within the
boundaries or property lines of the property described and that there is no
encroachment or trespass unless noted in this report.
5. YOSEMITE/AHWAHNEE I AND II (Mentor)
- The title of the property is marketable.
- Unless otherwise indicated, the property is free and clear of all
liens, encumbrances, easement and restrictions.
- The property does not exist in violation of any applicable codes,
ordinances, statutes or other governmental regulations.
- The property is under responsible ownership and competent management
and is available for its highest and best use.
- Information supplied by others, which was considered in this
valuation, came from sources believed to be reliable. The appraiser assumes
no further responsibility for its
A2.8
<PAGE>
accuracy. The appraiser reserves the right to adjust the valuation herein
reported by consideration of additional or more reliable data that may become
available.
- The appraiser assumes no hidden or unexpected conditions of the
property exist which would adversely affect value.
- The appraiser assumed no responsibility for economic or physical
factors occurring after the date of value which may affect the opinions
reported.
- Hazardous substances, if present in a facility, can introduce an
actual or potential liability that will adversely affect the marketability
and value of the facility. Such liability may take the form of immediate
recognition of existing hazardous conditions. Future liability could stem
from the release of currently nonhazardous contaminants, such as asbestos
fibers or toxic vapors from urea formaldehyde foam insulation, through aging
or building renovations.
- In the development of the appraiser's opinion of value, no
consideration has been given to such liability or its impact on value. The
appraiser is not qualified to investigate the possible presence of toxic
materials requiring either immediate or future correction.
- The overall site does contain various easements, as well encumbering
the larger landholdings, which are assumed not to adversely affect the
utilization of the subject land.
- All governmental approvals necessary to permit development for the
proposed residential, recreational vehicle timeshare area are assumed
available as per actual discussions with the Madera County planner. However,
no preliminary site plans showing the proposed development were submitted.
A2.9
<PAGE>
APPENDIX 3
PRIOR PERFORMANCE SCHEDULES
A3.1
<PAGE>
APPENDIX 3
SCHEDULE A
The purpose of Schedule A is to show, as of December 31, 1997, information
about the funds raised and the associated offering expenses of the only
"Trudy Pat" program which closed in the three most recent years. The
business objective of the program was to earn a higher rate of interest on
money than was available from financial institutions and to receive a return
of the principal advance in four years or less. THIS PROGRAM DID NOT HAVE
INVESTMENT OBJECTIVES SIMILAR TO THOSE OF THE COMPANY. Prospective investors
should be aware that the results of this program are not necessarily
indicative of the potential results of the Company. See "Prior Programs" at
page __ for a narrative summary of similar programs in which National was
involved.
<TABLE>
Arciero-Diamond Ridge
---------------------
<S> <C>
Dollar amount offered $14,000,000
Dollar amount raised 5,538,800
Less offering expenses:
Organizational expenses(1) 0
Sales commissions(1) 0
Discounts retained by affiliates(1) 0
Loan Amount $ 5,538,800
Date offering began July 21, 1993
Length of offering in months 12.75
Months to investment all available for
investment one
</TABLE>
- -------------
(1) The borrower repaid the loan proceeds on August 17, 1994 before the entire
amount offered was raised. No offering expenses were paid by the
investors.
A3.1
<PAGE>
APPENDIX 3
SCHEDULE B
The purpose of Schedule B is to show, as of December 31, 1997, aggregate
compensation paid over the last three years to National and its affiliates by
the eleven public "Trudy Pat" programs which have not been completed. The
business objective of the program was to earn a higher rate of interest on
money than was available from financial institutions and to receive a return
of the principal advance in four years or less. NONE OF THE PROGRAMS HAVE
INVESTMENT OBJECTIVES SIMILAR TO THOSE OF THE COMPANY. Prospective investors
should be aware that the results of these programs are not necessarily
indicative of the potential results of the Company. See "Prior Programs" at
page __ for a narrative summary of similar programs in which National was
involved.
<TABLE>
Arciero-
Sacramento/ Yosemite/ Yosemite/ Cypress Diamond
Delta Greens Oceanside Ahwahnee I Ahwahnee II Mori Point Joshua Ranch Lakes Ridge
------------ ----------- ----------- ----------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Date offering commenced 11/1/88 11/15/91 5/2/89 9/10/90 11/20/89 3/26/90 2/19/91 7/21/93
Dollar amount raised $5,000,000 $30,000,000 $6,500,000 $13,500,000 $10,000,000 $15,000,000 $14,000,000 $5,538,000
Servicing fees
Jan. 1995 to Dec. 1997:
Accrued 0 0 0 0 0 0 0 0
Paid 0 900,000 48,750 101,250 0 0 0 0
Property management fees
Jan. 1995 to Dec. 1997:
Accrued 141,733 0 0 0 272,667 0 0 0
Paid 8,267 0 146,250 303,750 27,333 450,000 420,000 0
Amount paid to National
from proceeds of offerings
closed in the most recent
three years N/A N/A N/A N/A N/A N/A N/A $ 69,670
</TABLE>
A3.2
<PAGE>
APPENDIX 3
SCHEDULE B (continued)
<TABLE>
Esperanza Stacey Rose "A" Stacey Rose "B"
--------- --------------- ---------------
<S> <C> <C> <C>
Date offering commenced 11/18/87 5/5/88 5/5/88
Dollar amount raised $500,000 $85,000 $315,300
Servicing fees
Jan. 1995 to Dec. 1997:
Accrued 0 0 0
Paid 0 0 0
Property management fees
Jan. 1995 to Dec. 1997:
Accrued 15,000 2,550 9,459
Paid 0 0 0
Amount paid to National
from proceeds of offerings
closed in the most recent
three years N/A N/A N/A
</TABLE>
A3.3
<PAGE>
APPENDIX 3
SCHEDULE C
The purpose of Schedule C is to show, as of December 31, 1997, the annual
operating results of the eight public "Trudy Pat" programs the offerings of
which closed in the most recent five years. No tax information is included
as tenancy-in-common arrangements are not required to file information tax
returns. Each investor determines the tax treatment of distributions. The
business objective of the program was to earn a higher rate of interest on
money than was available from financial institutions and to receive a return
of the principal advance in four years or less. NONE OF THE PROGRAMS HAVE
INVESTMENT OBJECTIVES SIMILAR TO THOSE OF THE COMPANY. Prospective investors
should be aware that the results of these programs are not necessarily
indicative of the potential results of the Company. See "Prior Programs" at
page __ for a narrative summary of similar programs in which National was
involved.
<TABLE>
Sacramento/Delta Greens Oceanside
------------------------------------ ----------------------------------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrower loan
repayments:
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $375,000 $900,000 $900,000 $675,000
Interest 0 0 0 0 0 3,145,869 393,750 0 0 0
Cash from sale N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Distributions to
investors:(1)
Principal 0 0 0 0 0 0 375,000 900,000 900,000 675,000
Interest 0 0 0 0 0 3,145,869 393,750 0 $ 0 0
Distributions per
$1,000 invested:
Principal N/A N/A N/A N/A N/A 0 12.50 30 30 22.50
Interest N/A N/A N/A N/A N/A 104.86 13.13 0 0 0
</TABLE>
- ------------
(1) Net of servicing fees and property management fees and expenses.
A3.4
<PAGE>
<TABLE>
APPENDIX 3
SCHEDULE C (continued)
Yosemite/Ahwahnee I Yosemite/Ahwahnee II
------------------------------------------------------ ----------------------------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrower loan
repayments:
Principal $ 103,085 $ 0 $ 0 $ 0 $ 0 $ 68,264 $ 0 $ 0 $ 0 $ 0
Interest 920,794 4,756 0 0 0 688,303 10,273 0 0 0
Cash from sale N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Distributions to
investors:(1)
Principal 103,085 0 0 0 0 68,264 0 0 0 0
Interest 920,794 4,756 0 0 0 688,303 10,273 0 0 0
Distributions per
$1,000 invested:
Principal 15.86 0 0 0 0 5.06 0 0 0 0
Interest 141.66 .73 0 0 0 50.99 .76 0 0 0
</TABLE>
- ----------------
(1) Net of servicing fees and property management fees and expenses.
A3.5
<PAGE>
<TABLE>
APPENDIX 3
SCHEDULE C (continued)
Mori Point Joshua Ranch
------------------------------------------------------ ----------------------------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrower loan
repayments:
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest 0 0 0 0 0 478,127 0 0 0 0
Cash from sale 0 0 0 0 0 N/A 0 0 0 0
Distributions to
investors:(1)
Principal 0 0 0 0 0 0 0 0 0 0
Interest 0 0 0 0 0 478,127 0 0 0 0
Distributions per
$1,000 invested:
Principal 0 0 0 0 0 0 0 0 0 0
Interest 0 0 0 0 0 31.88 0 0 0 0
</TABLE>
- ----------------
(1) Net of servicing fees and property management fees and expenses.
A3.6
<PAGE>
<TABLE>
APPENDIX 3
SCHEDULE C (continued)
Cypress Lakes Arciero-Diamond Ridge
------------------------------------------------------ ----------------------------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrower loan
repayments:
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $5,538,800 N/A N/A N/A
Interest 1,337,101 62,706 0 0 0 113,531 297,077 N/A N/A N/A
Cash from sale N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Distributions to
investors:(1)
Principal 0 0 0 0 0 $ 0 5,538,800 N/A N/A N/A
Interest 1,337,101 62,706 0 0 0 113,551 997,027 N/A N/A N/A
Distributions per
$1,000 invested:
Principal 0 0 0 0 0 $ 0 1,000 N/A N/A N/A
Interest 95.57 4.48 0 0 0 20.50 53.64 N/A N/A N/A
</TABLE>
- ----------------
(1) Net of servicing fees and property management fees and expenses.
A3.7
<PAGE>
APPENDIX 3
SCHEDULE D
The purpose of Schedule D is to show, as of December 31, 1997, the results of
the only "Trudy Pat" program in which the loan has been completely repaid within
the last five years. No tax information is available as tenancy-in-common
arrangements are not required to file information income tax returns. The
business objective of the program was to earn a higher rate of interest on money
than was available from financial institutions and to receive a return of the
principal advance in four years or less. NONE OF THE PROGRAMS HAVE INVESTMENT
OBJECTIVES SIMILAR TO THOSE OF THE COMPANY. Prospective investors should be
aware that the results of these programs are not necessarily indicative of the
potential results of the Company. See "Prior Programs" at page __ for a
narrative summary of similar programs in which National was involved.
<TABLE>
Arciero-Diamond Ridge
---------------------
<S> <C>
Dollar amount raised $ 5,538,800
Loan secured by one property
Date loan fully funded July 25, 1994
Date loan paid off August 17, 1994(1)
Repayment/Distributions:
Principal $ 5,538,800
Interest $ 297,077(2)
Distributions per $1,000 invested:
Principal $ 1,000
Interest $ 53.64(2)
</TABLE>
- ----------------
(1) This loan was funded over the course of 12.75 months, commencing on July
21, 1993. Funds were first advanced to the borrower on September 16, 1993.
(2) Net of compensation to National. In 1993, interest in the amount of
$113,551 ($53.64 per $1,000 of investment), net of compensation to
National, was distributed to investors.
A3.8
<PAGE>
OFFICIAL INVESTOR BALLOT
[attach mailing label here The Primary Investor named on this label
for each distinct investor] 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 EXPIRES AT 11:59 PM, PACIFIC TIME, ON ___________,
1998, UNLESS EXTENDED (THE "EXPIRATION TIME").
Pursuant to the Prospectus dated _________, 1998 (the "Prospectus"), which
accompanied the original mailing of this Official Investor Ballot, American
Family Holdings, Inc. (the "Company") is proposing to acquire the assets,
(including, without limitation, real estate and cash reserves), 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 and
the applicable Supplement, (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
(less amounts forgiven by National) shall remain owing to National and be
assumed by the Company. 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>
INSTRUCTIONS TO INVESTORS ON HOW TO COMPLETE THE OFFICIAL INVESTOR BALLOT
STEPS TO COMPLETE THE INVESTOR BALLOT
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.
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.
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.
<PAGE>
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.
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
Send your completed and duly executed ballot, 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.
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
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.
This Supplement has been prepared to help the Investors in the
Sacramento/Delta Greens Program to understand how the Acquisition described in
the accompanying Prospectus 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.
As described in the accompanying Prospectus, American Family Holdings,
Inc. (the "Company") is offering shares of its Common Stock in exchange for
the assets (including cash reserves), certain liabilities and business
activities owned by Investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[20,012,475] of shares
of common stock arbitrarily valued at $10 per Share. The stock will be
listed for trading on the ___________ under the symbol "___." The purpose of
the transaction is to consolidate the operations of the programs, improve the
ability to sell or obtain financing for development of the programs'
properties, and provide the investors with liquidity for their investments.
Of the [2,001,248] shares to be issued by the Company in the Acquisition,
Investors in the Sacramento/Delta Greens Program will receive a total of
[193,650] shares or [320] shares per $10,000 of Adjusted Outstanding Investment.
After costs of sale, and the payment of Program liabilities, National does not
believe any alternative would yield to Investors in the Sacramento/Delta Greens
Program an amount that is higher than the value of the Company shares to be
received in the Acquisition.
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 _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - If the acquisition is approved, your investment will be subject to the
risks associated with residential development plus new risks associated with a
business which also operates a golf course and a recreational vehicle park, and
which plans to pursue the development of timeshare facilities and a
hotel/conference center.
- - If a trading market develops, the initial trading price for the stock will
likely be substantially below the arbitrary value of $10 per share assigned to
the Company's shares for purposes of the acquisition. Thus, the value of the
shares you receive may be less than you might receive if the property of your
program were sold.
- - Principal stockholders of National and executive officers of the Company
will hold approximately 18.23% of the Company's stock for which they paid $0.01
per share and will receive annual cash compensation aggregating $660,000 as
officers and employees. National will be relieved of its servicing and asset
management obligations and will no longer earn servicing and asset management
fees of approximately $650,000 annually. However, the Company will still owe
National over $1,300,000 of accrued but unpaid fees and expenses.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event. If
so, National believes a tax loss is the probable result for most of you.
- - The Company must have additional cash to fund its proposed operations. If
it cannot obtain such funding from the sale of its securities or certain of its
properties, it will be no more successful than the programs have been
individually in completing the development of some or all of the properties.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found on
pages [30] through [42] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If
the acquisition is completed, there will be a change in the nature of the
investment of each investor from holding a tenancy-in-common interest in real
estate to holding shares in an on-going company, the assets of which may be
changed from time to time without approval of investors. If the acquisition
is completed, investors will be able to liquidate their investments only by
selling their shares on the _____ or in private transactions, and they will
not receive a return of their investment in the form of liquidation proceeds
through property sales. If the acquisition is completed, investors will have
an investment in an entity that is larger than each of the programs and will
thus lose relative voting power. Investors will have an investment in a
business which also operates a golf course and a recreational vehicle park,
and which plans to pursue the development of timeshare facilities and a
hotel/conference center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL
SALES PRICE. Investors are subject to the risk that the exchange value of a
program does not reflect the price a program's assets might bring in a sale.
If the property of a program were to be sold, the net proceeds of the sale
and the amount finally distributed to an investor in that program may be more
or less than the exchange value. There is no assurance that the future value
of the shares will continue to be greater than the most recent appraised
value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may
trade at prices substantially below the arbitrarily determined exchange value
of $10 per share or historical book value of the company's assets. There is
no guaranty that a liquid trading market will develop for the shares, or be
sustained. If a trading market develops for the shares, the price of shares
after the acquisition will likely decrease below the exchange value per share
of $10 due to a potentially large number of shares that investors may sell
immediately after the acquisition.
THERE WILL BE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of
interest. The principal shareholders and employees of National and the
company will hold approximately [18.23]% of the company's outstanding stock
for which they paid $0.01 per share. Other founders of the company will hold
approximately [1.6]% of the company's outstanding stock for which they also
aid $0.01 per share. Thus, the investors' total ownership interests in the
programs' properties will be diluted by the equity interest in the company
held by the founders of the company. The principal stockholders of National
and other executive officers of the company will receive annual cash
compensation aggregating $660,000 as officers and employees of the company.
National will be relieved of its servicing and asset management obligations
and will no longer earn asset management or servicing related fees. However,
the company will still owe National over $1,300,000 of accrued but unpaid
fees and expenses.
2
<PAGE>
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote, and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
Messrs. Lasker and Orth will be required to devote some of their time to
other projects for which National acts as servicing agent and asset manager.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF THE
INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of each
program, the terms of the acquisition may have been more favorable to certain or
all of the programs and fewer shares and less favorable employment contracts may
have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to opine
conclusively on the taxability of the acquisition to investors. If the
acquisition is a taxable transaction, an investor would recognize gain or loss
in 1998 equal to the difference between the investor's tax basis in his interest
in a program property, and the number of shares of the company received valued
at $10 per share. If the acquisition is treated as taxable, National believes
most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, none of the properties will be subject to any liens other than
for property taxes. The board of directors could authorize borrowing by the
company the debt service for which may adversely affect the company's ability
to make distributions to shareholders. The company may incur full recourse
debt which exposes all of the assets of the company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS.
