<PAGE>
As filed with the Securities and Exchange Commission on May __, 1998
Registration No. 333-44199
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
AMENDMENT NO. 2
to
Form SB-2
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
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
<TABLE>
Item of Form SB-2 Prospectus Caption or Location
- ----------------- ------------------------------
<S> <C>
1. Front of Registration
Statement and Outside Front
Cover of Prospectus. . . . . . . . Cover of Registration Statement; Cross
Reference sheet; Outside Front Cover
of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus. . . . . Inside Front Cover of Prospectus;
Reports to Shareholders; Table of
Contents; Outside Back Cover of
Prospectus
3. Summary Information and Risk
Factors. . . . . . . . . . . . . . Prospectus Summary; Risk Factors
4. Use of Proceeds. . . . . . . . . . Use of Proceeds
5. Determination of Offering Price. . The Offering
6. Dilution . . . . . . . . . . . . . Dilution
7. Selling Securityholders. . . . . . Not Applicable
8. Plan of Distribution . . . . . . . Prospectus Summary; The Offering
9. Legal Proceedings. . . . . . . . . Business and Properties
10. Directors, Executive Officers,
Promoters and Control Persons. . . Prospectus Summary
11. Security Ownership of Certain
Beneficial Owners and Management . Prospectus Summary; Principal
Shareholders; Management
12. Description of Securities. . . . . Prospectus Summary; Description of
Shares; Dividend Policy
13. Interest of Named Experts and
Counsel. . . . . . . . . . . . . . Not Applicable
14. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities . . . . Fiduciary Responsibility and
Indemnification; Management
15. Organization within Last
Five Years . . . . . . . . . . . . Business and Properties
16. Description of Business. . . . . . Prospectus Summary; Business and
Properties
17. Management's Discussion and
Analysis or Plan of Operation. . . Management's Discussion and Analysis
of Financial Condition and Results of
Operations
</TABLE>
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
(continued)
<TABLE>
Item of Form SB-2 Prospectus Caption or Location
- ----------------- ------------------------------
<S> <C>
18. Description of Property. . . . . . Prospectus Summary; Business and
Properties; Policies with Respect to
Certain Activities
19. Certain Relationships and
Related Transactions . . . . . . . Not Applicable
20. Market for Common Equity and
Related Stockholder Matters. . . . Risk Factors; The Offering; Shares
Eligible for Future Sale; Dividend
Policy
21. Executive Compensation . . . . . . Prospectus Summary; Management
22. Financial Statements . . . . . . . Prospectus Summary; Selected Financial
Information; Financial Statements
23. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure . . . . . Not Applicable
Item of Form S-11*
- ------------------
13. Investment Policies of
Registrant . . . . . . . . . . . . Prospectus Summary; Policies with
Respect to Certain Activities
14. Description of Real Estate . . . . Prospectus Summary; Business and
Properties
15. Operating Data . . . . . . . . . . Prospectus Summary; Business and
Properties
</TABLE>
- -------------
* As required by General Instruction B.2. of Form SB-2
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
$10,000,000 OF UNITS
CONSISTING OF ONE SHARE OF COMMON STOCK AND
ONE WARRANT TO PURCHASE TWO ADDITIONAL SHARES
-----------------
1,000,000 UNITS AT $10 PER UNIT
THE OFFERING
American Family Holdings, Inc. (the "Company") is offering $10,000,000
of Units on a "best efforts" basis exclusively to current investors in the
following tenancy-in-common loan programs: Sacramento/Delta Greens "Trudy
Pat" Program, Oceanside "Trudy Pat" Program, Yosemite/Ahwahnee I "Trudy Pat"
Program, Yosemite/Ahwahnee II "Trudy Pat" Program and Mori Point "Trudy Pat"
Program. NO PERSON OR ENTITY THAT IS NOT, AS OF THE DATE OF THIS PROSPECTUS,
AN INVESTOR IN ONE OF THOSE FIVE PROGRAMS, OR AN OFFICER OR DIRECTOR OF THE
COMPANY, WILL BE PERMITTED TO PURCHASE UNITS UNDER ANY CIRCUMSTANCES. Each
Unit consists of one share of Company Common Stock and one warrant to
purchase two additional shares of Company Common Stock. The purchase price
for each Unit is $10.
THE OFFERING IS SUBJECT TO SUBSTANTIAL RISK FACTORS. SEE "RISK FACTORS"
COMMENCING AT PAGE __.
CONCURRENT VOTE SOLICITATION
By a separate Consent Solicitation Statement/Prospectus, the Company
is offering shares of its Common Stock in exchange for the assets (including
cash on hand), certain liabilities and business activities owned by investors
in the five "Trudy Pat" programs named above (the "Acquisition"). For that
proposed Acquisition, the Company will issue $[20,012,475] of its shares of
Common Stock arbitrarily valued at $10 per share. The purpose of the
Acquisition 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 potential liquidity for their
investments. IF INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH
OF THE PROGRAMS DO NOT VOTE TO APPROVE THE ACQUISITION, THE ACQUISITION WILL
NOT TAKE PLACE. IF THE ACQUISITION DOES NOT TAKE PLACE, NONE OF THE SHARES
OFFERED BY THIS PROSPECTUS WILL BE SOLD. See the Company's Consent
Solicitation Statement/Prospectus delivered with this Prospectus for further
information about the Acquisition.
-----------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR THE ATTORNEY GENERAL OF
THE STATE OF NEW YORK. NONE OF THESE HAVE PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Price to Proceeds to
the Public Selling Commissions(2) the Company(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit(1) $ 10 $ 0.70 $ 9.30
- --------------------------------------------------------------------------------
Total $10,000,000 $700,000 $9,300,000
- --------------------------------------------------------------------------------
Total Minimum $ 10 $ 0.70 $ 9.30
- --------------------------------------------------------------------------------
Total Maximum $10,000,000 $700,000 $9,300,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) A unit consists of one share of Common Stock and one detachable warrant to
purchase two additional shares of Common Stock for a per share purchase
price equal to 80% of the closing price for the Company's Common Stock on
the _____ trading date before the warrant exercise date.
(2) The sales commission is seven percent for Units sold through NASD licensed
broker-dealers.
(3) Proceeds are calculated before deducting organization and offering expenses
(excluding selling commissions) payable by the Company which are estimated
to be approximately $__________ in both a minimum and maximum offering.
The date of this Prospectus is _______________, 1998
<PAGE>
Money accepted by the Company or soliciting dealers from the sale of
Units will be promptly deposited into an interest-bearing escrow account at
First Trust of California, N.A.. The interest earned in this account will be
paid to investors. The offering will close only if the Acquisition is
approved. If the Acquisition is approved, the offering will close on the
date that the Acquisition is completed. Investors will become holders of
Units when their funds are transferred from the escrow account to the
Company's account. If the Acquisition is not successful, investors' funds in
the escrow account will be returned promptly with interest earned thereon and
the Company will stop selling Units. See "The Offering -- Escrow
Arrangements."
The Company's shares will be listed on the _____ under the symbol
"_____."
The Company does not presently file reports with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
It will commence to do so after the Acquisition described in the accompanying
Consent Solicitation/Prospectus.
