<PAGE>
As filed with the Securities and Exchange Commission on October 6, 1988
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. ___)
AMERICAN FAMILY HOLDINGS, INC.
(Name of small business issuer in its charter))
Delaware 6500 33-0769625
-------------------------- --------------------- -------------------
(State or Jurisdiction of (Primary Standard (IRS Employer
Organization or Industrial Identification
Incorporation) Classification Code Number)
Number)
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
949-833-8600
(Address and telephone number of principal executive offices)
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
(Address of principal place of business or intended principal place of business)
David G. Lasker, President
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
949-833-8600
(Name, address and telephone number of agent for service)
Copy to:
David R. Decker, Esq.
Arter & Hadden LLP
725 South Figueroa Street, 34th Floor
Los Angeles, California 90017
Approximate date of proposed sale to the public: AS SOON AS PRACTICAL AFTER THE
EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Offering Proposed Maximum
Title of Securities Amount Being Price Per Aggregate Amount of
Being Registered Registered Share or Unit(3) Offering Price Registration Fee(4)
---------------- ---------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Units(1) 125,000 $ 20.00 $ 2,500,000 $ 738.00
Common Stock 375,000(2) $ 16.00 $ 6,000,000 $ 1,770.00
TOTAL 500,000 $ 8,500,000 $ 2,508.00
</TABLE>
(1) Units consist of one share of Common Stock and warrants to purchase three
shares of Common Stock for a period of 20 consecutive trading days at a per
share price equal to 80% of the average closing price for the 20 trading
dates preceding the six month anniversary of the issuance of the Units.
(2) Issuable upon exercise of the warrants included in the Units.
(3) $20 is an arbitrary amount chosen and is not intended to imply that the
Common Stock will trade at a price of $20 per share.
(4) The registration fee for the common stock and the units to be issued in
this offering has been calculated using the maximum number of shares and
Units that can be issued in this offering. The registration fee for the
common stock issuable upon exercise of the warrants has been calculated
pursuant to Rule 457(i) assuming that all of the warrants would be
exercised at a price equal to 80% of the offering price of the Units issued
in this offering.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
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 Securities; 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>
<CAPTION>
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.
$2,500,000 OF UNITS
CONSISTING OF ONE SHARE OF COMMON STOCK AND
THREE WARRANTS TO PURCHASE THREE ADDITIONAL SHARES
-------------------------
125,000 UNITS AT $20 PER UNIT
THE OFFERING
American Family Holdings, Inc. (the "Company") is offering $2,500,000 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, Mori Point "Trudy Pat"
Program, Cypress Lakes "Trudy Pat" Program, Palmdale/Joshua Ranch "Trudy Pat"
Program, Esperanza Program, Stacey Rose Properties A Program and Stacey Rose
Properties B Program. NO PERSON OR ENTITY THAT IS NOT, AS OF THE DATE OF
THIS PROSPECTUS, AN INVESTOR IN ONE OF THOSE TEN PROGRAMS, WILL BE PERMITTED
TO PURCHASE UNITS UNDER ANY CIRCUMSTANCES. Each Unit consists of one share
of Company Common Stock and warrants to purchase three additional shares of
Company Common Stock. The purchase price for each Unit is $20.
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 Units (identical to those offered hereby) in exchange for the assets
(including cash on hand), certain liabilities and business activities owned by
investors in ten programs named above (the "Acquisition"). For that proposed
Acquisition, the Company will issue $[28,066,419] of its Units arbitrarily
valued at $20 per Unit. 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, eliminate the assessment process, focus
on revenue-generating potential, improve efficiency of operation in order to
reduce costs and increase profit potential and provide the investors with
potential liquidity for their investments. IF INVESTORS HOLDING A MAJORITY OF
THE AMOUNT INVESTED IN THE SEVEN "TRUDY PAT" PROGRAMS DO NOT VOTE TO APPROVE THE
ACQUISITION, THE ACQUISITION WILL NOT TAKE PLACE. IF THE ACQUISITION DOES NOT
TAKE PLACE, NONE OF THE UNITS 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)................ $ 20 $ 1.40 $ 18.60
- ---------------------------------------------------------------------------------------------------------
Total...................... $ 2,500,000 $ 175,000 $ 2,325,000
- ---------------------------------------------------------------------------------------------------------
Total Minimum.............. $ 20 $ 1.40 $ 18.60
- ---------------------------------------------------------------------------------------------------------
Total Maximum.............. $ 2,500,000 $ 175,000 $ 2,325,000
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) A unit consists of one share of Common Stock and [detachable] warrants to
purchase three additional shares of Common Stock for a period of 20
consecutive trading days for a per share purchase price equal to 80% of the
average closing price for the Company's Common Stock for the 20 trading
dates preceding the six month anniversary of the issuance of the Units.
(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 by the
seven "Trudy Pat" programs. 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>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Summary Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . .1
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Current Status of the Programs . . . . . . . . . . . . . . . . . . . . . .4
Organization Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Summary of the New Business Plan . . . . . . . . . . . . . . . . . . . . .9
Concurrent Consent Solicitation. . . . . . . . . . . . . . . . . . . . . 10
Summary Financial Information. . . . . . . . . . . . . . . . . . . . . . 11
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
General Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
The shares included in the units may trade at prices substantially
below the arbitrarily determined purchase price of $20 per unit . . 13
Management will have conflicts of interest. . . . . . . . . . . . . . 13
The company may incur significant additional debt . . . . . . . . . . 14
The board of directors will have the ability to change investment,
financing and other policies of the company without shareholder
consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
The company has no operating history. . . . . . . . . . . . . . . . . 14
No right to vote on matters affecting properties; reduced
voting power. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
No assurance of future cash distributions . . . . . . . . . . . . . . 14
Real Estate Risks Associated with All Properties . . . . . . . . . . . . 15
Certain assets may have to be sold to raise working capital . . . . . 15
Federal, state and local environmental and other laws may
require expensive hazardous substance clean-up or removal as
well as expensive public improvements . . . . . . . . . . . . . . . 15
If there is an uninsured loss, the company could lose its
investment, profits or cash flow from a property. . . . . . . . . . 15
The development of additional projects may occur. . . . . . . . . . . 15
The California economy has fluctuated broadly in the past few years . 15
When the acquisition is completed, National and its principals
will be owed $1,818,684 by the company. . . . . . . . . . . . . . . 16
Real Estate Risks of Specific Properties . . . . . . . . . . . . . . . . 16
Sacramento/Delta Greens . . . . . . . . . . . . . . . . . . . . . . . 16
Permits to develop the properties need to be obtained. . . . . . 16
Holding an inventory of residential lots may cause the company
to incur substantial carrying costs until the lots can
be sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Risks of residential development . . . . . . . . . . . . . . . . 16
Additional specific risks. . . . . . . . . . . . . . . . . . . . 16
Yosemite/Ahwahnee Properties. . . . . . . . . . . . . . . . . . . . . 17
i
<PAGE>
Permits to develop the condominium-type timeshare aspect of
the resort have not yet been obtained. . . . . . . . . . . . . 17
Risks affecting operation of a golf course . . . . . . . . . . . 17
Resort development is unpredictable for a variety of reasons
and could result in losses . . . . . . . . . . . . . . . . . . 17
Risks relating to timeshare operations . . . . . . . . . . . . . 17
Risks relating to recreational vehicle park operations . . . . . 18
Additional specific risks. . . . . . . . . . . . . . . . . . . . 18
Mori Point Property . . . . . . . . . . . . . . . . . . . . . . . . . 18
Permits to develop the property have not yet been obtained . . . 18
Hotel/conference center development is unpredictable for a
variety of reasons and could result in losses. . . . . . . . . 18
Additional specific risks. . . . . . . . . . . . . . . . . . . . 19
Cypress Lakes Property. . . . . . . . . . . . . . . . . . . . . . . . 19
The vested tentative map will expire in April 1999 unless
renewed and build the out of the property will be expensive. . 19
Risks affecting operation of a golf course . . . . . . . . . . . 19
Risks of residential development . . . . . . . . . . . . . . . . 19
Palmdale/Joshua Ranch Property. . . . . . . . . . . . . . . . . . . . 20
A final tract map must be recorded . . . . . . . . . . . . . . . 20
Permits to develop the property need to be obtained. . . . . . . 20
Holding an inventory of residential lots may cause the company to
incur substantial carrying costs until the lots can be sold. . 20
Risks of residential development . . . . . . . . . . . . . . . . 20
Additional specific risks. . . . . . . . . . . . . . . . . . . . 20
Esperanza Property. . . . . . . . . . . . . . . . . . . . . . . . . . 20
Risks of commercial development. . . . . . . . . . . . . . . . . 20
Additional specific risks. . . . . . . . . . . . . . . . . . . . 21
Stacey Rose Properties. . . . . . . . . . . . . . . . . . . . . . . . 21
Risks of residential development . . . . . . . . . . . . . . . . 21
Additional specific risks. . . . . . . . . . . . . . . . . . . . 21
Anti-Takeover Provisions and Limitation of Director Liability. . . . . . 21
The board's ability to issue preferred shares which could affect your
voting power and to issue additional shares to discourage or impede
a merger or other transaction that may be in your best or
financial interest. . . . . . . . . . . . . . . . . . . . . . . . . 21
The board is divided into three classes serving staggered three
year terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
There are restrictions on certain business combinations with
interested parties. . . . . . . . . . . . . . . . . . . . . . . . . 22
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. . . . . . . . . . . . . . . . . . . . . . . 22
The Delaware law, as well as the charter documents, limit the
liability of directors and officers to shareholders . . . . . . . . 22
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ii
<PAGE>
DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
CONFLICTS OF INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Company Shares Owned by Company Management. . . . . . . . . . . . . . 24
Allocation of Services and Expenses . . . . . . . . . . . . . . . . . 24
Non-Arm's-Length Agreements . . . . . . . . . . . . . . . . . . . . . 24
Competition with the Company from Other Non-Participating Programs. . 25
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION . . . . . . . . . . . . . . . 25
Fiduciary Responsibility of National. . . . . . . . . . . . . . . . . 25
Indemnification of Officers and Directors of the Company. . . . . . . 25
Officers and Directors Insurance. . . . . . . . . . . . . . . . . . . 26
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 26
BUSINESS AND PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . 27
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Business of the Company . . . . . . . . . . . . . . . . . . . . . . . 27
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Management of the Properties since Foreclosure. . . . . . . . . . . . 31
Efforts to Dispose of the Properties. . . . . . . . . . . . . . . . . 39
Consolidation of the Properties . . . . . . . . . . . . . . . . . . . 43
The Residential Development Industry. . . . . . . . . . . . . . . . . 43
The Lodging and Recreation Industry . . . . . . . . . . . . . . . . . 44
The Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . 47
The Consolidated Business Plan. . . . . . . . . . . . . . . . . . . . 48
Priority of Projects and Estimated Timetable. . . . . . . . . . . . . 56
Types of Borrowing Required . . . . . . . . . . . . . . . . . . . . . 58
Impact of Interest Rates on the Company . . . . . . . . . . . . . . . 59
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 60
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES. . . . . . . . . . . . . . . . 60
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . 60
Financing Policies. . . . . . . . . . . . . . . . . . . . . . . . . . 61
Miscellaneous Policies. . . . . . . . . . . . . . . . . . . . . . . . 62
Working Capital Reserves. . . . . . . . . . . . . . . . . . . . . . . 62
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . 63
iii
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 67
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Results of Operations - The Sacramento/Delta Greens Program . . . . . 67
Results of Operations - The Oceanside Program . . . . . . . . . . . . 68
Results of Operations - The Yosemite/Ahwahnee Programs. . . . . . . . 69
Results of Operations - The Mori Point Program. . . . . . . . . . . . 70
Results of Operations - The Cypress Lakes Program . . . . . . . . . . 70
Results of Operations - The Palmdale/Joshua Ranch Program . . . . . . 71
Results of Operations - The Esperanza Program . . . . . . . . . . . . 72
Results of Operations - The Stacey Rose Properties A and B Programs . 72
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . 72
Historical Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . 75
New Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . 76
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Executive Officers and Directors. . . . . . . . . . . . . . . . . . . 78
Directors and Executive Officers Compensation and Incentives. . . . . 81
Stock Incentive Plan. . . . . . . . . . . . . . . . . . . . . . . . . 82
401(k) Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . 84
Limitation of Liability and Indemnification . . . . . . . . . . . . . 84
PRIOR PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
PRIOR PERFORMANCE SCHEDULES. . . . . . . . . . . . . . . . . . . . . . . . 87
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . . . 96
Director and Officer Stock Ownership. . . . . . . . . . . . . . . . . 97
DESCRIPTION OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . 98
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Certain Shareholder Voting Requirements . . . . . . . . . . . . . . . 99
Transfer Agent and Registrar. . . . . . . . . . . . . . . . . . . . .100
THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100
Offering of Units . . . . . . . . . . . . . . . . . . . . . . . . . .100
Escrow Arrangements . . . . . . . . . . . . . . . . . . . . . . . . .100
Concurrent Consent Solicitation . . . . . . . . . . . . . . . . . . .101
SHARES ELIGIBLE FOR FUTURE SALE. . . . . . . . . . . . . . . . . . . . . .102
iv
<PAGE>
REPORTS TO SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . .103
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103
FURTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .103
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
</TABLE>
ACCOMPANYING THE PROSPECTUS
- - Subscription Order
- - Broker/Dealer Information Form
- - Instructions to Investors on How to Complete the Subscription Documents
v
<PAGE>
THROUGHOUT THIS PROSPECTUS ARE REFERENCES TO THE "ACQUISITION" OR "ACQUISITION."
THOSE REFERENCES RELATE TO THE COMPANY'S PROPOSAL TO PURCHASE THE SEVEN "TRUDY
PAT" PROGRAMS AND THE THREE OTHER 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 125,000 units at $20 per unit to be issued
exclusively to existing program investors and officers or directors of the
Company. 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 warrants to purchase three additional shares of common
stock. The warrants may be exercised for a period of 20 consecutive trading
days at a per share purchase price equal to 80% of the average closing price
for the company's common stock for the 20 trading dates preceding the six
month anniversary of the issuance of the units. The warrants will be allowed
to separate from the units [60]days after issuance. NASD broker-dealers will
receive an aggregate of $1.40 per unit commission from the Company for any
units sold with their help.
These units are identical to the units being offered in the acquisition
described in the Consent Solicitation Statement/Prospectus which accompanies
this prospectus.
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 $20 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 $20 due to a potentially large number of
shares that investors may sell immediately after the acquisition described in
the accompanying Consent Solicitation Statement.
<PAGE>
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of interest.
The principal shareholders and employees of National and the company will hold
approximately [16.35]% (6.23% if all the units are sold in the concurrent
offering and 4.66% if all the units are sold in the concurrent offering and all
warrants in units issued in the acquisition are exercised) of the company's
outstanding stock for which they paid $0.01 per share. Other founding
shareholders will hold approximately [2.3]% of the company's outstanding stock
(0.88% if all the units are sold in the concurrent offering and 0.66% if all the
units are sold in the concurrent offering and all warrants in units issued in
the acquisition are exercised) for which they also paid $0.01 per share. Thus,
the investors' total ownership interests in the programs' properties will be
diluted by the equity interest in the company held by the founders of the
company. The principal stockholders of National, and other executive officers
of the company, will receive annual cash compensation aggregating $560,000 as
officers and employees of the company. National will be relieved of its asset
management obligations and will no longer earn asset management fees. However,
despite the fact that National will have forgiven over $3,800,000 of unpaid fees
and expenses, the company will still owe National and its principals and
employees over $[1,800,000] of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not favored
by the board of directors. These provisions include a board of directors with
three classes serving staggered three year terms, the inability to remove a
particular director before the expiration of his or her term without a
two-thirds supermajority vote , and the inability to amend the anti-takeover
provisions of the charter documents without a similar vote. Thus, if investors
are unhappy with management's performance, it will be more difficult to remove
directors not favored by the investors.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the acquisition,
none of the properties will be subject to any liens other than for property
taxes. The board of directors could authorize borrowing by the company the debt
service for which may adversely affect the company's ability to make
distributions to shareholders. The company may incur full recourse debt which
exposes all of the assets of the company to repayment instead of limited
recourse debt which generally exposes specific properties for the repayment of
debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed over one year
ago 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.
2
<PAGE>
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 the properties of the
seven former "Trudy Pat" programs plus the property of any other program which
elects to participate in the acquisition. 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 risks exist for the programs
whether or not the acquisition is approved. These include
(i) the need to raise additional cash funds to pay delinquent property
taxes on each of the properties, as well as keeping those property taxes current
in the future (without needed cash, one or more properties may be lost at a tax
sale in the future at below market prices);
(ii) the need to pay for the costs associated with maintaining and
obtaining permits and government approvals to develop the properties (without
such permits and approvals, management believes the properties might be less
marketable, requiring months or even years to sell, because there are fewer
buyers at the early stage of development of certain projects);
(iii) the cost of holding land to be developed and built upon at
Sacramento/Delta Greens (presently approximately $10,000 per month) or Mori
Point (presently approximately $25,000 per month) or Cypress Lakes (presently
approximately $15,000 per month) or Palmdale/Joshua Ranch (presently
approximately $25,000 per month) or Esperanza and Stacey Rose A and B properties
(presently approximately $5,000 per month together);
(iv) the cost of development, operation and maintenance on the various
aspects of the Yosemite/Ahwahnee project in order to increase revenue and
marketability could exceed funds available; and
(v) the payment of over $[1,800,000] accrued fees and expenses to
National and its principals. Additionally, there are particular risks related
to each of the programs' properties more specifically described in "Risk Factors
- -- Real Estate Risks" commencing at page __.
3
<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 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.
CURRENT STATUS OF THE PROGRAMS
The properties owe a significant amount of property taxes totalling over
$[1,000,000] as of August 31, 1998. This amount includes those taxes due under
payment plans that have been paid on a current basis. Under California statute,
property owners have the option of entering into a payment plan no later than
five years following June 30th of the first year a tax payment becomes past due.
Thus, the property owner may elect to accumulate up to five years of taxes into
the plan, along with any penalties and accrued interest. Payments are then
spread evenly over the next five years and are due each April 10th along with
accrued interest on the remaining balance. The plan remains in effect, as long
as all current property taxes and all past due plan payments are made on time,
until the balance is reduced to zero. In order to preserve cash, National
arranged for payment plans for past due taxes on behalf of certain programs and
anticipates placing others into such plans. The following chart summarizes the
status and amount paid and/or due for each property on a cash basis. The
financial statements herein account for these taxes due on an accrual basis.
<TABLE>
<CAPTION>
Property Taxes Paid in April 1998
Past Due Payment Plan
Program Current Year Payment Plan Total Payments Balance Remaining
- ------- ------------ ------------ -------------- -----------------
<S> <C> <C> <C> <C>
Sacramento/Delta Greens $ 16,545 $ 35,540 $ 52,085 $ 26,132
Mori Point 20,503 121,220 141,723 157,413
Palmdale/Joshua Ranch 9,461 53,200 62,661 69,092
---------- ---------- ---------- ----------
Total $ 46,509 $ 209,960 $ 256,469 $ 252,637
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Property Taxes Paid in June 1998
Past Due Payment Plan
Program Current Year Payment Plan Total Payments Balance Remaining
- ------- ------------ ------------ -------------- -----------------
<S> <C> <C> <C> <C>
Oceanside $ 53,690 $ 33,416 $ 87,106 $ 0
Yosemite/Ahwahnee 106,983 126,518 233,501 506,070
Stacey Rose Properties 4,843 7,523 12,366 29,670
---------- ---------- ---------- ----------
Total $ 165,516 $ 167,457 $ 332,973 $ 535,740
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Estimated Property Taxes Scheduled for Payment in June 2000
Payment Plan
Past Due Balance to be
Current Year Payment Plan Total Payments Remaining
------------ ------------ -------------- ---------
<S> <C> <C> <C> <C>
4
<PAGE>
Program
- -------
Cypress Lakes $ 34,300 $ 62,800 $ 97,100 $ 251,200
Esperanza 3,700 5,800 9,500 23,200
---------- ---------- ---------- ----------
Total $ 38,000 $ 68,600 $ 106,600 $ 274,400
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The Sacramento/Delta Greens Program is in the fourth year of its payment
plan and the Mori Point and Palmdale/Joshua Ranch Programs are in the third year
of their respective plans. As of July 1998, the Yosemite/Ahwahnee and Stacey
Rose Programs entered into the first year of their respective payment plans. If
not sold, then the Cypress Lakes and Esperanza Programs are expected to enter
into five-year payment plans in June 2000 if delinquent taxes are not paid prior
to that time.
In addition to property tax liabilities, working capital is needed in order
to position the properties for sale on terms that might be approved by a
majority of investors. Only the golf course owned by the Oceanside Program and
the recreational vehicle park portion 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 complete conceptual plans, comply with
the governmental permitting requirements and eventually construct other
improvements on the land. The programs' tenancy-in-common agreements contain
provisions for voluntary advances and mandatory assessments by investors.
Investors have progressively demonstrated a reluctance to provide adequate
working capital through the mandatory assessment process. This reluctance on
the part of investors to provide the necessary funding to maintain the
properties, pay for minimal expenses such as property taxes, and continue the
predevelopment approval process makes continuation of the status quo tenuous at
best.
The remaining Oceanside property was sold on June 5, 1998 for a gross
amount of $6,672,099. This was significantly greater than its May 1997
appraisal of $2,850,000. As part of the approval process, Oceanside investors
directed that $3,000,000 of that amount be distributed back to them and that
$3,550,000 be used to purchase the Yosemite/Ahwahnee golf course and certain
additional land around the golf course that is being held for future
development. The golf course was leased back to the Yosemite/Ahwahnee programs
for five years on a fully net basis for $80,000 for the first year, and
$140,000, $250,000, $380,000 and $380,000 for the succeeding years. The golf
course currently has a negative cash flow of approximately $350,000 per year
which is the responsibility of the Yosemite/Ahwahnee Programs based on this
lease-back arrangement of that property from the Oceanside Program. The
Yosemite/Ahwahnee Programs will also have the responsibility for payment of
future property taxes during the term of the lease. A sale, if possible, at
either the recent purchase price or the exchange value would not generate
sufficient funds to return all of the Oceanside investors money.
The Sacramento/Delta Greens property may be sold for a cash price
approximating its March 1998 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 is substantially less than the outstanding
5
<PAGE>
investment, the sale of this property at current prices will not yield all or a
substantial portion of the investors' money at this time.
Without an infusion of approximately $[3,000,000] of additional capital,
the Yosemite/Ahwahnee properties (some of which are now owned by Oceanside
investors) cannot reach a point where they are developed enough to be able to
eliminate losses from operations and break even on the lease obligations to the
Oceanside program investors for the golf course. The March 1998 appraisal was
used for the estate lots and for the balance of the land to be developed with
timeshare units and additional recreational vehicle sites. 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 March 1998 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 March 1998 appraised value would
not generate sufficient funds to return all of the investors' money at this
time.
If the current proposed sale is not consummated, the Cypress Lakes property
must undergo some redesign in order to reduce the estimated infrastructure
costs, particularly those related to the construction of a levee around it. It
is estimated that this redesign and related engineering and legal costs to
change the map could cost approximately $400,000. Without a significant
increase in the demand for property from homebuilders for additional lots in
eastern Contra Costa County, the best short-term strategy to maximize the return
of capital may be to hold the property in anticipation of being able to sell it
in bulk when that demand does finally develop. A bulk sale at the current
appraised value would not result in enough funds to return all of the investors
capital at this time.
The Palmdale/Joshua Ranch property has some significant challenges in
regard to infrastructure costs, particularly for a main road and utilities.
These costs preclude any profitability of a build-out under current market
conditions. A vested tentative map was secured in early July 1998 on the
property by National on behalf of the investors. The vested tentative map
approval is a significant document that helps to insure that local government
intervention will not stop the development process and it helps to lock in
certain governmental fees at current rates subject to only Consumer Price Index
increases. Approximately $[140,000] of capital is needed to complete final
soils and grading studies which are needed to attract a potential buyer or joint
venture partner. Based on the net value of each lot in the current market,
management believes that it may be best to sell the property in bulk unless some
of the infrastructure costs can be reduced, eliminated or financed on realistic
terms. A bulk sale at the March 1998 appraised value at this time would not
generate sufficient funds to return the investors' capital at this time.