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.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long time. This means that shares in the company
are much riskier than ownership of shares of
3
<PAGE>
established companies. If the company had been operating as if it owned the
properties which it desires to acquire, it would have experienced losses to
date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE ACQUISITION
TAKES PLACE. Rather than being focused on a single property, the company will
be an infinite life entity focused on the management of at least five
properties. The effect of this on investors is two-fold. First, poor
performance of a particular property may affect the company's operations as a
whole regardless of the performance of the other properties. Second, there will
be no particular time when an investor can expect that a sale of any of the
properties will result in cash distributions to him or her.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes or
sales of a particular property. Those decisions will be made by the board of
directors or management. In addition, you will have an investment in an entity
that is larger than each of the programs and, thus, you will lose relative
voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, because of the borrowers' defaults there have been
no distributions from any of the programs, other than the Oceanside program, in
the past three years. Future cash distributions will be based on the company's
earnings and the decision of the board of directors to pay dividends.
Therefore, even if a property in which you formerly held an interest were to
perform well, there is no assurance that there would be cash distributions to
you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National is
presently compensated for its services at the rate of one percent of the
principal amount originally invested in each program. In addition, additional
compensation has been accrued for property management services provided to the
Oceanside and Yosemite/Ahwahnee properties by officers and employees of National
in their capacities as officers of Oceanside Development, Inc. and Ahwahnee Golf
Course & Resort, Inc. In the future, compensation will be paid to officers of
the company in the form of salaries, stock options and other benefits. These
salaries and other forms of compensation will be payable to management of the
company even if one or more of the properties acquired in the acquisition is
subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE CONFLICTING YOSEMITE/AHWAHNEE APPRAISALS
MAY BE INCORRECT WHICH MEANS THAT THE EXCHANGE VALUES FOR THOSE PROPERTIES COULD
BE TOO LOW OR TOO HIGH. Faced with two conflicting appraisals for the
Yosemite/Ahwahnee properties, to determine the appraised values for these
properties for purposes of determining their exchange values, National's
management used the lower amount presented in the October 1996 appraisal unless
there was an intervening reason for accepting the higher May 1997 valuation. If
the values arrived at by National were too low for either program, the program's
exchange value would be too low and would result in too few shares being
allocated to that program in the acquisition. Conversely, if the values arrived
at by National were too high, the program would
4
<PAGE>
receive too large an allocation of shares in the acquisition to the detriment
of the investors in the other programs.
GENERAL 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 December 31, 1997: Sacramento/Delta Greens -
approximately $45,000; Oceanside - approximately $55,000; Yosemite/Ahwahnee
(combined) - approximately $684,000; and Mori Point - approximately $298,000.
Annual payments required for all the properties for current taxes (including
amounts currently due on five-year payment plans) total approximately $248,000.
In the case of Sacramento/Delta Greens and Mori Point, National has entered into
statutorily authorized 5-year payment plans with the applicable taxing
authorities. It plans to do the same with Yosemite/Ahwahnee shortly.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $[11,400,000] 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 entire business plan. Additionally, if a minimum of
approximately $250,000 is not raised to pay current property tax liabilities,
then certain 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 programs nor the company have
received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE EXPENSIVE
HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the properties.
As a result, there may be 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.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. 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.
5
<PAGE>
THE CALIFORNIA ECONOMY HAS FLUCTUATED BROADLY IN THE PAST FEW YEARS. We
presently conduct all of our business 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
[$1,381,881] 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 after the Acquisition, but only from
operating revenues or proceeds from the sale of assets, but not from working
capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED. Construction of the
Sacramento/Delta Greens property will require the filing of a final map and
obtaining building permits from the city's real estate planning authorities.
The existing tentative map approval does not entitle the property owner to build
on the property. 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. The longer this
process takes, the longer it will be until the company can make money from the
property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY 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. 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. This would mean a delay in realizing cash from the business operations.
The average carrying costs, including property taxes, management and servicing
related fees, for this property has averaged approximately $10,000 per month
over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. 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.
Sacramento/Delta Greens is a proposed residential developments and
represent over 8.4% of the assets of the company, respectively. Although there
can be no assurances and net revenues from Sacramento/Delta Greens may equal or
exceed $3,600,000 over the following 36 months.
6
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ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to (i) finance engineering and endangered species studies (estimated
by management to cost approximately $124,800), (ii) finance planning for final
approvals (estimated by management to cost approximately $51,700), and (iii)
finance utilities and roads and the construction of homes (estimated by
management to cost approximately $3,000,000 on a phased basis). Another risk is
whether the lots to be developed will appeal to project builders and whether
home financing will be available. Finally, there is a risk that the development
and sale of lots or homes will be profitable.
REAL ESTATE RISKS OF OCEANSIDE PROPERTY
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE PROPERTY 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. 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. This would mean a delay in realizing cash from the business operations.
The average carrying costs, including property taxes, management and servicing
related fees, for this property has averaged $30,000 per month over the past
three years.
RISKS OF RESIDENTIAL DEVELOPMENT. 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.
Oceanside is a proposed residential development and represent over 21.75%
of the assets of the company. Although there can be no assurances, net revenues
from Oceanside are expected to be in excess of $5,000,000 over the following 36
months.
ADDITIONAL SPECIFIC RISKS. There is a risk that enough investment money
may not be available to obtain a construction loan and begin construction of the
next tract of homes (estimated by management to be approximately $700,000 of
equity). There is also a risk that finished lots or completed homes will not be
marketable at a profit or that home financing will not be available at
affordable rates. There is also strong nearby competition.
REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE TIMESHARE ASPECT OF THE RESORT HAVE NOT YET BEEN
OBTAINED. The Yosemite/Ahwahnee property has a final map on 45 remaining single
family estate lots and a use permit for a 600 space recreational vehicle park.
Additional planned usage such as timeshare will require extensive county and
state approvals through the Departments of Real Estate and Housing and
Commercial Development.
RISKS AFFECTING OPERATION OF A GOLF COURSE. Increased competition,
seasonality, weather and course conditions will affect the operations of the
company. While no new golf courses have opened near the Ahwahnee Golf Course,
new courses could increase the competition and reduce
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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. All of these factors could
reduce the amount of money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity which may
attract potential timeshare purchasers in the future. At this time, the project
does not rely on the golf course for its revenue. National estimates that the
value of the golf course will be less than 5% of the assets of the company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. 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.
The recreational vehicle park at Yosemite/Ahwahnee may generate as much as
ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or eliminate
profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then 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 and we may not be able to
secure development financing on acceptable terms.
Timeshare development is planned for Yosemite/Ahwahnee. Since the project
is not yet permitted for timeshare, there has been no allocation of assets.
Should timeshare be approved, the company anticipates that a significant portion
of the revenue of the company will be derived from sales of timeshare units,
possibly in excess of 25%.
8
<PAGE>
RISKS RELATING TO RECREATIONAL VEHICLE PARK OPERATIONS. Risks relating to
recreational vehicle parks are substantially the same as those described above
for timeshare projects.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to (i) make up for the current cash drain from operations of the golf
course (estimated by management at approximately $150,000) annually, (ii)
construct an additional planned 100 recreational vehicle sites (estimated by
management to cost approximately $700,000), and (iii) obtain approvals for and
construction of the first group of timeshare units (estimated by management to
cost approximately $3,000,000). There are also a risk that the operation of
recreational vehicle sites, timeshares and golf course activities will not be
profitable.
REAL ESTATE RISKS OF MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY 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
applicable county or city real estate planning agencies is expensive and time
consuming. Mori Point had a specific plan and tentative map to build a
hotel/conference center which expired in 1991. These approvals must be
reinstated prior to construction on the property. Such reinstatement will be
complicated by the existence of two endangered species living on the property.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. 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. 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.
Mori Point represents over 20% of the assets of the company and, assuming
it is operated as a hotel/conference center, its revenues may exceed 20% of the
total revenues of the company upon completion of the project.
ADDITIONAL SPECIFIC RISKS. There is a risk that the city government will
not approve the property for its intended use. Capital to conduct engineering
and environmental studies in order to apply for and obtain approvals for its use
from the City is estimated to be approximately $500,000. Capital will also be
necessary for roads, utilities and other infrastructure costs prior to
construction. Finally, there is a risk that the proposed hotel/conference
center may not be profitable.
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
9
<PAGE>
party to acquire and exercise control of the Company or to change its
management, even if that change would be beneficial to you. These provisions
include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate of
incorporation, subject to the receipt of fair value, the Board of Directors may
issue shares in other classes or series and fix the rights, powers and
limitations associated with such shares. Although the Board of Directors has no
present intention of doing so, it could issue a class or series that could,
depending on its terms, impede a merger, tender offer or other transaction that
you might believe is in your best interest or in which you might receive a
premium for your shares over the then current market price. The issuance of
such shares could also dilute your voting power.
STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability to
change control of the company, even if you believe such a change is in your best
interests.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's certificate
of incorporation, as well as Delaware law, prohibits certain business
combinations with owners of more than 15% of the outstanding voting stock of the
company ("interested stockholders") within the three year period immediately
prior to the date on which the interested stockholder became an interested
stockholder. These restrictions on certain business combinations may deter
potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. 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. This restriction also may deter potential purchasers
who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well as
the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections National
enjoys under the programs' servicing agreements.
FAIRNESS TO INVESTORS IN THE SACRAMENTO/DELTA GREENS PROGRAM
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. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that develops
will be sustained;
- while the number of shares to be issued to reflect the exchange value
of a program is arbitrary, the trading price of such shares initially is likely
to be substantially below the $10 value arbitrarily assigned to such shares. In
our opinion, the exchange values offered to investors for their assets allow for
an equitable allocation of the [2,001,248] shares among the programs. The
disparity between exchange values and appraised values results from adding the
value of program cash reserves and other assets, if any, to appraised values and
deducting program liabilities (principally accrued property taxes and other fees
net of fees to be forgiven by National);
10
<PAGE>
- on completion of the acquisition the investors from all five programs
will hold over 80% of the outstanding stock of the company. After the
Acquisition, a total of [7.76]% of the outstanding stock of the Company will be
held by Sacramento/Delta Greens investors. After the Acquisition, principals,
employees, and consultants of National will hold less than 20%. That 20% was
purchased for $.01 per share. While a minor factor in determining the number of
Shares to be held by the Company's founders, it should be noted that National
and its principals have forgiven, or will forgive at the completion of the
acquisition, over $3,000,000 of expenses and accrued fees of which a total of
approximately $1,700,000 was earned under the servicing agreements after the
loans defaulted and before the foreclosure actions were completed. The balance
was earned after foreclosure for asset and property management services and
expenses. Of such amount, $137,111 is attributable to fees owed by
Sacramento/Delta Greens investors. National believes that the amount paid for
the property management services is no greater than the amount that a third
party would charge;
- the valuation of the Sacramento/Delta Greens real estate assets (as
well as the real estate assets of the other programs) by the independent
appraisers;
- the probability that the transaction will either be tax-free to
investors or most likely yield a tax loss. Either way, National believes there
will likely be no out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have independent
representation in the structuring of the acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the Sacramento/Delta Greens Program (as well as the other
programs) were originally formed to have a two to four year finite life and the
investors expected to receive a return of their investment from the original
borrower, the company is an infinite life entity which will not return the
program investors' original investment based on a sale or refinancing of the
properties underlying the original programs. However, after the borrowers
defaulted on the "Trudy Pat" loans, the investors became beneficial owners of
the underlying properties with the need to complete development, manage or
otherwise ready the properties for sale. Those endeavors had no fixed timetable
and, thus, the finite life aspect of their original investments was
significantly changed. Therefore, the infinite life aspect of the company is
not viewed by National to be a material change from the investors' CURRENT
situation;
- the acquisition will cause fundamental changes in the business plan of
the Sacramento/Delta Greens program. Rather than being focused on the
development of a single property for residential purposes, the company will be
focused on the management of at least five properties. Thus, the poor
performance of a particular property may affect the Company's operations as a
whole regardless of the performance of the other Sacramento/Delta Greens
property. Further, there will be no particular time when an Investor can expect
its interest to be automatically liquidated;
11
<PAGE>
- investors will not be able to vote on changes to or dispositions of
the Sacramento/Delta Greens property or borrowing secured by that property.
Those decisions will be made by the Board of Directors or management of the
Company. Further, as investors in a larger entity, relative voting power will
be diluted;
- future cash distributions will be based on the company's earnings and
the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Sacramento/Delta Greens property;
- investors voting against the acquisition will have no alternative but
to accept shares in the company if the acquisition is approved by holders of a
majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a change
in management which is not favored by the Board of Directors of the company; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the shares in
the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection with
the acquisition and compared it with what you might receive if (i) the
Sacramento/Delta Greens property were operated "as is," (ii) the
Sacramento/Delta Greens property was sold in a quick sale in three months or
less, or (iii) the Sacramento/Delta Greens property was sold at the appraised
value used to determine the Sacramento/Delta Greens exchange value. Based on
that review, and even acknowledging that, initially, the company's shares issued
in the acquisition would likely trade substantially below their arbitrary $10
issuance value, National believes that there is a higher probability of
realizing value from the Sacramento/Delta Greens property through the
acquisition than through the other alternatives. This belief is based on the
expectation that some financing opportunities will become available based on the
form of the entity and the time pressure associated with forced sales or
liquidation will be relieved. See "Background and Reasons for the
Acquisition -- Comparison to Alternatives" 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.
12
<PAGE>
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Sacramento/Delta Greens 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, cash reserves,
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
Sacramento/Delta Greens Program, 193,650 shares) multiplied by an arbitrary $10
per share value.
The Exchange Value for the Sacramento/Delta Greens Program was calculated
as follows: appraised value of the Sacramento/Delta Greens Program property at
May 1997, plus book value of other Sacramento/Delta Greens Program assets at
December 31, 1997, less Sacramento/Delta Greens Program liabilities at [DECEMBER
31], 1997, and plus liabilities to National to be forgiven by National as part
of the Acquisition.
The following table summarizes the calculation of the Exchange Value of the
Sacramento/Delta Greens Program and the value assigned on $10,000 of Adjusted
Outstanding Investment:
<TABLE>
Value Assigned
Appraised Net Other to Program per
Value of + Assets and = Exchange $10,000 of Adjusted
Real Estate(1) Liabilities(2) Value Outstanding Investment
-------------- -------------- ----- ----------------------
<S> <C> <C> <C>
$ 2,000,000 $[ (63,499)] $ [1,936,501] $ [3,195](3)
</TABLE>
- ----------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values made in
determining Sacramento/Delta Greens property's Exchange Value as of
[DECEMBER 31, 1997].
<TABLE>
Book Assets Book Liabilities To Be Forgiven Net Other Assets
(12/31/97)* - (12/31/97)* + Amounts = and Liabilities
----------- ---------------- -------------- ----------------
<S> <C> <C> <C>
$ 108,627 $ (309.237) $ 137,111** $ (63,499)
</TABLE>
* See balance sheet of the Program in the financial statements accompanying
the Prospectus for details of book assets and book liabilities. There is
no mortgage debt on the Sacramento/Delta Greens property.
** Prior to 1994, National forgave $500,000 of fees and advances to this
Program.
(3) Equals [320] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,001,248] 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 [193,650] shares.
13
<PAGE>
The shares allocated to the Sacramento/Delta Greens Program will be
allocated among Investors in the Program based on their respective pro rata
investments in the 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 [320] shares of Company stock
arbitrarily valued at $10 per share.
Neither National nor the Company's founders have any economic interest
in the Sacramento/Delta Greens Program except for National's contractual right
to asset management fees and the $3,118 of tenancy-in-common interests purchased
by National at the inception of the Program for which interests National will
receive Company shares in the Acquisition pro rata with the other
Sacramento/Delta Greens Investors.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Sacramento/Delta Greens Program (including accrued but
unpaid interest) plus the amount of assessments and advances paid by Investors
at [DECEMBER 31], 1997, appraised real estate value, Exchange Value of the
Program, the number and percentage of shares allocated to the Program, and the
number of shares and comparative value of the Company to be held by founders
after the Acquisition.
<TABLE>
% of Total
Shares to be
Amount Real Estate Outstanding
Owed plus Appraised Exchange No. of Shares After the
Name of Program Assessments Value Value(1) Allocated(1)(2) Acquisition
- --------------- ----------- ----- -------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 6,038,016 $ 2,000,000 $ [1,936,501] [193,650] [7.76]%
</TABLE>
- ----------------
(1) The founders of the Company which include members of Company management, as
well as certain employees of National and consultants to the Company and
the Programs, will hold a total of [495,318] Company shares after the
Acquisition (19.84% of the outstanding shares post-Acquisition) which, if
valued at $10 per share, would have an aggregate value of $[4,953,180].
The Company was formed, and shares were purchased by the founders for $.01
per share, prior to making the Acquisition proposal. While a minor factor
considered in the analysis, the shares to be retained by the Company's
founders were not determined based only on fees cancelled or to be
cancelled by National and its principals. Overall, National believed that
the Company's founders should hold slightly less than 20% of the shares
after the Acquisition. 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:
14
<PAGE>
<TABLE>
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>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [20.30]% of the total shares to
be owned by the Company's founders after the Acquisition ([100,550] shares)
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, 1997,
1996 and 1995.
<TABLE>
Incurred for Actually Paid Incurred for Actually Paid Incurred for Actually Paid
Year Ended for Year Ended Year Ended for Year Ended Year Ended for Year Ended
Name of Program 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96 12/31/97(1) 12/31/97
--------------- ------------ -------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $50,000(2) $-0- $50,000(2) $-0- $50,000 (2) $8,267
</TABLE>
- ----------------
(1) These amounts represent accrued servicing fees.