UNTIL ___________, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
TABLE OF CONTENTS
<TABLE>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Summary Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Current Status of the Properties . . . . . . . . . . . . . . . . . . . . 4
Experience of Management . . . . . . . . . . . . . . . . . . . . . . . . 6
Organization Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Summary of Business Plan . . . . . . . . . . . . . . . . . . . . . . . . 7
Concurrent Consent Solicitation. . . . . . . . . . . . . . . . . . . . . 8
Summary Financial Information. . . . . . . . . . . . . . . . . . . . . . 8
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
General Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
The shares may trade at prices substantially below the
arbitrarily determined purchase price of $10 per unit. . . . . .11
Management will have conflicts of interest. . . . . . . . . . . . .11
The Company may incur significant additional debt . . . . . . . . .12
The Board of directors will have the ability to change investment,
financing and other policies of the Company without
shareholder consent. . . . . . . . . . . . . . . . . . . . . . .12
The Company has no operating history. . . . . . . . . . . . . . . .12
No right to vote on matters affecting properties; reduced
voting power . . . . . . . . . . . . . . . . . . . . . . . . . .12
No assurance of future cash distributions . . . . . . . . . . . . .12
Real Estate Risks Associated with All Properties . . . . . . . . . . . .12
There are significant delinquent property taxes . . . . . . . . . .12
Units or certain assets must be sold to raise working capital . . .13
Federal, state and local environmental and other laws may require
expensive hazardous substance clean-up or removal as well as
expensive public improvements. . . . . . . . . . . . . . . . . .13
If there is an uninsured loss, the Company could lose its
investment, profits or cash flow from a property . . . . . . . .13
The development of additional projects may occur. . . . . . . . . .13
The California economy has fluctuated broadly in the past few
years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
When the acquisition is completed, Management and its principals
will be owed [$1,381,881] by the Company . . . . . . . . . . . .13
Real Estate Risks of Specific Properties . . . . . . . . . . . . . . . .14
Sacramento/Delta Greens. . . . . . . . . . . . . . . . . . . . .14
Permits to develop the properties need to be obtained. . . .14
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 . . . . . . . . . . . . . . . . . . . . . . . . .14
Risks of residential development . . . . . . . . . . . . . .14
Additional specific risks. . . . . . . . . . . . . . . . . .14
</TABLE>
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
PAGE
----
<S> <C>
Oceanside Property. . . . . . . . . . . . . . . . . . . . . . . . .15
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 . . . . . . . . . . . . . . .15
Risks of residential development . . . . . . . . . . . . . . . .15
Additional specific risks. . . . . . . . . . . . . . . . . . . .15
Yosemite/Ahwahnee Properties. . . . . . . . . . . . . . . . . . . .15
Permits to develop the timeshare aspect of the resort have not
yet been obtained. . . . . . . . . . . . . . . . . . . . . . .15
Risks affecting operation of a golf course . . . . . . . . . . .15
Resort development is unpredictable for a variety of reasons and
could result in losses . . . . . . . . . . . . . . . . . . . .16
Risks relating to timeshare operations . . . . . . . . . . . . .16
Risks relating to recreational vehicle park operations . . . . .17
Additional specific risks. . . . . . . . . . . . . . . . . . . .17
Mori Point Property . . . . . . . . . . . . . . . . . . . . . . . .17
Permits to develop the property have not yet been obtained . . .17
Resort development is unpredictable for a variety of reasons and
could result in losses . . . . . . . . . . . . . . . . . . . .17
Additional specific risks. . . . . . . . . . . . . . . . . . . .17
Anti-Takeover Provisions and Limitation of Director Liability. . . . . .18
Additional class of shares. . . . . . . . . . . . . . . . . . . . .18
Staggered terms for the Board . . . . . . . . . . . . . . . . . . .18
Restrictions on certain business combinations . . . . . . . . . . .18
Supermajority votes required to change anti-takeover provisions . .18
Limitation of the liability of officers and directors . . . . . . .18
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
CONFLICTS OF INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Company Shares Owned by Company Management . . . . . . . . . . . . . . . . .20
Allocation of Services and Expenses. . . . . . . . . . . . . . . . . . .20
Non-Arm's-Length Agreements. . . . . . . . . . . . . . . . . . . . . . .21
Competition with the Company from Other Programs Organized by National .21
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION . . . . . . . . . . . . . . . .21
Fiduciary Responsibility of Management . . . . . . . . . . . . . . . . .21
Indemnification of Officers and Directors of the Company . . . . . . . .21
Officers and Directors Insurance . . . . . . . . . . . . . . . . . . . .22
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . .22
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
PAGE
----
<S> <C>
BUSINESS AND PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . .23
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Business of the Company. . . . . . . . . . . . . . . . . . . . . . . . .23
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Management of the Properties since Foreclosure . . . . . . . . . . . . .25
Efforts to Dispose of the Properties . . . . . . . . . . . . . . . . . .28
Consolidation of the Properties. . . . . . . . . . . . . . . . . . . . .29
The Residential Development Industry . . . . . . . . . . . . . . . . . .30
The Lodging and Recreation Industry. . . . . . . . . . . . . . . . . . .31
The Business Strategy. . . . . . . . . . . . . . . . . . . . . . . . . .34
The Consolidated Business Plan . . . . . . . . . . . . . . . . . . . . .35
Priority of Projects and Estimated Timetable . . . . . . . . . . . . . .40
Types of Borrowing Required. . . . . . . . . . . . . . . . . . . . . . .42
Impact of Interest Rates on the Company. . . . . . . . . . . . . . . . .43
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . .44
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES. . . . . . . . . . . . . . . . .44
Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . . . .44
Financing Policies . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Miscellaneous Policies . . . . . . . . . . . . . . . . . . . . . . . . .46
Working Capital Reserves . . . . . . . . . . . . . . . . . . . . . . . .46
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . .47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Results of Operations - The Oceanside Program. . . . . . . . . . . . . .50
Results of Operations - The Yosemite/Ahwahnee Programs . . . . . . . . .51
Results of Operations - The Mori Point Program . . . . . . . . . . . . .51
Results of Operations - The Sacramento/Delta Greens Program. . . . . . .51
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . .52
Historical Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . .54
New Accounting Pronouncements. . . . . . . . . . . . . . . . . . . . . .54
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Executive Officers and Directors . . . . . . . . . . . . . . . . . . . .56
Directors and Executive Officers Compensation and Incentives . . . . . .59
Stock Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . .60
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
PAGE
----
<S> <C>
401(k) Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
Employment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . .62
Limitation of Liability and Indemnification. . . . . . . . . . . . . . .63
PRIOR PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . .66
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . .66
Director and Officer Stock Ownership . . . . . . . . . . . . . . . . . .67
DESCRIPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . .67
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
Certain Shareholder Voting Requirements. . . . . . . . . . . . . . . . .69
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . .69
THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Offering of Units. . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Escrow Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . .70
Concurrent Consent Solicitation. . . . . . . . . . . . . . . . . . . . .71
SHARES ELIGIBLE FOR FUTURE SALE. . . . . . . . . . . . . . . . . . . . . . .71
REPORTS TO SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . .72
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
FURTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
APPENDIX 1
Prior Performance Schedules. . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
iv
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
PAGE
----
<S> <C>
ACCOMPANYING THE PROSPECTUS
- - Subscription Order
- - Broker/Dealer Information Form
- - Instructions to Investors on How to Complete the Subscription Documents
</TABLE>
v
<PAGE>
THROUGHOUT THIS PROSPECTUS ARE REFERENCES TO THE "ACQUISITION" OR "ACQUISITION."
THOSE REFERENCES RELATE TO THE COMPANY'S PROPOSAL TO CONSOLIDATE THE "TRUDY PAT"
PROGRAMS NAMED ON THE COVER PAGE OF THIS PROSPECTUS. SEE THE ACCOMPANYING
CONSENT SOLICITATION STATEMENT/PROSPECTUS DELIVERED WITH THIS PROSPECTUS FOR
FURTHER INFORMATION ABOUT THE ACQUISITION.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARIZES MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
ELSEWHERE IN THIS PROSPECTUS.
THE OFFERING
The Company is 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 described in the accompanying Consent Solicitation Statement 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.
SUMMARY RISK FACTORS
The following is a summary of the potential disadvantages, adverse
consequences and risks of an investment in additional shares. 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 __.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares contained
in the units may trade at prices substantially below the arbitrarily determined
purchase price of $10 per unit or the assumed historical book value of the
Company's assets if the Acquisition is completed. 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 will likely decrease
below the purchase price per unit of $10 due to a potentially large number of
shares that investors may sell immediately after the Acquisition described in
the accompanying Consent Solicitation Statement.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the Company, and specifically the principal shareholders of
Management Investors Financial, Inc. ("Management") will be subject to conflicts
of interest. The founders of the Company, which include the principal
shareholders and employees of the Company, will hold almost 20% of the
<PAGE>
Company's outstanding stock for which they paid $0.01 per share. The
principal stockholders of Management, together with other Company founders,
will receive annual cash compensation aggregating $660,000 as officers and
employees of the Company. While the Acquisition will relieve Management of
its servicing and asset management obligations regarding the Company's
properties, the Company will still owe Management over $1,300,000 of accrued
but unpaid fees and expenses. Messrs. Lasker and Orth will be required to
devote some of their time to other projects for which Management acts as
servicing agent and asset manager.
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 IN 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.
THE COMPANY HAS NO OPERATING HISTORY. The Company was formed within the
past year to take part in the Acquisition. 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 through
the Acquisition, 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
to, 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. 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.
THERE WILL BE SIGNIFICANT REAL ESTATE RISKS ASSOCIATED WITH THE COMPLETION
OF THE COMPANY'S PROPOSED BUSINESS PLAN. These include
2
<PAGE>
(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 shareholder 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 required a two-third approval vote.
For more details, see "Risk Factors -- Anti-Takeover Provisions and
Limitation of Director Liability" commencing 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 Management, 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.
3
<PAGE>
CURRENT STATUS OF THE PROPERTIES
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 for each of the properties. 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 properties to be acquired by the Company if the Acquisition is
successful were appraised in May 1997. The Yosemite/Ahwahnee properties were
also appraised in October 1996. The results of those appraisals are set forth
in the table that follows:
<TABLE>
<CAPTION>
May 1997
Property Appraised Value
-------- ---------------
<S> <C>
Sacramento/Delta Greens $2,000,000
Oceanside 2,850,000
Yosemite/Ahwahnee I 8,050,000(1)(2)
Yosemite/Ahwahnee II 12,866,000(1)(2)
Mori Point 5,500,000
</TABLE>
- ----------------
(1) The October 1996 appraisal of the combined Yosemite/Ahwahnee properties
yielded a $4,000,000 aggregate appraised value.