6
<PAGE>
The Esperanza property is zoned commercial. Unfortunately, the current
market demand in the area does not justify the build out of the site at this
time. In National's opinion, the property should be discounted and sold. It
cannot be sold for the original loan amount at this time.
The Stacey Rose A and Stacey Rose B properties are contiguous properties
that are zoned residential. Additionally, National owns a third contiguous
parcel on behalf of these two groups of investors. It is estimated that it may
cost $50,000 to finalize a tentative tract map on the parcels. The property
could contain up to 160 lots. The property could also be held for a bulk sale
without spending the capital to obtain the tentative map. However, a bulk sale
at the March 1998 appraised value would not generate sufficient funds to return
the investors' capital.
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) as inadequate or not forthcoming at all (in the case of the
Yosemite/Ahwahnee, Cypress Lakes, Palmdale/Joshua Ranch, Esperanza and Stacey
Rose programs). Prior to the recent sale of the remaining lots of the Oceanside
property, two offers had been received that were considered by National to be
inadequate. See "Background and Reasons for the Acquisition -- Efforts to
Dispose of the Properties." The Sacramento/Delta Greens and the Palmdale/Joshua
Ranch properties have been presented to several local area homebuilders in the
last year without yielding any significant immediate interest or negotiations
toward a sale. National continues to explore the possibility of selling all of
these properties, but, to date, no brokers have been hired. Even though
National is a licensed real estate broker and, along with its land development
consultants, has the resources to identify potential buyers for projects of this
type and size, it has recently requested proposals from several national real
estate brokerage firms, as well as some local ones that specialize in land
transactions in the vicinity of certain of the properties. The estate lots at
the Yosemite/Ahwahnee properties have been previously listed with a broker for
sale, as have the Mori Point, Cypress Lakes, Esperanza and Stacy Rose
properties. National also made efforts to interest two potential buyers or
joint venture partners in the Yosemite/Ahwahnee properties as a package
immediately after the foreclosure in 1995. However, the buyers could not
perform and purchase contracts were not consummated. Since then, the project
has not been packaged or listed for a bulk sale because National feels a better
price can be attained for some of the parcels independently or after further
development of the recreational vehicle spaces and planned timeshare program is
conducted. 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. Other than the sale of the golf course
and certain adjacent property to the Oceanside investors, only offers for
certain of the estate lots have been consummated. No offers that resulted in
purchase agreements have been received for the Yosemite/Ahwahnee properties as a
package. For a period of one year in 1992 to 1993, the Mori Point property was
listed with a reputable national commercial brokerage firm. 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 in order to
7
<PAGE>
achieve their objectives of a greater return of their capital. During two
separate time frames in 1995 and 1996, the Cypress Lakes property was listed
with two separate real estate brokerage firms; however, no purchase agreements
were received. An offer to purchase the property for $11,550,000 ($5,550,000 in
excess of the March 1998 appraised value) was presented to the Cypress Lakes
investors in June 1998. Holders of a majority-in-interest of invested funds
have not approved the sale. National briefly listed the Esperanza property with
a local Victorville real estate broker in the early 90s but, after about one
year, took the property off the market when no offers were received that were
acceptable to investors. National did not renew the listing agreement while
waiting for the real estate market to improve.
The acquisition has been proposed because National and the company believe
that the properties, when combined and used or sold for their mutual benefit
instead of separately operated or sold, can be sold and/or developed in a way
that will increase the overall value available to investors. This proposal
provides an alternative way to achieve the investors' goal of maximizing a
return of their original principal. While there can be no assurance that the
company will achieve that goal for the investors through its stock price,
continuing to attempt to achieve the investors' goals for each property
separately does not appear to provide any likelihood of achieving that
objective, because there is a natural reticence among the investors to
contribute adequate capital to pay the property taxes or sustain the
property-related holding costs any longer. 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 whether a market will develop
or what the market price for the shares will be and, therefore, it cannot be
known whether the value of the shares allocated to each program will ever exceed
the price that the properties might bring in a cash sale. See "Background and
Reasons for the Acquisition -- Comparison of Alternatives" at page __.
ORGANIZATION CHART
After the acquisition, if all ten programs participate in the acquisition,
[81.26]% (92.9% if all units are sold in the concurrent offering and 94.7% if
all the units are sold in the concurrent offering and all warrants issued in the
acquisition are exercised) of the company's outstanding shares will be owned by
the investors and [18.74]% (7.1% if all units are sold in the concurrent
offering and 5.3% if all the units are sold in the concurrent offering and all
warrants issued in the acquisition are exercised) 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. If all programs participate in the acquisition, title to the properties
will be held by, and day-to-day operations will be conducted through seven
separate wholly-owned subsidiaries of American Family Communities, Inc. The
ownership and organization of the company after the acquisition will be as
follows:
8
<PAGE>
<TABLE>
<CAPTION>
<S><C>
------------------------- --------------------------- ---------------------- -------------------------
Yale Partnership for
Growth and J-Pat, L.P. Consultants and other
Development, L.P. (controlled by James employees or former
All Programs' Investors (controlled by David Orth, a principal of employees of National
Lasker, a principal of National) or Company
National)
------------------------- --------------------------- ---------------------- --------------------------
[81.26]%(1) [6.88]%(1) [6.88]%(1) [4.98]%(1)
---------------------------------------------------------------------------------------------------------------------------------
American Family Holdings, Inc.
---------------------------------------------------------------------------------------------------------------------------------
100%
------------------------------------------
American Family
Communities, Inc.(2)
------------------------------------------
100%
----------- ----------- ----------- -------------- ----------- ----------- -------------
Yosemite
Delta Woods Mori Point Cypress Lakes, Palmdale/ Esperanza Victorville
Greens Family Destinations, Inc.(3) Joshua Ranch, Land, Inc.(3) Homes, Inc.(3)
Homes, Resort, Inc.(2) Inc.(3)
Inc.(3) Inc.(3)
----------- ----------- ----------- -------------- ----------- ----------- -------------
</TABLE>
- ---------------
(1) If all ten programs participate in the acquisition, these percentages will
be 92.9%, 2.62%, 2.62% and 1.9%, respectively, if all of the units are sold
in the concurrent offering and 94.7%, 1.96%, 1.96% and 1.42%, respectively,
if all of the warrants included in the units to be issued in the
acquisition are exercised.
(2) A subsidiary formed to coordinate the management and operation of the
properties. L.C. "Bob" Albertson, Jr. will be the Chief Executive Officer
and, as such, responsible for this entity and the wholly-owned operating
subsidiaries.
(3) Subsidiaries formed to hold title to the various properties and to conduct
the day-to-day operations.
SUMMARY OF THE NEW BUSINESS PLAN
Our objective is to preserve as much of the investors' original principal
as is possible and improve the value, performance and marketability of the
properties currently held by the programs in the following ways:
- By developing selected properties for their highest and best use,
particularly the Yosemite/Ahwahnee property for timeshare and recreational
vehicle memberships;
- By increasing the current cash flow from the operating assets;
- By maximizing the potential profit margins of for-sale products like
lots and/or parcels;
9
<PAGE>
- By raising funds for the company's operations through the sale of
selected real estate assets acquired from the programs to outside buyers, the
sale of some additional units in the concurrent offering, and through the
exercise of warrants; and
- By acquiring other projects or assets which are consistent with our
objectives and business plan, particularly those that can be timeshare oriented.
RESIDENTIAL DEVELOPMENTS. The Company will sell certain assets or programs
in bulk to raise operating funds that can be applied to more potentially
profitable areas of the company's business. Cash flow from the sale of parcels
for single-family homes and lots would continue our growth and build value.
We plan to continue to investigate the most feasible, profitable and
cost-effective ways to finalize the entitlements and provide for the necessary
infrastructure for the Sacramento/Delta Greens, Cypress Lakes, Palmdale/Joshua
Ranch, Esperanza and Stacey Rose properties while seeking bulk buyers at
acceptable prices and/or joint venture partners on reasonable financial terms.
RESORT DEVELOPMENTS. We will enhance the value of Yosemite/Ahwahnee by
continuing to develop the project. While the project itself presently has
limited cash available for capital improvements, we believe the highest
potential rewards in terms of revenues, profitability and increased share value
lie in this segment of the company's asset base. By using the remaining funds
available from the sale of the golf course and additional surrounding land to
the Oceanside investors, from the sale of certain assets of other programs, or
from the sale of units offered concurrently herewith, we will aggressively
continue to develop vacation villa timeshare units and recreational vehicle
sites. We will also continue to process the necessary approvals for the Mori
Point property which we believe has the potential to attract hotel and
conference center industry-oriented joint venture partners or purchasers. In
the future, we may also target additional resort or over-night-stay projects for
potential acquisition or joint venture. See "Business and Properties --
Properties" at page __ and "-- Consolidation of the Programs" at page __ for
further details regarding all of the properties.
MANAGEMENT. The Board of Directors will oversee the management of the
company. After the acquisition all directors will be elected by the
shareholders. The Board will consist of six directors, including three
directors who are independent of the company. For background on management of
the company and their compensation, see "Management" at page __.
CONCURRENT CONSENT SOLICITATION
By a separate Consent Solicitation Statement/Prospectus, the Company is
offering units (identical to those offered in this prospectus) in exchange for
the assets (including cash on hand and any leasehold rights), certain
liabilities and business activities owned by investors in the ten programs named
above. For that proposed Acquisition, the Company will issue $[28,066,419] of
its units arbitrarily valued at $20 per unit. 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, eliminate the
assessment process, focus on revenue-generating potential,
10
<PAGE>
improve efficiency of operations in order to reduce costs and increase profit
potential, provide the investors with potential liquidity for their
investments and create greater potential overall value than each of the
programs have separately. IF INVESTORS HOLDING A MAJORITY OF THE AMOUNT
INVESTED IN THE SEVEN "TRUDY PAT" 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 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.
11
<PAGE>
<TABLE>
<CAPTION>
Company Pro Forma The Acquisition Historical
------------------------------------- ---------------------------------------------------------
Six Months Year Ended
Ended June 30, December 31, Years Ended
1998 1997 December 31
---------------- ---------------- --------------------------------------------------------
The Acquisition The Acquisition 1997 1996 1995
---------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 324,654 $ 5,193,012 $ 5,193,012 $ 6,213,299 $ 6,333,143
Cost of sales 121,187 4,081,530 4,081,530 5,224,186 5,346,735
------------- -------------- -------------- -------------- --------------
Gross profit 203,467 1,111,482 1,111,482 989,113 986,408
Expenses:
Selling, general and
administrative 2,413,683 5,676,067 4,357,059 4,029,618 2,486,099
Land write-down 255,000 1,299,651 1,299,651 845,000 16,167,424
Management fees - 0 949,003 949,003 949,003
------------- -------------- -------------- -------------- --------------
Total expenses $ 2,668,683 $ 6,975,091 $ 6,605,713 $ 5,823,621 $ 19,602,526
Net interest income
(expense) (1,117) 31,345 31,345 73,205 1,222,008
------------- -------------- -------------- -------------- --------------
Gain on sale of
property 1,871,279 - - - -
Net loss $ (595,054) $ (5,832,886) $ (5,462,886) $ (4,761,303) $ (17,394,110)
------------- -------------- -------------- -------------- --------------
------------- -------------- -------------- -------------- --------------
Net loss per share (0.34) (3.38) N/A N/A N/A
------------- --------------
------------- --------------
Average number of
shares outstanding 1,726,617 [1,726,617] N/A N/A N/A
------------- --------------
------------- --------------
Balance Sheet Data:
Cash and cash
equivalents 2,809,752 N/A 540,909 1,065,715 N/A
Total real estate 27,601,000 N/A 27,427,617 28,444,055 N/A
Total assets 32,059,053 N/A 32,065,559 34,561,602 N/A
Total debt 313,083 N/A 324,920 424,767 N/A
Total liabilities 5,844,634 N/A 6,938,267 4,782,370 N/A
Stockholders'/
owners' equity 26,214,419 N/A 25,127,292 29,779,232 N/A
Other Data:
Cash used in
operating
activities (2,525,042) N/A (2,015,894) (1,658,879) (68,615)
Cash provided by
(used in)
investing
activities 6,988,374 N/A (163,264) (186,211) (436,545)
Cash provided by
(used in)
financing
activities (2,067,345) N/A 1,523,975 1,168,817 674,403
</TABLE>
[NOTE THAT THE AVERAGE NUMBER OF SHARES OUTSTANDING WILL CHANGE AS WE
RECALCULATE EXCHANGE VALUES UNTIL WE GO EFFECTIVE. THAT'S WHY THEY ARE
BRACKETED.]
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<PAGE>
RISK FACTORS
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 INCLUDED IN THE UNITS MAY TRADE INITIALLY AT PRICES
SUBSTANTIALLY BELOW THE ARBITRARILY DETERMINED PURCHASE PRICE OF $20 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 $20 issuance price of the units or the
book value of the company's assets. The market price of the shares included in
the units will likely be less than $20 per share after the acquisition,
particularly if investors decide to sell a large number of their shares shortly
after the acquisition.
MANAGEMENT WILL HAVE CONFLICTS OF INTEREST. After the acquisition, the
executive officers of the company, which include among others the principal
shareholders of National, will hold approximately [16.35]% (6.23% if all the
units are sold in this offering and 4.66% if all the units are sold in this
offering and all warrants in units issued in the acquisition are exercised) of
the company's stock for which they paid $0.01 per share. Other company founders
will hold approximately [2.33]% of the outstanding shares (0.88% if all the
units are sold in this offering and 0.66% if all the units are sold in this
offering and all warrants in units issued in the acquisition are exercised) of
the company for which they also paid $0.01 per share. The executive officers of
the company will receive annual cash compensation aggregating $560,000. While
the acquisition, if successful, will relieve National of its asset management
obligations (and it will cease to earn associated fees of approximately $885,000
per year), the company will still owe National and its affiliates over
$[1,800,000] 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.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not favored
by the board of directors. These provisions include, among others, a classified
board of directors where only one-third of the directors are elected in any
given year and directors serve three year terms; directors may only be removed
for cause and only by the affirmative vote of holders of not less than
two-thirds
13
<PAGE>
of the voting power of all outstanding shares; and amendments to the
anti-takeover provisions of the charter documents may only be effected by the
affirmative vote of holders of not less than two-thirds of the voting power of
all outstanding shares. This means that, if a group of investors are unhappy
with management's performance, it will take several years to change the board of
directors or it will require them to obtain the support of a significant number
of additional shareholders in order to be able to meet the two-thirds test to
change the anti-takeover provisions of the charter documents.
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 __.
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
$[1,000,000] in property taxes owed as of August 31, 1998. 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 over one year
ago 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
14
<PAGE>
amounts owing to National. They 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.
CERTAIN ASSETS MAY HAVE TO BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $4,565,000 from the sale of certain assets of the
programs or the sale of units in the concurrent offering or the exercise of
warrants become available, the company will not be able to proceed with its
entire business plan. 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. Neither the programs nor the
company have received any commitment from any sources for financing at this
time. In their current tenancy-in-common structure, the programs cannot obtain
traditional bank financing.
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 to the company. 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 could lose capital as well as revenues, and would still owe other debts
related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do so.
See "Business and Properties - Investments in Real Estate or Interests in Real
Estate" at page __. Real estate development involves more risks than there are
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; construction financing may not be available;
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.
Initially, we will 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 some areas of the State. In the past, these conditions have caused
local
15
<PAGE>
governments to restrict residential development. California's climate and
geology present risks of natural disaster such as earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE OWED
$1,818,684 BY THE COMPANY. This represents accrued fees and expenses from the
programs which National has not cancelled. This amount is due and payable and
the company intends to start paying it after the Acquisition, but only from
operating revenues, proceeds from the sale of assets, or from the exercise of
warrants, and not from proceeds available from the sale of units in the
concurrent offering.
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 approval of a new tentative map,
the filing of a final map and obtaining building permits from the city. The
tentative tract map process for the Sacramento/Delta Greens property required
that studies be conducted to identify any endangered species' habitat which may
exist on the property. Since some were identified, such as burrowing owls and
fairy shrimp, changes to the tentative development plans have been made that
will reduce or eliminate any damage to the habitat. A new tentative map needs
to be approved by the City. The longer this process takes, the longer it will
be before any of the property is ready for any construction, further development
activity or sale.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS 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, predevelopment activities and asset management fees
for this property have averaged approximately $10,000 per month over the past
three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real estate
is cyclical and the residential lot development industry is highly competitive.
If the demand for new lots does not keep pace with competitive supply, our
properties may be sold at a loss. The location of the company's lots, the
presence of other competition, customer acceptance and pricing are all factors
affecting success. Competitors may have better financial, managerial and other
resources, affecting our ability to successfully compete. Sacramento/Delta
Greens represents over 5% of the assets of the company.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to pay the engineering costs required to mitigate endangered species
issues and pay for the planning and
16
<PAGE>
design expenses for the city to approve a new tentative tract map (estimated by
management to cost approximately $25,000). Another risk is whether the lots to
be developed will appeal to builders and whether home financing will be
available. Finally, there is a risk that the development and sale of lots or
homes will not be profitable.
YOSEMITE/AHWAHNEE PROPERTIES (including the golf course and surrounding
land, which is owned by the Oceanside program investors)
PERMITS TO DEVELOP THE CONDOMINIUM-TYPE TIMESHARE ASPECT OF THE RESORT HAVE
NOT YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map on 32
remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Planning and development are currently underway for
100 additional recreational vehicle membership sites, as well as for vacation
villa timeshare units. Additional planned usage such as traditional, attached
timeshare units 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 reduce the rounds played.
Seasonal variations may require the company to supplement revenue at the golf
course to meet operating expenses. Weather can negatively affect the turf grass
and reduce the number of rounds played. Inflationary costs may not be offset by
increased dues. Also, golf's success depends on discretionary spending by
consumers, which may be vulnerable to regional and economic conditions, as well
as to pleasure or destination travel preferences by visitors and tourists. All
of these factors could reduce the amount of money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity which may
attract potential timeshare purchasers in the future. At this time, the project
does not rely on the golf course for its revenue. National estimates that the
value of the golf course will be less than 20% 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 completely develop its timeshare 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.
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.
17
<PAGE>
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.
The timeshare industry is extremely competitive and we may not be able to
secure development financing on acceptable terms.
Since the project is not yet permitted for traditional attached timeshare
units, there has been no allocation of assets. Should attached timeshare units
be approved, the company anticipates that a significant portion of the revenue
of the company will be derived from sales of these timeshare units.
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 and
maintenance of the golf course, clubhouse and current recreational vehicle
facilities (estimated by management at approximately $350,000) annually and (ii)
complete the construction of additional recreational vehicle sites and obtain
approvals for and construction of the first group of vacation villa timeshare
units (estimated by management to cost approximately $3,000,000). There is also
a risk that the operation of recreational vehicle sites, timeshares and a golf
course may not be profitable.
MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY HAVE NOT YET BEEN OBTAINED. If needed
permits for development for the Mori Point property are not obtained or
reissued, the business plan for the company will have to be revised.
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 the City of Pacifica is expensive and
time consuming. Mori Point had a specific plan and tentative map approvals to
build a hotel/conference center which expired in 1991. These approvals must be
obtained or reinstated prior to construction on the property. Mori Point will
represent approximately 20% of the assets of the company.
HOTEL/CONFERENCE CENTER 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 the hotel/conference center project 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. At the hotel/conference center property
at Mori Point, we may be competing against well-known chains and extended-stay
inns.
18
<PAGE>
ADDITIONAL SPECIFIC RISKS. There is a risk that the city government will
not approve the property for its intended use. Capital to conduct engineering
and environmental studies in order to apply for and obtain approvals for its use
from the City is estimated to be approximately $500,000. Financing will also be
necessary for roads, utilities and other infrastructure costs prior to
construction. Finally, there is a risk that the proposed hotel/conference
center may not be profitable.
CYPRESS LAKES PROPERTY
THE VESTED TENTATIVE MAP WILL EXPIRE IN APRIL 1999 UNLESS RENEWED AND THE
BUILD OUT OF THE PROPERTY WILL BE EXPENSIVE. Due to being located in a 100-year
flood plain, the property requires a levee to be constructed around its
perimeter which is very expensive. Preliminary engineering estimates indicate
these costs to be more than $9,000,000. It may be desirable to change the
vesting tentative map if the costs can be reduced significantly. While mere
extension of the expiration date of the existing vested tentative map is not
expected to be controversial, any changes in the existing plan could subject the
project to public hearings which might result in additional costs being placed
on the project. This could further increase the high front-end financial
requirements. Additionally, such modifications might not be approved by the
County.
Cypress Lakes is a proposed master-planned community and represents more
than 20% of the assets of the company. If the current proposed sale of the
Property is not consummated, and if a bulk sale cannot be achieved, then joint
venture partners would have to be brought in by the company to help with the
significant up-front capital requirements of such a large project in order to
develop it. It may be difficult to find substantial builder/developers who have
the financial ability to purchase or develop the project. Changing market
conditions may increase the difficulty in selling lots.
Should the company determine to build out the project, delays in
construction, reasonably priced mortgage and construction financing and the
local and general California economy could lengthen the holding period for the
lots. This would mean delays in realizing cash from the business operations.
RISKS AFFECTING OPERATION OF A GOLF COURSE. When, and if, the golf course
is developed, it will face competition from the 15 golf courses within the
immediate market area (an approximate 25-mile radius). Seasonality, weather and
course conditions will affect the operations of the company. 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 if the golf course is constructed.
RISKS OF RESIDENTIAL DEVELOPMENT. Totaling 1,330 lots when built out, a
large supply of lots would be available and, due to the cyclical nature of the
housing industry, demand may fluctuate differently than supply. This could
result in needing to sell lots at a loss. Due to the size of the project, it
could take between six and ten years to complete, which would subject it to new
competitors entering the marketplace during the sales period. An environmental
impact
19
<PAGE>
report was obtained on the property. Any and all environmental concerns will be
mitigated as required in the vested tentative map conditions of approval. No
evidence of endangered species that would limit or preclude development of the
project have been found.
PALMDALE/JOSHUA RANCH PROPERTY
A FINAL TRACT MAP MUST BE RECORDED. After several years of effort by
National, the vested tentative map was approved by the City of Palmdale at a
hearing before the planning commission in early July 1998. A final recorded map
must be secured by National or a buyer in order to build on the property. Final
engineering, soils, utility and various improvement studies will need to be
conducted in order to record the final map.
PERMITS TO DEVELOP THE PROPERTY NEED TO BE OBTAINED. A final recorded map,
which could take nine to twelve months after starting the process, will be
required prior to construction. Due to the size of this project which
encompasses some 739.6 acres and is currently planned for 539 lots, additional
grading studies, soils investigation and utility planning needs to be done which
could negatively impact the cost of this large-scale development.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Finding
builder/developers that have the financial strength to handle this size project
is difficult. Changing market conditions, the lack of reasonably-priced
construction or mortgage financing and the general or local market conditions
could lengthen the holding period for lots. This would mean a delay in
realizing cash from business operations. The average carrying costs, including
property taxes, predevelopment and asset management services for this property
have averaged approximately $16,300 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, the
property may be sold at a loss. The location of the 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
the company's ability to successfully compete. Any and all environmental
concerns will be mitigated as required in the vested tentative map conditions of
approval. No evidence of endangered species that would limit or preclude
development of the project have been found.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to pay for or finance (i) engineering, soils and utility studies which
is estimated to cost approximately $140,000, and (ii) another risk is whether
the lots to be developed may appeal to project builders so that the property can
be sold in whole or by parcel. Palmdale/Joshua Ranch is a proposed residential
development and represents about 10% of the assets of the company.
ESPERANZA PROPERTY
RISKS OF COMMERCIAL DEVELOPMENT. The material risks associated with the
development of the Esperanza Property are (i) as of August 31, 1998,
approximately $23,000 of property taxes
20
<PAGE>
are delinquent and must be brought current or a statutory five-year payment plan
must be arranged with the County of Riverside to avoid loss of the property for
delinquent property taxes; and (ii) despite a strong economy, rents and values
for many retail properties are expected to remain soft in 1998. Pressure on
rents brought about by over building, weakness in demand for space and store
closures caused by lagging profits are the forces causing a soft market. No
environmental or endangered species reports have been prepared for the property.