(2) Approximately $115,238 per year if the Acquisition had been completed
during the above periods including $63,822 of estimated salaries to be paid
by the Company to its officers and which were allocated to the
Sacramento/Delta Greens Program based on Exchange Values. No cash would
have been available to pay officers' bonuses or dividends to shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/
EFFECT OF THE ACQUISITION
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995, 1996 and
1997:
<TABLE>
Prior to
Name of Program 1992 1992 1993 1994 1995 1996 1997 Total
- --------------- ---------- -------- ------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $1,654,013 $343,750 $ 0 $ 0 $ 0 $ 0 $ 0 $1,997,763
</TABLE>
There have been no recent distributions to Investors. The Acquisition is
not expected to alter this distribution pattern.
15
<PAGE>
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Sacramento/Delta Greens 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.
16
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
OCEANSIDE "TRUDY PAT" PROGRAM
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.
----------------
This Supplement has been prepared to help the Investors in the Oceanside
Program to understand how the Acquisition described in the accompanying
Prospectus 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.
As described in the accompanying Prospectus, American Family Holdings, Inc. (the
"Company") is offering shares of its Common Stock in exchange for the assets
(including cash reserves), certain liabilities and business activities owned by
Investors in five former "Trudy Pat" programs managed by National Investors
Financial, Inc. ("National"). For this proposed Acquisition, the Company will
issue an aggregate of $[20,012,475] of shares of common stock arbitrarily valued
at $10 per Share. The stock will be listed for trading on the ___________ under
the symbol "___." The purpose of the transaction is to consolidate the
operations of the programs, improve the ability to sell or obtain financing for
development of the programs' properties, and provide the investors with
liquidity for their investments.
Of the [2,001,248] shares to be issued by the Company in the Acquisition,
Investors in the Oceanside Program will receive a total of [487,571] shares or
[162] shares per $10,000 of Adjusted Outstanding Investment. After costs of
sale, and the payment of Program liabilities, National does not believe any
alternative would yield to Investors in the Oceanside Program an amount that is
higher than the value of the Company shares to be received in the Acquisition.
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 _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a tenancy-in-common
interest in your program's property. Instead, you will hold shares in a
publicly-traded real estate company and will not receive liquidation proceeds
when, or if, your program's property is sold. As an investor in a
publicly-traded company with many stockholders, you will have relatively less
voting power.
- - If the acquisition is approved, your investment will be subject to the
risks associated with residential development plus new risks associated with a
business which also operates a golf course and a recreational vehicle park, and
which plans to pursue the development of timeshare facilities and a
hotel/conference center.
- - If the Oceanside property was sold for appraised value and if the Company's
stock traded below $__ per share, you would receive more value on sale of the
property than in the Acquisition.
- - If a trading market develops, the initial trading price for the stock will
likely be substantially below the arbitrary value of $10 per share assigned to
the Company's shares for purposes of the acquisition. Thus, the value of the
shares you receive may be less than you might receive if the property of your
program were sold.
- - Principal stockholders of National and executive officers of the Company
will hold approximately 18.23% of the Company's stock for which they paid $0.01
per share and will receive annual cash compensation aggregating $660,000 as
officers and employees. National will be relieved of its servicing and asset
management obligations and will no longer earn servicing and asset management
fees of approximately $650,000 annually. However, the Company will still owe
National over $1,300,000 of accrued but unpaid fees and expenses.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event. If
so, National believes a tax loss is the probable result for most of you.
- - The Company must have additional cash to fund its proposed operations. If
it cannot obtain such funding from the sale of its securities or certain of its
properties, it will be no more successful than the programs have been
individually in completing the development of some or all of the properties.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be
found on pages [30] through [42] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If the
acquisition is completed, there will be a change in the nature of the investment
of each investor from holding a tenancy-in-common interest in real estate to
holding shares in an on-going company, the assets of which may be changed from
time to time without approval of investors. If the acquisition is completed,
investors will be able to liquidate their investments only by selling their
shares on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through property
sales. If the acquisition is completed, investors will have an investment in an
entity that is larger than each of the programs and will thus lose relative
voting power. Investors will have an investment in a business which also
operates a golf course and a recreational vehicle park, and which plans to
pursue the development of timeshare facilities and a hotel/conference center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL AND
SALES PRICE. Investors are subject to the risk that the exchange value of a
program does not reflect the price a program's assets might bring in a sale. If
the property of a program were to be sold, the net proceeds of the sale and the
amount finally distributed to an investor in that program may be more or less
than the exchange value. There is no assurance that the future value of the
shares will continue to be greater than the most recent appraised value of the
property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may trade
at prices substantially below the arbitrarily determined exchange value of $10
per share or historical book value of the company's assets. There is no
guaranty that a liquid trading market will develop for the shares, or be
sustained. If a trading market develops for the shares, the price of shares
after the acquisition will likely decrease below the exchange value per share of
$10 due to a potentially large number of shares that investors may sell
immediately after the acquisition.
THERE WILL BE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of interest.
The principal shareholders and employees of National and the company will hold
approximately [18.23]% of the company's outstanding stock for which they paid
$0.01 per share. Other founders of the company will hold approximately [1.6]%
of the company's outstanding stock for which they also aid $0.01 per share.
Thus, the investors' total ownership interests in the programs' properties will
be diluted by the equity interest in the company held by the founders of the
company. The principal stockholders of National and other executive officers of
the company will receive annual cash compensation aggregating $660,000 as
officers and employees of the company. National will be relieved of its
servicing and asset management obligations and will no longer earn asset
management or servicing related fees. However, the company will still owe
National over $1,300,000 of accrued but unpaid fees and expenses.
2
<PAGE>
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote, and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
Messrs. Lasker and Orth will be required to devote some of their time to
other projects for which National acts as servicing agent and asset manager.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF THE
INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of each
program, the terms of the acquisition may have been more favorable to certain or
all of the programs and fewer shares and less favorable employment contracts may
have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to opine
conclusively on the taxability of the acquisition to investors. If the
acquisition is a taxable transaction, an investor would recognize gain or loss
in 1998 equal to the difference between the investor's tax basis in his interest
in a program property, and the number of shares of the company received valued
at $10 per share. If the acquisition is treated as taxable, National believes
most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the acquisition,
none of the properties will be subject to any liens other than for property
taxes. The board of directors could authorize borrowing by the company the debt
service for which may adversely affect the company's ability to make
distributions to shareholders. The company may incur full recourse debt which
exposes all of the assets of the company to repayment instead of limited
recourse debt which generally exposes specific properties for the repayment of
debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING
INVESTORS. 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.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long time. This means that shares in the company
are much riskier than ownership of shares of
3
<PAGE>
established companies. If the company had been operating as if it owned the
properties which it desires to acquire, it would have experienced losses to
date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE ACQUISITION
TAKES PLACE. Rather than being focused on a single property, the company will
be an infinite life entity focused on the management of at least five
properties. The effect of this on investors is two-fold. First, poor
performance of a particular property may affect the company's operations as a
whole regardless of the performance of the other properties. Second, there will
be no particular time when an investor can expect that a sale of any of the
properties will result in cash distributions to him or her.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes or
sales of a particular property. Those decisions will be made by the board of
directors or management. In addition, you will have an investment in an entity
that is larger than each of the programs and, thus, you will lose relative
voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, because of the borrowers' defaults there have been
no distributions from any of the programs, other than the Oceanside program, in
the past three years. Future cash distributions will be based on the company's
earnings and the decision of the board of directors to pay dividends.
Therefore, even if a property in which you formerly held an interest were to
perform well, there is no assurance that there would be cash distributions to
you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National is
presently compensated for its services at the rate of one percent of the
principal amount originally invested in each program. In addition, additional
compensation has been accrued for property management services provided to the
Oceanside and Yosemite/Ahwahnee properties by officers and employees of National
in their capacities as officers of Oceanside Development, Inc. and Ahwahnee Golf
Course & Resort, Inc. In the future, compensation will be paid to officers of
the company in the form of salaries, stock options and other benefits. These
salaries and other forms of compensation will be payable to management of the
company even if one or more of the properties acquired in the acquisition is
subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE CONFLICTING YOSEMITE/AHWAHNEE APPRAISALS
MAY BE INCORRECT WHICH MEANS THAT THE EXCHANGE VALUES FOR THOSE PROPERTIES COULD
BE TOO LOW OR TOO HIGH. Faced with two conflicting appraisals for the
Yosemite/Ahwahnee properties, to determine the appraised values for these
properties for purposes of determining their exchange values, National's
management used the lower amount presented in the October 1996 appraisal unless
there was an intervening reason for accepting the higher May 1997 valuation. If
the values arrived at by National were too low for either program, the program's
exchange value would be too low and would result in too few shares being
allocated to that program in the acquisition. Conversely, if the values arrived
at by National were too high, the program would
4
<PAGE>
receive too large an allocation of shares in the acquisition to the detriment
of the investors in the other programs.
GENERAL 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 December 31, 1997: Sacramento/Delta Greens -
approximately $45,000; Oceanside - approximately $55,000; Yosemite/Ahwahnee
(combined) - approximately $684,000; and Mori Point - approximately $298,000.
Annual payments required for all the properties for current taxes (including
amounts currently due on five-year payment plans) total approximately $248,000.
In the case of Sacramento/Delta Greens and Mori Point, National has entered into
statutorily authorized 5-year payment plans with the applicable taxing
authorities. It plans to do the same with Yosemite/Ahwahnee shortly.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $[11,400,000] 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 entire business plan. Additionally, if a minimum of
approximately $250,000 is not raised to pay current property tax liabilities,
then certain 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 programs nor the company have
received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE EXPENSIVE
HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the properties.
As a result, there may be 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.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. 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.
5
<PAGE>
THE CALIFORNIA ECONOMY HAS FLUCTUATED BROADLY IN THE PAST FEW YEARS. We
presently conduct all of our business 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
$1,381,881 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 after the Acquisition, but only from
operating revenues or proceeds from the sale of assets, but not from working
capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED. Construction of the
Sacramento/Delta Greens property will require the filing of a final map and
obtaining building permits from the city's real estate planning authorities.
The existing tentative map approval does not entitle the property owner to build
on the property. 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. The longer this
process takes, the longer it will be until the company can make money from the
property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY 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. 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. This would mean a delay in realizing cash from the business operations.
The average carrying costs, including property taxes, management and servicing
related fees, for this property has averaged approximately $10,000 per month
over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. 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.
Sacramento/Delta Greens is a proposed residential developments and
represent over 8.4% of the assets of the company, respectively. Although there
can be no assurances and net revenues from Sacramento/Delta Greens may equal or
exceed $3,600,000 over the following 36 months.
6
<PAGE>
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to (i) finance engineering and endangered species studies (estimated
by management to cost approximately $124,800), (ii) finance planning for final
approvals (estimated by management to cost approximately $51,700), and (iii)
finance utilities and roads and the construction of homes (estimated by
management to cost approximately $3,000,000 on a phased basis). Another risk is
whether the lots to be developed will appeal to project builders and whether
home financing will be available. Finally, there is a risk that the development
and sale of lots or homes will be profitable.
REAL ESTATE RISKS OF OCEANSIDE PROPERTY
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE PROPERTY 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. 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. This would mean a delay in realizing cash from the business operations.
The average carrying costs, including property taxes, management and servicing
related fees, for this property has averaged $30,000 per month over the past
three years.
RISKS OF RESIDENTIAL DEVELOPMENT. 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.
Oceanside is a proposed residential development and represent over 21.75%
of the assets of the company. Although there can be no assurances, net revenues
from Oceanside are expected to be in excess of $5,000,000 over the following 36
months.
ADDITIONAL SPECIFIC RISKS. There is a risk that enough investment money
may not be available to obtain a construction loan and begin construction of the
next tract of homes (estimated by management to be approximately $700,000 of
equity). There is also a risk that finished lots or completed homes will not be
marketable at a profit or that home financing will not be available at
affordable rates. There is also strong nearby competition.
REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE TIMESHARE ASPECT OF THE RESORT HAVE NOT YET BEEN
OBTAINED. The Yosemite/Ahwahnee property has a final map on 45 remaining single
family estate lots and a use permit for a 600 space recreational vehicle park.
Additional planned usage such as timeshare will require extensive county and
state approvals through the Departments of Real Estate and Housing and
Commercial Development.
RISKS AFFECTING OPERATION OF A GOLF COURSE. Increased competition,
seasonality, weather and course conditions will affect the operations of the
company. While no new golf courses have opened near the Ahwahnee Golf Course,
new courses could increase the competition and reduce
7
<PAGE>
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. All of these factors could
reduce the amount of money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity which may
attract potential timeshare purchasers in the future. At this time, the project
does not rely on the golf course for its revenue. National estimates that the
value of the golf course will be less than 5% of the assets of the company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. 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.
The recreational vehicle park at Yosemite/Ahwahnee may generate as much as
ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or eliminate
profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then 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 and we may not be able to
secure development financing on acceptable terms.
Timeshare development is planned for Yosemite/Ahwahnee. Since the project
is not yet permitted for timeshare, there has been no allocation of assets.
Should timeshare be approved, the company anticipates that a significant portion
of the revenue of the company will be derived from sales of timeshare units,
possibly in excess of 25%.
8
<PAGE>
RISKS RELATING TO RECREATIONAL VEHICLE PARK OPERATIONS. Risks relating to
recreational vehicle parks are substantially the same as those described above
for timeshare projects.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to (i) make up for the current cash drain from operations of the golf
course (estimated by management at approximately $150,000) annually, (ii)
construct an additional planned 100 recreational vehicle sites (estimated by
management to cost approximately $700,000), and (iii) obtain approvals for and
construction of the first group of timeshare units (estimated by management to
cost approximately $3,000,000). There are also a risk that the operation of
recreational vehicle sites, timeshares and golf course activities will not be
profitable.
REAL ESTATE RISKS OF MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY 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
applicable county or city real estate planning agencies is expensive and time
consuming. Mori Point had a specific plan and tentative map to build a
hotel/conference center which expired in 1991. These approvals must be
reinstated prior to construction on the property. Such reinstatement will be
complicated by the existence of two endangered species living on the property.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. 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. 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.
Mori Point represents over 20% of the assets of the company and, assuming
it is operated as a hotel/conference center, its revenues may exceed 20% of the
total revenues of the company upon completion of the project.
ADDITIONAL SPECIFIC RISKS. There is a risk that the city government will
not approve the property for its intended use. Capital to conduct engineering
and environmental studies in order to apply for and obtain approvals for its use
from the City is estimated to be approximately $500,000. Capital will also be
necessary for roads, utilities and other infrastructure costs prior to
construction. Finally, there is a risk that the proposed hotel/conference
center may not be profitable.
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
9
<PAGE>
party to acquire and exercise control of the Company or to change its
management, even if that change would be beneficial to you. These provisions
include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate of
incorporation, subject to the receipt of fair value, the Board of Directors may
issue shares in other classes or series and fix the rights, powers and
limitations associated with such shares. Although the Board of Directors has no
present intention of doing so, it could issue a class or series that could,
depending on its terms, impede a merger, tender offer or other transaction that
you might believe is in your best interest or in which you might receive a
premium for your shares over the then current market price. The issuance of
such shares could also dilute your voting power.
STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability to
change control of the company, even if you believe such a change is in your best
interests.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's certificate
of incorporation, as well as Delaware law, prohibits certain business
combinations with owners of more than 15% of the outstanding voting stock of the
company ("interested stockholders") within the three year period immediately
prior to the date on which the interested stockholder became an interested
stockholder. These restrictions on certain business combinations may deter
potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. 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. This restriction also may deter potential purchasers
who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well as
the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections National
enjoys under the programs' servicing agreements.
FAIRNESS TO INVESTORS IN THE OCEANSIDE PROGRAM
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. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that develops
will be sustained;
- while the number of shares to be issued to reflect the exchange value
of a program is arbitrary, the trading price of such shares initially is likely
to be substantially below the $10 value arbitrarily assigned to such shares. In
our opinion, the exchange values offered to investors for their assets allow for
an equitable allocation of the [2,001,248] shares among the programs. The
disparity between exchange values and appraised values results from adding the
value of program cash reserves and other assets, if any, to appraised values and
deducting program liabilities (principally accrued property taxes and other fees
net of fees to be forgiven by National);
10
<PAGE>
- on completion of the acquisition the investors from all five programs
will hold over 80% of the outstanding stock of the company. After the
Acquisition, a total of [19.53]% of the outstanding stock of the Company will be
held by Oceanside investors. After the Acquisition, principals, employees, and
consultants of National will hold less than 20%. That 20% was purchased for
$.01 per share. While a minor factor in determining the number of Shares to be
held by the Company's founders, it should be noted that National and its
principals have forgiven, or will forgive at the completion of the acquisition,
over $3,000,000 of expenses and accrued fees of which a total of approximately
$1,700,000 was earned under the servicing agreements after the loans defaulted
and before the foreclosure actions were completed. The balance was earned after
foreclosure for asset and property management services and expenses. Of such
amount, $800,000 is attributable to fees owed by Oceanside investors. National
believes that the amount paid for the property management services is no greater
than the amount that a third party would charge;
- the valuation of the Oceanside real estate assets (as well as the real
estate assets of the other programs) by the independent appraisers;
- the probability that the transaction will either be tax-free to
investors or most likely yield a tax loss. Either way, National believes there
will likely be no out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have independent
representation in the structuring of the acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the Oceanside Program (as well as the other programs) were
originally formed to have a two to four year finite life and the investors
expected to receive a return of their investment from the original borrower, the
company is an infinite life entity which will not return the program investors'
original investment based on a sale or refinancing of the properties underlying
the original programs. However, after the borrowers defaulted on the "Trudy
Pat" loans, the investors became beneficial owners of the underlying properties
with the need to complete development, manage or otherwise ready the properties
for sale. Those endeavors had no fixed timetable and, thus, the finite life
aspect of their original investments was significantly changed. Therefore, the
infinite life aspect of the company is not viewed by National to be a material
change from the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the individual
business plan of the Oceanside program. Rather than being focused on the
development of a single property for residential purposes, the company will be
focused on the management of at least five properties. Thus, the poor
performance of a particular property may affect the company's operations as a
whole regardless of the performance of the Oceanside property. Further, there
will be no particular time when an Investor can expect its interest to be
automatically liquidated;
- Oceanside investors will not be able to vote on changes to or
dispositions of the Oceanside property or borrowing secured by that property.