(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. Faced with
conflicting appraisals, to determine the appraised values for the
Yosemite/Ahwahnee properties for purposes of the above table, National's
management used the most conservative information presented in the
appraisals unless a change in circumstances or market conditions for a
particular parcel suggested one appraisal was more pertinent than another.
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
4
<PAGE>
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.
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 Management 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. The
Acquisition provides an alternative way to achieve the investors' goal of
achieving a return all or substantially all of their original principal. While
there can be no
5
<PAGE>
assurance that the Company will achieve that goal for 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 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.
EXPERIENCE OF MANAGEMENT
The key executive officers are David G. Lasker, James N. Orth, L.C. "Bob"
Albertson and Mark C. Kawanami. None of these officers has 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 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 timeshares. However, consultants
will be hired to provide those skills and services as needed. See "Management"
at page __ and "Prior Programs" at page __ for further information about the
experience of management.
ORGANIZATION CHART
After the Acquisition, 80.16% (83.85% assuming all units are sold) of the
Company's outstanding shares will be owned by the investors and 19.84% (14.17%
assuming all units are sold) 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:
6
<PAGE>
<TABLE>
<CAPTION>
----------------- -------------------- ---------------- ---------------
Yale Partnership
for Growth and J-Pat, L.P. Consultants
All Programs' Development, L,P. (controlled by and other
Investors (controlled by James Orth, a Employees of
David Lasker, a principal of National or
Principal of National Company
National
----------------- -------------------- ---------------- ---------------
<S> <C> <C> <C>
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.
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 through this
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.
7
<PAGE>
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
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 __.
CONCURRENT CONSENT SOLICITATION
By a separate Consent Solicitation Statement/Prospectus, the Company is
offering shares of its Common Stock in exchange for the assets (including cash
on hand), certain liabilities and business activities owned by investors in the
five "Trudy Pat" programs named above. For that proposed Acquisition, the
Company will issue $[20,012,475] of its shares of Common Stock arbitrarily
valued at $10 per share. The purpose of the Acquisition 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
potential liquidity for their investments. IF INVESTORS HOLDING A MAJORITY OF
THE AMOUNT INVESTED IN EACH OF THE PROGRAMS DO NOT VOTE TO APPROVE THE
ACQUISITION, THE ACQUISITION WILL NOT TAKE PLACE. IF THE ACQUISITION DOES NOT
TAKE PLACE, NONE OF THE SHARES OFFERED BY THIS PROSPECTUS WILL BE SOLD. See the
Company's Consent Solicitation Statement/Prospectus delivered with this
Prospectus for further information about the Acquisition.
SUMMARY FINANCIAL INFORMATION
We are providing the following summary financial information to aid you in
your analysis of the financial aspects of the acquisition. This information was
derived from our pro forma and historical financial statements (and related
notes) found later in this prospectus and should be read in conjunction with
that information. See "Financial Statements" beginning on page F-1. The
historical financial statements for the full year were audited; those for
interim
8
<PAGE>
periods and those showing pro forma information were not audited. The
unaudited financial information reflects all adjustments (consisting only of
normal recurring accruals) which are considered necessary to present fairly the
financial information for the periods. The results of any interim period are
not necessarily indicative of results for a full year, and historical and pro
forma results do not predict future results.
9
<PAGE>
<TABLE>
<CAPTION>
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>
[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.]
10
<PAGE>
RISK FACTORS
AN ADDITIONAL INVESTMENT IN THE COMPANY 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.
IN THE FOLLOWING RISK FACTORS, AND ELSEWHERE IN THIS PROSPECTUS, THE
COMPANY OR ITS 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.
GENERAL RISKS
THE SHARES MAY TRADE INITIALLY AT PRICES SUBSTANTIALLY BELOW THE
ARBITRARILY DETERMINED PURCHASE PRICE OF $10 PER UNIT. 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 purchase price of $10 per unit 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.
MANAGEMENT WILL HAVE CONFLICTS OF INTEREST. After the Acquisition, the
executive officers of the Company will hold almost 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. The executive officers of the Company will receive annual
cash compensation aggregating $660,000 as officers and employees of the Company.
While the Acquisition will relieve Management of its servicing and property
management obligations, the Company will still owe Management 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.
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
Management and the investors and the procedures adopted to mitigate the impact
of these conflicts on the Acquisition, see "Conflicts of Interest" at page __.
11
<PAGE>
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the Acquisition,
the properties will not be subject to any liens other than possible mechanics'
liens and 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 __.
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.
NO RIGHT TO VOTE ON MATTERS AFFECTING PROPERTIES; REDUCED VOTING POWER.
You will not be able to vote on changes to, 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.
NO ASSURANCE OF FUTURE CASH DISTRIBUTIONS. 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
Company will not use the proceeds from the sale of units to pay amounts owing to
Management. Management will be paid only from Company operating revenue or from
proceeds of the sale of assets.
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
12
<PAGE>
currently due on five-year payment plans) total approximately $248,000. In
the case of Sacramento/Delta Greens and Mori Point, Management 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 and properties might be lost to tax sales
before sales to third parties can be arranged. The Company will also need
financing from other sources to complete its plan. Financing sources are not
predictable and interest rates or other costs of financing may be prohibitive.
Other than a construction loan source for the Oceanside project, neither the
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. 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, MANAGEMENT AND ITS PRINCIPALS WILL BE
OWED $1,381,881 BY THE COMPANY. This represents accrued fees and expenses from
the programs
13
<PAGE>
which Management 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 county and city 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 $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 and 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
14
<PAGE>
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 $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 and net
revenues from Oceanside are expected to be in excess of only $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.
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
15
<PAGE>
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. Management 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%.
16
<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.
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
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
proposed 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 of the hotel/conference center. Finally, there is a risk that
the proposed hotel/conference center may not be profitable.
17
<PAGE>
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.
STAGGERED TERMS FOR THE 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 REQUIRED TO CHANGE ANTI-TAKEOVER PROVISIONS. 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.
LIMITATION OF THE LIABILITY OF OFFICERS AND DIRECTORS. 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.
18
<PAGE>
CAPITALIZED TERMS USED THROUGHOUT THE REST OF THIS PROSPECTUS ARE DEFINED IN
THE GLOSSARY LOCATED AT THE END OF THE PROSPECTUS, JUST BEFORE THE FINANCIAL
STATEMENTS.
USE OF PROCEEDS
There can be no assurance that any units will be sold in this offering.
The net proceeds of the offering will be used in the order of priority set forth
in the following table. If all units are sold through the efforts of
broker-dealers, the Company will receive $9,300,000 before estimated offering
expenses of $400,000. The net proceeds from the sale of the units offered
hereby will be prioritized as set forth in the table below:
<TABLE>
<CAPTION>
ESTIMATED AMOUNT
----------------
<S> <C>
Acquisition expenses $ 800,000
Offering expenses 750,000
Property taxes due for 1997-98:
Yosemite/Ahwahnee I and II 200,000
Sacramento/Delta Greens 40,000
Mori Point 140,000
Oceanside 20,000
General and administrative(1) (one year) 1,800,000
Yosemite/Ahwahnee I and II
Entitlement processing 300,000
Infrastructure improvements 2,700,000
Construction costs 700,000
Sacramento/Delta Greens
Entitlement processing 175,000
Mori Point
Entitlement processing 500,000
Oceanside
Infrastructure improvements 700,000
Working capital 475,000
------------
TOTAL $ 9,300,000
------------
------------
</TABLE>
- ----------------
(1) Of this amount, approximately $750,000 is expected to be used to pay
Company officers' salaries and reimburse Company officers' for normal
business expenses incurred in the operation of the Company.
The above amounts are estimates and management of the Company may revise
these priorities and amounts as necessary to fulfill the best interests of the
Company.
19
<PAGE>
Except to the extent used to pay future salaries and reimburse officers for
future out-of-pocket expenses, none of the proceeds will be allocated to
officers, directors or principal shareholders of the Company.
DIVIDEND POLICY
The Company has no plans to pay dividends in the foreseeable future. Funds
otherwise available for dividends will be utilized to potentially increase Share
value through Acquisition and development. The effect of this policy will be
that, as Company real estate assets are sold, unlike in the Programs, no cash
distributions will be made to Investors.
CONFLICTS OF INTEREST
A number of potential conflicts of interest are inherent in the
relationship between the Company's management and its shareholders. The
conflicts of interest are summarized below.
COMPANY SHARES OWNED BY COMPANY MANAGEMENT
Family partnerships controlled by David G. Lasker and James N. Orth (the
shareholders of Management) 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 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. After the Acquisition, these family partnerships will each
control 8.01% of the Company's outstanding stock (5.72% if all the units offered
hereby 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. Due to such
significant shareholdings by management, some decisions could be affected by the
results such decisions could have on members of management. See "Fiduciary
Responsibilities and Indemnification."
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 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.
20
<PAGE>
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, in their capacities as officers of National, Messrs. Lasker
and Orth are, committed to continue to provide the same quality of service for
these projects as it has in the past.