ADDITIONAL SPECIFIC RISKS. Within the City of Victorville there are
approximately 3,250 acres zoned for commercial use, of which 60% remains
available for development. Victorville is home to the largest enclosed regional
shopping center between San Bernardino and Las Vegas, which is known as The Mall
of Victor Valley. These commercial sites represent significant competition to
the Esperanza project. There are more than 5,400 acres within the city limits
of Victorville zoned for light and heavy industrial use. Nearly nine percent of
this 5,400 acres of land is vacant and is available in parcels ranging in size
from one-half to five hundred acres.
STACEY ROSE PROPERTIES
RISKS OF RESIDENTIAL DEVELOPMENT. The material risks associated with the
development of the Stacey Rose Properties are (i) as of August 31, 1998,
approximately $30,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the County
of Riverside to avoid loss of the Properties for delinquent property taxes; (ii)
it is estimated that it may cost about $50,000 to finalize a tentative tract map
on the parcels; (iii) a substantial, and potentially expensive, sales and
marketing effort will be necessary to sell homes constructed on the properties
if a bulk sale of the lots is not made; (iv) the properties are located in a
lower income residential 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. No environmental or
endangered species reports have been prepared for the property.
ADDITIONAL SPECIFIC RISKS. There is a risk that (i) adequate funds will
not be available to finalize a tentative tract map on the parcels (approximately
$50,000); (ii) the project will not appeal to project builders; and (iii) home
financing at reasonable costs may not be available. There is also a risk that
the development and sale of lots or homes may not be profitable
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:
THE BOARD'S ABILITY TO ISSUE PREFERRED SHARES WHICH COULD AFFECT YOUR
VOTING POWER AND TO ISSUE ADDITIONAL SHARES TO DISCOURAGE OR IMPEDE A MERGER OR
OTHER TRANSACTION THAT MAY BE IN YOUR BEST OR FINANCIAL INTEREST. 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
21
<PAGE>
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.
THE BOARD IS DIVIDED INTO THREE CLASSES SERVING STAGGERED THREE YEAR TERMS.
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.
THERE ARE RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS WITH INTERESTED
PARTIES. 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.
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. 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.
THE DELAWARE LAW, AS WELL AS THE CHARTER DOCUMENTS, LIMIT THE LIABILITY OF
DIRECTORS AND OFFICERS TO SHAREHOLDERS. 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.
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 $2,325,000 before estimated offering
expenses of $_______. The net proceeds from the sale of the Units offered
hereby will be prioritized as set forth in the table below:
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<TABLE>
<CAPTION>
Estimated Amount
----------------
<S> <C>
Acquisition expenses remaining $ 500,000
Offering expenses, including commissions 300,000
General and administrative expenses
(six months)(1) 1,000,000
Property taxes due for 1998-99:
Sacramento/Delta Greens 52,000
Yosemite/Ahwahnee I and II 234,000
Mori Point 142,000
Palmdale/Joshua Ranch 63,000
Stacey Rose A and B 12,000
Entitlement processing
Sacramento/Delta Greens 25,000
Working capital 172,000
--------------
TOTAL $ 2,500,000
--------------
--------------
</TABLE>
- ------------------
(1) Of this amount, approximately $[300,000] 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.
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.
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<PAGE>
COMPANY SHARES OWNED BY COMPANY MANAGEMENT
Family partnerships controlled by David G. Lasker and James N. Orth (the
shareholders of National) presently own, in the aggregate, [237,628] shares
of the Company's Common Stock. That represents over 75% of the Company's
outstanding stock. On the basis of a $20 per share value, such shares would
be deemed to have a value of $[4,752,560]. They paid, out-of-pocket, $0.01
per share for the stock. National will pay the same price as investors for
its Units in the Company. After the Acquisition, if all ten Programs
participate in the Acquisition, these family partnerships will each control
6.88% (2.62% if all the units are sold in the concurrent offering and 1.96%
if all the units are sold in the concurrent offering and all warrants in
units issued in the acquisition are exercised) of the Company's outstanding
stock. It should be noted that, although prior to 1995 National forgave over
$2,800,000 of fees and advances in its role as servicing agent and, if the
Acquisition is approved, will cancel and forgive an additional $986,648 in
accrued but unpaid fees, neither it nor its principals or employees are being
compensated based on those forgiven fees. To the extent National invested in
any of the Programs, it will be allocated Acquisition units on the same basis
as investors and at the same price.
In addition, in the formation period of the Company, L.C. Albertson, Jr.,
Executive Vice President of the Company has purchased 44,685 shares,
respectively, at $0.01 per share. If all ten Programs participate in the
Acquisition, Mr. Albertson will control [2.59]% (0.99% if all the units are sold
in the concurrent offering and 0.74% if all the units are sold in the concurrent
offering and all warrants in units issued in the acquisition are exercised) of
the Company's outstanding stock after the Acquisition.
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
Programs which may not elect to be included in the Acquisition. If the
Acquisition is consummated, these employees of National who will become
employees of the Company may continue to provide services related to
non-participating Programs. As a result, possible conflicts of interest may
arise regarding allocation of services of these employees between the Company,
National and the non-participating programs. At this time, the allocation of
services between the Company and National's other programs is not susceptible to
meaningful quantification.
NON-ARM'S-LENGTH AGREEMENTS
All agreements and arrangements, including those relating to compensation,
between the Company and employees of the Company who are also employees of
National will not be the result of arm's-length negotiations.
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<PAGE>
COMPETITION WITH THE COMPANY FROM OTHER NON-PARTICIPATING PROGRAMS
If any of the three non-"Trudy Pat" programs elect not to participate in
the Acquisition, National may retain the servicing agent and asset management
responsibilities for those programs. National may 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. If National elects to continue as asset manager of these
programs, it is anticipated that there will be minimal conflicts. However,
in their capacities as officers of National, Messrs. Lasker and Orth would be
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 NATIONAL
The Programs are not partnerships and, thus, National does not have the
fiduciary duties of a general partner in dealing with the Programs. However, as
asset manager for each of the Programs, National has the specific duties to
Investors set forth in the various servicing agreements. In addition, under
California law, as an agent, National is under a fiduciary duty to Investors (i)
to use reasonable care, diligence and skill in its work, (ii) not to compete
with the Investors' interests without full disclosure to, and agreement from,
the Investors, and (iii) not to obtain an interest adverse to the Investors
without full disclosure to, and consent from, the Investors.
INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY
The directors and officers of the Company, in exercising the powers and
responsibilities of managing the Company, owe the Company and its shareholders a
duty of care and a duty of loyalty. However, under the so-called "business
judgment rule," which could apply to the officers and directors of the Company,
the officers and directors of the Company may not be liable for errors in
judgment or other acts or omissions made in good faith which are done in a
manner they believe to be in the best interests of the Company and are performed
with the care that an ordinarily prudent person in a like position would use
under similar circumstances. In the event any legal action were brought against
officers or directors of the Company, they might be able to assert defenses
based on the business judgment rule.
According to the Charter Documents, officers and directors and other agents
of the Company are entitled to indemnification from the Company for any loss,
damage or claim (including any reasonable attorneys' fees incurred by such
person in connection therewith) due to any act or omission made by him or her,
except in the case of fraudulent or illegal conduct of such person. See
"Management After the Acquisition -- Limitation of Liability and
Indemnification."
25
<PAGE>
The indemnification provided by the Charter Documents is not deemed to be
exclusive of any other rights to which those indemnified may be entitled under
any agreement, vote of shareholders or directors, or otherwise, and shall inure
to the benefit of the heirs, executors and administrators of such person. Any
repeal or modification of the indemnification provisions contained in the
Charter Documents will not adversely affect any right or protection of a
director or officer of the Company existing at the time of such repeal or
modification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to officers, directors or persons controlling the Company
pursuant to any provisions described in this Consent Solicitation/Prospectus, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
OFFICERS AND DIRECTORS INSURANCE
The Company intends to obtain insurance for the benefit of the Company's
officers, directors and other agents relating to the liability of such persons.
Such insurance would insure the officers, directors and agents of the Company
from any claim arising out of an alleged wrongful act by such persons while
acting as officers, directors or agents of the Company, and the Company to the
extent that it has indemnified the officers, directors and agents for such loss.
FORWARD-LOOKING STATEMENTS
THE COMPANY (OR ITS REPRESENTATIVES) FROM TIME TO TIME MAY MAKE OR MAY HAVE
MADE CERTAIN FORWARD-LOOKING STATEMENTS, WHETHER ORALLY OR IN WRITING, INCLUDING
WITHOUT LIMITATION, STATEMENTS IN THIS PROSPECTUS OR OTHERWISE RELATING TO THE
BUSINESS PLAN OF THE COMPANY, ADVANTAGES THAT ARE EXPECTED TO BE REALIZED BY THE
ACQUISITION, ESTIMATES OF REAL ESTATE VALUES, ESTIMATES OF POTENTIAL FINANCIAL
RESULTS FROM OPERATIONS OR FROM SALES OF REAL ESTATE, PRO FORMA FINANCIAL
RESULTS AND OTHER MATTERS. SUCH STATEMENTS ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO, AND ARE ACCOMPANIED BY, THE FACTORS DISCLOSED UNDER THE HEADING
"RISK FACTORS." SUCH FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE RESULTS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION TO
THE "RISK FACTORS," INTERNAL AND EXTERNAL FACTORS SUCH AS, BUT NOT LIMITED TO,
THE FOLLOWING MAY ADVERSELY AFFECT SUCH FORWARD-LOOKING STATEMENTS: (I)
EXPECTED GREATER AVAILABILITY OF FINANCING TO THE COMPANY MAY NOT MATERIALIZE;
(II) COMPETITIVE PRESSURES MAY INCREASE SIGNIFICANTLY; (III) THERE MAY BE
UNEXPECTED COSTS OR OTHER DIFFICULTIES RELATING TO THE CONSOLIDATION OF THE
BUSINESS PLAN; (IV) CHANGES IN THE INTEREST RATE ENVIRONMENT MAKE FINANCING MORE
DIFFICULT OR IMPOSSIBLE; (V) GENERAL ECONOMIC CONDITIONS DETERIORATE RESULTING
IN, AMONG OTHER THINGS, A DETERIORATION OF REAL ESTATE VALUES; (VI) LEGISLATIVE
OR REGULATORY CHANGES ADVERSELY AFFECTING THE COMPANY'S BUSINESS; AND (VII)
CHANGES IN
26
<PAGE>
THE SECURITIES MARKETS. ACCORDINGLY, 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 up to seven separate
subsidiaries of AFC, namely Delta Greens Homes, Inc. (Sacramento/Delta Greens
Property), Yosemite Woods Family Resort, Inc. (Yosemite/Ahwahnee Properties),
Mori Point Destinations, Inc. (Mori Point Property), Cypress Lakes, Inc.
(Cypress Lakes Property), Palmdale/Joshua Ranch, Inc. (Palmdale/Joshua Ranch
Property), Esperanza, Inc. (Esperanza Property), and Victorville Homes, Inc.
(Stacey Rose Properties).
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 or add value to the Company
in accordance with its overall business plan. It may also seek to acquire and
develop additional properties that take advantage of its expertise or its
competitive position in order to enhance its financial performance. Such
additional acquisitions may include, but are not limited to: (a)
resort-oriented properties, such as hotels; (b) extended-stay-oriented
properties, such as recreational vehicle or timeshare facilities; (c)
leisure-oriented properties, such as golf courses and recreation facilities; and
(d) residential development properties. The Company may also purchase or form
adjunct businesses to supplement and enhance these types of properties, such as
customer financing, loan servicing, mortgage brokerage, real estate brokerage,
property management, merchandising, marketing and telecommunications. 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.
27
<PAGE>
Some of the risks which the Company may face if it makes the acquisitions
described above include, but are not limited to: (a) the professional service
fees and financing costs which the Company would incur to complete such
acquisitions; (b) significant competition from other resort-oriented,
extended-stay oriented, leisure-oriented, and residential properties; (c) lack
of management experience in operating such businesses to the extent that
experienced personnel cannot be acquired at the time of the acquisition; (d)
dilution of Investors' voting rights to the extent that the Company's common
stock is used for such acquisitions; and (e) costs of on-going compliance with
applicable government regulation of consumer finance, real estate brokerage or
telecommunications activities. Any of such risks, together with additional
risks which may be identified in the future, could prevent the Company from
accomplishing potential future acquisitions.
PROPERTIES
The Company will purchase the Properties in their "as is" condition from
the Investors in the Programs, except that any remaining Investors' liens will
be removed. They are presently managed by National for the Investors pursuant
to servicing agreements which entitle National to receive an annual fee equal to
one percent of the principal amount outstanding as of the Ownership Date of the
applicable loan. Upon completion of the Acquisition, the Company, through its
subsidiaries, will own at least seven Properties which are described below.
SACRAMENTO/DELTA GREENS PROPERTY. The Sacramento/Delta Greens Property
consists of a 121-acre site in South Sacramento, California, located
approximately one-half mile east of Interstate 5. Title is held by National
Investors Land Holding Trust IV as the agent of and for the benefit of the
Program's Investors. The Property is unencumbered by liens and is subject to no
leases, sales contracts or options and property taxes are currently on a payment
plan. A new tentative tract map is in process and has been revised to provide
for approximately 465 lots for the construction of single-family homes and final
approval is currently being sought from the City of Sacramento. 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 area has a reputation as a high crime area, but an active community
effort is underway to upgrade the community identity.
OCEANSIDE PROPERTY. Presently, the Property owned by the Oceanside
Program is the golf course at Yosemite/Ahwahnee (consisting of PLUS OR MINUS
141.53 acres plus clubhouse, dining facilities and pro shop) and six outlots
(consisting of PLUS OR MINUS 1,015.66 total acres of unimproved land designed
for residential development). The golf course was purchased in June 1998 for
$1,800,000 cash and the outlots were purchased for $1,750,000 cash pursuant
to the majority approval of the Oceanside Investors and the Yosemite/Ahwahnee
I and II Investors. The golf course has been leased to Ahwahnee Golf Course,
Inc., for the benefit of the Yosemite/Ahwahnee Programs on a net-net-net
basis for a period of five years. The lease calls for annual lease payments
to the Oceanside Program of $80,000 in the first year, $140,000 in the second
year, $250,000 in the third year, and $380,000 for each of the fourth and
fifth years.
28
<PAGE>
YOSEMITE/AHWAHNEE PROPERTIES. The Yosemite/Ahwahnee Properties originally
consisted of approximately 1,650 acres divided into two parcels, one containing
660 acres and one containing 990 acres prior to the sale of the golf course and
six outlots to the Oceanside Program in order to obtain working capital. The
660 acre parcel was originally planned to be developed with 218 residential
estate lots, 1-3 acres in size. Of the 58 completed lots in this portion of the
property, 26 have been sold. The balance of the project consists of
approximately 990 acres which has been 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 50 "full hookup" sites with an additional 101 sites with full
hookups under construction. "Full hookups" are spaces that have water, sewer
and electrical and service to the site. The Yosemite/Ahwahnee Program has
retained ownership of the land containing the recreational vehicle membership
park and the land to be developed into vacation villa timeshare facilities. A
vacation villa is a detached, stand-alone residence for timesharing users that
has full kitchen, bathroom and sleeping facilities. The Properties are located
in Madera County, California, approximately 46 miles northeast of Fresno and 16
miles south of Yosemite National Park. Over the past few years, the Park has
averaged an annual visitor rate of 4.1 million people with the average group
size being approximately 3.3 people.
The remaining balance of 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 remaining balance of the 990 acre
parcel with the exception of the golf course property which is leased on a
triple-net basis by Ahwahnee Golf Course, Inc. from the Oceanside Program, 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 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. The Property is unencumbered by liens and is subject to no leases
or sales contracts or options and property taxes are currently under a payment
plan. 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.
29
<PAGE>
CYPRESS LAKES PROPERTY. The Cypress Lakes Property consists of 686 acres
and 1,330 residential lots and is located in the northeastern portion of Contra
Costa County. The Property is located 40 and 50 miles, respectively, northeast
of Oakland and San Francisco. The Property is unencumbered by liens and is
subject to no leases, sales contracts or options, however, property taxes are
delinquent since 1995 in the amount of approximately $199,000. It has a vesting
tentative map approved by Contra Costa County. The area in which it is located
is primarily rural farmland. The local areas of Brentwood and Oakley are
considered to be good residential neighborhood locations.
PALMDALE/JOSHUA RANCH PROPERTY. The Joshua Ranch Property consists of
739.6 acres of hillside property and is comprised of 539 10,000 and 20,000
square foot lots. The City of Palmdale, through a grant by the County of Los
Angeles, will develop a hiking, biking and equestrian trail across the Property.
The project will be equestrian-oriented and is located 60 miles north of Los
Angeles in the growing City of Palmdale.
The Property is unencumbered by liens and is subject to no leases, sales
contracts or options and property taxes are paid currently under a payment plan.
The project received approval of a vested tentative map by the City of Palmdale
in July 1998.
The neighborhood can provide a mix of housing (including single and
multi-family dwellings) and is served by adequate amenities such as parks,
retail, commercial and community services. Access to the Property is good and
is considered to be well located for residential usage.
ESPERANZA PROPERTY. The Esperanza Property consists of 6.12 acres, or
266,568 square feet, of unimproved raw land with varying terrain and topography.
The site is triangular in configuration and has approximately 1,000 feet of
frontage along Hesperia Road.
The Esperanza Property is zoned commercial. Victorville is regarded as a
high desert location within the Southern California region offering lower
residential and commercial real estate prices than more urban areas. This is
due, in part, to its somewhat remote location and hot summer climate. Overall,
the region's natural and man-made physical environment provides adequate
resources for commercial development.
According to the Victorville Chamber of Commerce, the number of housing
units in the City have grown from 6,108 units in 1980 to 23,143 units in January
1996, an annual growth rate of nine percent. The driving force behind
Victorville's rapid population and employment growth during the 1980s and 1990s
is Victorville's lower land prices and housing costs relative to other parts of
Southern California. The lower land basis helped draw residents looking for
more affordable housing options, as well as businesses to serve this growing
population base.
The Property is unencumbered by liens and is subject to no leases, sales
contracts or options; however, property taxes are delinquent in the amount of
approximately $19,700. A payment plan must be implemented in 2000 or the
property will be sold at a tax sale.
30
<PAGE>
STACEY ROSE PROPERTIES. The Stacey Rose Properties consist of 32 acres of
unimproved raw land which is comprised of three separate parcels. The Property
is zoned residential and could contain approximately 160 lots.
Since Victorville is regarded as a high desert location within the Southern
California region, it offers relatively lower residential and commercial real
estate prices. This is due, in part, to its somewhat remote location and hot
summer climate.
Victorville has experienced substantial growth since 1980, with the
population growing from 14,229 residents in 1980 to 40,674 residents in 1990, an
increase of 11% annually, according to the City of Victorville Chamber of
Commerce. The City is estimated to have reached 60,400 residents as of January
1, 1997, a six percent increase from 1990. The number of housing units in the
City has grown from 6,108 units in 1980 to 23,143 units in January 1996, an
annual growth rate of nine percent. The driving force behind Victorville's
rapid population and employment growth during the 1980s and 1990s is
Victorville's lower land prices and housing costs relative to other parts of
Southern California. The lower land basis helped draw residents looking for
more affordable housing options, as well as businesses to serve this growing
population base.
The Property is unencumbered by liens and is subject to no taxes, sales
contracts or options and property taxes are currently under a payment plan.
MANAGEMENT OF THE PROPERTIES SINCE FORECLOSURE
SACRAMENTO/DELTA GREENS PROGRAM. As the agent of and on behalf of the
Sacramento/Delta Greens Program Investors, National took title to the Property
of the Sacramento/Delta Greens (formerly "North Shores") Program in March 1993.
An appraisal of the Property's value was not obtained at the time title was
taken; however, in May 1997, National obtained appraisals to determine the
Property's value as of May 1997 and as of the date title to the Property was
taken. The May 1997 appraisal was updated as of March 1998. The Property is
located in Sacramento, California, and is held for the benefit of the
Sacramento/Delta Greens Investors by National Investors Land Holding Trust IV.
Subsequent to the foreclosure, on behalf of the Sacramento/Delta Greens
Investors, National hired consultants and engineers to determine the economic,
political and environmental issues surrounding the Property in order to
determine how to maximize its marketability. The City had previously approved a
tentative map for detached and duplex residential units, but it was determined
by National that there was considerable market and political resistance to any
duplex housing. So the project was redesigned to be developed in multiple
phases as a single-family detached, entry-level housing product. This reduced
the number of lots from 596 to 534, which was then accepted by the City subject
to mitigation of endangered species. That mitigation, which required several
months of effort and the expertise of specialized consultants and engineers,
resulted in the further reduction of the number of lots available to
approximately 465. The City has recently advised National to submit a new
tentative map application for approval. 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
31
<PAGE>
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 and to be paid when each lot was built on and sold (or a
total of $3,814,400) plus 50% of the profits derived from home sales. It was
estimated that this would have been an approximate five year process. The
transaction was never consummated because of the developer's failure to fulfill
its initial financial obligations under the agreement. The agreement was
terminated in 1995. No brokers were used in this transaction. Because of the
prevailing market conditions through 1996, most builders in the area were
attracted to real estate projects that already had finished lots, unlike the
Sacramento/Delta Green project which still faced considerable infrastructure
costs prior to attaining finished lot status. National has not sought financing
from third party sources for the pre-construction costs, as such a loan, if
available at all to a tenant-in-common group, was too premature and would have
exposed the Investors to loss of the Property unless a builder could be found to
become financially involved in the Property's development. National believes
that the Sacramento market for entry-level single-family residential housing has
improved and it is anticipated that, subject to the availability of financing,
the Property can be developed in parcels and homes can be constructed in
successive phases by several different builders. See "-- Efforts to Dispose of
the Properties" for a discussion of alternatives considered for this Program by
National.
Since foreclosure, National has considered continuing development of the
Property to enhance its value and marketability (and, indeed, has developed and
planned for the operation of the Property prior to the proposed Acquisition) in
order to sell the Property for an amount sufficient to repay the Investors. In
addition, due to diminishing available capital, National continues to consider,
but has made no recommendations with respect to, prompt liquidation or
bankruptcy reorganization of the Program. National has viewed a discounted
liquidation or bankruptcy as alternatives of last resort because it believes
that those alternatives have not been in the best interest of Investors. As
long as there were minimal funds available to maintain and manage the
project-related activities, National has sought to optimize its value and
marketability for an orderly sale on behalf of the Investors.
OCEANSIDE PROGRAM. This was a construction loan for in excess of 300
single-family detached homes in Oceanside, California. Funding for the
Oceanside Program was completed in stages commencing in November 1991. The
final stage of funding (amounting to approximately $6,374,000) was completed in
April 1993. After an investigation by National, in November 1993, a technical
default on the loan was caused by the borrower's admission that funds that were
to be used to pay subcontractors had been diverted to corporate overhead. In
order to avoid prolonged litigation that could have been detrimental to the
Property, National succeeded in obtaining the borrower's agreement to grant the
ownership of the Oceanside Properties to Oceanside Development, Inc. ("ODI"), a
corporation formed to hold title to, and manage, the Oceanside Property on
behalf of the Oceanside Investors. An appraisal of the Property's value was not
obtained at the time title was taken; however, in May 1997, National obtained
appraisals to determine the Property's value as of May 1997 and as of the date
title to the Property was taken for the Investors. An experienced and reputable
homebuilder was hired and, through 1997, a total of 114 homes in the Encore
tract, one of two parcels of the project, were built and sold for a total of
approximately $18,000,000, net of selling expenses. Initially 84 homes were
built from
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Program funds without the need for construction financing. Because of the
decreasing sales volume and prices, in order to complete the construction of the
remaining 30 homes, it was necessary for the builder to obtain traditional
construction loans from a 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. These funds were utilized for
project-related expenses and some of the costs to prepare the Program for the
Acquisition by the Company. Principal and interest in the aggregate amount of
over $10,000,000 have been returned to Investors through August 31, 1998.