Those decisions will be made by
11
<PAGE>
the Board of Directors or management of the Company. Further, as investors
in a larger entity, relative voting power will be diluted;
- future cash distributions will be based on the company's earnings and
the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Oceanside property;
- investors voting against the acquisition will have no alternative but
to accept shares in the company if the acquisition is approved by holders of a
majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a change
in management which is not favored by the Board of Directors of the company; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the shares in
the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection with
the acquisition and compared it with what you might receive if (i) the Oceanside
property was operated "as is," (ii) the Oceanside property was sold in a quick
sale in three months or less, or (iii) the Oceanside property was sold at the
appraised value used to determine the Oceanside exchange value. Based on that
review, and even acknowledging that, initially, the company's shares issued in
the acquisition would likely trade substantially below their arbitrary $10
issuance value, National believes that there is a higher probability of
realizing value from the Oceanside property through the acquisition than through
the other alternatives. This belief is based on the expectation that some
financing opportunities will become available based on the form of the entity
and the time pressure associated with forced sales or liquidation will be
relieved. See "Background and Reasons for the Acquisition -- Comparison to
Alternatives" 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
The Exchange Value of the Oceanside 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, cash reserves, 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 Oceanside Program, [487,571 shares)
multiplied by an arbitrary $10 per share value.
The Exchange Value for the Oceanside Program was calculated as follows:
appraised value of the Oceanside Program's Property at May 1997, plus book value
of other Oceanside
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Program assets at [DECEMBER 31], 1997, less Oceanside Program liabilities at
[DECEMBER 31], 1997, and plus liabilities to National to be forgiven by
National as part of the Acquisition.
The following table summarizes the calculation of the Exchange Value of the
Oceanside Program and the value assigned per $10,000 of Adjusted Outstanding
Investment:
<TABLE>
Value Assigned
Appraised Value Net Other to Program per
of + Assets and = $10,000 of Adjusted
Real Estate(1) Liabilities(2) Exchange Value Outstanding Investment
--------------- -------------- -------------- ----------------------
<S> <C> <C> <C>
$2,850,000 $[2,025,714] $[4,875,714] $[1,624](3)
</TABLE>
- ----------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values made in
determining the Oceanside property Exchange Value as of [DECEMBER 31,
1997].
<TABLE>
Book
Book Assets - Liabilities + To Be Forgiven = Net Other Assets
(12/31/97)* (12/31/97)* Amounts and Liabilities
----------- ------------ -------------- ----------------
<S> <C> <C> <C>
$2,593,408 $(1,271,694) $704,000 $2,025,714
</TABLE>
* See balance sheet of the Oceanside Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no third party mortgage debt on the Oceanside
property.
(3) Equals [162] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,012,248] 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 [487,571]shares.
The shares allocated to the Oceanside Program will be allocated among
Investors in the Program based on their respective pro rata investments in the
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 [162] shares of Company stock arbitrarily valued at $10 per share.
Neither National nor the Company's founders have any economic interest
in the Oceanside Program except for National's contractual right to asset
management fees and the $[2,082] of tenancy-in-common interests purchased by
National at the inception of the Program for which interests National will
receive Company shares in the Acquisition pro rata with the other Mori Point
Investors.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Oceanside Program (including accrued but unpaid
interest) plus the amount of
13
<PAGE>
assessments and advances paid by Investors at December 31, 1997, appraised
real estate value, Exchange Value of the Program, the number and percentage
of shares allocated to the Program, and the number of shares and comparative
value of the Company to be held by founders after the Acquisition.
<TABLE>
% of Total Shares
Amount to be Outstanding
Owed plus Real Estate No. of Shares After the
Name of Program Assessments Appraised Value Exchange Value(1) Allocated(1)(2) Acquisition
--------------- ----------- --------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Oceanside $27,100,000 $2,850,000 $4,875,714 [487,571] [19.53]%
</TABLE>
- ------------------
(1) The founders of the Company which include members of Company management, as
well as certain employees of National and consultants to the Company and the
Programs, will hold a total of [495,318] Company shares after the
Acquisition (19.84% of the outstanding shares post-Acquisition) which, if
valued at $10 per share, would have an aggregate value of $[4,953,180].
The Company was formed, and shares were purchased by the founders for
$.01 per share, prior to making the Acquisition proposal. While a minor
factor considered in the analysis, the shares to be retained by the
Company's founders were not determined based only on fees cancelled or to
be cancelled by National and its principals. Overall, National believed
that the Company's founders should hold slightly less than 20% of the
shares after the Acquisition. 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:
<TABLE>
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>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [22.44]% of the total shares to
be owned by the Company's founders after the Acquisition ([111,149] shares)
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, 1997,
1996 and 1995.
14
<PAGE>
<TABLE>
Incurred for Actually Paid Incurred for Actually Paid Incurred for Actually Paid
Year Ended for Year Ended Year Ended for Year Ended Year Ended for Year Ended
Name of Program 12/31/95(1) 12/31/95(2) 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2)
--------------- ------------ -------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Oceanside $492,000(3) $300,000 $492,000(3) $300,000 $444,000(3) $300,000
</TABLE>
- ----------------
(1) These amounts represent servicing fees and officer salaries for Oceanside
Development, Inc.
(2) These amounts represent servicing fees only.
(3) Approximately $284,739 per year if the Acquisition had been completed
during the above periods including $148,104 of estimated salaries to be
paid by the Company to its offices and other employees which were allocated
to the Oceanside Program based on Exchange Values. No cash would have been
available to pay officers' bonuses or dividends to shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/
EFFECT OF THE ACQUISITION
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995, 1996 and
1997:
<TABLE>
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 $[675,000] $2,850,000
Interest $1,080,804 $3,145,869 $393,750 $ 0 $ 0 $ 0 $4,620,423
</TABLE>
There have been no recent distributions to Investors. The Acquisition is
not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Oceanside 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.
15
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
YOSEMITE/AHWAHNEE I "TRUDY PAT" PROGRAM
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.
---------------
This Supplement has been prepared to help the Investors in the
Yosemite/Ahwahnee I Program to understand how the Acquisition described in the
accompanying Prospectus 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.
As described in the accompanying Prospectus, American Family Holdings, Inc. (the
"Company") is offering shares of its Common Stock in exchange for the assets
(including cash reserves), certain liabilities and business activities owned by
Investors in five former "Trudy Pat" programs managed by National Investors
Financial, Inc. ("National"). For this proposed Acquisition, the Company will
issue an aggregate of $[20,012,475] of shares of common stock arbitrarily valued
at $10 per Share. The stock will be listed for trading on the ___________ under
the symbol "___." The purpose of the transaction is to consolidate the
operations of the programs, improve the ability to sell or obtain financing for
development of the programs' properties, and provide the investors with
liquidity for their investments.
Of the [2,001,248] shares to be issued by the Company in the Acquisition,
Investors in the Yosemite/Ahwahnee I Program will receive a total of [320,567]
shares or [354] shares per $10,000 of Adjusted Outstanding Investment. After
costs of sale, and the payment of Program liabilities, National does not believe
any alternative would yield to Investors in the Yosemite/Ahwahnee I program an
amount that is higher than the value of the Company shares to be received in the
Acquisition.
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 _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - If the Acquisition is approved, your investment will be subject to the
risks associated with resort development and management plus new risks
associated with a business which also plans to construct and sell residential
properties, and which plans to pursue the development of a hotel/conference
center.
- - If a trading market develops, the initial trading price for the stock will
likely be substantially below the arbitrary value of $10 per share assigned to
the Company's shares for purposes of the acquisition. Thus, the value of the
shares you receive may be less than you might receive if the property of your
program were sold.
- - Principal stockholders National and executive officers of the Company will
hold approximately 18.23% of the Company's stock for which they paid $0.01 per
share and will receive annual cash compensation aggregating $660,000 as officers
and employees. National will be relieved of its servicing and asset management
obligations and will no longer earn servicing and asset management fees of
approximately $650,000 annually. However, the Company will still owe National
over $1,300,000 of accrued but unpaid fees and expenses.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event. If
so, National believes a tax loss is the probable result for most of you.
- - The Company must have additional cash to fund its proposed operations. If
it cannot obtain such funding from the sale of its securities or certain of its
properties, it will be no more successful than the programs have been
individually in completing the development of some or all of the properties.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found on
pages [30] through [42] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If the
acquisition is completed, there will be a change in the nature of the investment
of each investor from holding a tenancy-in-common interest in real estate to
holding shares in an on-going company, the assets of which may be changed from
time to time without approval of investors. If the acquisition is completed,
investors will be able to liquidate their investments only by selling their
shares on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through property
sales. If the acquisition is completed, investors will have an investment in an
entity that is larger than each of the programs and will thus lose relative
voting power. Investors will have an investment in a business which also plans
to construct and sell residential properties, and which plans to pursue the
development of a hotel/conference center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL SALES
PRICE. Investors are subject to the risk that the exchange value of a program
does not reflect the price a program's assets might bring in a sale. If the
property of a program were to be sold, the net proceeds of the sale and the
amount finally distributed to an investor in that program may be more or less
than the exchange value. There is no assurance that the future value of the
shares will continue to be greater than the most recent appraised value of the
property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may trade
at prices substantially below the arbitrarily determined exchange value of $10
per share or historical book value of the company's assets. There is no
guaranty that a liquid trading market will develop for the shares, or be
sustained. If a trading market develops for the shares, the price of shares
after the acquisition will likely decrease below the exchange value per share of
$10 due to a potentially large number of shares that investors may sell
immediately after the acquisition.
THERE WILL BE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of interest.
The principal shareholders and employees of National and the company will hold
approximately [18.23]% of the company's outstanding stock for which they paid
$0.01 per share. Other founders of the company will hold approximately [1.6]%
of the company's outstanding stock for which they also paid $0.01 per share.
Thus, the investors' total ownership interests in the programs' properties will
be diluted by the equity interest in the company held by the founders of the
company. The principal stockholders of National and other executive officers of
the Company will receive annual cash compensation aggregating $660,000 as
officers and employees of the company. National will be relieved of its
servicing and asset management obligations and will no longer earn asset
management or servicing related fees. However, the company will still owe
National over $1,300,000 of accrued but unpaid fees and expenses.
2
<PAGE>
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote, and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
Messrs. Lasker and Orth will be required to devote some of their time to
other projects for which National acts as servicing agent and asset manager.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF THE
INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of each
program, the terms of the acquisition may have been more favorable to certain or
all of the programs and fewer shares and less favorable employment contracts may
have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to opine
conclusively on the taxability of the acquisition to investors. If the
acquisition is a taxable transaction, an investor would recognize gain or loss
in 1998 equal to the difference between the investor's tax basis in his interest
in a program property, and the number of shares of the company received valued
at $10 per share. If the acquisition is treated as taxable, National believes
most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the acquisition,
none of the properties will be subject to any liens other than for property
taxes. The board of directors could authorize borrowing by the company the debt
service for which may adversely affect the company's ability to make
distributions to shareholders. The company may incur full recourse debt which
exposes all of the assets of the company to repayment instead of limited
recourse debt which generally exposes specific properties for the repayment of
debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING
INVESTORS. 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.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long time. This means that shares in the company
are much riskier than ownership of shares of
3
<PAGE>
established companies. If the company had been operating as if it owned the
properties which it desires to acquire, it would have experienced losses to
date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE ACQUISITION
TAKES PLACE. Rather than being focused on a single property, the company will
be an infinite life entity focused on the management of at least five
properties. The effect of this on investors is two-fold. First, poor
performance of a particular property may affect the company's operations as a
whole regardless of the performance of the other properties. Second, there will
be no particular time when an investor can expect that a sale of any of the
properties will result in cash distributions to him or her.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes or
sales of a particular property. Those decisions will be made by the board of
directors or management. In addition, you will have an investment in an entity
that is larger than each of the programs and, thus, you will lose relative
voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, because of the borrowers' defaults there have been
no distributions from any of the programs, other than the Oceanside program, in
the past three years. Future cash distributions will be based on the company's
earnings and the decision of the board of directors to pay dividends.
Therefore, even if a property in which you formerly held an interest were to
perform well, there is no assurance that there would be cash distributions to
you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National is
presently compensated for its services at the rate of one percent of the
principal amount originally invested in each program. In addition, additional
compensation has been accrued for property management services provided to the
Oceanside and Yosemite/Ahwahnee properties by officers and employees of National
in their capacities as officers of Oceanside Development, Inc. and Ahwahnee Golf
Course & Resort, Inc. In the future, compensation will be paid to officers of
the company in the form of salaries, stock options and other benefits. These
salaries and other forms of compensation will be payable to management of the
company even if one or more of the properties acquired in the acquisition is
subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE CONFLICTING YOSEMITE/AHWAHNEE APPRAISALS
MAY BE INCORRECT WHICH MEANS THAT THE EXCHANGE VALUES FOR THOSE PROPERTIES COULD
BE TOO LOW OR TOO HIGH. Faced with two conflicting appraisals for the
Yosemite/Ahwahnee properties, to determine the appraised values for these
properties for purposes of determining their exchange values, National's
management used the lower amount presented in the October 1996 appraisal unless
there was an intervening reason for accepting the higher May 1997 valuation. If
the values arrived at by National were too low for either program, the program's
exchange value would be too low and would result in too few shares being
allocated to that program in the acquisition. Conversely, if the values arrived
at by National were too high, the program would
4
<PAGE>
receive too large an allocation of shares in the acquisition to the detriment
of the investors in the other programs.
GENERAL 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 December 31, 1997: Sacramento/Delta Greens -
approximately $45,000; Oceanside - approximately $55,000; Yosemite/Ahwahnee
(combined) - approximately $684,000; and Mori Point - approximately $298,000.
Annual payments required for all the properties for current taxes (including
amounts currently due on five-year payment plans) total approximately $248,000.
In the case of Sacramento/Delta Greens and Mori Point, National has entered into
statutorily authorized 5-year payment plans with the applicable taxing
authorities. It plans to do the same with Yosemite/Ahwahnee shortly.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $[11,400,000] 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 entire business plan. Additionally, if a minimum of
approximately $250,000 is not raised to pay current property tax liabilities,
then certain 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 programs nor the company have
received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE EXPENSIVE
HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the properties.
As a result, there may be 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.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. 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.
5
<PAGE>
THE CALIFORNIA ECONOMY HAS FLUCTUATED BROADLY IN THE PAST FEW
YEARS. We presently conduct all of our business 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 [$1,381,881] 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 after the
Acquisition, but only from operating revenues or proceeds from the sale of
assets, but not from working capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED.
Construction of the Sacramento/Delta Greens property will require the filing
of a final map and obtaining building permits from the city's real estate
planning authorities. The existing tentative map approval does not entitle
the property owner to build on the property. 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.
The longer this process takes, the longer it will be until the company can
make money from the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE
SACRAMENTO/DELTA GREENS PROPERTY 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. 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. This would mean a delay in
realizing cash from the business operations. The average carrying costs,
including property taxes, management and servicing related fees, for this
property has averaged approximately $10,000 per month over the past three
years.
RISKS OF RESIDENTIAL DEVELOPMENT. 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.
Sacramento/Delta Greens is a proposed residential developments
and represent over 8.4% of the assets of the company, respectively. Although
there can be no assurances and net revenues from Sacramento/Delta Greens may
equal or exceed $3,600,000 over the following 36 months.
6
<PAGE>
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate
funds will not be available to (i) finance engineering and endangered species
studies (estimated by management to cost approximately $124,800), (ii)
finance planning for final approvals (estimated by management to cost
approximately $51,700), and (iii) finance utilities and roads and the
construction of homes (estimated by management to cost approximately
$3,000,000 on a phased basis). Another risk is whether the lots to be
developed will appeal to project builders and whether home financing will be
available. Finally, there is a risk that the development and sale of lots or
homes will be profitable.
REAL ESTATE RISKS OF OCEANSIDE PROPERTY
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE
PROPERTY 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. 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. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged $30,000
per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. 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.
Oceanside is a proposed residential development and represent
over 21.75% of the assets of the company. Although there can be no
assurances, net revenues from Oceanside are expected to be in excess of
$5,000,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that enough
investment money may not be available to obtain a construction loan and begin
construction of the next tract of homes (estimated by management to be
approximately $700,000 of equity). There is also a risk that finished lots
or completed homes will not be marketable at a profit or that home financing
will not be available at affordable rates. There is also strong nearby
competition.
REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE TIMESHARE ASPECT OF THE RESORT HAVE NOT
YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map on 45
remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Additional planned usage such as timeshare will
require extensive county and state approvals through the Departments of Real
Estate and Housing and Commercial development.
RISKS AFFECTING OPERATION OF A GOLF COURSE. Increased
competition, seasonality, weather and course conditions will affect the
operations of the company. While no new golf courses have opened near the
Ahwahnee Golf Course, new courses could increase the competition and reduce
7
<PAGE>
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. All of these factors could
reduce the amount of money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity
which may attract potential timeshare purchasers in the future. At this
time, the project does not rely on the golf course for its revenue. National
estimates that the value of the golf course will be less than 5% of the
assets of the company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS
AND COULD RESULT IN LOSSES. 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.
The recreational vehicle park at Yosemite/Ahwahnee may
generate as much as ten percent of the revenue of the company, yet this
portion of the project represents less than five percent of the assets of the
company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors
affecting timeshare operations could result in losses. Negative press
surrounding the remarketing of timeshares might negatively impact sales and
operations. Also, marketing costs are high relative to selling price which
can reduce or eliminate profits from the sale of timeshare interests.
In addition, according to the American Resort Development
Association, there is a tendency for timeshare owners to default more often
on their timeshare loans then 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 and we may not
be able to secure development financing on acceptable terms.
Timeshare development is planned for Yosemite/Ahwahnee. Since
the project is not yet permitted for timeshare, there has been no allocation
of assets. Should timeshare be approved, the company anticipates that a
significant portion of the revenue of the company will be derived from sales
of timeshare units, possibly in excess of 25%.
8
<PAGE>
RISKS RELATING TO RECREATIONAL VEHICLE PARK OPERATIONS. Risks
relating to recreational vehicle parks are substantially the same as those
described above for timeshare projects.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate
funds will not be available to (i) make up for the current cash drain from
operations of the golf course (estimated by management at approximately
$150,000) annually, (ii) construct an additional planned 100 recreational
vehicle sites (estimated by management to cost approximately $700,000), and
(iii) obtain approvals for and construction of the first group of timeshare
units (estimated by management to cost approximately $3,000,000). There are
also a risk that the operation of recreational vehicle sites, timeshares and
golf course activities will not be profitable.
REAL ESTATE RISKS OF MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY 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 applicable county or city real estate
planning agencies is expensive and time consuming. Mori Point had a specific
plan and tentative map to build a hotel/conference center which expired in
1991. These approvals must be reinstated prior to construction on the
property. Such reinstatement will be complicated by the existence of two
endangered species living on the property.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS
AND COULD RESULT IN LOSSES. 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. 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.
Mori Point represents over 20% of the assets of the company
and, assuming it is operated as a hotel/conference center, its revenues may
exceed 20% of the total revenues of the company upon completion of the
project.
ADDITIONAL SPECIFIC RISKS. There is a risk that the city
government will not approve the property for its intended use. Capital to
conduct engineering and environmental studies in order to apply for and
obtain approvals for its use from the City is estimated to be approximately
$500,000. Capital will also be necessary for roads, utilities and other
infrastructure costs prior to construction. Finally, there is a risk that
the proposed hotel/conference center may not be profitable.
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
9
<PAGE>
party to acquire and exercise control of the Company or to change its
management, even if that change would be beneficial to you. These provisions
include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate
of incorporation, subject to the receipt of fair value, the Board of
Directors may issue shares in other classes or series and fix the rights,
powers and limitations associated with such shares. Although the Board of
Directors has no present intention of doing so, it could issue a class or
series that could, depending on its terms, impede a merger, tender offer or
other transaction that you might believe is in your best interest or in which
you might receive a premium for your shares over the then current market
price. The issuance of such shares could also dilute your voting power.
STAGGERED BOARD. The Board of Directors is divided into three
classes serving staggered three year terms. This arrangement may affect your
ability to change control of the company, even if you believe such a change
is in your best interests.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% of the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. 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. This restriction also may deter
potential purchasers who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law,
as well as the charter documents, limit the liability of directors and
officers to shareholders. This limitation of liability may exceed the
protections National enjoys under the programs' servicing agreements.
FAIRNESS TO INVESTORS IN THE YOSEMITE/AHWAHNEE I PROGRAM
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. This determination is based on consideration of the
following positive and negative factors:
- the shares offer an opportunity for individual investor
liquidity while the tenancy-in-common interests do not, however, there is no
assurance that the shares will have any liquidity, or that any liquid market
that develops will be sustained;
- while the number of shares to be issued to reflect the
exchange value of a program is arbitrary, the trading price of such shares
initially is likely to be substantially below the $10 value arbitrarily
assigned to such shares. In our opinion, the exchange values offered to
investors for their assets allow for an equitable allocation of the
[2,001,248] shares among the programs. The disparity between exchange values
and appraised values results from adding the value of program cash reserves
and other assets, if any, to appraised values and deducting program
liabilities (principally accrued property taxes and other fees net of fees to
be forgiven by National);
10
<PAGE>
- on completion of the acquisition the investors from all
five programs will hold over 80% of the outstanding stock of the company.
After the Acquisition, a total of [12.84]% of the outstanding stock of the
Company will be held by Yosemite/Ahwahnee I investors. After the
Acquisition, principals, employees, and consultants of National will hold
less than 20%. That 20% was purchased for $.01 per share. While a minor
factor in determining the number of Shares to be held by the Company's
founders, it should be noted that National and its principals have forgiven,
or will forgive at the completion of the acquisition, over $3,000,000 of
expenses and accrued fees of which a total of approximately $1,700,000 was
earned under the servicing agreements after the loans defaulted and before
the foreclosure actions were completed. The balance was earned after
foreclosure for asset and property management services and expenses. Of such
amount, $35,000 is attributable to fees owed by Yosemite/Ahwahnee I
investors. National believes that the amount paid for the property
management services is no greater than the amount that a third party would
charge;
- the valuation of the Yosemite/Ahwahnee I real estate
assets (as well as the real estate assets of the other programs) by the
independent appraisers;
- the probability that the transaction will either be
tax-free to investors or most likely yield a tax loss. Either way, National
believes there will likely be no out-of-pocket tax cost to all, or the vast
majority, of you;
- while conflicts of interest exist in the structuring of
the acquisition, the issuance of shares to the founders of the company and
the determination of management compensation and while you did not have
independent representation in the structuring of the acquisition, we believe
they have been counterbalanced by your opportunity to vote on the transaction
and the Fairness Opinion;
- while the Yosemite/Ahwahnee I Program (as well as the
other programs) were originally formed to have a two to four year finite life
and the investors expected to receive a return of their investment from the
original borrower, the company is an infinite life entity which will not
return the program investors' original investment based on a sale or
refinancing of the properties underlying the original programs. However,
after the borrowers defaulted on the "Trudy Pat" loans, the investors became
beneficial owners of the underlying properties with the need to complete
development, manage or otherwise ready the properties for sale. Those
endeavors had no fixed timetable and, thus, the finite life aspect of their
original investments was significantly changed. Therefore, the infinite life
aspect of the company is not viewed by National to be a material change from
the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the
business plan of the Yosemite/Ahwahnee I Program. Rather than being focused
on a single property for residential purposes, the company will be focused on
the management of at least five properties. Thus, the poor performance of a
particular property may affect the company's operations as a whole regardless
of the performance of the Yosemite/Ahwahnee I Property. Further, there will
be no particular time when an Investor can expect its interest to be
automatically liquidated;
11
<PAGE>
- Yosemite/Ahwahnee I investors will not be able to vote on
changes to or dispositions of Yosemite/Ahwahnee I property or borrowing
secured by that property. Those decisions will be made by the Board of
Directors or management of the Company. Further, as investors in a larger
entity, relative voting power will be diluted;
- future cash distributions will be based on the company's
earnings and the decision of the Board of Directors to pay dividends rather
than the performance or sale of the Yosemite/Ahwahnee I property;
- investors voting against the acquisition will have no
alternative but to accept shares in the company if the acquisition is
approved by holders of a majority of the tenancy-in-common interests in each
of the programs;
- the anti-takeover provisions of the company's charter
documents contain provisions that may have the effect of delaying or
discouraging a change in management which is not favored by the Board of
Directors of the company; and
- the Fairness Opinion rendered by Houlihan Valuation
Advisers, an independent valuation firm which addresses only the allocation
of the shares in the acquisition and not the amount of the consideration paid
to program investors in the acquisition as a whole. See "Background and
Reasons for the Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in
connection with the acquisition and compared it with what you might receive
if (i) the Yosemite/Ahwahnee I property was operated "as is," (ii) the
Yosemite/Ahwahnee I property was sold in a quick sale in three months or
less, or (iii) the Yosemite/Ahwahnee I property was sold at the appraised
value used to determine the Yosemite/Ahwahnee I exchange value. Based on
that review, and even acknowledging that, initially, the company's shares
issued in the acquisition would likely trade substantially below their
arbitrary $10 issuance value, National believes that there is a higher
probability of realizing value from the Yosemite/Ahwahnee I property through
the acquisition than through the other alternatives. This belief is based on
the expectation that some financing opportunities will become available based
on the form of the entity and the time pressure associated with forced sales
or liquidation will be relieved. See "Background and Reasons for the
Acquisition -- Comparison to Alternatives" 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
The Exchange Value of the Yosemite/Ahwahnee I 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 Yosemite/Ahwahnee
I Program, [320,567] shares) multiplied by an arbitrary $10 per share value.
12
<PAGE>
In calculating the Exchange Value for the Yosemite/Ahwahnee I
Program, National had to reconcile the differences between the May 1997
appraisal by Arnold Associates and the October 1996 appraisal by The Mentor
Group. See "Appraisals and Fairness Opinion -- Reconciliation of
Yosemite/Ahwahnee Properties' Appraisals" at page [__] of the Prospectus.
After determining the reconciled appraised value of the Program, the Exchange
Value was calculate by adding to the reconciled appraised value the book
value of the Program's other assets at [DECEMBER 31], 1997, deducting the
Program's liabilities as [DECEMBER 31], 1997, and adding back liabilities to
National to be forgiven by National as part of the Acquisition.
The following table summarizes the calculation of the Exchange
Value of the Yosemite/Ahwahnee I Program and the value assigned on $10,000 of
Adjusted Outstanding Investment:
<TABLE>
<S> <C> <C> <C>
Value Assigned
Appraised Net Other to Program per
Value of + Assets and = Exchange $10,000 of Adjusted
Real Estate(1) Liabilities(2) Value Outstanding Investment
-------------- -------------- ----- ----------------------
$3,912,454 $[(706,787)] $[3,205,666] $[3,542](3)
</TABLE>
- -------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values made in
determining Yosemite/Ahwahnee I property's Exchange Value as of [DECEMBER
31, 1997].
<TABLE>
<S> <C> <C> <C>
Book
Book Assets - Liabilities + To Be Forgiven = Net Other Assets
(12/31/97)* (12/31/97)* Amounts and Liabilities
----------- ------------ ------- ---------------
$602,891 $(1,344,678) $35,000** $(706,787)
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no third party mortgage debt on the
Yosemite/Ahwahnee I Property.
** Prior to 1994, National forgave $406,158 of fees and advances to this
Program.
(3) Equals [354] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,001,248] 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 [320,567]
shares.
The shares allocated to the Yosemite/Ahwahnee I Program will
be allocated among Investors in the Program based on their respective pro
rata investments in the 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 [354]
shares of Company stock arbitrarily valued at $10 per share.
13
<PAGE>
Neither National nor the Company's founders have any
interest in the Yosemite/ Ahwahnee I Program except for National's
contractual right to asset management fees and the $[2,373] of
tenancy-in-common interests purchased by National for which interests
National will receive Company shares in the Acquisition pro rata with the
other Yosemite/Ahwahnee I Investors.
The following table and its footnotes sets forth the amount
owed by the original borrower to the Yosemite/Ahwahnee I Program (including
accrued but unpaid interest) plus the amount of assessments and advances paid
by Investors at [DECEMBER 31], 1997, appraised real estate value, Exchange
Value of the Program, the number and percentage of shares allocated to the
Program, and the number of shares and comparative value of the Company to be
held by founders after the Acquisition.
<TABLE>
% of Total
Shares to be
Amount Outstanding
Owed plus Real Estate No. of Shares After the
Name of Program Assessments Appraised Value Exchange Value(1) Allocated(1)(2) Acquisition
- --------------- ----------- --------------- ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee I $8,987,163 $3,912,4545 $3,205,666 320,567 [12.84]%
</TABLE>
- -------------
(1) The founders of the Company which include members of Company management, as
well as certain employees of National and consultants to the Company and
the Programs, will hold a total of [495,318] Company shares after the
Acquisition (19.84% of the outstanding shares post-Acquisition) which, if
valued at $10 per share, would have an aggregate value of $[4,953,180].
The Company was formed, and shares were purchased by the founders for $.01
per share, prior to making the Acquisition proposal. While a minor factor
considered in the analysis, the shares to be retained by the Company's
founders were not determined based only on fees cancelled or to be
cancelled by National and its principals. Overall, National believed that
the Company's founders should hold slightly less than 20% of the shares
after the Acquisition. 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:
<TABLE>
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>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [3.42]% of the total shares to
be owned by the Company's founders after the Acquisition ([16,940] shares)
would have been deemed allocated from this Program.
14
<PAGE>
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, 1997,
1996 and 1995.
<TABLE>
Incurred for Actually Paid Incurred for Actually Paid Incurred for Actually Paid
Year Ended for Year Ended Year Ended for Year Ended Year Ended for Year Ended
Name of Program 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2)
- --------------- ----------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee I $84,051(3) $-0- $150,800(3) $101,626 $148,439(3) $60,700
</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.
(3) Approximately $187,189 per year if the Acquisition had been completed
during the above periods including $22,572 of estimated salaries to be paid
by the Company to its officers and other employees which were allocated to
the Yosemite/Ahwahnee I Program based on Exchange Values. No cash would
have been available to pay officers' bonuses or dividends to shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/
EFFECT OF THE ACQUISITION
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995, 1996 and
1997:
<TABLE>
Prior to
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 $ 0 $ 0 $ 0 $ 0 $ 283,085
Interest $1,903,306 $920,794 $335,557 $4,756 $ 0 $ 0 $ 0 $3,164,413
</TABLE>
There have been no recent distributions to Investors. The Acquisition
is not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Yosemite/Ahwahnee I 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.
15
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
YOSEMITE/AHWAHNEE II "TRUDY PAT" PROGRAM
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.
----------------------
This Supplement has been prepared to help the Investors in the
Yosemite/Ahwahnee II Program to understand how the Acquisition described in
the accompanying Prospectus 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.
As described in the accompanying Prospectus, American Family Holdings,
Inc. (the "Company") is offering shares of its Common Stock in exchange for
the assets (including cash reserves), certain liabilities and business
activities owned by Investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[20,012,475] of shares
of common stock arbitrarily valued at $10 per Share. The stock will be
listed for trading on the ___________ under the symbol "___." The purpose of
the transaction is to consolidate the operations of the programs, improve the
ability to sell or obtain financing for development of the programs'
properties, and provide the investors with liquidity for their investments.
Of the [2,001,248] shares to be issued by the Company in the Acquisition,
Investors in the Yosemite/Ahwahnee II Program will receive a total of
[513,755]shares or [265] shares per $10,000 of Adjusted Outstanding
Investment. After costs of sale, and the payment of Program liabilities,
National does not believe any alternative would yield to Investors in the
Yosemite/Ahwahnee II program an amount that is higher than the value of the
Company shares to be received in the Acquisition.
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 _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - If the acquisition is approved, your investment will be subject to the
risks associated with resort development and management plus new risks
associated with a business which also plans to construct and sell residential
properties, and which plans to pursue the development of a hotel/conference
center.
- - If a trading market develops, the initial trading price for the stock will
likely be substantially below the arbitrary value of $10 per share assigned
to the Company's shares for purposes of the acquisition. Thus, the value of
the shares you receive may be less than you might receive if the property of
your program were sold.
- - Principal stockholders of National and executive officers of the Company
will hold approximately 18.23% of the Company's stock for which they paid
$0.01 per share and will receive annual cash compensation aggregating
$660,000 as officers and employees. National will be relieved of its
servicing and asset management obligations and will no longer earn servicing
and asset management fees of approximately $650,000 annually. However, the
Company will still owe National over $1,300,000 of accrued but unpaid fees
and expenses.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event. If
so, National believes a tax loss is the probable result for most of you.
- - The Company must have additional cash to fund its proposed operations. If
it cannot obtain such funding from the sale of its securities or certain of
its properties, it will be no more successful than the programs have been
individually in completing the development of some or all of the properties.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found
on pages [30] through [42] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
THERE WILL BE A FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If
the acquisition is completed, there will be a change in the nature of the
investment of each investor from holding a tenancy-in-common interest in real
estate to holding shares in an on-going company, the assets of which may be
changed from time to time without approval of investors. If the acquisition
is completed, investors will be able to liquidate their investments only by
selling their shares on the _____ or in private transactions, and they will
not receive a return of their investment in the form of liquidation proceeds
through property sales. If the acquisition is completed, investors will have
an investment in an entity that is larger than each of the programs and will
thus lose relative voting power. Investors will have an investment in a
business which also plans to construct and sell residential properties, and
which plans to pursue the development of a hotel/conference center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL
SALES PRICE. Investors are subject to the risk that the exchange value of a
program does not reflect the price a program's assets might bring in a sale.