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION
FIDUCIARY RESPONSIBILITY OF MANAGEMENT
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.
INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY
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
21
<PAGE>
any act or omission made by him or her, except in the case of fraudulent
or illegal conduct of such person. See "Management -- 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 Prospectus or otherwise,
the Company has been advised that, 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, 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
22
<PAGE>
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. 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, FORWARD-LOOKING
STATEMENTS SHOULD NOT BE RELIED UPON AS A PREDICTION OF ACTUAL RESULTS.
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 plans of the Programs into a unified Company
business plan with the ultimate goal of creating sufficient value in the
Company's Shares to allow for Investors in the Programs to have the ability to
recover a significantly larger portion of their Outstanding Investments in such
Programs than if the Acquisition did not occur.
As a part of its plan, in the future the Company may seek to acquire
certain assets and properties that are synergistic and add value to the
Company in accordance with its overall business plan. 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,
23
<PAGE>
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
If the Acquisition is approved, the Company will purchase the Properties in
their "as is" condition from the Investors in the Programs, except that any
remaining Investors' liens will be removed. Upon completion of the Acquisition,
the Company, through its subsidiaries, will own four Properties which are
described below.
SACRAMENTO/DELTA GREENS PROPERTY. The Sacramento/Delta Greens Property
consists of a 121-acre site in South Sacramento, California, located
approximately one-half mile east of Interstate 5. Except for property tax
liens, the Property is unencumbered by liens and is subject to no leases, sales
contracts or options. It has a revised and approved tentative tract map from
the City of Sacramento for over 500 lots for the construction of single-family
homes. The area in which the 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. 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 Management 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
24
<PAGE>
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 Management 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.
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.
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. Management believes this would radically reduce its value.
MANAGEMENT OF THE PROPERTIES SINCE FORECLOSURE
SACRAMENTO/DELTA GREENS PROGRAM. As the agent of and on behalf of the
Sacramento/Delta Greens Program Investors, Management 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, Management obtained appraisals to determine the
Property's value as of May 1997 (appraised at $2,000,000) and as of the date
title to the Property was taken (appraised at $3,075,000). The Property is
located in Sacramento, California. Subsequent to the foreclosure, on behalf of
25
<PAGE>
the Sacramento/Delta Greens Investors, Management 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 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. Management 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. Management believes that the
Sacramento market for entry-level single-family residential housing has
improved. Management 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."
OCEANSIDE PROGRAM. 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, Management 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, Management obtained appraisals to
determine the Property's value as of May 1997 (remaining lots appraised at
$2,850,000) and as of the date title to the Property was taken (appraised at
$6,484,000 before a significant number of lots and homes had been sold). 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
local bank. 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. Principal and interest in the aggregate
amount of approximately $7,000,000 have also been returned to Investors.
There are an additional 111 lots available on which homes can be built on
the Symphony tract, but an estimated $700,000 of equity is needed to qualify for
a traditional construction loan. Management 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, Management believes
that the remaining lot inventory of the Program can be built-out within a
26
<PAGE>
two to three year time frame based on current absorption rates and prices.
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."
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, Management
obtained appraisals to determine the Property's value as of May 1997 (appraised
at $8,050,000 for Yosemite/Ahwahnee I and $12,866,000 for Yosemite/Ahwahnee II)
and as of the date title to the Property was taken (appraised at $9,325,000 for
Yosemite/Ahwahnee I and $10,816,000 for Yosemite/Ahwahnee II). The properties
are located in Madera County, California, approximately 46 miles northeast of
Fresno and 15 miles south of Yosemite Management Park.
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, Management 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, Management has
operated them as the agent of and on behalf of the Investors through a
corporation known as Ahwahnee Golf Course and Resort, Inc. Approximately
$3,000,000 has been funded by Investors' assessments in these Programs to
provide working capital to maintain, improve and further develop the project,
and to fund the negative cash flow from operations. Management 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. Management has also explored the
possibility of a sale of the entire project; however, no offers were
forthcoming. Management 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."
MORI POINT PROGRAM. The Mori Point Program Property was foreclosed on in
August 1992 after Management, 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, Management obtained appraisals to determine the Property's value as of May
1997 (appraised at $5,500,000) and as of the date title
27
<PAGE>
to the Property was taken (appraised at $4,100,000). Title is held by
Management 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.
Management 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, Management 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."
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, Management 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, although the proposed purchaser
had the ability to assign the transaction itself. More recently, during the
first half of 1997, Management 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, Management began the process of marketing the Symphony tract
lots on an "as-is" basis. No brokers were used in the marketing effort as
Management has adequate knowledge of the builders in the area likely to be
interested. Through Management, 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
28
<PAGE>
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, Management 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, Management
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 $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, Management 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 Management 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. Management continues to seek possible
joint venture development arrangements for the Property but no proposals
have been received.
CONSOLIDATION OF THE PROPERTIES
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
29
<PAGE>
the Acquisition. For example, Sacramento/Delta Greens Investors are
entirely dependent upon the economic opportunities available from
building entry-level homes in South Sacramento submarket. That
dependency will be substantially reduced by the Acquisition. As another
example, the Oceanside Investors are restricted to accepting the economic
opportunities available from building homes in Oceanside, California, and
acquiring additional lots. The Acquisition will allow for Oceanside
Investors to have geographical diversification in residential development
because of the Sacramento/Delta Greens Property, as well as being
diversified into the lodging and recreation industries as made available
with the Yosemite/Ahwahnee and the Mori Point Properties. This
diversification will reduce the Oceanside Investors dependence on
homebuilding exclusively in the Oceanside market. Conversely, the
Yosemite/Ahwahnee and Mori Point Investors' opportunities will be
expanded and diversified as well to take advantage of those represented
by the Sacramento/Delta Greens and the Oceanside Properties.
Upon completion of the Acquisition, the Company's resources can be managed
such that the operation of each of its subsidiaries contributes meaningfully to
the achievement of its consolidated business objectives. Initially, the Company
will be involved in two primary industries: (1) the residential development
industry, and (2) the lodging and recreation industry.
THE RESIDENTIAL DEVELOPMENT INDUSTRY
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.
30
<PAGE>
THE LODGING AND RECREATION INDUSTRY
This industry includes many distinct product categories, including
commercial lodging-oriented products such as hotels and conference centers,
recreation-oriented products such as golf courses, equestrian facilities,
sports complexes, marinas, theme parks, destination resorts, recreational
vehicle resorts, and vacation-oriented products such as timeshare resorts, to
name a few. Initially, the Company will focus on the future development of
an executive conference center and timeshare resort, and the operation of a
golf course and recreational vehicle and timeshare resorts.
THE EXECUTIVE CONFERENCE CENTER INDUSTRY
An Executive Conference Center is distinguished from general, resort,
institutional and academic conference centers by virtue of its positioning
within the target market to attract corporate executive meetings. According
to the International Association of Conference Centers ("IACC"), a conference
center is defined as "a facility whose primary purpose is to accommodate
small to medium-sized meetings." A fully dedicated conference center differs
from a hotel or resort that has meeting space in that the primary purpose of
a conference center is to satisfy and accommodate groups by offering a
self-contained, full-service meeting environment. It is dedicated to
accommodating small-to-medium sized groups, and meetings usually comprise at
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.
31
<PAGE>
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.
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.
32
<PAGE>
The Company believes that the following factors have contributed to the
increased acceptance of the timeshare concept among the general public and
the substantial growth of the timeshare industry over the past 15 years:
- Increased consumer confidence resulting from consumer protection
regulation of the timeshare industry;
- The entrance of brand name national lodging companies to the
industry;
- Increased flexibility of timeshare ownership due to the growth of
exchange organizations;
- Improvement in the quality of both the facilities themselves and
the management of available timeshare resorts;
- Increased consumer awareness of the value and benefits of timeshare
ownership; and
- Improved availability of financing for purchasers of timeshare
units.
The timeshare industry traditionally has been highly fragmented and
dominated by local and regional resort developers and operators. The Company
believes that one of the most 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
33
<PAGE>
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.
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 hereby 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. A 54 site recreational vehicle
park is currently operated there and is being expanded with the addition of
another 100 sites. The Company will investigate 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
34
<PAGE>
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
Management attempted to develop the Properties after foreclosure, except for
the Oceanside Program, the other Programs generally were faced with obstacles
which Management 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 Management, 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 Management 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
35
<PAGE>
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 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
36
<PAGE>
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.
THE YOSEMITE/AHWAHNEE PROPERTIES. Yosemite Management 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
37
<PAGE>
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.
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 Management Park and
the fact that the nearest
38
<PAGE>
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 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 approximately $142,000 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.
39
<PAGE>
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.
<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 May 1997 appraised values because of
the need to obtain governmental approvals and permits prior to their
development. The Company believes the Oceanside Property is salable because
Management 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
Management because of the Investors' desire to receive as
40
<PAGE>
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 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 process. If the Company conducts the construction of the homes,
approximately $3,000,000 of capital for 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
41
<PAGE>
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, 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
42
<PAGE>
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 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.