At the end of 1997, there remained an additional 111 lots in the Symphony
tract (the second parcel) available to be finished and built on. An estimated
$700,000 of equity was needed to qualify for the construction loan needed to
complete the buildout and sale of homes on these lots. National did not believe
that equity would be available from the Investors, so it began to attempt to
sell the Symphony tract to homebuilders in the area. By the second quarter of
1998, there were three different homebuilders competing to buy the lots. A
selling price of $6,672,099 was negotiated and sale was consummated by National
on behalf of the Oceanside Investors on June 5, 1998 pursuant to approval of
holders of a majority of the investments in the Oceanside Program. Even if
National had continued to manage the build-out of the lots for Investors, they
were not likely to receive a full return of their investment from the completion
of the construction and sales of homes on those remaining lots. Since the
original projections by the borrower were based on the construction of a number
of homes which exceeded the number of lots initially acquired with loan
proceeds, the Program had 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. Investors subsequently voted against
this. However, the investors also indicated their preference by majority vote
to be able to potentially obtain a greater return of their original funds by
continuing to own real estate assets that could attract buyers at increasing
values, including a transaction similar to that proposed by the Company. The
Yosemite/Ahwahnee golf course and additional land surrounding it was offered as
an asset for such a purpose as described below by vote of the Yosemite/Ahwahnee
investors and recommended by National. See "-- Efforts to Dispose of the
Properties" for a discussion of alternatives considered for this Program by
National.
Concurrently with the sale of the Symphony tract, the Oceanside investors
were offered the alternative of applying $3,550,000 of the sale proceeds to the
purchase of the golf course ($1,800,000) and surrounding land ($1,750,000) from
the Yosemite/Ahwahnee Programs. The purchase of such land was designed to
provide the Yosemite/Ahwahnee Programs with needed funds to operate and to
further the development of the timeshare and recreational vehicle portions of
the Properties, while providing the Oceanside Investors with (i) an additional
potential revenue source through a lease of the golf course back to the
Yosemite/Ahwahnee Programs and (ii) a possibility of capital appreciation in
excess of the price paid. The purchase prices were determined and recommended
by National. The golf course price was based on a discount from the March 1998
appraisal of the golf course property due to continued negative cash flow from
operations, the lack of achievement of the projected rounds of play, and the
Yosemite/Ahwahnee Programs' need for working capital. The price for the
surrounding land was based on the lesser October 1996 appraised value for vacant
land. Such sale was approved by holders of a majority-
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in-interest of the Oceanside and Yosemite/Ahwahnee Programs' Investors. The
balance of the sale price for the Symphony tract ($3,000,000) was remitted to
the Oceanside Investors.
YOSEMITE/AHWAHNEE PROGRAMS. Title to the Yosemite/Ahwahnee Programs'
Properties was obtained in September 1995. An appraisal of the Property's value
was not obtained at the time title was taken; however, in May 1997, National
obtained appraisals to determine the Property's value as of May 1997 and as of
the date title to the Property was taken. The May 1997 appraisal was updated in
March 1998. An appraisal for planning purposes was previously conducted in
October 1996. The properties are located in Madera County, California,
approximately 46 miles northeast of Fresno and 15 miles south of Yosemite
National Park. They included an operating 18-hole golf course, swimming pool
and tennis courts, along with approximately 47 finished estate lots and an
existing 54 site recreational vehicle park, permitting for up to 600 sites in
total.
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 of the property 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 of the
property. After the borrower's default, National foreclosed on the second deeds
of trust as the agent of and on behalf of the Investors in each Program. The
first deeds of trust were left in place to protect the Investors against
subsequent creditors. These will be "extinguished" as a part of the
Acquisition.
Since taking over the operation of these Properties, National has operated
them as the agent of and for the benefit 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. In order to achieve the Investors'
objectives, National has sought to maintain the status of the project and keep
it from any deterioration while enhancing its value. To obtain the needed
financing to further improve the property, National has attempted to seek
conventional financing for the project without success due to the fact that no
title company would provide a lender's policy of title insurance for the loan
because of the tenancy-in-common relationship among the Investors holding
beneficial ownership of the Property. National has also explored the
possibility of a sale of the entire project; however, no offers have been
forthcoming. National has continued its efforts to enhance the marketability
and value through revenue production from the golf course, club house and
restaurant facilities, to market and develop recreation vehicle sites, to
develop vacation villa timeshare units and to pursue additional entitlements
required to develop the remainder of the project. 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" for a discussion of alternatives considered for this
Program by National.
As described above, in June 1998, pursuant to a majority vote of Investors,
in order to raise badly needed cash, the golf course and outlots to be used for
future development were sold to the Oceanside Investors for an aggregate of
$3,550,000. This cash infusion was allocated to
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pay property taxes (approximately $235,000), to develop the timeshare and
recreational vehicle portions of the project (approximately $1,000,000), to pay
a portion of the expenses of the Acquisition (approximately $350,000), to
maintain current operational expenses and pay some delinquent accounts payable.
Since taking title to the property, National has considered continuing
operation of the Properties in order to maintain their value and marketability
(and, indeed, has operated, or planned for the operation of, the Properties
prior to the proposed Acquisition) and sale of the Properties for amounts that
might be accepted by Investors. In addition, based on diminishing available
capital, National considered, but has made no recommendations with respect to,
prompt liquidation or bankruptcy reorganization of the Programs. National views
a discounted liquidation or bankruptcy as alternatives of last resort and not in
the best interest of Investors as long as there continues to be adequate funds
to manage, operate and develop the Properties in order to optimize their values
and marketability for an orderly sale on behalf of the Investors.
MORI POINT PROGRAM. The Mori Point Program Property was foreclosed on in
August 1992 after National, on behalf of the Investors, obtained relief from the
borrower's bankruptcy stay from the Bankruptcy Court. An appraisal of the
Property's value was not obtained at the time title was taken; however, in May
1997, National obtained appraisals to determine the Property's value as of May
1997 and as of the date title to the Property was taken. The May 1997 appraisal
was updated in March 1998. Title is held by National Investors Land Holding
Trust as the agent of and for the benefit of the Investors. The Property was
originally to be developed into a hotel/conference center in Pacifica,
California, which is approximately 15 miles southwest of San Francisco on the
coast. National endeavored to negotiate alternative uses for the Property which
would be supported by the local 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 approved 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 habitats 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 ultimate
use and design of the Property, National has not attempted to obtain
pre-construction financing because no title company would provide title
insurance under the current tenancy-in-common form of ownership. However, even
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 from 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" for
a discussion of alternatives considered for this Program by National.
Since foreclosure, National has considered continuing operation of the
Property to maintain its value and marketability (and, indeed, has operated, or
planned for the operation of, the Property prior to the proposed Acquisition) in
order to sell the Property for an amount
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sufficient to repay the Investors. In addition, due to diminishing available
capital, National continues to consider, but has made no recommendations with
respect to, prompt liquidation or bankruptcy reorganization of the Program.
National has viewed a discounted liquidation or bankruptcy as alternatives of
last resort unless funds are not available to maintain and further the
development of the Property in order to optimize its value and marketability for
an orderly sale on behalf of the Investors.
CYPRESS LAKES PROGRAM. The Cypress Lakes Program Property, which is
located in eastern Contra Costa County, California, was foreclosed on in July
1995 after the borrower had defaulted on interest payments due. Title is held
by the National Investors Land Holding Trust VII for the benefit of the Cypress
Lakes Investors. In early 1996, National retained the services of a major,
publicly-held real estate company to determine the status of and recommend a
strategy to liquidate the Property in the most expeditious way, as well as to
maximize the return of capital for Investors. Economic, environmental and
political issues and their impact on the project were investigated and analyzed.
The vesting tentative tract map which provided for an 18-hole golf course with
various amenities along with 1,330 dwelling units on 686 acres, was due to
expire in September 1997 and was renewed for a two year period. In addition,
two engineering firms were hired to determine the infrastructure cost
requirement. Various market studies were conducted to determine the long-term
economic feasibility of lot and home sales, as well as other uses for the
Property including a design exclusively for the "age restricted" segment of the
population. It was concluded that the infrastructure expenses, particularly
those pertinent to the requirement to structure a levee around the Property
(estimated to be approximately $9,000,000) may necessitate a redesign of the map
to potentially reduce the cost. During this process, attempts were made to
gather enough data so a potential joint venture partner could be approached,
both in the sense of the overall development, as well as for the golf course
portion exclusively. In 1996, Investors voted to offer the golf course portion
of the property to certain qualified developers in exchange for their commitment
to the construction of the course and clubhouse facilities. Any constructed
amenities such as this would reduce many of the infrastructure costs and create
greater demand for the property. That strategy did not result in any specific
offers. In May 1998, National obtained appraisals of the Property's value as of
the Ownership Date and as of March 31, 1998. The real estate market for large
residential land development projects in the East Bay, Contra Costa County, area
has been in a recessionary situation for several years, although single-family
homes have been selling well further west. National believes that the market
for this type of project was improving enough for a well capitalized real estate
development company to be attracted to it for the purpose of land banking it for
future completion. In other words, it is still premature to develop the
property into several parcels of land that could each be further developed into
residential lots, particularly in light of current values and the costs of the
infrastructure. But for a company or entity with capital and time available to
wait for more attractive profitability, the timing could be right. That
perception led to National's negotiation of a potential sale on behalf of the
investors.
Since foreclosure, National has considered continuing operation of the
Property in order to maintain its value and marketability (and, indeed, has
operated, or planned for the operation of, the Property prior to the proposed
Acquisition) in order to sell the Property for amounts that might be accepted
by Investors. In addition, due to diminishing available capital, National
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continues to consider, but has made no recommendations with respect to, prompt
liquidation or bankruptcy reorganization of the Program. National has viewed a
discounted liquidation sale or bankruptcy as alternatives of last resort. As
long as there were adequate funds to manage, operate and develop the Property,
National has sought to optimize its value and marketability for an orderly sale
on behalf of the Investors.
PALMDALE/JOSHUA RANCH PROGRAM. Final funding for the loan to the developer
occurred in February 1992. National foreclosed on behalf of the investors in
September 1993 after the borrower had defaulted on interest payments due.
Subsequent to the investors gaining ownership of the project, which is held on
their behalf in the National Investors Financial Land Holding Trust V, National
hired a firm that specialized in entitlement and land development to assess the
economic, environmental and political situation regarding the Property. The
Palmdale market has typically been dependent on the aerospace industry, as well
as the commuter base from other areas of Los Angeles County. The original
borrower had projected from 1,200 to 2,000 units in density for the project.
However, there has been a considerable supply of traditional middle-market
single-family lot and home inventories over the past few years. One
significantly large development tract failed with the developer defaulting on
its bond obligations. The Property is unique in that its 700+ acres sit mostly
on a ridge that overlooks the valley and the City of Palmdale, so National's
consultants conducted market studies indicating that lots of a larger and
equestrian type of appeal would be more feasible both economically and
politically. The City planning department had severely downsized the quantity
of lots that could be approved for a tentative map from the time that the
original developer was involved which dramatically decreased its value. These
factors caused National to hire engineers and land planners to redesign the
project accordingly in order to submit a tentative map that would be approved.
National was advised that the Property would be much more marketable with a
tentative map approved for a particular development rather than without a map
but with just the zoning. After approximately three years of significant
engineering and planning efforts, the vested tentative map for 539 10,000 to
20,000 square foot lots was approved in July 1998. National obtained appraisals
for the Property as of the date of foreclosure and March 1998. Both indicated a
deterioration in the market below the amount invested originally. While the
appraiser indicated that obtaining the vested tentative map would have little or
no impact on the current valuation, National believes the value may have been
slightly increased by obtaining the vested tentative map.
Since foreclosure, National has considered continuing operation of the
Property in order to maintain its value and marketability (and, indeed, has
operated, or planned for the operation of, the Property prior to the proposed
Acquisition) in order to sell the Property for amounts that might be accepted by
Investors. In addition, due to diminishing available capital, National
continues to consider, but has made no recommendations with respect to, prompt
liquidation or bankruptcy reorganization of the Program. National has viewed a
discounted liquidation or bankruptcy as alternatives of last resort and not in
the best interest of Investors. As long as there were adequate funds to manage,
operate and develop the Property, National sought to optimize its value and
marketability for an orderly sale on behalf of the Investors.
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ESPERANZA PROGRAM. The funding for the Esperanza project was finalized for
the developer in March 1988. The developer defaulted on the interest payments
for the loan in March 1990 and National initiated foreclosure proceedings on
behalf of Investors. However, the borrower filed a bankruptcy action to
preclude foreclosure so National had to file a request for relief from the stay
in the Bankruptcy Court. In December 1990, that stay was granted and National
obtained ownership on behalf of Investors. National had the Property listed for
sale by two local Victorville, California, brokerage firms during 1991 and 1992.
There was one offer received in November 1991 that was rejected by Investors.
When the listing agreement expired, National determined that it was in the best
interest of the Investors to market the project on a non-listed basis until the
economy dictated better economic feasibility for the Victorville area, and
particularly for the location and commercial zoning represented by the project.
To date, the market has not reflected any activity or turnaround that has
resulted in a price being offered that will allow for the recovery of the
initial investment by Investors.
Since foreclosure, National has considered continuing operation of the
Property in order to maintain its value and marketability (and, indeed, has
operated, or planned for the operation of, the Property prior to the proposed
Acquisition) in order to sell the Property for an amount sufficient to repay
the Investors. In addition, due to diminishing available capital, National
continues to consider, but has made no recommendations with respect to,
prompt liquidation or bankruptcy reorganization of the Program. National
views a discounted liquidation sale or bankruptcy as alternatives of last
resort.
STACEY ROSE PROGRAMS. The Stacey Rose Properties represent three adjacent
parcels zoned for single-family residential use. Parcel A and B secured two
separate Investor loans. In March 1990, due to borrower default in interest
payments, National began foreclosure action on behalf of Investors which was
delayed by the borrower's bankruptcy filings and was not concluded until July
1992. An offer was made to the bankruptcy trustee which was accepted and the
parcels A and B were purchased for the amount of debt owed plus $20,000. The
purchase also included an additional parcel that is larger, adjacent and
integral to the value of the Stacey Rose A and Stacey Rose B parcels. These
parcels are estimated to require approximately $50,000 in order to obtain a
tentative tract map from the City for a certain design for approximately 160
residential lots. Due to lack of funds, this process has not been started.
Without a tentative tract map, coupled with the recessionary effects of the real
estate market, it was determined that the Property could not have been sold for
even a fraction of the original investment. In May 1998, National obtained
appraisals for the Property as of the date of foreclosure and March 1998. Both
indicated a deterioration in the market below the amount invested originally.
Since foreclosure, National has considered continuing operation of the
Property in order to maintain its value and marketability (and, indeed, has
operated, or planned for the operation of, the Property prior to the proposed
Acquisition) in order to sell the Property for an amount sufficient to repay
the Investors. In addition, due to the lack of capital, National continues
to consider, but has made no recommendations with respect to, prompt
liquidation or bankruptcy reorganization of the Program. National views a
discounted liquidation sale or bankruptcy as alternatives of last resort.
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EFFORTS TO DISPOSE OF THE PROPERTIES
SACRAMENTO/DELTA GREENS PROGRAM. Subsequent to foreclosure on the Property
in 1993, the project manager, which was hired, managed and supervised by
National, 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 early 1994, National negotiated for and received a purchase
offer and joint venture proposal from a real estate company located in San
Mateo, California, both of which were rejected by the Investors because the net
amount to them 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. Subsequent to that, in late 1994, another joint
venture proposal was obtained from a local Sacramento builder. It was
considered and approved by investors; however, the transaction and agreement
were terminated because the builder failed to fulfill his initial financial
obligations. Then, in 1996, National negotiated another joint venture with a
builder from Davis, California, that was not finalized because the builder was
unable to obtain an infrastructure and development loan. More recently, since
1997 National has been informally presenting the Property to several large
homebuilders with presence in the Sacramento area. While more interest was
shown than before, again no significant steps were taken by any of such builders
to enter negotiations to acquire the Property.
OCEANSIDE PROGRAM. In the second quarter of 1997, on behalf of the
Oceanside Program, National began the process of marketing the 111 Symphony
tract lots. No brokers were used in the marketing effort as National has
adequate knowledge of the builders in the area likely to be interested. Through
National, those efforts resulted in a preliminary offer from a major homebuilder
to buy the Symphony tract in bulk for approximately $41,000 per lot, subject to
due diligence. A sale escrow was opened but the details of the offer were not
submitted to the Oceanside Investors pending completion of the buyer's due
diligence. A sale at that price would not have yielded an amount sufficient to
return the Investors' capital. After conducting due diligence, the potential
buyer asserted that the cost to finish the lots would be about $42,000 per lot
instead of its original estimate of approximately $26,000 per lot for such
costs. The buyer then attempted to negotiate the price down to approximately
$25,500 per lot, $15,000 less than the preliminary offer. Before selling
expenses and closing costs, that price per lot would have yielded $2,830,500,
approximately $20,200 less than the May 1997 appraised value. Based on advice
from consultants, National believed the potential buyer's estimate of costs to
finish the lots was too high. Thereafter, the sale escrow was cancelled. In
early 1998, National resumed its efforts to sell the Symphony lots. After an
extensive competitive situation involving three different builders, Investors
approved the proposed sale, as well as the use of $3,550,000 of the proceeds to
acquire the golf course and surrounding property from the Yosemite/Ahwahnee
Programs. On June 5, 1998, the Symphony parcel was sold for $6,672,099.
YOSEMITE/AHWAHNEE I AND II PROGRAMS. The foreclosures took place in
September 1995. At that time, the Programs' Properties also included 47
finished estate lots of 1-3 acres available for sale. Two of those lots were
sold in mid-1996 for approximately $50,000 per lot to current owners of
contiguous homes. For working capital purposes, in February 1998, National
negotiated the sale of twelve of the estate lots to the independent project
manager for the
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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 placed on contiguous lots by
existing homeowners for the 1996 sales and the fact that the 1998 transaction
was a bulk sale designed to provide working capital for the Programs. An
additional lot was sold in February 1998 for $52,500 to an independent buyer.
Although the remaining estate lots were listed with local brokers during two
separate six-month time periods since the foreclosures, no further offers were
forthcoming and the listings have been allowed to expire. After the
foreclosure, National contacted several of the former borrowers' potential joint
venture partners and possible purchasers of the Properties, but no offers were
forthcoming. In the first quarter of 1996, National had received two letters of
intent, one from a potential buyer of the entire project and one from a
potential buyer of the golf course. Neither could perform financially and no
formal purchase offer was obtained. In mid-1996, National received another
letter of intent from a nearby Kampgrounds of America ("KOA") campground owner
for the 50-site recreational vehicle membership area and ten additional acres
for $200,000. National informed the potential buyer that his offer was
significantly less than the property was worth. No purchase agreement was
forthcoming. In December 1996, National received another letter of intent for
the golf course which was contingent upon financing for a down payment and that
the investors carry back a seven-year note. There was no final purchase
agreement because the financing could not be arranged. The golf course was sold
in June 1998, along with additional land surrounding it, to the Oceanside
Program for $3,550,000 to obtain working capital for timeshare and recreational
vehicle site development. The golf course has been subsequently leased back for
the benefit of the Yosemite/Ahwahnee Programs.
MORI POINT PROGRAM. After foreclosing, in 1993, the Property was listed
for sale with a national commercial brokerage firm for approximately six months
to no avail. During 1994 and 1995, National solicited two large land trusts
that, with both federal and state funds, purchase and hold tracts of land for
open space. Although both expressed an interest in the Mori Point property, a
purchase offer was not generated. In January 1996, the Investors were offered a
joint venture opportunity with an Orange County-based property developer.
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 a value acceptable to Investors
could be realized through an orderly sale process. National continues to seek
possible joint venture development arrangements for the Property but no
proposals have been received.
CYPRESS LAKES. After the borrower's default in 1994 but prior to the
foreclosure in 1995, National allowed the borrower to package the project for
presentation of the golf course portion to golf course developers in such a way
as to attract the capital necessary to begin the infrastructure on the project.
National also solicited the Investors and they indicated their support to
research the potential of an acquisition by or an exchange of the Property for
shares of a public company. The proposal from the borrower was to provide the
golf course property to a developer in exchange for that developer building the
golf course. The proposal was presented to
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several golf course developers without serious subsequent negotiations. In the
interim, a developer gave National a proposal to either develop the Property on
a fee basis or purchase it after the final map was obtained. National rejected
the offer to develop the Property on a fee basis because the $20,000 per month
proposal had no time definition and was not provided for by Investors. In 1996,
the Property was listed for six months with a nationally known real estate
brokerage company which did not result in any sales. Subsequently, a broker
that represented foreign interests, particularly one from Japan that had golf
course holdings, presented the property to them. That process also did not
generate any sale agreements. National also retained the expertise of a
knowledgeable real estate development company to assist in providing engineering
and environmental cost analyses, as well as a rapport with the County's Planning
Department to maintain the current vesting tentative map. In October 1995,
National solicited and entered into a 90-day exclusive negotiating agreement
regarding the potential purchase of the Property with a large, publicly-traded
national homebuilder. It did not result in a purchase offer because the
potential buyer decided to acquire property in other geographic areas that were
more conducive to the immediate construction of homes for sale.
In the second quarter of 1998, an offer was received from a reputable
real estate company to purchase the Cypress Lakes Property for a total
purchase price of $11,550,000, including third party brokerage commissions,
payable $100,000 upon completion of its due diligence, an additional
$2,100,000 upon the closing of escrow, and a promissory note secured by a
first trust deed on the property for $9,350,000 bearing a market rate of
interest at the closing of escrow. The note was to be due and payable on or
before December 15, 1999. Investors in the Cypress Lakes Program were
advised of the offer. Although, by its servicing agreement, National may
sell the property without the approval of the Investors, it determined that
Investor votes would be solicited to confirm the sale. The sale has not been
confirmed by Investors holding a majority-in-interest. However, National has
continued to negotiate with the potential buyer and, if finalized, the
agreement will be treated as an asset of the Cypress Lakes Program and
transferred to the Company if the Acquisition is approved. If (i) a
definitive agreement is reached, (ii) the Acquisition is approved, and (iii)
the buyer pays the balance due on the note by the end of December 1999, the
Cypress Lakes Investors will receive a contingent payment of Units (valued at
$20 per Unit) equal to the difference in the net cash purchase price
(exclusive of broker commissions, closing costs and interest) received for
the Property and the March 1998 appraised value used to compute the Exchange
Value assigned to the Property for purposes of the Acquisition. Based on $20
per Unit, the approximate additional value of these Units would be $5,000,000.
PALMDALE/JOSHUA RANCH: After the borrower's default and subsequent
foreclosure, National retained the expertise of a land development consulting
firm on behalf of Investors in order to further the approval status of the
Property with the City of Palmdale in order to make it more marketable. After
several hearings and studies, it was determined that the project's marketability
hinged on obtaining a vested tentative tract map and the activities to obtain it
along with the expenses were authorized by Investors. The density proposed by
the original borrower for approximately 2,000 units initially was altered to
less than 1,200 units in order to conform to the more current economic and
political environment. The owners and developers of two large tracts of land in
the City had recently abandoned their plans due to seriously deteriorating
market
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conditions. One had defaulted on City-backed bonds for infrastructure
improvements. National then engaged two different market studies and, under the
direction of its consulting firm, coupled with the cooperation of the City
Planning Department to tend to approve a larger-lot, equestrian-oriented site,
the density was downsized to accommodate significantly larger, but purportedly
more marketable, lots. The approval process for the tentative map has included
the continuous involvement of engineers and various consultants to obtain a
complex easement from the State for access, negotiate for the exchange of land
from adjacent property owners, design utilities and water systems that would be
cost-effective, as well as most conducive to approval by the City Council. The
final hearing for approval occurred in July 1998. In addition to assisting
National in the tentative map approval process, the land development consultant
presented the project on a preliminary basis to several developers in 1996.
They indicated future interest on a joint venture basis in the future when
approval for the tentative map was obtained from the City and when potential
infrastructure financing could be obtained. None indicated interest in an
outright purchase at prices approximating the Investors' capital nor did they
express any interest in committing any funds to infrastructure improvements on a
joint venture basis. National initiated preliminary meetings with a municipal
bond underwriting company to introduce them to the project's needs. They also
indicated an interest upon finalizing tentative map approvals.
ESPERANZA: The Property is commercially zoned and is located within one
and one-half blocks from the residentially zoned Stacey Rose Program discussed
below. The Esperanza Property was listed for sale by two different local
Victorville real estate brokerage companies, one for approximately six months in
1991 and the other from the end of 1992 through 1993. One offer was received in
November 1991, but was determined to be unsatisfactory and rejected by a
majority vote of Investors. Market conditions must improve considerably in
order to justify development of the Property or a sale that would recover the
Investors' capital.