If the property of a program were to be sold, the net proceeds of the sale
and the amount finally distributed to an investor in that program may be more
or less than the exchange value. There is no assurance that the future value
of the shares will continue to be greater than the most recent appraised
value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may
trade at prices substantially below the arbitrarily determined exchange value
of $10 per share or historical book value of the company's assets. There is
no guaranty that a liquid trading market will develop for the shares, or be
sustained. If a trading market develops for the shares, the price of shares
after the acquisition will likely decrease below the exchange value per share
of $10 due to a potentially large number of shares that investors may sell
immediately after the acquisition.
THERE WILL BE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of
interest. The principal shareholders and employees of National and the
company, will hold approximately [18.23]% of the company's outstanding stock
for which they paid $0.01 per share. Other founders of the company will hold
approximately [1.6]% of the company's outstanding stock for which they also
paid $0.01 per share. Thus, the investors' total ownership interests in the
programs' properties will be diluted by the equity interest in the company
held by the founders of the company. The principal stockholders of National
and other executive officers of the company will receive annual cash
compensation aggregating $660,000 as officers and employees of the company.
National will be relieved of its servicing and asset management obligations
and will no longer earn asset management or servicing related fees. However,
the company will still owe National over $1,300,000 of accrued but unpaid
fees and expenses.
2
<PAGE>
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote, and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
Messrs. Lasker and Orth will be required to devote some of their time to
other projects for which National acts as servicing agent and asset manager.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF
THE INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject
to arm's-length negotiation. Had an independent party negotiated on behalf
of each program, the terms of the acquisition may have been more favorable to
certain or all of the programs and fewer shares and less favorable employment
contracts may have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to
opine conclusively on the taxability of the acquisition to investors. If the
acquisition is a taxable transaction, an investor would recognize gain or
loss in 1998 equal to the difference between the investor's tax basis in his
interest in a program property, and the number of shares of the company
received valued at $10 per share. If the acquisition is treated as taxable,
National believes most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, none of the properties will be subject to any liens other than
for property taxes. The board of directors could authorize borrowing by the
company the debt service for which may adversely affect the company's ability
to make distributions to shareholders. The company may incur full recourse
debt which exposes all of the assets of the company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING
INVESTORS. 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.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long time. This means that shares in the
company are much riskier than ownership of shares of
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established companies. If the company had been operating as if it owned the
properties which it desires to acquire, it would have experienced losses to
date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE
ACQUISITION TAKES PLACE. Rather than being focused on a single property, the
company will be an infinite life entity focused on the management of at least
five properties. The effect of this on investors is two-fold. First, poor
performance of a particular property may affect the company's operations as a
whole regardless of the performance of the other properties. Second, there
will be no particular time when an investor can expect that a sale of any of
the properties will result in cash distributions to him or her.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes
or sales of a particular property. Those decisions will be made by the board
of directors or management. In addition, you will have an investment in an
entity that is larger than each of the programs and, thus, you will lose
relative voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, because of the borrowers' defaults there have
been no distributions from any of the programs, other than the Oceanside
program, in the past three years. Future cash distributions will be based on
the company's earnings and the decision of the board of directors to pay
dividends. Therefore, even if a property in which you formerly held an
interest were to perform well, there is no assurance that there would be cash
distributions to you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National is
presently compensated for its services at the rate of one percent of the
principal amount originally invested in each program. In addition,
additional compensation has been accrued for property management services
provided to the Oceanside and Yosemite/Ahwahnee properties by officers and
employees of National in their capacities as officers of Oceanside
Development, Inc. and Ahwahnee Golf Course & Resort, Inc. In the future,
compensation will be paid to officers of the company in the form of salaries,
stock options and other benefits. These salaries and other forms of
compensation will be payable to management of the company even if one or more
of the properties acquired in the acquisition is subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE CONFLICTING YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THAT THE EXCHANGE VALUES FOR THOSE
PROPERTIES COULD BE TOO LOW OR TOO HIGH. Faced with two conflicting
appraisals for the Yosemite/Ahwahnee properties, to determine the appraised
values for these properties for purposes of determining their exchange
values, National's management used the lower amount presented in the October
1996 appraisal unless there was an intervening reason for accepting the
higher May 1997 valuation. If the values arrived at by National were too low
for either program, the program's exchange value would be too low and would
result in too few shares being allocated to that program in the acquisition.
Conversely, if the values arrived at by National were too high, the program
would
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receive too large an allocation of shares in the acquisition to the detriment
of the investors in the other programs.
GENERAL 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 December 31, 1997:
Sacramento/Delta Greens - approximately $45,000; Oceanside - approximately
$55,000; Yosemite/Ahwahnee (combined) - approximately $684,000; and Mori
Point - approximately $298,000. Annual payments required for all the
properties for current taxes (including amounts currently due on five-year
payment plans) total approximately $248,000. In the case of Sacramento/Delta
Greens and Mori Point, National has entered into statutorily authorized
5-year payment plans with the applicable taxing authorities. It plans to do
the same with Yosemite/Ahwahnee shortly.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $[11,400,000] 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 entire business plan. Additionally, if a minimum of
approximately $250,000 is not raised to pay current property tax liabilities,
then certain 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 programs nor
the company have received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be 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.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. 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.
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THE CALIFORNIA ECONOMY HAS FLUCTUATED BROADLY IN THE PAST FEW YEARS. We
presently conduct all of our business 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 $1,381,881 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 after the Acquisition, but
only from operating revenues or proceeds from the sale of assets, but not
from working capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED. Construction of
the Sacramento/Delta Greens property will require the filing of a final map
and obtaining building permits from the city's real estate planning
authorities. The existing tentative map approval does not entitle the
property owner to build on the property. 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.
The longer this process takes, the longer it will be until the company can
make money from the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY 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. 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. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged
approximately $10,000 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. 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.
Sacramento/Delta Greens is a proposed residential developments and
represent over 8.4% of the assets of the company, respectively. Although
there can be no assurances and net revenues from Sacramento/Delta Greens may
equal or exceed $3,600,000 over the following 36 months.
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ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) finance engineering and endangered species studies
(estimated by management to cost approximately $124,800), (ii) finance
planning for final approvals (estimated by management to cost approximately
$51,700), and (iii) finance utilities and roads and the construction of homes
(estimated by management to cost approximately $3,000,000 on a phased basis).
Another risk is whether the lots to be developed will appeal to project
builders and whether home financing will be available. Finally, there is a
risk that the development and sale of lots or homes will be profitable.
REAL ESTATE RISKS OF OCEANSIDE PROPERTY
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE PROPERTY 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. 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. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged $10,000
per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. 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.
Oceanside is a proposed residential development and represent over
21.75% of the assets of the company. Although there can be no assurances,
net revenues from Oceanside are expected to be in excess of $5,000,000 over
the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that enough investment money
may not be available to obtain a construction loan and begin construction of
the next tract of homes (estimated by management to be approximately $700,000
of equity). There is also a risk that finished lots or completed homes will
not be marketable at a profit or that home financing will not be available at
affordable rates. There is also strong nearby competition.
REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE TIMESHARE ASPECT OF THE RESORT HAVE NOT YET BEEN
OBTAINED. The Yosemite/Ahwahnee property has a final map on 45 remaining
single family estate lots and a use permit for a 600 space recreational
vehicle park. Additional planned usage such as timeshare will require
extensive county and state approvals through the Departments of Real Estate
and Housing and Commercial Development.
RISKS AFFECTING OPERATION OF A GOLF COURSE. Increased competition,
seasonality, weather and course conditions will affect the operations of the
company. While no new golf courses have opened near the Ahwahnee Golf
Course, new courses could increase the competition and reduce
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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. All of these factors could
reduce the amount of money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity which may
attract potential timeshare purchasers in the future. At this time, the
project does not rely on the golf course for its revenue. National estimates
that the value of the golf course will be less than 5% of the assets of the
company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. 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.
The recreational vehicle park at Yosemite/Ahwahnee may generate as much
as ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then 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 and we may not be able
to secure development financing on acceptable terms.
Timeshare development is planned for Yosemite/Ahwahnee. Since the
project is not yet permitted for timeshare, there has been no allocation of
assets. Should timeshare be approved, the company anticipates that a
significant portion of the revenue of the company will be derived from sales
of timeshare units, possibly in excess of 25%.
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RISKS RELATING TO RECREATIONAL VEHICLE PARK OPERATIONS. Risks relating
to recreational vehicle parks are substantially the same as those described
above for timeshare projects.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) make up for the current cash drain from operations of the
golf course (estimated by management at approximately $150,000) annually,
(ii) construct an additional planned 100 recreational vehicle sites
(estimated by management to cost approximately $700,000), and (iii) obtain
approvals for and construction of the first group of timeshare units
(estimated by management to cost approximately $3,000,000). There are also a
risk that the operation of recreational vehicle sites, timeshares and golf
course activities will not be profitable.
REAL ESTATE RISKS OF MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY 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 applicable county or city real estate planning agencies is
expensive and time consuming. Mori Point had a specific plan and tentative
map to build a hotel/conference center which expired in 1991. These
approvals must be reinstated prior to construction on the property. Such
reinstatement will be complicated by the existence of two endangered species
living on the property.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. 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.
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.
Mori Point represents over 20% of the assets of the company and,
assuming it is operated as a hotel/conference center, its revenues may exceed
20% of the total revenues of the company upon completion of the project.
ADDITIONAL SPECIFIC RISKS. There is a risk that the city government
will not approve the property for its intended use. Capital to conduct
engineering and environmental studies in order to apply for and obtain
approvals for its use from the City is estimated to be approximately
$500,000. Capital will also be necessary for roads, utilities and other
infrastructure costs prior to construction. Finally, there is a risk that
the proposed hotel/conference center may not be profitable.
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
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party to acquire and exercise control of the Company or to change its
management, even if that change would be beneficial to you. These provisions
include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate of
incorporation, subject to the receipt of fair value, the Board of Directors
may issue shares in other classes or series and fix the rights, powers and
limitations associated with such shares. Although the Board of Directors has
no present intention of doing so, it could issue a class or series that
could, depending on its terms, impede a merger, tender offer or other
transaction that you might believe is in your best interest or in which you
might receive a premium for your shares over the then current market price.
The issuance of such shares could also dilute your voting power.
STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability
to change control of the company, even if you believe such a change is in
your best interests.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% of the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. 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. This restriction also may deter
potential purchasers who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well
as the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements.
FAIRNESS TO INVESTORS IN THE YOSEMITE/AHWAHNEE II PROGRAM
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. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that
develops will be sustained;
- while the number of shares to be issued to reflect the exchange
value of a program is arbitrary, the trading price of such shares initially
is likely to be substantially below the $10 value arbitrarily assigned to
such shares. In our opinion, the exchange values offered to investors for
their assets allow for an equitable allocation of the [2,001,248] shares
among the programs. The disparity between exchange values and appraised
values results from adding the value of program cash reserves and other
assets, if any, to appraised values and deducting program liabilities
(principally accrued property taxes and other fees net of fees to be forgiven
by National);
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- on completion of the acquisition the investors from all five
programs will hold over 80% of the outstanding stock of the company. After
the Acquisition, a total of [20.58]% of the outstanding stock of the Company
will be held by Yosemite/Ahwahnee II investors. After the Acquisition,
principals, employees, and consultants of National will hold less than 20%.
That 20% was purchased for $.01 per share. While a minor factor in
determining the number of Shares to be held by the Company's founders, it
should be noted that National and its principals have forgiven, or will
forgive at the completion of the acquisition, over $3,000,000 of expenses and
accrued fees of which a total of approximately $1,700,000 was earned under
the servicing agreements after the loan defaulted and before the foreclosure
actions were completed. The balance was earned after foreclosure for asset
and property management services and expenses. Of such amount, $70,000 is
attributable to fees owed by Yosemite/Ahwahnee II investors. National
believes that the amount paid for the property management services is no
greater than the amount that a third party would charge;
- the valuation of the Yosemite/Ahwahnee II real estate assets (as
well as the real estate assets of the other programs) by the independent
appraisers;
- the probability that the transaction will either be tax-free to
investors or most likely yield a tax loss. Either way, National believes
there will likely be no out-of-pocket tax cost to all, or the vast majority,
of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have
independent representation in the structuring of the acquisition, we believe
they have been counterbalanced by your opportunity to vote on the transaction
and the Fairness Opinion;
- while the Yosemite/Ahwahnee II Program (as well as the other
programs) were originally formed to have a two to four year finite life and
the investors expected to receive a return of their investment from the
original borrower, the company is an infinite life entity which will not
return the program investors' original investment based on a sale or
refinancing of the properties underlying the original programs. However,
after the borrowers defaulted on the "Trudy Pat" loans, the investors became
beneficial owners of the underlying properties with the need to complete
development, manage or otherwise ready the properties for sale. Those
endeavors had no fixed timetable and, thus, the finite life aspect of their
original investments was significantly changed. Therefore, the infinite life
aspect of the company is not viewed by National to be a material change from
the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the individual
business plan of the Yosemite/Ahwahnee II Program. Rather than being focused
on the development of a single property for residential purposes, the company
will be focused on the management of at least five properties. Thus, the
poor performance of a particular property may affect the company's operations
as a whole regardless of the performance of the Yosemite/Ahwahnee II
Property. Further, there will be no particular time when an Investor can
expect its interest to be automatically liquidated;
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- Yosemite/Ahwahnee II investors will not be able to vote on changes
to or dispositions of the Yosemite/Ahwahnee II Property or borrowing secured
by that property. Those decisions will be made by the Board of Directors or
management of the Company. Further, as investors in a larger entity,
relative voting power will be diluted;
- future cash distributions will be based on the company's earnings
and the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Yosemite/Ahwahnee II Property;
- investors voting against the acquisition will have no alternative
but to accept shares in the company if the acquisition is approved by holders
of a majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a
change in management which is not favored by the Board of Directors of the
company; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the shares
in the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection
with the acquisition and compared it with what you might receive if (i) the
Yosemite/Ahwahnee II property was operated "as is," (ii) the
Yosemite/Ahwahnee II property was sold in a quick sale in three months or
less, or (iii) the Yosemite/Ahwahnee II property was sold at the appraised
value used to determine the Yosemite/Ahwahnee II exchange value. Based on
that review, and even acknowledging that, initially, the company's shares
issued in the acquisition would likely trade substantially below their
arbitrary $10 issuance value, National believes that there is a higher
probability of realizing value from the Yosemite/Ahwahnee II property through
the acquisition than through the other alternatives. This belief is based on
the expectation that some financing opportunities will become available based
on the form of the entity and the time pressure associated with forced sales
or liquidation will be relieved. See "Background and Reasons for the
Acquisition -- Comparison to Alternatives" 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
The Exchange Value of the Yosemite/Ahwahnee II 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 Yosemite/Ahwahnee
II Program, [513,755] shares) multiplied by an arbitrary $10 per share value.
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In calculating the Exchange Value for the Yosemite/Ahwahnee II Program,
National had to reconcile the differences between the May 1997 appraisal by
Arnold Associates and the October 1996 appraisal by The Mentor Group. See
"Appraisals and Fairness Opinion -- Reconciliation of Yosemite/Ahwahnee
Properties' Appraisals" at page [__] of the Prospectus. After determining the
reconciled appraised value of the Program, the Exchange Value was calculated by
adding to the reconciled appraised value the book value of the Program's other
assets at December 31, 1997, deducting the Program's liabilities as December 31,
1997, and adding back liabilities to National to be forgiven by National as part
of the Acquisition.
The following table summarizes the calculation of the Exchange Value of the
Yosemite/Ahwahnee II Program and the value assigned on $10,000 of Adjusted
Outstanding Investment:
<TABLE>
Value Assigned
Appraised Net Other to Program per
Value of Assets and Exchange $10,000 of Adjusted
Real Estate(1) + Liabilities(2) = Value Outstanding Investment
- -------------- -------------- ---------- ----------------------
<S> <C> <C> <C>
$6,253,121 $(1,115,570) $5,137,552 $[2,646](3)
</TABLE>
- -------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values made in
determining the Yosemite/Ahwahnee II property's Exchange Value as of
December 31, 1997.
<TABLE>
Book
Book Assets - Liabilities + To Be Forgiven = Net Other Assets
(12/31/97)* (12/31/97)* Amounts and Liabilities
----------- ----------- -------------- ---------------
<S> <C> <C> <C>
$963,576 $(2,149,146) $70,000** $[(1,115,570)]
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no third party mortgage debt on the
Yosemite/Ahwahnee II property.
** Prior to 1994, National forgave $823,867 of fees and advances to
this Program.
(3) Equals [265] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,001,248] 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 [513,755] shares.
The shares allocated to the Yosemite/Ahwahnee II Program will be allocated
among Investors in the Program based on their respective pro rata investments in
the 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 $10,000 will receive [265] shares of Company stock
arbitrarily valued at $10 per share.