43
<PAGE>
There will initially be approximately 35 additional full- and part-time
employees at the Yosemite/Ahwahnee Property who will handle the operation and
maintenance of the project and carry forward with the development and
entitlement activities. Marketing and consulting services for the recreational
vehicle membership sales and resort operations are contracted through Western
Horizons, a Colorado-based recreational vehicle park management and marketing
Company. None of the employees will be subject to collective bargaining
agreements.
LEGAL PROCEEDINGS
Neither the Company nor the Properties is the subject of any material,
legal proceeding.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing, conflicts
of interest and other policies of the Company. These policies have been
determined by the Company's Board of Directors and generally may be amended or
revised from time to time by the Board of Directors without a vote of the
shareholders.
INVESTMENT POLICIES
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
44
<PAGE>
estate. The Company does not presently intend to invest in mortgages, but may
do so. The mortgages which the Company may purchase may be first mortgages or
junior mortgages and may or may not be insured by a governmental agency.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES. The Company may also invest in securities of entities engaged in
real estate activities or securities of other issuers, including for the purpose
of exercising control over such entities. However, the Company has no present
plans to make any such investment in securities. In any event, the Company does
not intend that its investments in securities will require it to register as an
"investment Company" under the Investment Company Act of 1940, and the Company
would divest itself of such securities before any such registration would be
required.
JOINT VENTURES. The Company may enter into joint ventures or partnerships
or other participations with real estate developers, builders, owners and others
for the purpose of obtaining or retaining equity interests in a particular
property.
OFFERING SECURITIES IN EXCHANGE FOR PROPERTY. The Company may offer its
securities in exchange for a property in which it wishes to invest.
REPURCHASING ITS OWN SHARES. The Company may purchase or repurchase Shares
from any person for such consideration as the Board of Directors may determine
in its reasonable discretion, whether more or less than the original issuance
price of such Share or the then trading price of such Share.
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.
45
<PAGE>
MISCELLANEOUS POLICIES
REPORTS TO SHAREHOLDERS. The Company will be subject to the reporting
requirements of the Exchange Act and will file annual and quarterly reports.
The Company currently intends to provide annual and quarterly reports to its
Shareholders.
COMPANY CONTROL. The Board of Directors has exclusive control over the
Company's business and affairs subject only to restrictions in the Charter
Documents and the Delaware General Corporation Law. Shareholders have the right
to elect members of the Board of Directors. The Directors are accountable to
the Company as fiduciaries and are required to exercise good faith and integrity
in conducting the Company's affairs.
WORKING CAPITAL RESERVES
The Company will attempt to maintain working capital reserves (and when not
sufficient, access to borrowing) in amounts that the Board of Directors
determines to be adequate to meet the normal contingencies in connection with
the operation of the Company's business and investments.
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>
<CAPTION>
[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 Acquisitions and the conversion of investor
interests into common stock ownership in the Company.
46
<PAGE>
DILUTION
As the value of the portion of the Units offering price relating to the
share of common stock is less than the net tangible book value per share of the
Company after the Acquisition, the investors in the Units offering will not
experience any 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.
<TABLE>
<CAPTION>
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.
47
<PAGE>
<TABLE>
<CAPTION>
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>
48
<PAGE>
<TABLE>
<CAPTION>
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
SACRAMENTO/DELTA
AHWAHNEE 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>
49
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
"Selected Financial Information" as well as the financial statements listed
in the index on page F-1. If approved by the Investors in the five former
"Trudy Pat" programs, the programs discussed below will be acquired by the
Company. Except for historical information contained herein, the matters
discussed in this report contain forward-looking statements that involve
risks and uncertainties that could cause results to differ materially.
RESULTS OF OPERATIONS - THE OCEANSIDE PROGRAM
COMPARISON OF 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.
50
<PAGE>
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
51
<PAGE>
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:
52
<PAGE>
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
53
<PAGE>
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
54
<PAGE>
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
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
55
<PAGE>
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 basic concepts through 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*
---- --- -------- --------
<S> <C> <C> <C>
David G. Lasker 52 Co-Chairman of the Board,
President and Chief Financial
Officer 2000
James N. Orth 51 Co-Chairman of the Board,
Chief Executive Officer and
Secretary 2000
L.C. Bob Albertson, Jr. 54 Executive Vice President of
the Company and President and
Chief Executive Officer of
American Family Communities,
Inc., Director 1999
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>
* Each director first elected in 1997.
56
<PAGE>
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 Management 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 Management 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 Management 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
57
<PAGE>
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 Management 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, Management 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.
58
<PAGE>
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
59
<PAGE>
L.C. Bob Albertson, Jr. Executive Vice President and $200,000 30,000(2)
Director of the Company;
President and Chief Executive
Officer of American Family
Communities, Inc., Director
Mark K. Kawanami Vice President of the Company; $100,000 5,000(2)
Vice President of Finance of
American Family Communities,
Inc.
Charles F. Hanson Director - 2,500(3)
Dudley Muth* Director - 2,500(3)
James G. LeSieur, III* Director - 2,500(3)
</TABLE>
- -----------
* Initial members of Audit Committee.
(1) Employment Agreements for Messrs. Lasker, Orth and Albertson contain
provisions for bonus payments based on performance criteria.
(2) 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.
60
<PAGE>
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)
61
<PAGE>
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 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
62
<PAGE>
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
Management 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
63
<PAGE>
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 --Executive Officers and Directors" for biographical information
about the executive officers.
In the last ten years, Management 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.
64
<PAGE>
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 is located in Contra Costa County, California, and
consists of approximately 660 acres which were intended to be developed into
an 18-hold golf course along with 1,330 residential units.
In Management'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 as Appendix 1 at the
back of this Prospectus. 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 Management 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 for
which the offering closed in the last five years. Schedule D shows general
information about the one program that was completed within the last five
years. Schedule D shows general information about the one program that was
completed within the last five years. See also
65
<PAGE>
"Background and Reasons for the Acquisition -- Historical Compensation for
Servicing, Asset 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.
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.
66
<PAGE>
DIRECTOR AND OFFICER STOCK OWNERSHIP
<TABLE>
Percent of
Percent Class if
of Class if Acquisition
Acquisition Completed Common
Common Completed and All Stock Percent
Name/Position Stock Only Units Sold Options of Class
- ------------- ------ --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
David G. Lasker, President, Chief
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
67
<PAGE>
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
68
<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 UNITS
The Company is also offering to existing Investors in the Programs
EXCLUSIVELY an aggregate of 1,000,000 units at $10 per unit. A unit consists
of one Share and one Warrant. For a period of two years, each warrant
entitles the holder to purchase two additional shares of Common Stock at a
per share price equal to 80% of the closing price for the Company's Common
Stock on the trading date immediately preceding the warrant exercise date.
The Warrants are immediately exercisable. Shares purchasable upon exercise
of Warrants will be registered under the Securities Act. Units will be
allocated among the Investors on a first-come-first-serve basis. NASD
broker-dealers which assist in selling the units will receive an aggregate
commission of $0.70 per unit sold.
69
<PAGE>
There is no established public market for the company's stock. The
offering price of the units was arbitrarily determined by the Company to
coincide with the $10 per share price being used by the Company to calculate
the number of shares to be issued to Investors i the Acquisition, See
accompanying Consent Solicitation Statement/Prospectus. The exercise price
of the warrants was designed to encourage Investors who purchase units in
this offering to purchase more equity in the Company at a later time. Even
if the Company's shares were not performing well, a 20% discount against
market value would provide (i) a buyer with the opportunity for a quick
short-term profit, and (ii) the Company with additional low cost equity. The
Company has received approval for listing upon issuance on _________ under
the symbol "___."
FINANCIAL ADVISORY SERVICES. Management has entered into an agreement
with L.H. Friend, Weinress, Frankson & Presson, Inc. and Management
Securities Corporation (the "Advisors"), whereby the Advisors agreed to
provide financial advisory and investment banking services in connection with
the Acquisition and the offering of units. In exchange, the Advisors will
receive $7,500 per month for a minimum of three months and options to
purchase up to 30,000 shares of Common Stock at $10 per share.
ESCROW ARRANGEMENTS
Commencing on the date of this Prospectus, all funds received by the
Company from orders for units will be placed promptly in an interest bearing
escrow account with the Escrow Agent at the Management's expense until such
funds are released as described below. Separate escrow accounts will be
established for benefit plan funds as required by law or such benefit plans.
Payment for units will be payable to "First Trust of California, N.A., as
Escrow Agent for American Family Holdings, Inc. Unit Offering," but sent to
the Company which will promptly send them to the Escrow Agent. Such funds
will be held in trust for the benefit of subscribing Investors to be used for
the purposes set forth in this Prospectus. The funds will be invested in a
money market account maintained by the Escrow Agent. The interest, if any,
earned on escrow funds prior to the transmittal of such proceeds to the
Company will not become part of the Company's capital. Instead, within 15
days following the issuance of units, the Company will cause the Escrow Agent
to make distributions to subscribing Investors of all interest earned on
their escrowed funds used to purchase the Shares.