STACEY ROSE PROGRAMS: Subsequent to the initiation of the foreclosure
action in 1990, the borrower filed for bankruptcy. National's efforts in the
bankruptcy court on behalf of the Program resulted in relief from the bankruptcy
stay and the foreclosure was finalized in 1992. National arranged for the
purchase of the two parcels subject to the Investors' loans in the Stacey Rose
Programs, along with an adjacent parcel from the bankruptcy court. This parcel
is being held by National for the benefit of the Programs and the Investors.
The borrower subsequently filed an action against National and the Program
alleging collusion to illegally possess his property. After a series of court
proceedings, the suit was dismissed in 1994. In 1993, National began the
negotiations with a builder to finalize the approvals and improve the parcels so
that they could be subdivided into single-family residential lots for
construction. After studying the cost and marketing feasibility, the developer
and National determined that the lack of demand for homes and the cost of
development dictated that the Property must be held for future development or
until market conditions improved. National has maintained regular
communications with brokers, developers and builders that are familiar with and
active in the Victorville and Antelope Valley market and has been advised as
recently as the last quarter of 1997 that market conditions in the area of the
Properties are not yet attractive to builders, nor can the Properties be sold
for enough to recover the initial capital. In 1996, Investors approved the
deferral of the payment of property taxes until five years of delinquency made
it necessary to arrange a payment plan in 1998. Due to lack of funds from
Investors, National recently
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advanced funds on behalf of the Program in the amount of approximately $12,000
for payment of the current taxes and the first payment of a five year plan for
those that are past due.
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
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. The Acquisition will allow for Palmdale/Joshua
Ranch 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, Oceanside and Mori Point Properties. 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, the Cypress Lakes and the Palmdale/Joshua Ranch
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.
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 or timeshare 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
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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 potential timeshare projects
rather than for land to entitle the actual construction of homes. The Company
intends to focus its residential development acquisitions, if any, primarily in
the infill and emerging market segments. Properties acquired by the Company
through the Acquisition will be in various stages of the approval process and
development.
THE LODGING AND RECREATION INDUSTRY
This industry includes many distinct product categories, including
commercial lodging-oriented products such as hotels and conference centers,
recreation-oriented products such as golf courses, equestrian facilities, sports
complexes, marinas, theme parks, destination resorts, recreational vehicle
resorts, and vacation-oriented products such as timeshare resorts, to name a
few.
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
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commercial lodging establishment can be very expensive, and the space provided
to the guest relative to the cost (without renting multiple rooms) is not
economical for vacationers. First introduced in Europe in the mid-1960s,
ownership of vacation intervals has been one of the fastest growing segments of
the hospitality industry over the past two decades.
The Company believes that the following factors have contributed to the
increased acceptance of the timeshare concept among the general public and the
substantial growth of the timeshare industry over the past 15 years:
- Increased consumer confidence resulting from consumer protection
regulation of the timeshare industry;
- The entrance of brand name national lodging companies to the industry;
- Increased flexibility of timeshare ownership due to the growth of
exchange organizations;
- Improvement in the quality of both the facilities themselves and the
management of available timeshare resorts;
- Increased consumer awareness of the value and benefits of timeshare
ownership; and
- Improved availability of financing for purchasers of timeshare units.
The timeshare industry traditionally has been highly fragmented and
dominated by local and regional resort developers and operators. The Company
believes that one of the most 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
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advantage of expected growth in the timeshare industry as the baby-boom
generation enters the 40-55 year age bracket, the age group which purchased the
most vacation intervals in 1994.
TIMESHARE EXCHANGE COMPANIES. Exchange privileges simply represent the
opportunity for timeshare owners to place their timeshare interval in a pool and
exchange it for a comparable timeshare elsewhere. The ability to do this is the
single most important motivation for timeshare purchases, and appears especially
important to educated consumers, who look forward to opportunities to learn
through travel.
According to ARDA, two exchange companies dominate the industry. These are
Resort Condominiums International, which started in 1974 and controls about
two-thirds of the market, and Interval International, which began in 1976 and
controls most of the remaining one-third. Both systems operate similarly. They
compete to sign up new resorts; once a resort is affiliated with one or the
other company, anyone who purchases a timeshare at the resort is automatically
signed up with the exchange. Timeshare owners must renew their membership with
the exchange company every year for about $75. Exact figures are not available,
but it is estimated that about 75% of timeshare owners are affiliated with an
exchange company.
A timeshare owner wishing to make an exchange places his time in the
exchange system and requests a location and time to exchange into. Exchange
requests generally cost less than $100. Time placed in the exchange system does
not have to be used in order for the person who places it to receive the
exchange they request, and it is not a one-for-one trade.
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
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management meetings and education/training seminars. Facilities usually include
sophisticated equipment and are staffed with professional conference
coordinators. Because of its proximity to San Francisco and the Silicon Valley,
the Company believes that the Mori Point Conference Center could be positioned
within this category of facilities.
According to a recent report issued by the IACC and PKF Consulting entitled
"Conference Center Industry, A Statistical and Financial Profile - North
American 1996," since the recession in 1991 to year-end 1995, U.S. conference
centers have achieved a 27.2% increase in occupancy. This compares to an 8.3%
increase in occupancy for the overall lodging industry during the same period.
Except for resort conference centers, all types of conference facilities have
enjoyed double digit increases in occupancy since 1991.
According to the same sources, total revenue, measured on a per occupied
room basis, has grown approximately 20% for resort and executive conference
centers since 1991. For comparative purposes, cumulative inflation during the
same period was 11.9% and the total revenue for U.S. hotels grew only 10.4%.
The primary competitive lodging market for the proposed conference center
at Mori Point is comprised of four hotels with a total of 508 rooms. The
selection of the competitive supply was based on location, facilities and
amenities, room rate structure, and market orientation. These hotels are all
full-service hotels and conference centers which cater to group and leisure
demand emanating primarily from the Bay Area, but with a secondary component of
national business attracted to their coastal locations. The secondary
competitive lodging market is comprised of three group-oriented airport
properties with 1,865 guest rooms, rendering the total potential current
competition to 2,373 rooms.
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 capital obtained from the sale
of certain properties and additional units, as well as exercise of warrants to
create the necessary initial cash flow and capital to do so. The Company does
not currently own or operate any timeshare or recreational vehicle resort
properties. After the Acquisition, the Company will own the Yosemite/Ahwahnee
Programs and their assets. On behalf of Investors in those Programs, National
currently operates a 54 site recreational vehicle park and is expanding the park
with the addition of another 100 sites. Additionally, National is beginning the
development of vacation villa timeshare units and investigating the feasibility
of traditional attached timeshare facilities for the future 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. 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.
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In order to meet its objectives, the Company intends to (i) develop certain
of 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 exercise of
warrants by its stockholders, the sale of additional units and the sale of
selected real estate assets acquired from the Programs to outside parties in
order to finance the Company's operations and expansion; and (v) generate
revenues through lateral expansion by acquiring complimentary projects and
assets which are consistent with the Company's objectives and business plans
(external growth).
EXTERNAL GROWTH STRATEGY. When appropriate, and assuming market acceptance
for the Company's Shares, it is intended that growth through acquisitions will
be initially achieved through (i) the issuance of Shares of the Company to the
seller of the asset(s) to be acquired or (ii) the utilization of options to
purchase real estate assets. Preserving cash may be preferable even though such
transactions may result in the dilution of the current Shareholders.
THE CONSOLIDATED BUSINESS PLAN
It is anticipated that the Company will have approximately $[1,500,000] of
liquidity if the Acquisition is completed before the end of 1998. 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 loan amount to raise
cash for Company operations, which would enhance overall shareholder value, the
Company believes such a sale would make sense and will attempt it. Although
National attempted to develop the Properties after the Ownership Dates, except
for the Oceanside Program, the other Programs generally were faced with
obstacles which National was not able to overcome. The principal obstacle was
the inability to obtain project financing secured by the Properties from third
party lenders due to the unwillingness of California title insurance companies
to provide lenders' policies of title insurance when title was beneficially held
by such a large number of tenants-in-common. In addition, potential joint
venture partners found dealing with the tenancy-in-common ownership structure of
the Programs to be unattractive. The inability to obtain third party financing
and the unwillingness of Program Investors to provide sufficient additional
equity capital meant that National, on behalf of the Programs, could not proceed
to obtain necessary permits and approvals from applicable real estate regulatory
authorities without which continued development could not proceed in order to
improve the value and marketability of the Programs. Furthermore, in the case
of the Yosemite/Ahwahnee Properties, prior to the cash sale of the golf course
and certain outlots to the Oceanside Program Investors, lack of adequate
financing prevented a more aggressive marketing of the golf course and
recreational vehicle portions of the Properties, as well as a slowdown in the
sale of the estate lots. The Company and National believe that these
disadvantages will disappear when the Properties are owned by a single
corporation.
If the Company attains liquidity from the sale of units or certain of the
Properties or from the exercise of warrants, and if management is correct in its
belief that third party financing
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would become available to the Company through the Acquisition (which eliminates
the tenancy-in-common form of ownership thereby making the critical element of
lenders' policies of title insurance available), 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
sell the property in bulk or develop it in phases. Depending on the
availability of working capital from the sale of assets, the Company will seek
to obtain approval of the revised tentative map from the City of Sacramento by
the first quarter of 1999. After the final map is approved, the necessary
infrastructure (main road and utilities) can then be built along with finished
lots, model homes and the first phase of production homes.
The material risks associated with the development of the Sacramento/Delta
Greens Property are (i) as of [AUGUST 31, 1998], approximately $26,000 of
property taxes are owed for the last payment of a 5-year payment plan and must
be paid in April 1999 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 approval of the revised tentative and final maps from
the City of Sacramento; (iii) a recent ruling by local officials stated that
housing tracts in this area which are affected by the 100-year flood plain must
mitigate against potential flood damage which will add further costs of the
development; (iv) a substantial sales and marketing effort will be necessary to
sell homes constructed on the Property if a bulk sale of the lots or the entire
property is not made; (v) the Property is located in a lower income residential
area that has had a reputation as a high crime area; and (vi) 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 improved in 1997 and the
first part of 1998. 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 YOSEMITE/AHWAHNEE PROPERTIES. Yosemite National Park is located within
a six hour drive of over 30 million people. The Company plans to aggressively
focus on the following areas of operations and development for these Properties:
(1) recreational vehicle facility, (2) timeshare development, and (3) the golf
course facility.
Recreational vehicle development presents additional cash flow and profit
opportunities. In addition to the existing 54 recreational vehicle sites, the
Company intends to complete the
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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 50
sites and has over 320 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 planning and construction of the vacation villas has been
initiated . Additional capital of approximately $3,000,000 will be required to
finalize the initial vacation villa timeshare construction on the recreational
vehicle site and implement an aggressive marketing program.
In terms of timeshare competition, the Property has almost 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. The golf course and surrounding land was recently sold to
the Oceanside Program for $3,550,000 in order to obtain working and development
capital.
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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 August 31, 1998, approximately $[506,000] of property taxes remain on a
five-year payment plan that was recently arranged with the County of Madera and
must be paid when due in order to avoid a 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; and (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.
The Company believes that the economic outlook for the golf course
operation is favorable. Given its proximity to Yosemite National Park and the
fact that the nearest comparable golf facility is approximately 15 miles away,
the Company expects that, with proper marketing, the use of the golf course will
increase. With regard to the recreational vehicle facility, vacation villas and
the proposed attached 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. It may also
explore the possibility of including timeshare facilities in the development.
However, because of its proximity to San Francisco and the Silicon Valley, the
Company believes that the Mori Point Property could be positioned competitively
within the executive conference center category of facilities. 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 believes it
can obtain governmental approvals to complete the development of the Property.
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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 August 31,1998, amount to approximately $157,000 which are on a
payment plan and must be paid when due in order to avoid a loss at a tax sale;
(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; and (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.
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 desirable 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>
<CAPTION>
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.
THE CYPRESS LAKES PROPERTY. The project has an approved vested tentative
map covering 1,330 residential units on 686 acres. Several different land uses
have been planned for the
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project, including an 18-hole championship golf course, lakes, a church, public
parks, 23 acres of open space, wetlands, a school, a beach club, a fire station
and a day care center. Due to the size of the parcel and the required
infrastructure to service it, the Property will most likely be sold. The
present vested tentative map will expire April 15, 1999 and must be planned for
renewal immediately. The Property is located in the delta area of Contra Costa
County and as such is subject to flooding without proper levee protection which
is typical of the area. The most likely candidates to purchase the Property are
large master-plan builder/developers who are able to generate large front-end
capital resources to install the needed infrastructure.
In the event the Company is unable to find a willing buyer, it will need to
continue processing for governmental approval which could require an estimated
$400,000 to finalize the engineering in order to submit for a final record map.
In the event a purchaser is not found, the next step would be to install
preliminary infrastructure to the site, record lots in increments of 100 units
for potential sale to more moderately sized builders who could afford to
purchase lots in smaller quantities. Once the initial infrastructure is
installed, an aggressive sales program would be initiated with homebuilders to
coincide with the completion of the initial infrastructure to service the
project.
An additional alternative would be to bring in a joint venture partner who
can bring in cash and also act as the master developer. In either case, the
Company would attempt to phase out of any actual site work as soon as the
economics and sales of land with the project are stabilized.
The risks associated with the Property, its infrastructure challenges, the
size of the project and the high capital requirements all combine to somewhat
limit its marketability. The site is subject to
(1) A 100-year flood zone and must be protected by an earthen levee that
will surround the project's perimeter in an effort to reduce potential flood,
the costs of which are estimated to be in excess of $9,000,000;
(2) In 1995, the Company received a property tax default notice from the
Contra Costa County Treasurer-Tax Collector. As of August 31, 1998, total
taxes, penalties and interest amounts to approximately $199,000. The Company
intends to enter into a redemption plan agreement with Contra Costa County that
allows for the payment of delinquent taxes, penalties and interest over a five-
year period. Under the terms of the agreement, all property taxes must be kept
current and all payments made on time. If the Company defaults on the agreement
or fails to enter into the agreement by the deadline of June 30, 2000, the
Property could become subject to a tax sale.
(3) The cost of grading, installing utilities, building the levee and golf
course require in-depth planning and extensive estimating in order to properly
estimate the cost of such a large-scale development.
53
<PAGE>
(4) Modification of the existing vesting tentative map might expose the
project to additional exactions by County government which could possibly
negatively impact the financial viability of the project.
(5) Market conditions, while improving at the present time, might well
become less positive over time as the project is built out.
According to the Ryness Company, a residential market feasibility research
company located in California, real estate values are improving in eastern
Contra Costa County; however, the project is considered to be a "pioneering"
area. Access to it by major transportation corridors is somewhat limited and
the area is considered to be somewhat rural. Shopping and schools are located
in neighboring Oakley and Brentwood. The project must be well thought out,
competitively priced and offer the consumer the ability to upgrade and customize
his or her house.
Also according to Ryness Company, the East Bay metropolitan statistical
area has an average annual demand for new housing of some 4,000 units per year.
Sales rates remain strong at one sale per project per week to 1.25 sales per
project per week. There were some 182 residential projects in the Bay Area in
the first quarter of 1998 with net sales averaging 1.29 sales per week.
THE PALMDALE/JOSHUA RANCH PROPERTY. The project, which contains 739.6
acres and 539 10,000 and 20,000 square foot lots, has received a vested
tentative map. Due to the relatively large scale of the project, the Property
most likely will be sold in bulk. The most likely candidates to purchase a
large master-planned community such as Joshua Ranch are large master-plan
builders and developers. It is estimated that $140,000 will be required to
complete the engineering, soils and utility planning. It is unlikely that a
purchaser can be found until a majority of these funds are expended. If a
purchaser is not found, and depending on the market, the Company will need to
secure third party financing in order to record the final map and post the
necessary bonds. The next step would be to install the initial roads and
utilities to service the site and record lots in phases of 100 units for
potential sale to more moderate size builders. Again, third party financing
will have to be obtained. An aggressive lot sales program would coincide with
the completion of the initial improvements.
Another alternative is to bring in a joint venture partner who can provide
equity capital and also act as a master developer of the lots. In either case,
the Company will attempt to phase out of any actual site development work as
soon as the economics and sales within the project are stabilized. The risks
associated with the project, its infrastructure requirements in the initial
phases of the development, the project's size and large capital requirements
tend to limit the project's marketability. There are no assurances that the
Company can secure the necessary financing to start the project.
The risks associated with the Property include:
(1) In 1996, the Company entered into an installment Plan of Redemption
("Payment Plan") with the Los Angeles County Tax Collector. The Payment Plan
allows for the annual
54
<PAGE>
payment of delinquent property taxes, penalties and interest over a period not
to exceed five years providing that all payments, including current property
taxes, are paid on time. If payments, which amount to approximately $53,000
annually or current year taxes of approximately $20,000, are missed and the
agreement falls into default, the Property could become subject to a tax sale by
the County.
(2) The cost of grading, installing utilities and building the main
infrastructure, require in-depth planning and extensive estimating in order to
properly assess the cost of such a large scale development.
(3) Market conditions, while improving marginally in the area, might well
become less favorable over time as the project is built out.
As stated in recent articles in the Business and Sunday Real Estate
Sections of the LOS ANGELES TIMES, real estate values are showing signs of
improving in the area. Access to the site is quite good with schools and major
services close by. National believes that the project is in the path of logical
development within the City. Major retail shopping is located close by as are
all other services.
National also believes that the current housing market is considered to be
of moderate supply and demand. Inventory is reducing and average unit prices
are relatively unchanged from the prior one-year period. There are presently 17
projects selling within the submarket area which the Property is located. The
project offers an equestrian feature and larger lots than typically found in the
market area which should help to ensure a relatively stable annual sales pace.
THE ESPERANZA PROPERTY. The project, which contains 6.12 acres and is
commercially zoned, will most likely be sold to a commercial developer. The
Company will initiate a sales program utilizing a local commercial broker. An
arrangement for a payment plan for past due property taxes must be made in 2000
to avoid a tax sale.
The risks associated with the Property include
(i) approximately $23,000 of property taxes are delinquent and must be
brought current or a statutory 5-year payment plan must be arranged with the
County of San Bernardino in the year 2000 to avoid loss of the Property for
delinquent property taxes; and
(ii) rents and values for retail properties in the Victorville area are
expected to remain soft due to the amount of property zoned for commercial use
which is available for development.
THE STACEY ROSE PROPERTIES. The Property consists of 32 acres of
unimproved raw land which is comprised of three separate parcels. The Property
is zoned residential and could contain approximately 160 lots. The Property is
most likely to be sold to residential builders and developers. It is estimated
that it may cost about $50,000 to finalize a tentative tract map on the parcels.
A payment plan for past due taxes in the amount of approximately $7,500
annually,
55
<PAGE>
along with current taxes of approximately $10,000 annually, must be kept current
in order to avoid the loss of the Property to a tax sale.
The risks associated with the Property include
(i) approximately $30,000 of property taxes are delinquent and must be
brought current or a statutory 5-year payment plan must be arranged with the
County of San Bernardino in order to avoid loss of the Properties for delinquent
property taxes;
(ii) approximately $50,000 will be needed to finalize a tentative tract
map on the parcels;
(iii) a substantial, and potentially expensive, sales and marketing
effort will be necessary to sell homes which are constructed on the Properties
unless a bulk sale of the lots can be made;
(iv) the Properties are located in a lower income residential area;
(v) increasing government fees and assessments for streets, schools,
parks and other infrastructure requirements could increase the cost of the lots,
thereby delaying market absorption; and
(vi) home financing may not be available at reasonable costs.
PRIORITY OF PROJECTS AND ESTIMATED TIMETABLE
If adequate working capital is available from the sale of assets, the
Company will bring delinquent property taxes current and begin work on all of
the Properties promptly after the Acquisition is completed. In order to obtain
additional working capital, the Company believes that funds may also become
available from the sale of the Units offered concurrently and exercise of the
warrants included in the Units offered in the Acquisition and concurrently. It
plans to sell one or more of the Sacramento/Delta Greens, Mori Point, Cypress
Lakes, Palmdale/Joshua Ranch, Esperanza or Stacey Rose Properties to raise such
working capital. Sale prices for all of these Properties may be below the
appraised values. The Company believes these Properties can be sold at prices
that would not be acceptable to, nor achieve the objectives of, the respective
Programs' Investors if such sales occurred separately within each Program.
Efforts to conduct such discounted sales were never undertaken by National
because of the Investors' expressed desire to receive as nearly a full return of
principal as possible. However, National has investigated, and rejected, the
auction process as an alternative since it appears unlikely that such process
would yield any significant number of bidders or bidders willing to offer more
than the amount of the appraised values for any of the Properties. While
discounted prices might not have been attractive to the Programs' Investors,
sales at such prices could provide needed cash capital to move the Company
forward once these Properties become assets of the Company after the
Acquisition.
56
<PAGE>
Approximately $4,565,000 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 Sacramento/Delta Greens Property. Any funds from the sale of assets
will be focused on the development of the Yosemite/Ahwahnee Properties as the
Company considers the Yosemite/Ahwahnee Properties to have the most potential
for short-term cash flows and long-term profits in order to build value for the
shareholders. 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 assets to fulfill the
Yosemite/Ahwahnee Properties' initial requirements (approximately $3,000,000),
the balance of any asset sale proceeds would be applied to the Sacramento/Delta
Greens, Mori Point, Cypress Lakes, Palmdale/Joshua Ranch, Stacey Rose, and
Esperanza 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, Cypress Lakes, Palmdale/Joshua Ranch, Esperanza, Stacey Rose 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: $3,000,000. Funds would
come first from the proceeds of the sale of other assets. Balance, if any, from
third party financing, if available, or from exercise of warrants included in
the Units.
SACRAMENTO/DELTA GREENS. Amount needed: initially $25,000 to complete the
permitting and approval process. If a sale cannot be consummated, the Company
conducts the construction of the homes, approximately $3,000,000 of capital will
be needed to be financed for the permitting, approvals, infrastructure and to
build the initial phase of homes. Funds for the permitting process would come
first from a joint venture partner, or from sale of another 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. Funds to complete the permitting process would come from
a joint venture partner in return for a profit participation, or sale of one of
the other 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.
57
<PAGE>
CYPRESS LAKES. Amount needed: initially $400,000 to modify the existing
vested tentative map in order to be more cost effective in the physical
development stages. Funds to complete the modifications to the vested tentative
map would come from a joint venture partner or sale of the Sacramento/Delta
Greens or Palmdale/Joshua Ranch Properties.
PALMDALE/JOSHUA RANCH. Amount needed: initially $140,000 in order to
complete grading, soils and utility studies in order to analyze and reduce
overall development costs. Funds to complete this work noted would come from a
joint venture partner or sale of the Sacramento/Delta Greens Property.
ESPERANZA. Amount needed is unknown to complete preliminary planning for
the commercial site. Funds to complete the work noted would come from a joint
venture partner or sale of the Sacramento/Delta Greens Property.
STACEY ROSE. Amount needed: $50,000 in order to obtain a tentative map
and complete grading, land planning and cost structure. Funds to complete the
work noted would come from a joint venture partner or sale of the
Sacramento/Delta Greens Property.
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, as well as proceeds from sale of the Units offered concurrently and
exercise of warrants, would constitute sources 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, if any, will be
brought current, including applicable interest, from the proceeds of the sale of
other properties. Pursuant to statute, the Company will either enter into or
succeed to 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 the Spring of 1999 for the completion of 100 additional
recreational vehicle sites and the readiness of the initial timeshare vacation
villa units at the recreational vehicle sites for sale. Thereafter, additional
recreational vehicle sites and vacation villa timeshare units will be built from
cash flow. If funds are available either from external sources or the sale of
other properties, 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.
THERE IS NO ASSURANCE THAT THE ABOVE ESTIMATED TIMETABLES FOR ANY OF THE
PROPERTIES CAN BE MET.
TYPES OF BORROWING REQUIRED
The Company anticipates that it will seek infrastructure financing and
construction financing. Infrastructure
58
<PAGE>
financing is designed to provide borrowed funds to construct roads, install
utilities and other things necessary for a Property to function in the manner
anticipated. For example, a residential development requires the installation
of roads, sidewalks, sewer lines, water lines, and power lines for it to be able
to function as a community. The principal risks involved in infrastructure
financing involve the cost (usually higher for infrastructure loans than
construction or permanent financing loans) and the risk that there will be no
replacement financing in the form of construction or permanent loans available
when the loan is due resulting in a default and a potential loss of the
property.
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 if it
pursues the buildout of the lots and homes on its Sacramento/Delta Greens
Property, as well as for the construction of the traditional and vacation villa
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 in the 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 and vacation villa
timeshares, as well as the costs for the traditional timeshare approvals and
initial model construction on 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 Property.