13
<PAGE>
Neither National nor the Company's founders have any economic interest
in the Yosemite/Ahwahnee II Program except for National's contractual right to
asset management fees and the $[46,454] of tenancy-in-common interests purchased
by National at the inception of the Program for which interests National will
receive Company shares in the Acquisition pro rata with the other
Yosemite/Ahwahnee II Investors.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Yosemite/Ahwahnee II Program (including accrued but
unpaid interest) plus the amount of assessments and advances paid by Investors
at December 31, 1997, appraised real estate value, Exchange Value of the
Program, the number and percentage of shares allocated to the Program, and the
number of shares and comparative value of the Company to be held by founders
after the Acquisition.
<TABLE>
% of Total
Shares to be
Amount Real Estate Outstanding
Owed plus Appraised Exchange No. of Shares After the
Name of Program Assessments Value Value(1) Allocated(1)(2) Acquisition
- --------------- ----------- ----- -------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II $19,344,964 $6,253,121 $[5,137,552] [513,755] [20.58]%
</TABLE>
- -------------
(1) The founders of the Company which include members of Company management, as
well as certain employees of National and consultants to the Company and
the Programs, will hold a total of [495,318] Company shares after the
Acquisition (19.84% of the outstanding shares post-Acquisition) which, if
valued at $10 per share, would have an aggregate value of $[4,953,180].
The Company was formed, and shares were purchased by the founders for $.01
per share, prior to making the Acquisition proposal. While a minor factor
considered in the analysis, the shares to be retained by the Company's
founders were not determined based only on fees cancelled or to be
cancelled by National and its principals. Overall, National believed that
the Company's founders should hold slightly less than 20% of the shares
after the Acquisition. 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:
<TABLE>
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>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [39.13]% of the total shares to
be owned by the Company's founders after the Acquisition ([193,818] shares)
would have been deemed allocated from this Program.
14
<PAGE>
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, 1997,
1996 and 1995.
<TABLE>
Incurred for Actually Paid Incurred for Actually Paid Incurred for Actually Paid
Year Ended for Year Ended Year Ended for Year Ended Year Ended for Year Ended
Name of Program 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2)
- --------------- ----------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II $174,569(3) $-0- $313,200(3) $211,069 $248,157(3) $123,998
</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.
(3) Approximately $312,375 per year if the Acquisition had been completed
during the above periods including $258,258 of estimated salaries to be
paid by the Company to its officers and other employees which were
allocated to the Yosemite/Ahwahnee II Program based on Exchange Values. No
cash would have been available to pay officers' bonuses or dividends to
shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/EFFECT OF THE ACQUISITION
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995, 1996 and
1997:
<TABLE>
Prior to
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 $ 0 $ 0 $ 0 $ 0 $ 148,264
Interest $592,498 $1,153,352 $688,303 $10,273 $ 0 $ 0 $ 0 $2,444,426
</TABLE>
There have been no recent distributions to Investors. The Acquisition is
not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Yosemite/Ahwahnee II 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.
15
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
MORI POINT "TRUDY PAT" PROGRAM
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.
This Supplement has been prepared to help the Investors in the Mori Point
Program to understand how the Acquisition described in the accompanying
Prospectus 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.
As described in the accompanying Prospectus, American Family Holdings, Inc.
(the "Company") is offering shares of its Common Stock in exchange for the
assets (including cash reserves), certain liabilities and business activities
owned by Investors in five former "Trudy Pat" programs managed by National
Investors Financial, Inc. ("National"). For this proposed Acquisition, the
Company will issue an aggregate of $[20,012,475] of shares of common stock
arbitrarily valued at $10 per Share. The stock will be listed for trading on
the ___________ under the symbol "___." The purpose of the transaction is to
consolidate the operations of the programs, improve the ability to sell or
obtain financing for development of the programs' properties, and provide the
investors with liquidity for their investments.
Of the [2,001,248] shares to be issued by the Company in the Acquisition,
Investors in the Mori Point Program will receive a total of [485,704] shares or
[399] shares per $10,000 of Adjusted Outstanding Investment. After costs of
sale, and the payment of Program liabilities, National does not believe any
alternative would yield to Investors in the Mori Point program an amount that is
higher than the value of the Company shares to be received in the Acquisition.
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 _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a tenancy-in-common
interest in your program's property. Instead, you will hold shares in a
publicly-traded real estate company and will not receive liquidation proceeds
when, or if, your program's property is sold. As an investor in a publicly-
traded company with many stockholders, you will have relatively less voting
power.
- - If the acquisition is approved, your investment will be subject to the
risks associated with the development of a hotel/conference center plus new
risks associated with a business which also operates a golf course and a
recreational vehicle park, and which plans to pursue the development of
timeshare facilities and residential lots.
- - If a trading market develops, the initial trading price for the stock will
likely be substantially below the arbitrary value of $10 per share assigned to
the Company's shares for purposes of the acquisition. Thus, the value of the
shares you receive may be less than you might receive if the property of your
program were sold.
- - Principal stockholders of National and executive officers of the Company
will hold approximately 18.23% of the Company's stock for which they paid $0.01
per share and will receive annual cash compensation aggregating $660,000 as
officers and employees. National will be relieved of its servicing and asset
management obligations and will no longer earn servicing and asset management
fees of approximately $650,000 annually. However, the Company will still owe
National over $1,300,000 of accrued but unpaid fees and expenses.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event. If
so, National believes a tax loss is the probable result for most of you.
- - The Company must have additional cash to fund its proposed operations. If
it cannot obtain such funding from the sale of its securities or certain of its
properties, it will be no more successful than the programs have been
individually in completing the development of some or all of the properties.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found on
pages [30] through [42] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If the
acquisition is completed, there will be a change in the nature of the investment
of each investor from holding a tenancy-in-common interest in real estate to
holding shares in an on-going company, the assets of which may be changed from
time to time without approval of investors. If the acquisition is completed,
investors will be able to liquidate their investments only by selling their
shares on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through property
sales. If the acquisition is completed, investors will have an investment in an
entity that is larger than each of the programs and will thus lose relative
voting power. Investors will have an investment in a business which also
operates a golf course and a recreational vehicle park, and which plans to
pursue the development of timeshare facilities and a hotel/conference center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL SALES
PRICE. Investors are subject to the risk that the exchange value of a program
does not reflect the price a program's assets might bring in a sale. If the
property of a program were to be sold, the net proceeds of the sale and the
amount finally distributed to an investor in that program may be more or less
than the exchange value. There is no assurance that the future value of the
shares will continue to be greater than the most recent appraised value of the
property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may trade
at prices substantially below the arbitrarily determined exchange value of $10
per share or historical book value of the company's assets. There is no
guaranty that a liquid trading market will develop for the shares, or be
sustained. If a trading market develops for the shares, the price of shares
after the acquisition will likely decrease below the exchange value per share of
$10 due to a potentially large number of shares that investors may sell
immediately after the acquisition.
THERE WILL BE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of interest.
The principal shareholders and employees of National and the company, will hold
approximately [18.23]% of the company's outstanding stock for which they paid
$0.01 per share. Other founders of the company will hold approximately [1.6]%
of the company's outstanding stock for which they also paid $0.01 per share.
Thus, the investors' total ownership interests in the programs' properties will
be diluted by the equity interest in the company held by the founders of the
company. The principal stockholders of National and other executive officers of
the company will receive annual cash compensation aggregating $660,000 as
officers and employees of the company. National will be relieved of its
servicing and asset management obligations and will no longer earn asset
management or servicing related fees. However, the company will still owe
National over $1,300,000 of accrued but unpaid fees and expenses.
<PAGE>
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not favored
by the board of directors. These provisions include a board of directors with
three classes serving staggered three year terms, the inability to remove a
particular director before the expiration of his or her term without a two-
thirds supermajority vote, and the inability to amend the anti-takeover
provisions of the charter documents without a similar vote. Thus, if investors
are unhappy with management's performance, it will be more difficult to remove
directors not favored by the investors.
Messrs. Lasker and Orth will be required to devote some of their time to
other projects for which National acts as servicing agent and asset manager.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF THE
INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of each
program, the terms of the acquisition may have been more favorable to certain or
all of the programs and fewer shares and less favorable employment contracts may
have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to opine
conclusively on the taxability of the acquisition to investors. If the
acquisition is a taxable transaction, an investor would recognize gain or loss
in 1998 equal to the difference between the investor's tax basis in his interest
in a program property, and the number of shares of the company received valued
at $10 per share. If the acquisition is treated as taxable, National believes
most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the acquisition,
none of the properties will be subject to any liens other than for property
taxes. The board of directors could authorize borrowing by the company the debt
service for which may adversely affect the company's ability to make
distributions to shareholders. The company may incur full recourse debt which
exposes all of the assets of the company to repayment instead of limited
recourse debt which generally exposes specific properties for the repayment of
debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS.
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.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long time. This means that shares in the company
are much riskier than ownership of shares of
3
<PAGE>
established companies. If the company had been operating as if it owned the
properties which it desires to acquire, it would have experienced losses to
date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE ACQUISITION
TAKES PLACE. Rather than being focused on a single property, the company will
be an infinite life entity focused on the management of at least five
properties. The effect of this on investors is two-fold. First, poor
performance of a particular property may affect the company's operations as a
whole regardless of the performance of the other properties. Second, there will
be no particular time when an investor can expect that a sale of any of the
properties will result in cash distributions to him or her.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes or
sales of a particular property. Those decisions will be made by the board of
directors or management. In addition, you will have an investment in an entity
that is larger than each of the programs and, thus, you will lose relative
voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, because of the borrowers' defaults there have been
no distributions from any of the programs, other than the Oceanside program, in
the past three years. Future cash distributions will be based on the company's
earnings and the decision of the board of directors to pay dividends.
Therefore, even if a property in which you formerly held an interest were to
perform well, there is no assurance that there would be cash distributions to
you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National is
presently compensated for its services at the rate of one percent of the
principal amount originally invested in each program. In addition, additional
compensation has been accrued for property management services provided to the
Oceanside and Yosemite/Ahwahnee properties by officers and employees of National
in their capacities as officers of Oceanside Development, Inc. and Ahwahnee Golf
Course & Resort, Inc. In the future, compensation will be paid to officers of
the company in the form of salaries, stock options and other benefits. These
salaries and other forms of compensation will be payable to management of the
company even if one or more of the properties acquired in the acquisition is
subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE CONFLICTING YOSEMITE/AHWAHNEE APPRAISALS
MAY BE INCORRECT WHICH MEANS THAT THE EXCHANGE VALUES FOR THOSE PROPERTIES COULD
BE TOO LOW OR TOO HIGH. Faced with two conflicting appraisals for the
Yosemite/Ahwahnee properties, to determine the appraised values for these
properties for purposes of determining their exchange values, National's
management used the lower amount presented in the October 1996 appraisal unless
there was an intervening reason for accepting the higher May 1997 valuation. If
the values arrived at by National were too low for either program, the program's
exchange value would be too low and would result in too few shares being
allocated to that program in the acquisition. Conversely, if the values arrived
at by National were too high, the program would
4
<PAGE>
receive too large an allocation of shares in the acquisition to the detriment
of the investors in the other programs.
GENERAL 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 December 31, 1997: Sacramento/Delta Greens -
approximately $45,000; Oceanside - approximately $55,000; Yosemite/Ahwahnee
(combined) - approximately $684,000; and Mori Point - approximately $298,000.
Annual payments required for all the properties for current taxes (including
amounts currently due on five-year payment plans) total approximately $248,000.
In the case of Sacramento/Delta Greens and Mori Point, National has entered into
statutorily authorized 5-year payment plans with the applicable taxing
authorities. It plans to do the same with Yosemite/Ahwahnee shortly.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $[11,400,000] 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 entire business plan. Additionally, if a minimum of
approximately $250,000 is not raised to pay current property tax liabilities,
then certain 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 programs nor the company have
received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE EXPENSIVE
HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the properties.
As a result, there may be 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.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. 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.
5
<PAGE>
THE CALIFORNIA ECONOMY HAS FLUCTUATED BROADLY IN THE PAST FEW YEARS. We
presently conduct all of our business 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
[$1,381,881] 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 after the Acquisition, but only from
operating revenues or proceeds from the sale of assets, but not from working
capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED. Construction of the
Sacramento/Delta Greens property will require the filing of a final map and
obtaining building permits from the city's real estate planning authorities.
The existing tentative map approval does not entitle the property owner to build
on the property. 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. The longer this
process takes, the longer it will be until the company can make money from the
property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY 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. 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. This would mean a delay in realizing cash from the business operations.
The average carrying costs, including property taxes, management and servicing
related fees, for this property has averaged approximately $10,000 per month
over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. 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.
Sacramento/Delta Greens is a proposed residential developments and
represent over 8.4% of the assets of the company, respectively. Although there
can be no assurances and net revenues from Sacramento/Delta Greens may equal or
exceed $3,600,000 over the following 36 months.
6
<PAGE>
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to (i) finance engineering and endangered species studies (estimated
by management to cost approximately $124,800), (ii) finance planning for final
approvals (estimated by management to cost approximately $51,700), and (iii)
finance utilities and roads and the construction of homes (estimated by
management to cost approximately $3,000,000 on a phased basis). Another risk is
whether the lots to be developed will appeal to project builders and whether
home financing will be available. Finally, there is a risk that the development
and sale of lots or homes will be profitable.
REAL ESTATE RISKS OF OCEANSIDE PROPERTY
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE PROPERTY 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. 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. This would mean a delay in realizing cash from the business operations.
The average carrying costs, including property taxes, management and servicing
related fees, for this property has averaged $10,000 per month over the past
three years.
RISKS OF RESIDENTIAL DEVELOPMENT. 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.
Oceanside is a proposed residential development and represent over 21.75%
of the assets of the company. Although there can be no assurances, net revenues
from Oceanside are expected to be in excess of $5,000,000 over the following 36
months.
ADDITIONAL SPECIFIC RISKS. There is a risk that enough investment money
may not be available to obtain a construction loan and begin construction of the
next tract of homes (estimated by management to be approximately $700,000 of
equity). There is also a risk that finished lots or completed homes will not be
marketable at a profit or that home financing will not be available at
affordable rates. There is also strong nearby competition.
REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE TIMESHARE ASPECT OF THE RESORT HAVE NOT YET BEEN
OBTAINED. The Yosemite/Ahwahnee property has a final map on 45 remaining single
family estate lots and a use permit for a 600 space recreational vehicle park.
Additional planned usage such as timeshare will require extensive county and
state approvals through the Departments of Real Estate and Housing and
Commercial Development.
RISKS AFFECTING OPERATION OF A GOLF COURSE. Increased competition,
seasonality, weather and course conditions will affect the operations of the
company. While no new golf courses have opened near the Ahwahnee Golf Course,
new courses could increase the competition and reduce
7
<PAGE>
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. All of these factors could reduce the amount of
money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity which may
attract potential timeshare purchasers in the future. At this time, the project
does not rely on the golf course for its revenue. National estimates that the
value of the golf course will be less than 5% of the assets of the company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. 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.
The recreational vehicle park at Yosemite/Ahwahnee may generate as much as
ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or eliminate
profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then 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 and we may not be able to
secure development financing on acceptable terms.
Timeshare development is planned for Yosemite/Ahwahnee. Since the project
is not yet permitted for timeshare, there has been no allocation of assets.
Should timeshare be approved, the company anticipates that a significant portion
of the revenue of the company will be derived from sales of timeshare units,
possibly in excess of 25%.
8
<PAGE>
RISKS RELATING TO RECREATIONAL VEHICLE PARK OPERATIONS. Risks relating to
recreational vehicle parks are substantially the same as those described above
for timeshare projects.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to (i) make up for the current cash drain from operations of the golf
course (estimated by management at approximately $150,000) annually, (ii)
construct an additional planned 100 recreational vehicle sites (estimated by
management to cost approximately $700,000), and (iii) obtain approvals for and
construction of the first group of timeshare units (estimated by management to
cost approximately $3,000,000). There are also a risk that the operation of
recreational vehicle sites, timeshares and golf course activities will not be
profitable.
REAL ESTATE RISKS OF MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY 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
applicable county or city real estate planning agencies is expensive and time
consuming. Mori Point had a specific plan and tentative map to build a
hotel/conference center which expired in 1991. These approvals must be
reinstated prior to construction on the property. Such reinstatement will be
complicated by the existence of two endangered species living on the property.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. 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. 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.
Mori Point represents over 20% of the assets of the company and, assuming
it is operated as a hotel/conference center, its revenues may exceed 20% of the
total revenues of the company upon completion of the project.
ADDITIONAL SPECIFIC RISKS. There is a risk that the city government will
not approve the property for its intended use. Capital to conduct engineering
and environmental studies in order to apply for and obtain approvals for its use
from the City is estimated to be approximately $500,000. Capital will also be
necessary for roads, utilities and other infrastructure costs prior to
construction. Finally, there is a risk that the proposed hotel/conference
center may not be profitable.
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
9
<PAGE>
party to acquire and exercise control of the Company or to change its
management, even if that change would be beneficial to you. These provisions
include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate of
incorporation, subject to the receipt of fair value, the Board of Directors may
issue shares in other classes or series and fix the rights, powers and
limitations associated with such shares. Although the Board of Directors has no
present intention of doing so, it could issue a class or series that could,
depending on its terms, impede a merger, tender offer or other transaction that
you might believe is in your best interest or in which you might receive a
premium for your shares over the then current market price. The issuance of
such shares could also dilute your voting power.
STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability to
change control of the company, even if you believe such a change is in your best
interests.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's certificate
of incorporation, as well as Delaware law, prohibits certain business
combinations with owners of more than 15% of the outstanding voting stock of the
company ("interested stockholders") within the three year period immediately
prior to the date on which the interested stockholder became an interested
stockholder. These restrictions on certain business combinations may deter
potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. 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. This restriction also may deter potential purchasers
who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well as
the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections National
enjoys under the programs' servicing agreements.
FAIRNESS TO INVESTORS IN THE MORI POINT PROGRAM
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. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that develops
will be sustained;
- while the number of shares to be issued to reflect the exchange value
of a program is arbitrary, the trading price of such shares initially is likely
to be substantially below the $10 value arbitrarily assigned to such shares. In
our opinion, the exchange values offered to investors for their assets allow for
an equitable allocation of the [2,001,248] shares among the programs. The
disparity between exchange values and appraised values results from adding the
value of program cash reserves and other assets, if any, to appraised values and
deducting program liabilities (principally accrued property taxes and other fees
net of fees to be forgiven by National);
10
<PAGE>
- on completion of the acquisition the investors from all five programs
will hold over 80% of the outstanding stock of the company. After the
Acquisition, a total of [19.45]% of the outstanding stock of the Company will be
held by Mori Point investors. After the Acquisition, principals, employees, and
consultants of National will hold less than 20%. That 20% was purchased for
$.01 per share. While a minor factor in determining the number of Shares to be
held by the Company's founders, it should be noted that National and its
principals have forgiven, or will forgive at the completion of the acquisition,
over $3,000,000 of expenses and accrued fees of which a total of approximately
$1,700,000 was earned under the servicing agreements after the loan defaulted
and before the foreclosure actions were completed. The balance was earned after
foreclosure for asset and property management services and expenses. Of such
amount, none is attributable to fees owed by Mori Point investors. National
believes that the amount paid for the property management services is no greater
than the amount that a third party would charge;
- the valuation of the Mori Point real estate assets (as well as the
real estate assets of the other programs) by the independent appraisers;
- the probability that the transaction will either be tax-free to
investors or most likely yield a tax loss. Either way, National believes there
will likely be no out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have independent
representation in the structuring of the acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the Mori Point Program (as well as the other programs) were
originally formed to have a two to four year finite life and the investors
expected to receive a return of their investment from the original borrower, the
company is an infinite life entity which will not return the program investors'
original investment based on a sale or refinancing of the properties underlying
the original programs. However, after the borrowers defaulted on the "Trudy
Pat" loans, the investors became beneficial owners of the underlying properties
with the need to complete development, manage or otherwise ready the properties
for sale. Those endeavors had no fixed timetable and, thus, the finite life
aspect of their original investments was significantly changed. Therefore, the
infinite life aspect of the company is not viewed by National to be a material
change from the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the business plans
of the Mori Point Program. Rather than being focused on the development of a
single property for residential purposes, the company will be focused on the
management of at least five properties. Thus, the poor performance of a
particular property may affect the company's operations as a whole regardless of
the performance of the Mori Point property. Further, there will be no
particular time when an Investor can expect its interest to be automatically
liquidated;
11
<PAGE>
- Mori Point investors will not be able to vote on changes to or
dispositions of the Mori Point property or borrowing secured by that property.
Those decisions will be made by the Board of Directors or management of the
Company. Further, as investors in a larger entity, relative voting power will
be diluted;
- future cash distributions will be based on the company's earnings and
the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Mori Point property;
- investors voting against the acquisition will have no alternative but
to accept shares in the company if the acquisition is approved by holders of a
majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a change
in management which is not favored by the Board of Directors of the company; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the shares in
the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection with
the acquisition and compared it with what you might receive if (i) the Mori
Point property was operated "as is," (ii) the Mori Point property was sold in a
quick sale in three months or less, or (iii) the Mori Point property was sold at
the appraised value used to determine the Mori Point exchange value. Based on
that review, and even acknowledging that, initially, the company's shares issued
in the acquisition would likely trade substantially below their arbitrary $10
issuance value, National believes that there is a higher probability of
realizing value from the Mori Point property through the acquisition than
through the other alternatives. This belief is based on the expectation that
some financing opportunities will become available based on the form of the
entity and the time pressure associated with forced sales or liquidation will be
relieved. See "Background and Reasons for the Acquisition -- Comparison to
Alternatives" 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
The Exchange Value of the Mori Point 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, cash reserves, 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 Mori Point Program, [485,704] shares)
multiplied by an arbitrary $10 per share value.
12
<PAGE>
The Exchange Value for the Mori Point Program was calculated as follows:
appraised value of the Mori Point Program's property at May 1997, plus book
value of other Mori Point Program assets at December 31, 1997, less Mori Point
Program liabilities at December 31, 1997, and plus liabilities to National to be
forgiven by National as part of the Acquisition.
The following table summarizes the calculation of the Exchange Value of the
Mori Point Program and the value assigned on $10,000 of Adjusted Outstanding
Investment:
<TABLE>
Value Assigned
Appraised Net Other to Program per
Value of + Assets and = Exchange $10,000 of Adjusted
Real Estate(1) Liabilities(2) Value Outstanding Investment
- -------------- -------------- ----- ----------------------
<S> <C> <C> <C>
$5,500,000 $[(642,958)] $[4,857,042] $[3,988](3)
</TABLE>
- -------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values made in
determining the Mori Point property's Exchange Value as of [DECEMBER 31,
1997].
<TABLE>
Book Assets Book Liabilities To Be Forgiven Net Other Assets
(12/31/97)* - (12/31/97)* + Amounts = and Liabilities
----------- ----------- ------- ---------------
<S> <C> <C> <C>
$239,911 $(882,869) $ 0** $[(642,958)]
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no mortgage debt on the Mori Point Property.
** Prior to 1994, National forgave $461,589 of fees and advances to
this Program.
(3) Equals [399] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The 2,001,248 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 [485,704] shares.
The shares allocated to the Mori Point Program will be allocated among
Investors in the Program based on their respective pro rata investments in the
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 [399] shares of Company stock arbitrarily valued at $10 per share.
Neither National nor the Company's founders have any economic interest
in the Mori Point Program except for National's contractual right to asset
management fees and the $[5,279] of tenancy-in-common interests purchased by
National for which interests National will receive Company shares in the
Acquisition pro rata with the other Mori Point Investors.
13
<PAGE>
The following table and its footnotes sets forth the amount owed by the
original borrower to the Mori Point Program (including accrued but unpaid
interest) plus the amount of assessments and advances paid by Investors at
[DECEMBER 31, 1997], appraised real estate value, Exchange Value of the Program,
the number and percentage of shares allocated to the Program, and the number of
shares and comparative value of the Company to be held by founders after the
Acquisition.
<TABLE>
% of Total Shares
Amount Real Estate to be Outstanding
Owed plus Appraised Exchange No. of Shares After the
Name of Program Assessments Value Value(1) Allocated(1)(2) Acquisition
- --------------- ----------- ----- -------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Mori Point $12,420,000 $5,500,000 $[4,857,042] [485,704] [19.45]%
</TABLE>
- -------------
(1) The founders of the Company which include members of Company management, as
well as certain employees of National and consultants to the Company and
the Programs, will hold a total of [495,318] Company shares after the
Acquisition (19.84% of the outstanding shares post-Acquisition) which, if
valued at $10 per share, would have an aggregate value of $[4,953,180].
The Company was formed, and shares were purchased by the founders for $.01
per share, prior to making the Acquisition proposal. While a minor factor
considered in the analysis, the shares to be retained by the Company's
founders were not determined based only on fees cancelled or to be
cancelled by National and its principals. Overall, National believed that
the Company's founders should hold slightly less than 20% of the shares
after the Acquisition. 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:
<TABLE>
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>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [14.71]% of the total shares to
be owned by the Company's founders after the Acquisition ([72,861] shares)
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, 1997,
1996 and 1995.
14
<PAGE>
<TABLE>
Incurred for Actually Paid Incurred for Actually Paid Incurred for Actually Paid
Year Ended for Year Ended Year Ended for Year Ended Year Ended for Year Ended
Name of Program 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96 12/31/97(1) 12/31/97
- --------------- ----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Mori Point $100,000(2) $-0- $100,000(2) $-0- $100,000(2) $27,333
</TABLE>
- ------------
(1) These amounts represent accrued servicing fees.
(2) Approximately $283,676 per year if the Acquisition had been completed
during the above periods including $93,522 of estimated salaries to be paid
by the Company to its officers and other employees which were allocated to
the Mori Point Program based on Exchange Values. No cash would have been
available to pay officers' bonuses or dividends to shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/EFFECT OF THE ACQUISITION
No cash distributions made to Investors in any of the years ended December
31, 1992, 1993, 1994, 1995, 1996 or 1997. Prior to 1992, $1,354,708 in interest
was distributed to Investors. The Acquisition is not expected to alter this
distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Mori Point 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.
15
<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
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*
5.1 Opinion of Arter & Hadden LLP regarding legality of Shares*
8.1 Form of Arter & Hadden LLP tax opinion*
8.2 Revised form of Arter & Hadden LLP tax opinion
10.1 Signed Employment Agreement of David Lasker*
10.2 Signed Employment Agreement of James Orth*
10.3 Signed 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*
10.5 Form of Employment Agreement of Mark Kawanami*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Arter & Hadden LLP as counsel contained in Exhibit
5.1*
II-1
<PAGE>
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)*
23.10 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 2)*
23.11 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 3)*
23.12 Consent of Houlihan Valuation Advisers (re Amendment No. 3)*
23.13 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 4)
23.14 Consent of Houlihan Valuation Advisers (re Amendment No. 4)
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*
99.7 Schedule E to Prior Performance Schedules*
99.8 Revised Schedule E to Prior Performance Schedules
* Previously filed
** To be filed by amendment
Item 22 Undertakings
(a) Item 512 Undertakings.
(i) The undersigned Registrant hereby undertakes:
II-2
<PAGE>
(A) to file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(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 May 12,
1998.
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.
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Co-Chairman of the Board,
/s/ David G. Lasker President, Chief Financial May 12, 1998
- ---------------------------- Officer and Chief
David G. Lasker Accounting Officer
/s/ James N. Orth Co-Chairman of the Board,
- ---------------------------- Chief Executive Officer and May 12, 1998
James N. Orth Secretary
L.C. "Bob" Albertson, Jr.* Executive Vice President May 12, 1998
- ---------------------------- and Director
L.C. "Bob" Albertson, Jr.
Charles F. Hanson* May 12, 1998
- ---------------------------- Director
Charles F. Hanson
Dudley Muth* May 12, 1998
- ---------------------------- Director
Dudley Muth
John G. LeSieur, III* May 12, 1998
- ---------------------------- Director
John G. LeSieur, III
*By /s/ David G. Lasker
---------------------------------
David G. Lasker, Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
EXHIBIT
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*
5.1 Opinion of Arter & Hadden LLP regarding legality of Shares*
8.1 Form of Arter & Hadden LLP tax opinion*
8.2 Revised form of Arter & Hadden LLP tax opinion
10.1 Signed Employment Agreement of David Lasker*
10.2 Signed Employment Agreement of James Orth*
10.3 Signed 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*
10.5 Form of Employment Agreement of Mark Kawanami*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Arter & Hadden LLP 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)*
23.10 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 2)*
23.11 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 3)*
23.12 Consent of Houlihan Valuation Advisers (re Amendment No. 3)*
23.13 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 4)
23.14 Consent of Houlihan Valuation Advisers (re Amendment No. 4)
<PAGE>
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*
99.7 Schedule E to Prior Performance Schedules*
99.8 Revised Schedule E to Prior Performance Schedules
* Previously filed
** To be filed by amendment
<PAGE>
EXHIBIT 8.1
[Arter & Hadden LLP Letterhead]
______________, 1998
American Family Holdings, Inc.
4220 Von Karman Avenue,
Suite 110
Newport Beach, California 92660
Re: ISSUANCE OF SHARES IN ACQUISITION
Gentlemen:
You have requested our opinion as to certain Federal income tax
consequences with respect to the Acquisition described in that certain
Prospectus contained in Registration Statements (File Nos. 333-37161) to which
this opinion letter is attached as Exhibit 8.1. In formulating our opinion, we
have examined and have relied upon (i) the Prospectus and the correctness of all
statements, representations and information set forth therein, and (ii) the
correctness of other documents, statements, representations and information that
the Company and its representatives have furnished to us. Capitalized words in
this opinion have the meanings set forth in the Prospectus.
For the reasons set forth in the portion of the Prospectus entitled
"Federal Income Tax Consequences," we are unable to opine that the Acquisition
will qualify under Section 351 of the Internal Revenue Code of 1986, as amended.
However, if Investors who acquire 80% or more of the Shares are not subject to
the step transaction doctrine discussed therein, we are of the opinion that the
Acquisition will qualify under Section 351, with the resulting Federal income
tax consequences as summarized therein. Conversely, if Investors who are not
subject to the step transaction doctrine acquire less than 80% of the Shares, we
are of the opinion that the Acquisition will not qualify under Section 351, with
the resulting Federal income tax consequences as summarized therein.
We confirm and adopt the tax opinions set forth under "Federal Income Tax
Consequences" in the Prospectus. We are also of the opinion that such
discussion fully and fairly addresses all material Federal income tax issues
relating to the Acquisition which involve the reasonable possibility of a
challenge by the Service.
<PAGE>
American Family Holdings, Inc.
_______________, 1998
Page 2
Our opinion (i) is subject to the qualifications and assumptions set forth
herein and in the "Federal Income Tax Consequences" discussion, (ii) is rendered
solely for the information and assistance of the Company and Investors in the
Programs in connection with the Acquisition, and may not be relied upon by any
other person or for any other purpose, or quoted in whole or in part, or
otherwise referred to, in any document (other than the Prospectus) without our
prior written consent, and (iii) are dated as set forth above, and we undertake
no, and hereby disclaim any, obligation to advise you of any changes in the
current laws and regulations or any new developments which might affect matters
set forth in "Federal Income Tax Consequences" subsequent to the date hereof.
We consent to the use of this opinion as an exhibit to the Registration
Statement. We bring to your attention the fact that our legal opinion is our
expression of professional judgment and is not a guarantee of a result.
We consent to the use of this opinion as an exhibit to the Registration
Statements and to the use of our name under the headings "Federal Income Tax
Consequences" and "Legal Matters" in the Preliminary Prospectus forming a part
of the Registration Statements.
Very truly yours,
<PAGE>
EXHIBIT 23.13
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 February 24, 1998,
relating to the financial statement of American Family Holdings, Inc., as of
December 31, 1997; and our reports dated February 24, 1998 relating to the
financial statements of the Oceanside Program, the Yosemite/Ahwahnee Programs,
the Mori Point Program and the Sacramento/Delta Greens Program for each of the
two years in the period ended December 31, 1997, 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
May 11, 1998
<PAGE>
EXHIBIT 23.14
CONSENT
The undersigned hereby consents to the filing of its amended Fairness
Opinion as an exhibit to the registration statement on Form S-4 filed by
American Family Holdings, Inc. with the Securities and Exchange Commission
(the "Registration Statement") and to the reference to us under the caption
"Background and Reasons for the Acquisition -- Appraisals and Fairness
Opinion" in the prospectus which is a part of the Registration Statement.
Dated: May 8, 1998
HOULIHAN VALUATION ADVISORS
By /S/ BRET TACK
--------------------------------
Print Name BRET TACK
------------------------
Title PRINCIPAL
-----------------------------
<PAGE>
EXHIBIT 99.8
SCHEDULE E
Schedule E shows, as of December 31, 1997, properties acquired by "Trudy Pat"
programs in the three most recent years through foreclosure of defaulted
loans or acceptance of a deed in lieu of foreclosure of defaulted loans.
None of the programs have investment objectives similar to those of the
Company. Prospective investors should be aware that the results of these
programs are not necessarily indicative of the potential results of the
Company.
<TABLE>
Yosemite/Ahwahnee I Yosemite/Ahwahnee II
------------------- --------------------
<S> <C> <C>
1. Name, location and type of property 660 acres located in Madera County, 990 acres located in Madera County,
California. Improvement consisted of 47 California. Improvements consisted of an
finished lots with roads and utilities.(1) 18-hole golf course with clubhouse, pro
shop, recreational vehicle area with roads
and utilities.(1)
2. Date of foreclosure September 19, 1995 September 19, 1995
3. Balance of loan due including
interest accrued through foreclosure $ 7,954,629 $ 17,388,470
date
4. Acquisition price(2) $ 7,954,629 $ 17,383,470
5. Foreclosure costs expensed $ 19,113.49 $ 38,226.99
6. Foreclosure costs capitalized None None
7. Total acquisition costs(3) $ 19,113.49 $ 38,226.99
</TABLE>
- ------------
(1) These parcels are adjacent to each other.
(2) Same as balance of loan due plus accrued interest through foreclosure date.
(3) Total of lines 5 and 6.
<PAGE>
EXHIBIT 99.8
SCHEDULE E (continued)
<TABLE>
Cypress Lakes
-------------
<S> <C>
1. Name, location and type of 660 acres located in Contra Costa
property County, California. Planned for a
golf course and 1,330 residential
units
2. Date of foreclosure July 14, 1995
3. Balance of loan due including
interest accrued through $ 18,183,404
foreclosure date
4. Acquisition price(2) $ 18,183,404
5. Foreclosure costs expensed $ 31,783.18
6. Foreclosure costs capitalized None
7. Total acquisition costs(3) $ 31,783.18
</TABLE>