As soon as practicable after the Closing of the Acquisition, the Company
will cause to be issued units to all Investors whose orders have been
accepted. The Offering of units will terminate at the time of the Effective
Time of the Acquisition.
On or after the date received by the Escrow Agent, Investors will have
no right to withdraw any funds submitted to the Escrow Agent prior to the
earlier of the Effective Time of the Acquisition or the determination by
Management that the votes to approve the Acquisition are not available. No
sales of units will be consummated unless the Acquisition is approved.
If the Acquisition is not approved within 60 days after the date this
Prospectus is first mailed to Investors, or such later date as may by
approved by Management and the Company, then the Company will cancel all
existing orders for units and all funds submitted on account of
70
<PAGE>
such orders will be released from escrow and promptly returned to each
investor together with all interest earned thereon.
Pending use of funds received by the Company from the Escrow Agent, the
Company may invest such funds in Permitted Temporary Investments.
FIRST TRUST OF CALIFORNIA, N.A., IS ACTING ONLY AS AN ESCROW AGENT IN
CONNECTION WITH THE OFFERING OF THE UNITS DESCRIBED IN THIS PROSPECTUS, AND
HAS NOT ENDORSED, RECOMMENDED OR GUARANTEED THE PURCHASE VALUE OR REPAYMENT
OF THE UNITS.
CONCURRENT CONSENT SOLICITATION
By a separate Consent Solicitation Statement/Prospectus, the Company
is offering shares of its Common Stock in exchange for the assets (including
cash on hand), certain liabilities and business activities owned by investors
in the five "Trudy Pat" programs named above. For that proposed Acquisition,
the Company will issue $[20,012,475] of its shares of Common Stock
arbitrarily valued at $10 per share. The purpose of the Acquisition 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 potential liquidity for their investments. IF INVESTORS
HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF THE PROGRAMS DO NOT VOTE
TO APPROVE THE ACQUISITION, THE ACQUISITION WILL NOT TAKE PLACE. IF THE
ACQUISITION DOES NOT TAKE PLACE, NONE OF THE SHARES OFFERED BY THIS
PROSPECTUS WILL BE SOLD. See the Company's Consent Solicitation
Statement/Prospectus delivered with this Prospectus for further information
about the Acquisition.
SHARES ELIGIBLE FOR FUTURE SALE
There are currently __ holders of the issued and outstanding shares of
common stock. Upon completion of the Acquisition, the Company will have
outstanding [__________] shares of Common Stock ([_____] if all the units
offered hereby are sold). Of these shares, all shares issued in the
Acquisition and Offering will be freely tradable without restriction or
further registration under the Securities Act except for any of such shares
held by "affiliates" of the Company.
The remaining shares of Common Stock held by the existing shareholders
are "restricted securities" as that term is defined in Rule 144 of the
Securities Act. In general, under Rule 144 as currently in effect, a person
(or persons whose shares are aggregated) who has beneficially owned
restricted shares for at least one year, as well as persons who may be deemed
"affiliates" of the Company, will be entitled to sell in any three month
period a number of shares that does not exceed the greater of (i) one percent
of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Securities
and Exchange Commission. Sales pursuant to Rule 144 are also subject to
certain other requirements relating to manner of sale, notice and
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been
71
<PAGE>
an affiliate of the Company at any time during the three months immediately
preceding the sale is entitled to sell restricted shares pursuant to Rule
144(k) without regard to the limitations described above, provided that two
years have expired since the later of the date on which such restricted
shares were fist acquired from the Company or from an affiliate of the
Company.
Upon completion of the Acquisition, 72,500 authorized shares of Common
Stock will be subject to outstanding options. Additionally, 185,000 shares
of Common Stock of the Company have been reserved for issuance pursuant to
the 1997 Stock Incentive Plan. Shares granted or issued upon the exercise of
stock options will be restricted shares and subject to Rule 144.
Because there has been no public market for shares of Common Stock of
the Company, the Company is unable to predict the effect that sales made
under Rule 144, pursuant to future registration statements or otherwise may
have on any then prevailing market price of shares of the Common Stock.
Nevertheless, sales of a substantial amount of Common Stock in the public
market at any time, or the perception that such sales could occur, could
adversely affect market prices.
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 units will be
passed upon for the Company by Arter & Hadden LLP, Los Angeles, California.
72
<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 Prospectus does not contain all the information set forth in the
Registration Statement on Form SB-2 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 Management 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
73
<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.
"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.
"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.
"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
three Independent Directors.
"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.
"NASD" means the Management Association of Securities Dealers, Inc.
74
<PAGE>
"Management" means Management Investors Financial, Inc., the Company which
organized, and acts as servicing agent for the Investors in, each of the
Programs.
"ODI" means Oceanside Development, Inc., the entity formed to hold title
to the Oceanside Property for the benefit of Investors in the Oceanside
Program and to supervise continued development.
"Offering" means the offering of 1,000,000 units described in the
Prospectus.
"Outstanding Investment" means the sum of the unpaid principal balance
owed to an Investor as of the Ownership Date plus accrued but unpaid interest
on such balance as of the Ownership Date plus all amounts paid by the
Investor pursuant to mandatory assessments called for by Management plus all
amounts voluntarily advanced by an Investor on behalf of Investors who failed
to honor a demand for an advance from Management.
"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.
"Permitted Temporary Investments" means United States government
securities, certificates of deposit or other time or demand deposits of
commercial banks, savings banks, savings and loan associations or similar
institutions which have a net worth of at least $100,000,000 or in which such
certificates or deposits are fully insured by any federal or state government
agency, United States dollar deposits in foreign branches of banks which have
a net worth of at least $100,000,000, bank repurchase agreements covering
securities of the United States government or governmental agencies,
commercial paper, bankers acceptance, public money funds or other similar
short-term highly liquid investments.
"Program" means any one of the following: Sacramento/Delta Greens
Program, Mori Point Program, Oceanside Program, Yosemite/Ahwahnee I Program
or Yosemite/Ahwahnee II Program. "Programs" means each of the foregoing
collectively. None of the Programs is structured as a partnership,
corporation, trust, limited liability Company, or separately identifiable
business association of any kind. Each Program merely consists of a group of
Persons, each of whom purchased a fractionalized, tenancy-in-common, interest
in a loan secured by a deed of trust on real property. Such group of Persons
is bound together only by a servicing agreement with Management 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.
75
<PAGE>
"Prospectus" means this Prospectus which is included in the Registration
Statement filed with the Commission in connection with the issuance of the
Shares in the Acquisition.
"Registration Statement" means the Company's registration statement on
Form SB-2 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.
"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.
76
<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 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>
APPENDIX 1
Prior Performance Schedules
<PAGE>
APPENDIX 1
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>
<CAPTION>
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 investors.
<PAGE>
APPENDIX 1
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>
<CAPTION>
Sacramento/ Yosemite/ Yosemite/
Delta Greens Oceanside Ahwahnee I Ahwahnee II
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Date offering commenced 11/1/88 11/15/91 5/2/89 9/10/90
Dollar amount raised $ 5,000,000 $ 30,000,000 $ 6,500,000 $ 13,500,000
Servicing fees
Jan. 1995 to Dec. 1997:
Accrued 0 0 0 0
Paid 0 900,000 48,750 101,250
Property management fees
Jan. 1995 to Dec. 1997:
Accrued 141,733 0 0 0
Paid 8,267 0 146,250 303,750
Amount paid to National
from proceeds of offerings
closed in the most recent
three years N/A N/A N/A N/A
<CAPTION>
Arciero-
Mori Point Joshua Ranch Cypress Lakes Diamond Ridge
---------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Date offering commenced 11/20/89 3/26/90 2/19/91 7/21/93
Dollar amount raised $ 10,000,000 $ 15,000,000 $ 14,000,000 $ 5,538,000
Servicing fees
Jan. 1995 to Dec. 1997:
Accrued 0 0 0 0
Paid 0 0 0 0
Property management fees
Jan. 1995 to Dec. 1997:
Accrued 272,667 0 0 0
Paid 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 $ 69,670
</TABLE>
<PAGE>
APPENDIX 1
SCHEDULE B (continued)
<TABLE>
<CAPTION>
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>
<PAGE>
APPENDIX 1
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>
<CAPTION>
Sacramento/Delta Greens
-----------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Borrower loan repayments:
Principal $ 0 $ 0 $ 0 $ 0 $ 0
Interest 0 0 0 0 0
Cash from sale N/A N/A N/A N/A N/A
Distributions to
investors:(1)
Principal 0 0 0 0 0
Interest 0 0 0 0 0
Distributions per $1,000
invested:
Principal N/A N/A N/A N/A N/A
Interest N/A N/A N/A N/A N/A
Oceanside
-----------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Borrower loan repayments:
Principal $ 0 $ 375,000 $ 900,000 $ 900,000 $ 675,000
Interest 3,145,869 393,750 0 0 0
Cash from sale N/A N/A N/A N/A N/A
Distributions to
investors:(1)
Principal 0 375,000 900,000 900,000 675,000
Interest 3,145,869 393,750 0 $ 0 0
Distributions per $1,000
invested:
Principal 0 12.50 30 30 22.50
Interest 104.86 13.13 0 0 0
</TABLE>
- ----------------
(1)Net of servicing fees and property management fees and expenses.