INSURANCE
Management of the Company believes that each of the Properties is
adequately insured for title, property and casualty matters.
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<PAGE>
EMPLOYEES
It is anticipated that the Company's initial employees will consist of
approximately 15 individuals located at the home office in Newport Beach,
California, who will handle the responsibilities of management, accounting and
administration of the subsidiaries through AFC. There will initially be
approximately 35 additional full- and part-time employees at the
Yosemite/Ahwahnee Property who will handle the operation and maintenance of the
project and carry forward with the development and entitlement activities.
Marketing and consulting services for the recreational vehicle membership sales
and resort operations are contracted through Western Horizons, a Colorado-based
recreational vehicle park management and marketing company. None of the
employees will be subject to collective bargaining agreements.
LEGAL PROCEEDINGS
Neither the Company nor the Properties is the subject of any material legal
proceeding.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing, conflicts
of interest and other policies of the Company. These policies have been
determined by the Company's Board of Directors and generally may be amended or
revised from time to time by the Board of Directors without a vote of the
shareholders.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE. Initially, the Company will invest in the
Properties it receives in the Acquisition. This is a portfolio of properties in
various stages of development. As the business plans for the various Properties
described herein are either completed or matured, the Company will seek to
acquire and develop or manage, as appropriate, properties which are compatible
with its existing properties. Such properties may include resort properties (in
the development phase or completed), residential properties (in the development
phase), or such other types of properties as the Board of Directors may from
time to time in its sole discretion deem to be appropriate investments for the
Company. The Company expects that most of its initial investments will be
located in the State of California, although there is no requirement that such
be the case. 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;
60
<PAGE>
however, the Board of Directors will use its best efforts to diversify the
Company's investment portfolio as much as possible.
INVESTMENTS IN REAL ESTATE MORTGAGES. While the Company will emphasize
equity real estate investments, it may, in its discretion, invest in mortgages
and other interests related to real estate. The Company does not presently
intend to invest in mortgages, but may do so. The mortgages which the Company
may purchase may be first mortgages or junior mortgages and may or may not be
insured by a governmental agency.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES. The Company may also invest in securities of entities engaged in
real estate activities or securities of other issuers, including for the purpose
of exercising control over such entities. However, the Company has no present
plans to make any such investment in securities. In any event, the Company does
not intend that its investments in securities will require it to register as an
"investment Company" under the Investment Company Act of 1940, and the Company
would divest itself of such securities before any such registration would be
required.
JOINT VENTURES. The Company may enter into joint ventures or partnerships
or other participations with real estate developers, builders, owners and others
for the purpose of obtaining or retaining equity interests in a particular
property.
OFFERING SECURITIES IN EXCHANGE FOR PROPERTY. The Company may offer its
securities in exchange for a property in which it wishes to invest.
REPURCHASING ITS OWN SHARES. The Company may purchase or repurchase Shares
from any person for such consideration as the Board of Directors may determine
in its reasonable discretion, whether more or less than the original issuance
price of such Share or the then trading price of such Share.
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.
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<PAGE>
LENDING POLICIES. The Company may, at any time, make mortgage loans
secured by properties of the type in which the Company may invest, subject to
restrictions on related party transactions contained in the Delaware General
Corporation Law.
MISCELLANEOUS POLICIES
REPORTS TO SHAREHOLDERS. The Company will be subject to the reporting
requirements of the Exchange Act and will file annual and quarterly reports.
The Company currently intends to provide annual and quarterly reports to its
Shareholders.
COMPANY CONTROL. The Board of Directors has exclusive control over the
Company's business and affairs subject only to restrictions in the Charter
Documents and the Delaware General Corporation Law. Shareholders have the right
to elect members of the Board of Directors. The Directors are accountable to
the Company as fiduciaries and are required to exercise good faith and integrity
in conducting the Company's affairs.
WORKING CAPITAL RESERVES
The Company will attempt to maintain working capital reserves (and when not
sufficient, access to borrowing) in amounts that the Board of Directors
determines to be adequate to meet the normal contingencies in connection with
the operation of the Company's business and investments.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
August 31, 1998 after giving effect to the completion of the Acquisition.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------
Pro Forma
Acquisition
-----------
<S> <C>
DEBT:
Capital lease obligations . . . . . . . . . . . $ 313,083
------------
Total debt . . . . . . . . . . . . . . . . 313,083
STOCKHOLDERS' EQUITY:
Common Stock(1) . . . . . . . . . . . . . . . . 1,727
Additional paid-in capital(1) . . . . . . . . . 26,212,692
Accumulated deficit(2). . . . . . . . . . . . . -
------------
Total stockholders' equity . . . . . . . . 26,214,419
------------
Total capitalization. . . . . . . . . . . . . . $ 26,527,502
------------
------------
</TABLE>
- ----------------
(1) Gives pro forma effect to the Acquisition and the conversion of investor
interests into common stock ownership in the Company.
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<PAGE>
DILUTION
Assuming completion of the Acquisition, the following table sets forth on a
pro forma basis as of June 30, 1998, 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
----------------------------------------------------------------
Average
Price per
Shares Purchased Total Consideration Share
---------------- ------------------- -----
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Founders and Consultants 323,296 19% $ 3,233 0% $ 0.01
Program Investors 1,403,321 81 27,680,906 100 19.73
--------- --- ------------ --- ---------
Total 1,726,617 100% $ 27,684,139 100% $ 16.03
--------- --- ------------ --- ---------
--------- --- ------------ --- ---------
</TABLE>
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 of and for the
periods indicated, nor does it purport to represent the future financial
position and results of operations for future periods.
63
<PAGE>
<TABLE>
<CAPTION>
Company Pro Forma The Acquisition Historical
------------------------------------ -------------------------------------------------------
Six Months Year Ended
Ended June 30, December 31, Years Ended
1998 1997 December 31
--------------- --------------- -------------------------------------------------------
The Acquisition The Acquisition 1997 1996 1995
--------------- --------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 324,654 $ 5,193,012 $ 5,193,012 $ 6,213,299 $ 6,333,143
Cost of sales 121,187 4,081,530 4,081,530 5,224,186 5,346,735
--------------- --------------- -------------- ------------- --------------
Gross profit 203,467 1,111,482 1,111,482 989,113 986,408
Expenses:
Selling, general and
administrative 2,413,683 5,676,067 4,357,059 4,029,618 2,486,099
Land write-down 255,000 1,299,651 1,299,651 845,000 16,167,424
Management fees - 0 949,003 949,003 949,003
--------------- --------------- -------------- ------------- --------------
Total expenses $ 2,668,683 $ 6,975,091 $ 6,605,713 $ 5,823,621 $ 19,602,526
Net interest income
(expense) (1,117) 31,345 31,345 73,205 1,222,008
--------------- --------------- -------------- ------------- --------------
Gain on sale of
property 1,871,279 - - - -
Net loss $ (595,054) $ (5,832,886) $ (5,462,886) $ (4,761,303) $ (17,394,110)
--------------- --------------- -------------- ------------- --------------
--------------- --------------- -------------- ------------- --------------
Net loss per share (0.34) (3.38) N/A N/A N/A
--------------- ---------------
--------------- ---------------
Average number of
shares outstanding 1,726,617 [1,726,617] N/A N/A N/A
--------------- ---------------
--------------- ---------------
Balance Sheet Data:
Cash and cash
equivalents 2,809,752 N/A 540,909 1,065,715 N/A
Total real estate 27,601,000 N/A 27,427,617 28,444,055 N/A
Total assets 32,059,053 N/A 32,065,559 34,561,602 N/A
Total debt 313,083 N/A 324,920 424,767 N/A
Total liabilities 5,844,634 N/A 6,938,267 4,782,370 N/A
Stockholders'/
owners' equity 26,214,419 N/A 25,127,292 29,779,232 N/A
Other Data:
Cash used in
operating
activities (2,525,042) N/A (2,015,894) (1,658,879) (68,615)
Cash provided by
(used in)
investing
activities 6,988,374 N/A (163,264) (186,211) (436,545)
Cash provided by
(used in)
financing
activities (2,067,345) N/A 1,523,975 1,168,817 674,403
</TABLE>
[NOTE THAT THE AVERAGE NUMBER OF SHARES OUTSTANDING WILL CHANGE AS WE
RECALCULATE EXCHANGE VALUES UNTIL WE GO EFFECTIVE. THAT'S WHY THEY ARE
BRACKETED.]
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[TO BE UPDATED]
<TABLE>
<CAPTION>
The Acquisition Historical
---------------------------------------------------------
Six Months
Ended June 30, Years Ended
1998 December 31
------------------ -------------------------------------------------
1998 1997 1996 1995
------------------ -------------- -------------- --------------
Investment Program
Data
<S> <C> <C> <C> <C>
Oceanside
---------
Cash and cash equivalents $ 17,037 $ 145,072 $ 660,207 $ N/A
Real estate 3,525,539 3,322,329 3,219,920 N/A
Total assets 4,335,472 5,443,408 7,938,216 N/A
Total debt - - 3,910 N/A
Total liabilities 778,149 1,271,694 1,207,402 N/A
Total owners' equity 3,557,323 4,171,714 6,730,814 N/A
Revenues - 4,290,850 5,490,180 5,920,600
Gross margin - 461,868 515,020 624,859
Net Loss (Income) (2,385,609) 1,857,850 548,675 367,219
Yosemite/Ahwahnee
-----------------
Cash and cash equivalents $ 2.751,587 $ - $ 101,551 $ N/A
Real estate 5,423,254 10,137,074 10,404,135 N/A
Total assets 10,151,876 11,704,727 11,499,429 N/A
Total debt 313,083 340,563 420,857 N/A
Total liabilities 3,538,760 3,495,010 2,141,259 N/A
Total owners' equity 6,613,176 8,209,717 9,358,130 N/A
Revenues 324,654 902,162 723,119 412,543
Gross margin 203,467 649,614 474,093 361,549
Net Loss 1,877,901 2,059,368 2,078,604 915,537
Mori Point
----------
Cash and cash equivalents $ 5,176 $ 7,204 $ 39,032 $ N/A
Real estate 4,100,000 4,100,000 4,100,000 N/A
Total assets 4,361,140 4,339,911 4,139,032 N/A
Total debt - - - N/A
Total liabilities 848,104 868,964 807,514 N/A
Total owners' equity 3,513,036 3,490,947 3,331,518 N/A
Revenues - - - -
Gross margin - - - -
Net Loss 123,848 279,448 189,125 146,867
Sacramento/
-----------
Delta Greens
------------
Cash and cash equivalents 7,886 $ 4,099 $ 62,583 $ N/A
Real estate 1,745,000 2,000,000 2,230,000 N/A
Total assets 1,871,316 2,108,627 2,292,583 N/A
Total debt - - - N/A
Total liabilities 300,830 322,271 259,066 N/A
Total owners' equity 1,570,486 1,786,356 2,033,517 N/A
Revenues - - - -
Gross margin - - - -
Net Loss 315,545 394,796 1,062,684 131,590
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
The Acquisition Historical
----------------------------------------------------------
Six Months
Ended June 30, Years Ended
1998 December 31
-------------- ----------------------------------------------------
1998 1997 1996 1995
-------------- -------------- -------------- --------------
Investment Program
Data
<S> <C> <C> <C> <C>
Cypress Lakes
-------------
Cash and cash equivalents $ 20,542 $ 148,068 $ 75,373 $ N/A
Real estate 5,200,000 5,200,000 5,200,000 N/A
Total assets 5,395,878 5,348,068 5,275,373 N/A
Total debt - - - N/A
Total liabilities 370,950 180,193 107,977 N/A
Total owners' equity 5,024,928 5,167,875 5,167,396 N/A
Revenues - - - -
Gross margin - - - -
Net Loss 234,378 392,353 254,791 14,484,305
Palmdale/
---------
Joshua Ranch
------------
Cash and cash equivalents $ 199 $ 98,898 $ 119,922 $ N/A
Real estate 2,700,000 2,700,000 2,700,000 N/A
Total assets 2,832,572 2,798,898 2,819,922 N/A
Total debt - - - N/A
Total liabilities 210,690 152,843 142,898 N/A
Total owners' equity 2,621,882 2,646,055 2,677,024 N/A
Revenues - - - -
Gross margin - - - -
Net Loss 232,302 455,476 615,688 1,211,310
Stacey Rose
-----------
Cash and cash equivalents $ 339 $ - $ - $ N/A
Real estate 320,000 320,000 320,000 N/A
Total assets 347,339 320,000 320,000 N/A
Total debt - - - N/A
Total liabilities 100,777 68,978 55,775 N/A
Total owners' equity 246,562 251,022 264,225 N/A
Revenues - - - -
Gross margin - - - -
Net Loss 6,410 13,203 12,445 76,571
Esperanza
---------
Cash and cash equivalents $ 3,753 $ 7,191 $ 7,047 $ N/A
Real estate 270,000 270,000 270,000 N/A
Total assets 298,253 277,191 277,047 N/A
Total debt - - - N/A
Total liabilities 81,897 55,481 44,944 N/A
Total owners' equity 216,356 221,710 232,103 N/A
Revenues - - - -
Gross margin - - - -
Net Loss 5,354 10,393 9,859 65,678
</TABLE>
66
<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 seven former
"Trudy Pat" programs and three non-"Trudy Pat" programs, as discussed below,
they 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 SACRAMENTO/DELTA GREENS PROGRAM
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
No 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 decreased from $69,059 at June
30, 1997 to $35,610 at June 30, 1998, a decrease of $33,449. The operating
expenses primarily consist of property taxes and consulting expenses. Property
tax expense remained consistent for both periods, while consulting expenses
decreased as a result of a decrease in the feasibility studies performed on the
property during the first quarter of 1998 compared to the same period in 1997.
Management fees were consistent for both periods at $25,000 per period. These
fees were for the management and administration of the property.
The appraised value of the Sacramento/Delta Greens property decreased from
$2,230,000 at December 31, 1996 to $2,000,000 at June 30, 1997 due to a decrease
in the median price of the homes in this community during 1996 and due to the
decrease in the number of homes zoned for this property. This decrease was
reflected in the statement of operations as a property write down loss.
During 1998, there was a further writedown of the Sacramento/Delta Greens
property from $2,000,000 at December 31, 1997 to $1,750,000 at June 30, 1998.
The decrease was attributable to a further decrease in the number of homes zoned
for this property. This decrease was reflected in the statement of operations
as a property writedown loss.
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
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<PAGE>
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 of homes zoned for this property during 1997, impairment losses of
$845,000 and $230,000 were 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.
RESULTS OF OPERATIONS - THE OCEANSIDE PROGRAM
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
For the six months ended June 30, 1998, net income amounted to $2,646,882
compared to a net loss of $659,911 for the six months ended June 30, 1997. Some
of the increase in net income is primarily due to the following factors: a
realization of the gain on the sale of real estate of $2,991,836 in 1998; a
decrease in the gross profit of $368,036, a decrease in selling, general and
administrative expenses of $346,516 and a decrease in real estate inventory
writedown of $360,172.
The gain on sale of real estate of $2,991,836 is a result of the sale of
the Symphony lots made during the second quarter of 1998.
The decrease in gross profit by $368,036 is due to the fact that there were
no home sales made during 1998, compared to the sale of 17 homes during the
first quarter of 1997.
Selling, general and administrative expenses decreased by $346,516 due to a
decrease in the accounting, legal and consulting fees as a result of the
decrease of the homes sold during 1998.
As a result of the sales of homes on the Encore project, capitalized
construction costs incurred on these homes in excess of the consideration
received were written off during 1997.
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
68
<PAGE>
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. Some of 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.
RESULTS OF OPERATIONS - THE YOSEMITE/AHWAHNEE PROGRAMS
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
For the six months ended June 30, 1998 the net loss amounted to $1,753,651
compared to a net loss of $1,129,395 for the six months ended June 30, 1997.
The change of results are primarily from the following factors: a decrease in
revenues of $121,625, a decrease in selling, general and administrative expenses
of $269,423 and the realization of the loss on sale of real estate of $735,034
during 1998.
The decrease in revenues of $121,625 (27%) is due to the decline in golf
course activity during the first six months in 1998, compared to the same period
in 1997.
Selling, general and administrative expenses decreased by $269,423 (20%) as
a result of the decrease in the golf course activity during the first six months
of 1998, compared to the same period in 1997.
As a result of the sale of the golf course and estate lots during 1998, a
$735,034 loss was realized during the six months ended June 30,1998.
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
69
<PAGE>
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 PERIOD ENDED JUNE 30, 1998 TO 1997
No 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 remained consistent at June 30,1
998, compared to June 30, 1997. The operating expenses consist of property
taxes and consulting expenses. Management fees were consistent for both periods
at $50,000. These fees were for the management and administration of the
property.
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 CYPRESS LAKES PROGRAM
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
No 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 $140,454 at June
30,1997 to $165,596 at June 30, 1998, an increase of $25,142. The operating
expenses primarily consist of property taxes and consulting expenses. Property
tax expense remained consistent for both periods, while consulting expenses
increased as a result of an increase in the work performed on feasibility
studies during the first quarter of 1998 compared to the same period in 1997.
Management fees were consistent for both periods at $70,000 per period. These
fees were for the management and administration of the property.
70
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
No 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 $120,114 at
December 31,1996 to $254,272 at December 31, 1997, an increase of $134,158. The
operating expenses primarily consist of property taxes, legal and development
expenses. Property taxes remained consistent for both periods. Legal expenses
increased by $75,331 and development expenses increased by $59,150. These legal
and development expenses mainly relate to land planning, feasibility studies,
permits and environmental consulting issues related to the property. Management
fees were consistent for both year ends at $140,000 per year. These fees were
for the management and administration of the property.
RESULTS OF OPERATIONS - THE PALMDALE/JOSHUA RANCH PROGRAM
COMPARISON OF PERIOD ENDED JUNE, 1998 TO 1997
No 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 $144,883 at June
30,1997 to $157,376 at June 30, 1998, an increase of $12,493. The operating
expenses primarily consist of property taxes and consulting expenses. The
increase in operating expenses were primarily attributable to an increase in
consulting expenses as a result of feasibility studies performed on the property
relating to the potential development of the property. Property taxes remained
consistent for both periods. Management fees were also consistent for both
periods at $75,000 per period. These fees were for the management and
administration of the property.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
No 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 decreased from $469,910 at
December 31,1996 to $306,484 at December 31, 1997, a decrease of $163,426. The
operating expenses primarily consist of property taxes, legal and development
and consulting expenses. Property taxes remained consistent for both periods.
Legal expenses increased by $86,111 and development and consulting expenses
decreased by $241,552. These legal and development expenses mainly relate to
land planning, feasibility studies, permits and environmental consulting issues
related to the property. Management fees were consistent for both year ends at
$150,000 per year. These fees were for the management and administration of the
property.
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<PAGE>
RESULTS OF OPERATIONS - THE ESPERANZA PROGRAM
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
No 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 remained consistent at June
30,1998 compared to June 30, 1997. The operating expenses consist of property
taxes. Management fees were consistent for both periods at $2,500 per period.
These fees were for the management and administration of the property.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
No 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 remained consistent for both
years ending December 31,1997 and December 31, 1996. The operating expenses
consist of property taxes. Management fees were consistent for both year ends
at $5,000 per year. These fees were for the management and administration of
the property.
RESULTS OF OPERATIONS - THE STACEY ROSE PROGRAMS
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
No 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 remained consistent at June
30,1998 compared to June 30, 1997. The operating expenses consist of property
taxes. Management fees were consistent for both periods at $2,002 per period.
These fees were for the management and administration of the property.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
No 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 remained consistent for both
years ending December 31,1997 and December 31, 1996. The operating expenses
consist of property taxes. Management fees were consistent for both year ends
at $4,003 per year. These fees were for the management and administration of
the property.
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Acquisition on a pro forma basis as of June 30,
1998, the Company will have approximately $2,800,000 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 $2,200,000.
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<PAGE>
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 June 30,
1998, the Company had approximately $313,000 of debt and approximately
$1,009,000 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 Company has made various property sales
during 1997 and 1998. In October 1997, the remaining 23 lots of the Encore
property, a development within the Oceanside Program, were sold for net proceeds
of $593,115. In addition to this sale, during June 1998, the 111 lots of the
Symphony property, a second development within the Oceanside Program, were sold
for net proceeds of $6,576,859. In February 1998, the Ahwahnee Program sold 13
single-family development lots for a sales price of $307,500. 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 March 1998 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:
YOSEMITE/AHWAHNEE
The Company plans to continue to develop the recreational vehicle park,
continue to operate the golf course, build a new public overnight stay park,
construct timeshare units and market these products and services. The Company
estimates that this will require approximately $3,000,000 of funding. The
source of the funds is intended to be the proceeds from the sale of the golf
course and the estate lots which were sold in June 1998 to the Oceanside Program
for
73
<PAGE>
proceeds of $3,550,000. If additional financing is required, the proceeds of
the unit offering, third party financing or sale of the Sacramento/Delta Greens,
Palmdale/Joshua Ranch or Mori Point Properties should be sufficient.
OCEANSIDE
The Company would continue to hold the Yosemite/Ahwahnee golf course and
surrounding land for lease and potential ultimate sale back to the
Yosemite/Ahwahnee Program.
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.
SACRAMENTO/DELTA GREENS
The Company anticipates finishing the permitting process and obtaining the
city and other governmental approvals of the project's tentative map and design.
Approximately $175,000 of capital is needed to complete the engineering,
environmental and other wetlands activities to finalize the tentative tract map
process.
CYPRESS LAKES
The Company will proceed with providing the due diligence documentation
required by the current potential buyer. The Company will then either
consummate the transaction or if the deal is not approved, then approximately
$400,000 of capital will be needed for the management, engineering and legal
expenses to redesign the project to minimize infrastructure costs and to renew
the tentative map.
PALMDALE/JOSHUA RANCH
The Company will most likely pursue a bulk sale at an adequate price.
Approximately $140,000 of capital is required in order to proceed with
finalizing the grading, soils and underground studies.
ESPERANZA
The Company will most likely pursue a bulk sale that is reasonable under
the current economic conditions, preferably before delinquent property taxes
become due in 2000.
STACEY ROSE
The Company will most likely pursue the approval of a tentative tract map
from the City of Victorville. It is estimated that the cost will exceed $50,000
and will require about nine months.
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<PAGE>
LIQUIDITY SUMMARY
The Company expects to meet its short- and long-term liquidity requirements
through the methods described above in addition to cash generated from the
operations of the resort properties once these properties are operational. The
Company believes that the liquidity sources described above will be adequate to
satisfy the cash requirements of the Company for the 12 months following the
completion of the Acquisition.
HISTORICAL CASH FLOWS
THE OCEANSIDE PROGRAM
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.
As there were no homes sold in 1998, while 17 homes were sold in the first
six months of 1997, cash flows from operations decreased from $784,227 for the
six months ended June 30, 1997 to $8,513 for the six months ended June 30, 1998.
The Program sold the Symphony lots during 1998, which generated $6,671,836 in
cash inflows. With the proceeds of the sale, the Program purchased the Ahwahnee
golf course and estate lots for $3,552,314 and distributed $3,000,000 back to
the investors.
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 significant increase in the cash balance at June 30, 1998 is primarily
attributable to the sale of the golf course and some of the outlots in 1998.
The proceeds from the sale of the golf course and outlots amounted to
$3,868,852.
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<PAGE>
THE MORI POINT, SACRAMENTO/DELTA GREENS, CYPRESS LAKES, PALMDALE/JOSHUA RANCH,
ESPERANZA AND STACEY ROSE PROGRAMS
The Mori Point, Sacramento/Delta Greens, Cypress Lakes, Palmdale/Joshua
Ranch, Esperanza and Stacey Rose Programs continued to explore opportunities for
development of their real estate assets during 1996, 1997 and 1998. 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
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.
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<PAGE>
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.
Any director may resign at any time and may be removed with or without
cause by the shareholders upon the affirmative vote of a majority of all the
votes entitled to be cast for the election of directors at a special meeting
called for the purpose of such proposed removal. The notice of such meeting
shall indicate that the purpose, or one of the purposes, of such meeting is to
determine if a director will be removed. A vacancy created by death,
resignation or removal of a director may be filled by a vote of a majority of
the remaining directors. Each director will be bound by the Company's Charter
Documents.
The directors are not required to devote all of their time to the Company
and are only required to devote such of their time to the affairs of the Company
as their duties require. The directors will meet quarterly or more frequently
if necessary. It is not expected that the directors will be required to devote
a substantial portion of their time to discharge their duties as directors.
Consequently, in the exercise of their fiduciary responsibilities, the directors
will be relying heavily on the executive officers of the Company. The Board is
empowered to fix the compensation of all officers that it selects and may pay
directors such compensation for special services performed by them as it deems
reasonable. Initially, the Company will pay Independent Directors a retainer
fee of $20,000 per year, plus $1,000 per meeting attended, plus 2,500 options to
purchase shares, plus out-of-pocket expenses in attending meetings. The Company
will not pay any director compensation to the officers of the Company who also
serve as directors.
The general investment and borrowing policies of the Company are set forth
in this Prospectus. The directors 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.
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<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Director Term
Name Age Position Expires
---- --- -------- -------
<S> <C> <C> <C>
David G. Lasker 52 Co-Chairman of the Board, 2000(1)
President and Chief Financial
Officer
James N. Orth 51 Co-Chairman of the Board, 2000(1)
Chief Executive Officer and
Secretary
L.C. "Bob" Albertson, Jr. 54 Executive Vice President of 1999(1)
the Company and President and
Chief Executive Officer of
American Family Communities,
Inc., Director
Charles F. Hanson 61 Director 1999(1)
Dudley Muth 58 Director 2001(2)
James G. LeSieur, III 57 Director 2001(2)
</TABLE>
(1) Elected in 1997.
(2) Elected in 1998.
The following is a biographical summary of the experience of the directors
and executive officers of the Company.
DAVID G. LASKER - Co-Chairman of the Board, President and Chief Financial
Officer of the Company. Mr. Lasker has served as Chairman and President of
National Investors Financial, Inc. since 1986. Prior to that, he served as
Chairman and Vice Chairman of the Board of Directors of American Merchant Bank,
a commercial bank headquartered in Orange County, California, from 1985 to 1986.
His experience includes all phases of negotiating, underwriting, closing and
servicing of residential and commercial loans. Since the Ownership Date, Mr.
Lasker has overseen the development and construction of the Oceanside Property.
He has served as project manager of the Mori Point Property. He and Mr. Orth
have supervised the predevelopment activities of the Sacramento/Delta Greens
Property and they have shared the responsibility for the management and ultimate
development of a business plan for the Yosemite/Ahwahnee Properties. He and Mr.
Orth are responsible for overall management of the Company. Mr. Lasker holds a
Bachelor of Science degree from Purdue University and an M.B.A. from the
University of Southern California.
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<PAGE>
JAMES ORTH - Co-Chairman of the Board, Chief Executive Officer and
Secretary of the Company. Since 1986, Mr. Orth has been Executive Vice
President and a member of the Board of Directors of National Investors
Financial, Inc. Prior to that, in 1980, he was a founding member of NIF
Securities, Inc., a securities broker-dealer oriented to the capitalization of
start-up and second-stage business ventures. In addition, he has been a founder
and executive officer of a variety of companies specializing in financial
management, marketing and distribution. From 1969 through 1976, Mr. Orth was
employed by IBM Corporation as a marketing representative and territory manager.
From 1977 to 1980, he was an employee, 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 1984, 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.
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.
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
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<PAGE>
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.
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, if permissible, 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.
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<PAGE>
NOMINATING COMMITTEE. In due course, the Board of Directors will establish
a nominating committee (the "Nominating Committee") to nominate persons to serve
on the Company's Board of Directors as vacancies arise. The Nominating
Committee will ultimately consist of three directors, at least two of whom will
be Independent Directors
DIRECTORS AND EXECUTIVE OFFICERS COMPENSATION AND INCENTIVES
The Company will compensate designated key managers of the Company with
cash compensation and certain incentives including stock option and bonus plans.
The below table sets forth the estimated annual base salary to be paid to the
Chief Executive Officer, President and Vice Presidents, as well as the stock
options for the officers and directors.
<TABLE>
<CAPTION>
Annual Common Stock
Name Position Salary(1) Options
---- -------- ------ -------
<S> <C> <C> <C>
David G. Lasker* Co-Chairman of the
Board, President and $180,000 30,000(2)
Chief Financial Officer
James N. Orth Co-Chairman of the $180,000 30,000(2)
Board, Chief Executive
Officer and Secretary
L.C. "Bob" Albertson, Jr. Executive Vice $200,000 30,000(2)
President and Director
of the Company;
President and Chief
Executive Officer of
American Family
Communities, Inc.,
Director
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 Incentive Plan. They have a ten year term. Messrs.
Lasker, Orth and Albertson may exercise options for 3,333 shares
immediately. 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 Incentive Plan. They have a ten-year
term and are exercisable
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<PAGE>
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.
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
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<PAGE>
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)
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.
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Employees of the Company and its subsidiaries will be eligible to
participate in the 401(k) Plan if they meet certain requirements concerning
minimum age and period of credited service. All contributions to the 401(k)
Plan will be invested in accordance with participant elections among certain
investment options. Distributions from participant accounts will not be
permitted before age 59 1/2, except in the event of death, disability, certain
financial hardships or termination of employment.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Lasker and
Orth for a term of five years and Mr. Albertson for a term of three years, each
subject to automatic one year extensions unless terminated. The agreements
provide for 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. 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 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. 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, 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. 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
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<PAGE>
or which involve intentional misconduct or a knowing violation of the law; (iii)
for unlawful distributions to stockholders; and (iv) for any transaction from
which the director derived an improper benefit.
The Company's By-Laws require the Company to indemnify its directors,
officers and certain other parties (collectively "agents") to the fullest extent
permitted from time to time by Delaware law. The Company's Certificate of
Incorporation and By-Laws also permit the Company to indemnify its agents who
have served another corporation or enterprise in various capacities at the
request of the Company. The Delaware law presently permits a corporation to
indemnify its agents against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service to or at the
request of the Company, unless it is established that: (i) the act or omission
of the indemnified party was material to the matter giving rise to the
proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) the indemnified party actually received an improper
personal benefit; or (iii) in the case of any criminal proceeding, the
indemnified party had reasonable cause to believe that the act or omission was
unlawful. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or officer
in connection with the proceeding; provided, however, that if the proceeding is
one by or in the right of the Company, indemnification may not be made with
respect to any proceeding in which the director or officer has been adjudged to
be liable to the Company. In addition, a director or officer may not be
indemnified with respect to any proceeding charging improper personal benefit to
the director or officer in which the director or officer was adjudged to be
liable on the basis that the personal benefit was improperly received. The
termination of any proceeding by conviction, or upon a plea of NOLO CONTENDERE
or its equivalent, or an entry of any order of probation prior to judgment,
creates a rebuttable presumption that the director or officer did not meet the
requisite standard of conduct required for indemnification to be permitted.
Indemnification under the provisions of the Delaware law is not deemed exclusive
to any other rights, by indemnification or otherwise, to which an officer or
director may be entitled under the Company's Charter or By-Laws, or under
resolutions of shareholders or directors, contract or otherwise.
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
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<PAGE>
Company. See "Management -- Executive Officers and Directors" for biographical
information about the executive officers.
In the last ten years, Management (through Messrs. Lasker and Orth)
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 5,500 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 ten 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 $16,000,000
was distributed back to investors. 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.
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 Program (located in Victorville, California), Stacey Rose "A" Program
(located in Victorville, California), Stacey Rose "B" 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 and consists of approximately 686 acres which were intended to be
developed into an 18-hole golf course along with 1,330 residential units.
In Management's opinion, the principal adverse business development which
caused 10 of the 12 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
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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 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.
PRIOR PERFORMANCE SCHEDULES
Certain prior performance schedules are included in the following tables.
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 programs which have not been
completed. Schedule C shows, as of December 31, 1997, the annual operating
results of the eight 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 and the two programs which obtained title
to the real estate securing their loans in the last five years. Schedule D
shows general information about the one program that was completed within the
last five years. See also "Background and Reasons for the Acquisition --
Historical Compensation for Servicing, Asset and Property Management/Effect of
Acquisition" and "-- Historical Cash Distributions to Investors" in the
accompanying Consent Solicitation Statement/Prospectus for further information
about compensation paid to National and its affiliates and distributions to
Investors in the Programs.
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SCHEDULE A
The purpose of Schedule A is to show, as of August 31, 1998, 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 one
investment
</TABLE>
- --------------------
(1) The borrower repaid the loan proceeds on August 17, 1994 before the entire
amount offered was raised. No offering expenses were paid by the
investors.
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SCHEDULE B
The purpose of Schedule B is to show, as of August 31, 1998, 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>
89
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE B (continued)
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 $315,300
$500,000 $85,000
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>
90
<PAGE>
SCHEDULE C
The purpose of Schedule C is to show, as of August 31, 1998, the annual
operating results of the seven 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
<CAPTION>
Oceanside
-------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Borrower loan repayments:
Principal $ 0 $ 375,000 $ 900,000 $ 900,000 $ 675,000 $
Interest 3,145,869 393,750 0 0 0 3,000,000
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.
91
<PAGE>
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
<CAPTION>
Yosemite/Ahwahnee II
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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.
92
<PAGE>
SCHEDULE C (continued)
<TABLE>
<CAPTION>
Mori Point Joshua Ranch
---------------------------------------------------- -----------------------------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrower loan
repayments:
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest 0 0 0 0 0 478,127 0 0 0 0
Cash from sale 0 0 0 0 0 N/A 0 0 0 0
Distributions to
investors:(1)
Principal 0 0 0 0 0 0 0 0 0 0
Interest 0 0 0 0 0 478,127 0 0 0 0
Distributions per
$1,000 invested:
Principal 0 0 0 0 0 0 0 0 0 0
Interest 0 0 0 0 0 31.88 0 0 0 0
</TABLE>
- ---------------------
(1) Net of servicing fees and property management fees and expenses.
93
<PAGE>
SCHEDULE C (continued)
<TABLE>
<CAPTION>
Cypress Lakes Arciero-Diamond Ridge
------------------------------------------------------ ------------------------------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrower loan
repayments:
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $5,538,800 N/A N/A N/A
Interest 1,337,101 62,706 0 0 0 113,531 297,077 N/A N/A N/A
Cash from sale N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Distributions to
investors:(1)
Principal 0 0 0 0 0 $ 0 5,538,800 N/A N/A N/A
Interest 1,337,101 62,706 0 0 0 113,551 997,027 N/A N/A N/A
Distributions per
$1,000 invested:
Principal 0 0 0 0 0 $ 0 1,000 N/A N/A N/A
Interest 95.57 4.48 0 0 0 20.50 53.64 N/A N/A N/A
</TABLE>
- -------------------
(1) Net of servicing fees and property management fees and expenses.
94
<PAGE>
SCHEDULE D
The purpose of Schedule D is to show, as of August 31, 1998, the results of the
"Trudy Pat" programs which closed or in which the loan has been completely
repaid or title obtained to the property 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 PALMDALE/
RIDGE JOSHUA RANCH CYPRESS LAKES
----- ------------ -------------
<S> <C> <C> <C>
Dollar amount raised $ 5,538,800 $ 15,000,000 $ 14,000,000
Loan secured by one property one property one property
Date loan fully funded July 25, 1994 February 24, 1992 February 26, 1993
Date loan paid off or title to property obtained August 17, 1994(1) October 8,1993 July 14, 1995
Repayment/Distributions:
Principal $ 5,538,800 $ -0- $ -0-
Interest $ 297,077(2) $ 3,887,428 $ 3,739,550
Distributions per $1,000 invested:
Principal $ 1,000 $ -0- $ -0-
Interest $ 53.64(2) $ 259.16 $ 267.11
</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.
95
<PAGE>
PRINCIPAL SHAREHOLDERS
The following tables set forth information as of the date hereof as to each
person or entity who owns of record or is known by the Company to own
beneficially five percent or more of the Company's outstanding voting securities
and information as to the securities ownership of management. All stock
ownership shown below is direct unless otherwise indicated.
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
Percent of All
Name and Address Common Stock Voting Shares Outstanding
---------------- ------------ -------------------------
<S> <C> <C>
Yale Partnership for Growth
and Development, L.P.(1) [118,814] 37.6%
4220 Von Karman Avenue
Suite 110
Newport Beach, CA 92660
J-Pat, L.P.(2)
4220 Von Karman Avenue [118,814] 37.6%
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.
96
<PAGE>
DIRECTOR AND OFFICER STOCK OWNERSHIP
<TABLE>
<CAPTION>
Percent of
Percent of Class if
Class if Percent of Acquisition
Percent Acquisition Class if Completed,
of Class if Completed Acquisition All Units
Aquisition only and all Completed Sold and All Common
Common Completed Warrants and All Warrants Stock Percent
Name/Position Stock Only(3) Exercised(3) Units Sold(3) Exercised(3) Options of Class
------------- ----- ------- ------------ ------------- ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
David G. Lasker, President, Chief
Financial Officer and Director(1) [118,814] 6.88%(4) 2.0%(7) 1.96%(10) 1.85%(13) 10,000(16) 26.66%
James Orth, Chief Executive Officer,
Secretary and Director(2) [118,814] 6.88%(4) 2.0%(7) 1.96%(10) 1.85%(13) 10,000(16) 26.66%
L.C. "Bob" Albertson, Jr. Executive
Vice President, Director 44,685 2.59%(5) 0.8%(8) 0.74%(11) 0.7%(14) 10,000(16) 26.66%
Charles F. Hanson, Jr., Director - - - - - 2,500 6.67%
Dudley Muth, Director - - - - - 2,500 6.67%
James G. LeSieur III, Director - - - - - 2,500 6.68%
Directors and Officers as a group [282,313] 16.35%(6) 4.8%(9) 4.66%(12) 4.40%(15) 37,500 100.00%
</TABLE>
- -----------------
(1) Mr. Lasker controls Yale Partnership for Growth and Development, L.P.
which owns the Shares reported. He has sole voting and investment
power.
(2) Mr. Orth controls J-Pat, L.P. which owns the Shares reported. He has
sole voting and investment power.
(3) Assuming all ten Programs participate in the Acquisition.
(4) 6.97% if only seven Programs participate.
(5) 2.62% if only seven Programs participate.
(6) 16.56% if only seven Programs participate.
(7) 2.03% if only seven Programs participate.
(8) 0.77% if only seven Programs participate.
(9) 4.83% if only seven Programs participate.
(10) 1.99% if only seven Programs participate.
(11) 0.75% if only seven Programs participate.
(12) 4.73% if only seven Programs participate.
(13) 1.87% if only seven Programs participate.
(14) 0.7% if only seven Programs participate.
(15) 4.44% if only seven Programs participate.
(16) Options to be granted to Messrs. Lasker, Orth and Albertson initially
will not be granted pursuant to the Stock Incentive Plan. Those granted
to the other directors will be granted pursuant to that Plan. Messrs.
Lasker, Orth and Albertson each will be able to exercise options to
purchase 3,333 shares immediately upon receipt. 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.
97
<PAGE>
DESCRIPTION OF SECURITIES
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
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
98
<PAGE>
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 to
be issued in the Acquisition and the concurrent offering they are denominated
"1998" Warrants. Each warrant will be exercisable to purchase one share of
Common Stock. The 1998 Warrants will be exercisable for a period of 20
consecutive trading days commencing on the first trading day of the first full
week after the six-month anniversary of the issuance of the Units to Investors.
The exercise price would be [80%] of the average trading price for the Common
Stock with average trading price meaning the average of the closing trading
prices for the Common Stock for the 20 consecutive trading days (whether or not
trades actually occurred on all of such dates) prior to the date the 1998
Warrants first become exercisable. The warrants are [not] detachable from the
Units [for 60 days], contain standard anti-dilution clauses and will be fully
transferable from [60 days 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 warrants
will not be listed initially.] National will not exercise any of the warrants
it receives with Units allocated to it as an Investor in each of the Programs.
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
meeting 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
99
<PAGE>
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 and on a "best efforts" basis" an aggregate of 125,000 units at $20
per unit. A unit consists of one Share and three 1998 Warrants. Shares
purchasable upon exercise of 1998 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 $1.40 per unit sold.
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 $20 per Unit price being used by the Company to calculate the
number of Units to be issued to Investors in 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 potential 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 Company's expense until such funds
are released as described below. Separate escrow accounts will be established
for benefit plan funds as required by law for such benefit plans. Payment for
Units will be payable to "First Trust of California, N.A., as Escrow Agent for
100
<PAGE>
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 the Company, then the Company will cancel all existing orders for Units and
all funds submitted on account of such orders will be released from escrow and
promptly returned to each investor together with all interest earned thereon.
Pending use of funds received by the Company from the Escrow Agent, the
Company may invest such funds in Permitted Temporary Investments.
FIRST TRUST OF CALIFORNIA, N.A., IS ACTING ONLY AS AN ESCROW AGENT IN
CONNECTION WITH THE OFFERING OF THE UNITS DESCRIBED IN THIS PROSPECTUS, AND HAS
NOT ENDORSED, RECOMMENDED OR GUARANTEED THE PURCHASE VALUE OR REPAYMENT OF THE
UNITS.
CONCURRENT CONSENT SOLICITATION
By a separate Consent Solicitation Statement/Prospectus, the
Company is offering Units (identical to those offered here) in exchange for
the assets (including cash on hand), certain liabilities and business
activities owned by investors in the ten Programs named above. For that
proposed Acquisition, the Company will issue up to $[28,066,419] of its Units
arbitrarily valued at $20 per Unit. 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, eliminate the
assessment process, focus on revenue-generating potential, improve efficiency
of operation in order to reduce costs and increase profit potential, provide
the investors with potential liquidity for their investments and create
greater potential overall value than each of the programs have separately.
IF INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF THE SEVEN
"TRUDY PAT" PROGRAMS DO NOT VOTE TO APPROVE THE ACQUISITION, THE ACQUISITION
WILL NOT TAKE PLACE. IF THE ACQUISITION DOES NOT TAKE PLACE, NONE OF THE
UNITS OFFERED BY THIS PROSPECTUS WILL BE SOLD. See the Company's Consent
Solicitation
101
<PAGE>
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 of the Company. 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 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 first acquired from the Company or from an affiliate of the Company.
Upon completion of the Acquisition, 97,500 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.
102
<PAGE>
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 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.
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
103
<PAGE>
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.
"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.
104
<PAGE>
"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 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.
"Management" means David G. Lasker, James N. Orth and L.C. "Bob" Albertson,
Jr..
"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 125,000 units described in the Prospectus.
"Outstanding Investment" means the sum of the unpaid principal balance owed
to an Investor as of the Ownership Date plus accrued but unpaid interest on such
balance as of the Ownership Date plus all amounts paid by the Investor pursuant
to mandatory assessments called for by National Investors Financial, Inc. plus
all amounts voluntarily advanced by an Investor on behalf of Investors who
failed to honor a demand for an assessment from National Investors Financial,
Inc.
"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
105
<PAGE>
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,
Yosemite/Ahwahnee II Program, Cypress Lakes Program, Palmdale/Joshua Ranch
Program, Esperanza Program, Stacey Rose A Program and Stacey Rose B 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.
"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 sold pursuant to a permit
issued by the California Department of Corporations. With regard to seven of
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.
"Unit" means one Share plus three 1998 Warrants to purchase three
additional Shares.
106
<PAGE>
FINANCIAL STATEMENTS
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRO FORMA COMBINED FINANCIAL INFORMATION:
Pro Forma Combined Balance Sheet as of June 30, 1998. . . . . . . . F-4
Notes to Pro Forma Combined Balance Sheet . . . . . . . . . . . . . F-5
Pro Forma Combined Statement of Operations for the year ended
December 31, 1997 and for the six months ended June 30, 1998. . . F-7
Notes to Pro Forma Combined Statement of Operations . . . . . . . . F-8
AMERICAN FAMILY HOLDINGS, INC.
Report of Independent Certified Public Accountants. . . . . . . . . F-10
Balance Sheet as of June 30, 1998 . . . . . . . . . . . . . . . . . F-11
Notes to Balance Sheet . . . . . . . . . . . . . . . . . . . . . . F-12
THE OCEANSIDE PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-14
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-15
Statements of Operations for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-16
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-17
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-18
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-19
THE YOSEMITE/AHWAHNEE PROGRAMS
Report of Independent Certified Public Accountants. . . . . . . . . F-23
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-24
Statements of Operations for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-26
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-28
THE MORI POINT PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-34
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-35
Statements of Operations for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-36
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-37
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-38
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-39
F-1
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-42
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-43
Statements of Operations for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-44
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-45
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-46
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-47
THE CYPRESS LAKES PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-50
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-51
Statements of Operations for two years ended December 31, 1997
and 1998 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-52
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-53
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-54
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-55
THE PALMDALE/JOSHUA RANCH PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-58
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-59
Statements of Operations for two years ended December 31,
1997 and 1998 and for the six months ended June 30, 1998
and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . F-60
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998
and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . F-61
Statements of Cash Flows for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-62
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-63
THE STACEY ROSE PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-66
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-67
Statements of Operations for two years ended December 31,
1997 and 1998 and for the six months ended June 30, 1998
and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . F-68
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-69
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-70
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-71
THE ESPERANZA PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-74
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-75
Statements of Operations for two years ended December 31,
1997 and 1998 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-76
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-77
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-78
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-79
</TABLE>
F-2
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED BALANCE SHEET
The following unaudited Pro Forma Combined Balance Sheet as of June
30, 1998 and the Pro Forma Combined Statement of Operations for the year
ended December 31, 1997 and for the six months ended June 30, 1998 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, the Sacramento/Delta Greens Program, the Cypress Lakes
Program, the Palmdale/Joshua Ranch Program, the Stacey Rose Programs and the
Esperanza Program (collectively, "The Acquisition"). The unaudited Pro Forma
Balance Sheet has been prepared as if The Acquisition had been consummated as
of June 30, 1998. The unaudited Pro Forma Statement of Operations for the
year ended December 31, 1997 and for the six months ended June 30, 1998 has
been prepared as if The Acquisition occurred at the beginning of each 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-3
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30, 1998
--------------------------------------------------------------------
The Pro Forma Pro Forma
Company Programs(1) Adjustments Combined
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
THE ACQUISITION
ASSETS:
Real estate, net . . . . . . . . . . . . . . $ - $23,283,793 $ 4,317,207 (2) $27,601,000
Cash and cash equivalents. . . . . . . . . . 3,901 2,806,519 (668)(4) 2,809,752
Restricted cash. . . . . . . . . . . . . . . - 221,726 - 221,726
Notes receivable . . . . . . . . . . . . . . - 295,629 295,629
Goodwill . . . . . . . . . . . . . . . . . . - - 100,000 (3) 100,000
Property and equipment . . . . . . . . . . . - 340,350 340,350
Deferred membership selling expense. . . . . - 581,781 - 581,781
Other assets . . . . . . . . . . . . . . . . - 108,815 108,815
Due from affiliate . . . . . . . . . . . . . - 1,955,243 (1,955,243)(5) -
Deferred acquisition costs . . . . . . . . . 1,955,243 (1,955,243)(3) -
---------- ---------- ----------- ----------
Total assets. . . . . . . . . . . . . . 1,959,144 29,593,856 32,059,053
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES:
Deferred membership revenue. . . . . . . . . - 1,385,710 1,385,710
Capital lease obligations. . . . . . . . . . - 313,083 313,083
Accounts payable and other liabilities . . . - 2,327,157 2,327,157
Due to affiliate . . . . . . . . . . . . . . 1,955,243 2,072,494 (1,955,243)(5) 1,818,684
(385,523)(6)
---------- ---------- ----------- ----------
Total liabilities . . . . . . . . . . . 1,955,243 6,230,157 5,844,634
---------- ---------- ----------
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common Stock . . . . . . . . . . . . . . . . 391 0 1,403 (2) 1,727
(67)(4)
Additional paid-in-capital . . . . . . . . . 3,510 0 27,679,503 (2) 26,212,692
(1,855,243)(3)
(601)(4)
385,523(6)
Accumulated deficit. . . . . . . . . . . . . - - -
Owners' equity . . . . . . . . . . . . . . . - 23,363,699 (23,363,699)(2) -
---------- ---------- ----------
Total stockholders' equity. . . . . . . 3,901 23,363,699 26,214,419
---------- ---------- ----------
Total liabilities and
stockholders' equity. . . . . . . . 1,959,144 29,593,856 32,059,053
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-4
<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 June
30, 1998.