<PAGE>
APPENDIX 1
SCHEDULE C (continued)
<TABLE>
<CAPTION>
Yosemite/Ahwahnee I
------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Borrower loan repayments:
Principal $ 103,085 $ 0 $ 0 $ 0 $ 0
Interest 920,794 4,756 0 0 0
Cash from sale N/A N/A N/A N/A N/A
Distributions to investors:(1)
Principal 103,085 0 0 0 0
Interest 920,794 4,756 0 0 0
Distributions per $1,000 invested:
Principal 15.86 0 0 0 0
Interest 141.66 .73 0 0 0
Yosemite/Ahwahnee II
------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Borrower loan repayments:
Principal $ 68,264 $ 0 $ 0 $ 0 $ 0
Interest 688,303 10,273 0 0 0
Cash from sale N/A N/A N/A N/A N/A
Distributions to investors:(1)
Principal 68,264 0 0 0 0
Interest 688,303 10,273 0 0 0
Distributions per $1,000 invested:
Principal 5.06 0 0 0 0
Interest 50.99 .76 0 0 0
</TABLE>
- -------------------
(1) Net of servicing fees and property management fees and expenses.
<PAGE>
APPENDIX 1
SCHEDULE C (continued)
<TABLE>
<CAPTION>
Mori Point
------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Borrower loan repayments:
Principal $ 0 $ 0 $ 0 $ 0 $ 0
Interest 0 0 0 0 0
Cash from sale 0 0 0 0 0
Distributions to investors:(1)
Principal 0 0 0 0 0
Interest 0 0 0 0 0
Distributions per $1,000 invested:
Principal 0 0 0 0 0
Interest 0 0 0 0 0
Joshua Ranch
------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Borrower loan repayments:
Principal $ 0 $ 0 $ 0 $ 0 $ 0
Interest 478,127 0 0 0 0
Cash from sale N/A 0 0 0 0
Distributions to investors:(1)
Principal 0 0 0 0 0
Interest 478,127 0 0 0 0
Distributions per $1,000 invested:
Principal 0 0 0 0 0
Interest 31.88 0 0 0 0
</TABLE>
- ------------------
(1) Net of servicing fees and property management fees and expenses.
<PAGE>
APPENDIX 1
SCHEDULE C (continued)
<TABLE>
<CAPTION>
Cypress Lakes
-------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Borrower loan repayments:
Principal $ 0 $ 0 $ 0 $ 0 $ 0
Interest 1,337,101 62,706 0 0 0
Cash from sale N/A N/A N/A N/A N/A
Distributions to investors:(1)
Principal 0 0 0 0 0
Interest 1,337,101 62,706 0 0 0
Distributions per $1,000 invested:
Principal 0 0 0 0 0
Interest 95.57 4.48 0 0 0
Arciero-Diamond Ridge
-------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Borrower loan repayments:
Principal $ 0 $ 5,538,800 N/A N/A N/A
Interest 113,531 297,077 N/A N/A N/A
Cash from sale N/A N/A N/A N/A N/A
Distributions to investors:(1)
Principal $ 0 5,538,800 N/A N/A N/A
Interest 113,551 997,027 N/A N/A N/A
Distributions per $1,000 invested:
Principal $ 0 1,000 N/A N/A N/A
Interest 20.50 53.64 N/A N/A N/A
</TABLE>
- ------------------
(1) Net of servicing fees and property management fees and expenses.
<PAGE>
APPENDIX 1
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>
<CAPTION>
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.
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
SUBSCRIPTION ORDER FOR UNITS
I am subscribing for _______ Units at $10.00 each for a total amount of
$__________. I have enclosed a check for that amount, made payable to "First
Trust of California, N.A, as Escrow Agent for American Family Holdings, Inc.
Unit Offering." I understand that no Units will be sold if the Acquisition
described in the Consent Solicitation Statement/Prospectus, dated
_________________, 1998, of American Family Holdings, Inc. is not completed.
The undersigned investor(s) having read and reviewed the Prospectus,
understand that if the Acquisition is completed, the Company is offering to
sell, on a first-come, first-served basis, up to 1,000,000 Units at $10.00
per Unit, and that each Unit consists of one share of common stock and one
warrant to purchase two additional shares at a 20% discount. In making this
subscription order, I/we represent and warrant that I/we am/are eligible to
participate in the Offering by virtue of the fact that I/we am/are currently
invested in one of the "Trudy Pat" lending programs described on the cover
page of the Prospectus, and that I/we followed the Instructions which
accompanied this Subscription Order Form. Furthermore, under penalties of
perjury, I/we certify that (i) the number shown below is my/our correct
Taxpayer Identification Number or Social Security Number (or I/we am/are
waiting for a number to be issued) and (ii) I/we am/are not subject to backup
withholding either because I/we have not been notified by the Internal
Revenue Service (IRS) that I/we am/are subject to backup withholding as a
result of a failure to report all interests or dividends, or the IRS has
notified me/us that I/we am/are no longer subject to backup withholding.
(NOTE: CLAUSE (ii) IN THIS CERTIFICATION SHOULD BE CROSSED OUT IF AN
INVESTOR IS SUBJECT TO BACKUP WITHHOLDING.)
INVESTOR INFORMATION
Name of Investor
-----------------------------------------------------
Name of Joint Investor
-----------------------------------------------------
Street address
-----------------------------------------------------
City/State/Zip
-----------------------------------------------------
Business Telephone Number
-----------------------------------------------------
Home Telephone Number
-----------------------------------------------------
- ------------------------------------ ------------------------------------
Investor's Tax I.D. No./Social Joint Investor's Tax I.D. No./Social
Security No. Security No.
- ------------------------------------ ------------------------------------
Signature of Investor Signature of Joint Investor
Date: Date:
------------------------------- ------------------------------
<PAGE>
BROKER / DEALER INFORMATION FORM
This Form must be returned with a subscription order, or the order cannot be
processed. If a broker is involved in the subscription order, the registered
representative broker/dealer must sign the form. If the subscription is made
without the assistance of a broker, the Investor must sign the form.
Broker/Dealer Name
-------------------------------------------------------------
Registered Representative Name
-------------------------------------------------
Registered Representative Mailing Address
--------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
City State Zip Code
----------------------------- ----------- -----------
Broker Number Telephone Number
------------------------- -------------------
BROKER STATEMENT: The undersigned confirms by his or her signature that the
broker/dealer is duly licensed and may lawfully sell shares in the state
designated as the Investor's residence, and that the person named as the
registered representative is duly licensed to represent the broker in this
transaction, and that he or she (i) has reasonable grounds to believe that
the information and representations concerning the Investor identified herein
are true, correct and complete in all respects; (ii) has discussed such
Investor's prospective purchase of Units with such Investor; (iii) has
advised such Investor of all pertinent facts with regard to the liquidity and
marketability of the Units pursuant to the NASD's Conduct Rules; (iv) has
delivered a current Prospectus and related supplements, if any, to such
Investor; and (v) has reasonable grounds to believe that the purchase of
Units is a suitable investment for such Investor and that such Investor is in
a financial position to enable such Investor to realize the benefits of such
an investment and to suffer any loss that may occur with respect thereto.
Registered Representative Name
-------------------------------------------------
- ------------------------------------- -------------------------------------
Registered Representative Signature Date
Broker/Dealer Authorized Signature
---------------------------------------------
Print Name
---------------------------------------------------------------------
ALL INVESTOR AND BROKER/DEALER INFORMATION MUST BE COMPLETED
OR REGISTRATION CANNOT PROCEED
INVESTOR STATEMENT: I confirm by my signature below that I have made my
subscription order without the assistance of a broker.
Name Joint Investor
--------------------------------- ----------------------
Signature Signature
---------------------------- ---------------------------
Date Date
--------------------------------- --------------------------------
<PAGE>
INSTRUCTIONS TO INVESTORS ON HOW TO COMPLETE THE SUBSCRIPTION DOCUMENTS
STEPS TO COMPLETE THE SUBSCRIPTION DOCUMENTS
1. If you want to purchase Units, complete the Subscription Order form
and attach your check for the full amount (see "Subscriptions" on the
next page of these Instructions for more details). Remember, orders
are first-come, first-served.
2. Make sure to include a Broker/Dealer Information Form with your
Subscription Order form, or your order cannot be processed.
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 which accompanied the Consent Solicitation
Statement/Prospectus, or if the Shares are to be sent to someone or someplace
other than what is shown on the label affixed to that 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.
SUBSCRIPTIONS
Subscription Orders for Units will be accepted on a first-come,
first-served basis, and the quantity of Units offered to Investors is
strictly limited. If you choose to subscribe, you must enclose a check
payable to "First Trust of California, N.A, as Escrow Agent for American
Family Holdings, Inc. Unit Offering," along with your order form, and your
funds will be held in escrow until the Acquisition is completed. If you
complete the subscription information, but fail to enclose a check, your
subscription will be deemed invalid. You may subscribe by sending a copy of
the form with your check at any time prior to completion of the Acquisition,
subject to availability of Units. All subscriptions must be accompanied by a
Broker/Dealer Information Form. Units can only be issued to the same
investor(s), and in the same manner, as Shares are issued to those same
investor(s) entitled to participate in the Acquisition and the Offering. If
the Acquisition is not completed, the Offering will be terminated and your
money (plus accrued interest) will be returned by the Escrow Agent.
WHERE TO SEND YOUR SUBSCRIPTION DOCUMENTS
Send your completed and duly executed subscription documents, 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.
II-1
<PAGE>
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
Item 24 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 25 Other Expenses of Issuance and Distribution*
<TABLE>
<S> <C>
SEC Registration Fee . . . . . . . . . . . . . . . . . . . $[7,670.40]**
NASD Fees. . . . . . . . . . . . . . . . . . . . . . . . . [3,100.00]**
Representative Non-Accountable Expense Allowance . . . . . 0
Accounting Fees and Expenses . . . . . . . . . . . . . . . ****
Legal Fees and Expenses. . . . . . . . . . . . . . . . . . ****
Printing Expenses. . . . . . . . . . . . . . . . . . . . . ****
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . 0
Transfer Agent Fees (if applicable). . . . . . . . . . . . ****
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . ****
Total . . . . . . . . . . . . . . . . . . . . . . . . ****
</TABLE>
* The total costs incurred by the Company in connection with the
Offering described in this Registration Statement and the Acquisition
described in Registration Statement File No. 333-37161 have been
allocated based on the exchange value of the Common Stock offered in
the Acquisition and the offering price of the Units offered hereby.
** 4,482.40 of which was previously paid in connection with Registration
Statement No. 333-37161.
*** $1,800 of which was previously paid in connection with Registration
Statement No. 333-37161.
**** To be filed by amendment.
II-1
<PAGE>
Item 26 Recent Sales of Unregistered Securities
On or about August 29, 1997, the Company issued an aggregate of 371,185
shares of common stock to Yale Partnership for Growth and Development, L.P.
(which is controlled by David G. Lasker, President of the Company), J-Pat,
L.P. (which is controlled by James N. Orth, Chief Executive Officer of the
Company), L.C. "Bob" Albertson, Jr., Executive Vice President of the Company,
and certain consultants to the Company. Such shares were purchased for
$3,712 in cash. On or about October 23, 1997, the Company issued an
aggregate of 18,918 additional shares to members of management for $189.18 in
cash. The issuances of the shares were exempt from the filing requirements
of the Securities Act of 1933, as amended (the "Act") by virtue of Section
4(2) of the Act, as a transaction by an issuer not involving any public
offering.
Item 27 Exhibits
<TABLE>
<S> <C>
1.1 Form of Wholesaling Agreement between the Company and L.H.
Friend, Weinress, Frankson & Presson, Inc.**
1.2 Form of Selling Agreement between the Company and
participating broker-dealers**
3.1 Certificate of Incorporation of American Family Holdings,
Inc.*
3.2 Certificate of Amendment of Certificate of Incorporation
before the Issuance of Stock*
3.3 By-Laws of American Family Holdings, Inc.*
4.1 Pages 1 through 4 of the Certificate of Incorporation of the
Company Filed as Exhibit 3.1 above defining the rights of
security holders are incorporated herein by this reference*
4.2 American Family Holdings, Inc. Warrant to Purchase Shares of
Common Stock**
5.1 Opinion of Arter & Hadden LLP re legality of units and shares
underlying the warrants**
5.2 Amended Opinion of Arter & Hadden LLP re legality of units
and shares underlying the warrants (re Amendment No. 1)
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 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 BDO Seidman, LLP as independent accountants
(re Amendment No. 1)**
23.4 Consent of Houlihan Valuation Advisers (re Amendment No. 1)**
23.5 Consent of Arter & Hadden LLP as counsel contained in Exhibit
5.2 (re Amendment No. 1)**
II-2
<PAGE>
23.6 Consent of BDO Seidman, LLP as independent accountants
(re Amendment No. 2)
23.7 Consent of Houlihan Valuation Advisors (re Amendment No. 2)
24.1 Power of Attorney**
99.1 Schedule E to Prior Performance Schedules**
99.2 Revised Schedule E to Prior Performance Schedules
* Incorporated by reference to identically numbered exhibits in
the Company's Registration Statement on Form S-4 (SEC File No.
333-37161) and all amendments thereto. Such Registration
Statement was originally filed October 3, 1997.
** Previously filed.
</TABLE>
Item 28 Undertakings
The undersigned Registrant hereby undertakes to:
(a) (1) File, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statements to:
(i) Include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information set
forth in the registration statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial BONA
FIDE offering.
(3) File a post-effective amendment to remove from registration
any of the securities being registered that remain unsold at the end of the
offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer 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 small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the
II-3
<PAGE>
securities being registered, the small business issuer 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 Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with 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 SB-2 and authorized 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 __, 1998.
AMERICAN FAMILY HOLDINGS, INC.
By /s/ David G. Lasker
-----------------------------
David G. Lasker,
Co-Chairman of the Board
In accordance with 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
President
Chief Financial Officer
/s/ David G. Lasker Chief Accounting Officer May __, 1998
- -----------------------------
David G. Lasker
Co-Chairman of the Board
Chief Executive Officer
/s/ James N. Orth Secretary May __, 1998
- -----------------------------
James N. Orth
Executive Vice President
/s/ L.C. "Bob" Albertson, Jr. Director May __, 1998
- -----------------------------
L.C. "Bob" Albertson, Jr.
/s/ Charles F. Hanson* Director May __, 1998
- -----------------------------
Charles F. Hanson
/s/ Dudley Muth* Director May __, 1998
- -----------------------------
Dudley Muth
/s/ John G. LeSieur, III* Director May __, 1998
- -----------------------------
John G. LeSieur, III
*By /s/ David G. Lasker
---------------------------------
David G. Lasker, Attorney-in-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
Exhibit
-------
<S> <C>
1.1 Form of Wholesaling Agreement between the Company and L.H.
Friend, Weinress, Frankson & Presson, Inc.**
1.2 Form of Selling Agreement between the Company and participating
broker-dealers**
3.1 Certificate of Incorporation of American Family Holdings,
Inc.*
3.2 Certificate of Amendment of Certificate of Incorporation
before the Issuance of Stock*
3.3 By-Laws of American Family Holdings, Inc.*
4.1 Pages 1 through 4 of the Certificate of Incorporation of the
Company Filed as Exhibit 3.1 above defining the rights of
security holders are incorporated herein by this reference*
4.2 American Family Holdings, Inc. Warrant to Purchase Shares of
Common Stock**
5.1 Opinion of Arter & Hadden LLP re legality of units and shares
underlying the warrants**
5.2 Amended Opinion of Arter & Hadden LLP re legality of units and
shares underlying the warrants (re Amendment No. 1)
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 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 BDO Seidman, LLP as independent accountants
(re Amendment No. 1)**
23.4 Consent of Houlihan Valuation Advisers (re Amendment No. 1)**
23.5 Consent of Arter & Hadden LLP as counsel contained in Exhibit
5.2 (re Amendment No. 1)**
23.6 Consent of BDO Seidman, LLP as independent accountants
(re Amendment No. 2)
23.7 Consent of Houlihan Valuation Advisors (re Amendment No. 2)
24.1 Power of Attorney**
99.1 Schedule E to Prior Performance Schedules**
99.2 Revised Schedule E to Prior Performance Schedules
* Incorporated by reference to identically numbered exhibits in
the Company's Registration Statement on Form S-4 (SEC File No.
333-37161) and all amendments thereto. Such Registration
Statement was originally filed October 3, 1997.
** Previously filed.
</TABLE>
<PAGE>
EXHIBIT 23.6
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 SB-2 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 23.7
CONSENT
The undersigned hereby consents to the filing of its amended Fairness
Opinion as an exhibit to the registration statement on Form SB-2 filed by
American Family Holdings, Inc. with the Securities and Exchange Commission
(the "Registration Statement") and to the reference to us under the caption
"Appraisals and Fairness Opinion" in the prospectus which is a part of the
Registration Statement.
Dated: May 11, 1998
HOULIHAN VALUATION ADVISORS
By /s/ BRET TACK
---------------------------
Print Name Bret Tack
-------------------
Title Principal
-----------------------
<PAGE>
EXHIBIT 99.2
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
date $ 7,954,629 $ 17,388,470
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 99.2
SCHEDULE E (continued)
<TABLE>
Cypress Lakes
-------------
<S> <C>
1. Name, location and type of property 660 acres located in Contra
Costa 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 foreclosure date $18,183,404
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>