(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 $23,363,699
Add: Excess of real estate appraised
value over book value 4,317,207(a)
-----------
Fair value of assets acquired and units
issued in Acquisition $27,680,906
Less: Par value of stock issued (1,403)
-----------
Net increase to additional paid-in-capital
and accumulated deficit $27,679,503
-----------
-----------
</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 original shareholder group having a significant ownership
interest in the Company and control of senior management and board of
director positions, the Company is considered the accounting acquirer in
the Acquisition. The transaction will be consummated by issuing 1,403,321
units of the Company, the value of which is estimated to be $19.73 per
unit, to the investors in the Programs. The value per unit of the
Company's units is based on the following calculation:
<TABLE>
<S> <C>
Fair value of net assets acquired in Acquisition $27,680,906
divided by the number of units issued 1,403,321
----------
Fair value per unit $ 19.73
----------
----------
</TABLE>
This excess purchase price is due to the appraised value of the
properties held by some of the programs being greater than their
carrying value on the program's historical financial statements.
These excess values are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Program Historical Financial Appraised Value Excess Purchase Price
Value
Mori Point $4,100,000 $6,000,000 $1,900,000
Oceanside 3,525,539 5,080,000 1,554,461
Cypress Lakes 5,200,000 6,000,000 800,000
Yosemite/Ahwahnee 5,423,254 5,486,000 62,746
--------- --------- ---------
TOTAL $4,317,207
---------
---------
</TABLE>
(3) To reclass the various professional fees incurred to consummate the
securities registration ($1,855,243) to equity, and the direct costs of
consummating the Acquisition to goodwill.
(4) To reflect the cancellation of 66,807 shares of common stock of the Company
in conjunction with the final allocation of units between Program investors
and founders.
(5) To eliminate intercompany receivables.
(6) To reflect the forgiveness of fees due from the Oceanside ($261,273) and
Yosemite/Ahwahnee ($124,250) programs and the resulting adjustment to the
value of the stock given to the founders of the Company.
F-5
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED BALANCE SHEETS
(7) 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>
<CAPTION>
SEGMENT ASSETS JUNE 30
Vacation and Residential Home
Leisure Resort Development All Other Total
-------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C>
Segment Assets 10,214,627 5,889,933 17,806,503 33,911,063
</TABLE>
<TABLE>
<CAPTION>
RECONCILIATION OF ASSETS
<S> <C>
Total assets for reportable segments 33,911,063
Cash 3,233
Goodwill 100,000
Elimination of receivables from corporate headquarters (1,955,243)
----------
Consolidated total assets after adjustments 32,059,053
----------
----------
</TABLE>
F-6
<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>
<CAPTION>
Year Ended December 31, 1997 Six Months Ended June 30, 1998
------------------------------------------------- -----------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Programs(1) Adjustments Combined Programs(1) Adjustments Combined
---------- ----------- -------- ---------- ----------- --------
THE ACQUISITION
<S> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . $5,193,012 $ $5,193,012 $324,654 $324,654
Cost of sales. . . . . . . . . . 4,081,530 4,081,530 121,187 121,187
---------- ---------- --------- ---------
Gross profit . . . . . . . . . . 1,111,482 1,111,482 203,467 203,467
Selling, general and
administrative . . . . . . . . 4,357,059 350,000(2) 5,676,062 1,754,181 175,000(2) 2,413,683
949,003(3) 474,502(3)
20,000(4) 10,000(4)
Land write down. . . . . . . . . 1,299,651 1,299,651 255,000 - 255,000
Management fees. . . . . . . . . 949,003 (949,003)(3) 0 474,502 (474,502)(3)
---------- ---------- --------- ---------
Total expenses . . . . . . . . . 6,605,713 6,975,713 2,483,683 2,668,683
---------- ---------- --------- ---------
Interest income (expense). . . . 31,345 31,345 (1,117) (1,117)
Gain on sale of property . . . . - - 1,871,279 1,871,279
---------- ---------- --------- ---------
Net income (loss). . . . . . . . (5,462,886) (5,832,886) (410,054) (595,054)
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Net loss per
common share(5). . . . . . . . . (3.42) (0.34)
---------- ---------
---------- ---------
</TABLE>
F-7
<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 and for the six months ended June 30,
1998.
(2) To reflect the replacement of National as asset manager of the investment
programs with the new management structure of the Company:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1997 June 30, 1998
----------------- -------------
<S> <C> <C>
Officers and staff salaries to be $ 806,000 $ 403,000
included in selling, general and
administration after Acquisition
Officers salaries included in selling,
general and administration prior to $(456,000) $(228,000)
Acquisition -------- -------
Pro forma adjustment to selling, general
and administration $ 350,000 $ 175,000
-------- -------
-------- -------
</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 1,726,617 weighted average number of shares
outstanding and does not include any warrants to be issued in conjunction
with the company's units offering or the Acquisition.
(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.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
<S> <C> <C> <C> <C>
Vacation and Residential Home
Leisure Resort Development All Other Total
-------------- ----------- --------- -----
Revenues 902,162 4,290,850 5,193,012
Segment profit/(loss) (1,795,368) (1,665,850) (1,545,668) (5,006,886)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
<S> <C> <C> <C> <C>
Vacation and Residential Home
Leisure Resort Development All Other Total
-------------- ----------- --------- -----
Revenues 324,654 - - 324,654
Segment profit/(loss) (1,877,901) 2,385,609 (689,762) (182,054)
</TABLE>
F-8
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(6) Segment Information (continued)
<TABLE>
<CAPTION>
PROFIT OR LOSS RECONCILIATION DECEMBER 31, 1997 JUNE 30, 1998
<S> <C> <C>
Total profit or loss for reportable segments (5,006,886) (182,054)
Adjustment for expenses not included in
segment loss:
Officers salaries (806,000) (403,000)
Amortization of goodwill (20,000) (10,000)
--------- -------
Total pro forma loss after adjustments (5,832,886) (595,054)
--------- -------
--------- -------
</TABLE>
F-9
<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 June 30, 1998. 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 June 30, 1998 in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
July 17, 1998
F-10
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
BALANCE SHEET
JUNE 30, 1998
<TABLE>
<S> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,901
Deferred acquisition costs . . . . . . . . . . . . . . . . . 1,955,243
---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . 1,959,144
---------
---------
LIABILITIES
Due to affiliate . . . . . . . . . . . . . . . . . . . . . . 1,955,243
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 . . . . . . . . . 1,959,144
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-11
<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 units consisting of one
share of its common stock plus one warrant at a price of $20 per Unit. Each
warrant entitled the holder to purchase three 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 units of the Company issued to the investors in these programs:
<TABLE>
<CAPTION>
Number of
Investment Program Units
- ------------------ -----
<S> <C>
Oceanside 268,653
Yosemite/Ahwahnee I and II 340,006
Mori Point 270,652
Sacramento/Delta Greens 78,524
Cypress Lakes 291,246
Palmdale/Joshua Ranch 131,094
Esperanza 10,818
Stacey Rose A and 12,328
---------
1,403,321
</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 registration of the units to be issued in the Acquisition. If the
transaction is not successfully completed, these costs will be expensed.
Upon a successful completion of the transaction, the direct costs associated
with the acquisition of the programs, which are approximately $100,000, has
been capitalized and will be allocated in conjunction with the acquisition
allocations. The remaining balance of $1,855,243, which represents the costs
associated with the registration of the securities to be issued in the
Acquisition, will be recorded as an adjustment to additional paid in capital.
F-12
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO BALANCE SHEET
(CONTINUED)
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. The agreements also provide for the issuance of 10,000
nonqualified stock options to each member upon completion of the Acquisition
and 10,000 additional nonqualified stock options to be issued to each of
these members on the first and second anniversaries of the Acquisition.
These options have ten year terms. The original tranche of options are
exercisable at $20 per share, while the remaining two tranches are
exercisable at the market price of the Company's stock at the date of grant.
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.
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-13
<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-14
<PAGE>
THE OCEANSIDE PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 145,072 $ $17,037
Restricted cash 1,421,670 221,726
Note receivable (Note 7) 50,000 50,000
Real estate and improvements - 3,525,539
Real estate property held for sale 3,322,329 -
Property and equipment, net (Note 3) 14,093 36,436
Other assets 46,597 32,712
Due from affiliate (Note 1) 443,647 452,022
---------- ----------
Total assets $5,443,408 $4,335,472
---------- ----------
---------- ----------
LIABILITIES:
Accounts payable $ 274,664 $ 292,478
Due to affiliate (Note 4) 800,000 281,273
Accrued expenses and other liabilities 197,030 204,398
---------- ----------
Total liabilities 1,271,694 778,149
COMMITMENTS AND CONTINGENCIES (Note 4)
OWNERS' EQUITY:
Owners' Equity 4,171,714 3,557,323
---------- ----------
Total liabilities and owners' equity $5,443,408 $4,335,472
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------- -------------------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
REVENUES FROM HOME SALES $ 4,290,850 $ 5,490,180 $ - $ 3,240,050
COST OF HOME SALES 3,828,982 4,975,160 - 2,872,014
----------- ----------- ---------- -----------
GROSS PROFIT 461,868 515,020 - 368,036
EXPENSES:
Selling, general and administrative 1,014,712 842,987 205,047 551,563
Real estate inventory writedown (Note 7) 1,069,651 - - 360,172
Related party management fees (Note 4) 300,000 300,000 150,000 150,000
----------- ----------- ---------- -----------
Total expenses 2,384,363 1,142,987 355,047 1,061,735
Interest income 64,645 79,292 10,093 33,788
Gain on sale of real estate (Note 8) - - 2,730,563 -
----------- ----------- ---------- -----------
Net income (loss) $(1,857,850) $ (548,675) $2,385,609 $ (659,911)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
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
Capital distributions (3,000,000)
Net profit for the Period (unaudited) 2,385,609
Balance June 30, 1998 (unaudited) $ 3,557,323
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- ---------------------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,857,850) $ (548,675) $ 2,385,609 $ (659,911)
Adjustments net loss to cash
provided by (used in) operating
activities:
Depreciation and amortization 12,584 3,352 4,432 4,255
Gain on sale of real estate - - (2,730,563) -
Real estate inventory writedown 1,069,651 - - -
Increase (decrease) from changes in:
Restricted cash 358,471 326,089 1,199,944 250,360
Note receivable (50,000) - -
Real estate inventory 1,161,508 1,155,537 - 1,231,159
Other assets (21,631) (24,120) 13,885 (35,948)
Due from affiliate (443,647) - (8,375) -
Accounts payable (311,104) 286,196 17,814 (108,989)
Accrued expenses and
other liabilities 379,306 (196,141) (772,632) 103,301
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 297,288 1,002,238 110,114 784,227
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (4,854) (17,600) - (4,854)
Additions to real estate property held
for sale (102,409) (96,462) (238,149) -
Cash received on sale of real estate - - 3,000,000 -
----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities (107,263) (114,062) 2,761,851 (4,854)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds 1,821,560 3,600,000 - 1,821,560
Line of credit repayments (1,825,470) (3,596,090) - (1,825,470)
Contributions (distributions) (701,250) (900,000) (3,000,000) (450,000)
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (705,160) (896,090) (3,000,000) (453,910)
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents (515,135) (7,914) (128,035) 325,463
Cash and cash equivalents
at beginning of period 660,207 668,121 145,072 660,207
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period $ 145,072 $ 660,207 $ 17,037 $ 985,670
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash paid during the
period for interest $ 4,272 $ 9,526 - $ 4,272
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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-18
<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 equity in
American. 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 $20 per unit. Each warrant entitled the holder to purchase three
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 and June 30, 1998 were $1,421,670 and
$221,726.
F-19
<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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however, in the opinion of management of the Program, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation o the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
F-20
<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
and June 30, 1998 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>
<CAPTION>
December 31 June 30,
1997 1998
----------- ----------
<S> <C> <C>
Office and computer equipment $ 5,787 $16,776
Furniture and fixtures 25,145 40,931
------ ------
30,932 57,707
Less accumulated depreciation (16,839) (21,271)
------ ------
$14,093 $36,436
------ ------
------ ------
</TABLE>
NOTE 4. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages seven other programs under similar
servicing agreements. As documented within the servicing agreement, National
is to receive an annual fee equal to 1% of the original loan balance.
National's requirements under the servicing agreement include managing the
assets of the Program to assure that the purpose and the activities of the
Program are continued for the investors. The Program incurred asset
management expenses of $300,000, $300,000, $150,000 and $150,000 for the
years ended December 31, 1996 and 1997 and for the six months ended June 30,
1997 and 1998. Additionally, the Program accrued compensation expense of
$192,000, $192,000, $96,000 and $96,000 for the years ended December 31, 1996
and 1997 and for the six months ended June 30, 1997 and 1998 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 and June 30, 1998 were $800,000 and $281,273. Included in the Due to
Affiliate balance at June 30, 1998 is an amount of $261,273, which relates to
commissions payable to National for the sale of the symphony lots.
F-21
<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.
NOTE 8. RELATED PARTY TRANSACTIONS
In June 1998, the Program purchased land held for sale from the Oceanside
Program ("Oceanside") and immediately sold the same land to an outside third
party for approximately $6,550,000 in net cash proceeds. In exchange for the
purchase of the Program's land from Oceanside, the program gave to Oceanside
$3,000,000 in cash, and land and a golf course, valued at $3,550,000. The
value of the land and golf course was derived by subtracting the value of the
land sold to an outside third party of $6,550,000 from the $3,000,000 of cash
given to Oceanside. This transaction resulted in a loss on the sale of the
land and golf course of approximately $478,000. The Program also entered into
a lease agreement with Yosemite for a five year lease of the golf course back
to Yosemite. Annual lease revenue to be received as of June 30, 1998 were as
follows:
<TABLE>
<CAPTION>
Years Ending December 31 Amount
------------------------ ------
<S> <C>
1998 $ 80,000
1999 220,000
2000 390,000
2001 630,000
2002 760,000
Thereafter 380,000
---------
$2,460,000
---------
---------
</TABLE>
NOTE 9. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
As part of the purchase and sale transaction disclosed in Note 8, land
valued at approximately $3,550,000 was exchanged between the Program and the
Yosemite/Ahwahnee Program.
F-22
<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-23
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS:
Real estate and improvements (Note 3) $10,137,074 $5,423,254
Cash and cash equivalents - 2,751,587
Notes receivable (Note 4) 353,028 245,629
Property and equipment, net (Note 5) 371,058 303,904
Deferred membership selling expense (Note 11) 538,993 581,781
Other assets 61,935 76,103
Due from affiliate (Note 1) 242,639 769,618
---------- ----------
Total assets $11,704,727 $10,151,876
---------- ----------
---------- ----------
LIABILITIES:
Capital lease obligations (Note 6) 340,563 313,083
Accounts payable 303,400 166,693
Due to affiliate (Note 7) 841,763 997,532
Accrued property taxes (Note 7) 683,558 499,606
Accrued expenses and other liabilities 144,149 176,136
Deferred revenues (Note 11) 1,181,577 1,385,710
---------- ----------
Total liabilities 3,495,010 3,538,760
COMMITMENTS AND CONTINGENCIES (NOTE 7)
OWNERS' EQUITY:
Owners' Equity 8,209,717 6,613,116
---------- ----------
Total liabilities and
owners' equity $11,704,727 $10,151,876
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- --------------------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
REVENUES
Golf course operations $ 765,167 $ 571,778 $ 252,953 $ 416,898
Sale of RV memberships 136,995 51,380 71,701 29,381
Sale of developed lots - 99,961 - -
---------- ---------- ---------- ----------
Total revenues 902,162 723,119 324,654 446,279
COST OF SALES
Golf course operations 252,548 165,836 121,187 90,827
Developed lots - 83,190 - -
---------- ---------- ---------- ----------
Total cost of sales 252,548 249,026 121,187 90,827
GROSS PROFIT 649,614 474,093 203,467 355,452
EXPENSES:
Selling, general and administrative 2,470,201 2,333,735 1,110,194 1,379,617
Related party management fees (Note 7) 200,000 200,000 100,000 100,000
---------- ---------- ---------- ----------
Total expenses 2,670,201 2,533,735 1,210,194 1,479,617
Interest expense 38,781 18,962 11,890 5,230
Loss on sale of real estate (Notes 12 and 13) - - 859,284 -
---------- ---------- ---------- ----------
Net loss $(2,059,368) $(2,078,604) $(1,877,901) $(1,129,395)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-25
<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
Capital contributions (unaudited) 281,300
Net loss for the period (unaudited) (1,877,901)
----------
Balance June 30, 1998 (unaudited) $6,613,116
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- -------------------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,059,368) $(2,078,604) $(1,877,901) $(1,129,395)
Adjustments net loss to cash
provided by (used in) operating activities:
Cost of developed lots sold - 83,190 -
Loss on sale of real estate - 859,284 -
Depreciation and amortization 381,299 336,229 175,902 184,155
Increase (decrease) from changes in:
Other assets (114,023) (264,478) 93,231 (196,083)
Due from affiliate (242,639) - (526,979) -
Accounts payable 92,661 172,210 (135,521) 117,633
Accrued expenses and
other liabilities 622,226 304,920 (120,446) 318,272
Net deferral of sales revenues and
selling expenses 443,673 198,910 161,345 242,888
---------- ---------- --------- ---------
Net cash provided by (used in)
operating activities (876,171) (1,247,623) (1,371,085) (462,530)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment - (48,899) -
Net cash proceeds from the purchase and sale of
assets (Notes 12 and 13) - 3,868,852 -
Additions to real estate (56,001) (23,250) (35,577)
---------- ---------- --------- ---------
Net cash provided by (used in)
investing activities (56,001) (72,149) 3,868,852 (35,577)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease repayments (80,294) (67,088) (27,480) (104,345)
Contributions 910,915 1,141,111 281,300 674,898
---------- ---------- --------- ---------
Net cash provided by (used in)
financing activities 830,621 1,074,023 253,820 570,553
---------- ---------- --------- ---------
Net increase (decrease) in
cash and cash equivalents (101,551) (245,749) 2,751,587 72,446
Cash and cash equivalents
at beginning of period 101,551 347,300 - 101,551
---------- ---------- --------- ---------
Cash and cash equivalents
at end of period $ - $ 101,551 $ 2,751,587 $ 173,997
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Cash paid during the
period for interest $ 40,628 $ 27,557 $ 31,885 $ 21,354
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-27
<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 equity in
American. 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 $20 per unit.
Each warrant entitled the holder to purchase three 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-28
<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-29
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED SELLING EXPENSES
The Company expenses most forms of advertising, except for costs associated
with commissions and direct mail costs, which is capitalized and amortized over
its expected period of failure benefits.
Commissions include commissions paid to salespeople, which are directly
associated with the successful sale of individual memberships. The commissions
paid to salespeople are amortized over the same period that the membership
revenue is recognized. Direct mail advertising consists primarily of the
campaigns held to promote the sale of the recreational vehicle lots. The
Company is able to determine which membership sales occur because of the direct
mailings. As a result, the total mailing costs are allocated to these
membership sakes and amortized over the same period
INCOME TAXES
The financial statements include the activity of the Programs, whose income
or losses are included in the investors' respective tax returns.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1998 are
unaudited; however, in the opinion of management of the Program, the interim
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation o the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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
and June 30, 1998 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>
<CAPTION>
December 31, June 30,
1997 1998
----------- ----------
<S> <C> <C>
Land $ 8,114,645 $5,205,536
Land improvements 1,890,656 223,800
Buildings and improvements 820,783 152,681
----------- ----------
10,826,084 5,582,017
Less accumulated depreciation (689,010) (158,763)
----------- ----------
$10,137,074 $5,423,254
----------- ----------
----------- ----------
</TABLE>
F-30
<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 and $25,150 as of December 31, 1997 and June 30, 1998. As of December
31, 1997 and June 30, 1998, a total of $324,502 and $284,704 of the notes
receivable balance is expected to be collected after one year. The total
allowance for doubtful accounts as of December 31, 1997 and June 30, 1998 is
$41,073 and $4,080.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------- ----------
<S> <C> <C>
Capital lease equipment $505,998 $515,317
Furnitures and fixtures 25,349 2,987
Machinery and equipment 37,033 -
----------- ----------
568,380 518,304
Less accumulated depreciation (197,322) (214,400)
----------- ----------
$371,058 $303,904
----------- ----------
----------- ----------
</TABLE>
NOTE 6. CAPITAL LEASE OBLIGATIONS
Future minimum rental payments under noncancellable capital leases as of
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
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-31
<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,
$200,000, $100,000 and $100,000 for the years ended December 31, 1996 and 1997
and for the six months ended June 30, 1997 and 1998. Additionally, the Programs
accrued compensation expense of $264,000, $264,000, $114,000 and $114,000 for
the years ended December 31, 1996 and 1997 and for the six months ended June 30,
1997 and 1998 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 and June 30, 1998 were $841,763 and
$997,532. Included in the Due to Affiliate balance at June 30, 1998 is an
amount of $124,250, which relates to commissions payable to National for the
sale of the lots.
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 and $499,606 as of
December 31, 1997 and June 30, 1998. 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.
As part of the purchase and sale transaction disclosed in Note 13, land
valued at approximately $3,550,000 was exchanged between the Program and the
Oceanside Program.
F-32
<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>
<CAPTION>
December 31, June 30,
1997 1996 1998 1997
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Deferred Selling Expenses:
Deferred selling expenses, beginning of year $ 263,508 $ 0 $ 538,993 $263,508
Expenses deferred 338,627 292,787 76,219 163,313
Expenses recognized (63,142) (29,279) (33,431) (30,592)
Deferred expenses written off - - - -
---------- -------- ---------- --------
Net change 275,485 263,508 42,788 132,721
---------- -------- ---------- --------
Deferred selling expenses, end of year $ 538,993 $263,508 $ 581,781 $396,229
---------- -------- ---------- --------
---------- -------- ---------- --------
Deferred Revenue:
Deferred revenue, beginning of year $ 462,419 $ 0 1,181,577 462,419
Revenue deferred 856,153 513,799 275,834 428,076
Revenue recognized (136,995) (51,380) (71,701) (29,381)
---------- -------- ---------- --------
Net change 719,158 462,419 204,133 398,695
---------- -------- ---------- --------
Deferred Revenue, end of year $1,181,577 $462,419 $1,385,710 $861,114
---------- -------- ---------- --------
---------- -------- ---------- --------
</TABLE>
NOTE 12. SALE OF LAND
On February 19, 1998, the Program entered into a sale transaction with a
consultant on the project for the sale of 13 single-family development estate
lots. The total sale price for these lots was $307,500 which realized a
$477,757 loss on the sale. Included in the sale agreement was a repurchase
provision which gives the Program the option to repurchase 12 of these lots from
the buyer for $300,000. In order to maintain this option, the Program must make
monthly option payments of $4,165 per month until the options are exercised.
The repurchase option expires in January 2001.
NOTE 13. RELATED PARTY TRANSACTIONS
In June 1998, the Program purchased land held for sale from the Oceanside
Program ("Oceanside"), and immediately sold the same land to an outside third
party for approximately $6,550,000 in net cash proceeds. In exchange for the
purchase of the Program's land from Oceanside, the Program gave to Oceanside
$3,000,000 in cash, and land and a golf course, valued at $3,550,000. The
valuation of the land and golf course was derived by subtracting the value of
the land sold to an outside third party of $6,550,000 from the $3,000,000 of
cash given to Oceanside. This transaction resulted in a loss on the sale of
the land and golf course of approximately $478,000. The Program then entered
into a five year lease agreement for the operation of the golf course.
Future minimum lease payments under the operating lease as of June 30, 1998
were as follows:
<TABLE>
<CAPTION>
Years Ending December 31 Amount
------------------------ ------
<S> <C>
1998 $ 80,000
1999 220,000
2000 390,000
2001 630,000
2002 760,000
Thereafter 380,000
----------
$2,460,000
----------
----------
</TABLE>
F-33
<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-34
<PAGE>
THE MORI POINT PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS:
Land $4,100,000 $4,100,000
Cash and cash equivalents 7,204 5,176
Due from affiliate (Note 1) 232,707 255,964
---------- ----------
Total assets $4,339,911 $4,361,140
---------- ----------
---------- ----------
LIABILITIES:
Due to affiliate (Note 3) $ 497,885 $ 537,885
Notes to affiliate (Note 3) - 43,655
Accrued property taxes (Note 3) 264,464 164,497
Accrued expenses 86,615 102,067
---------- ----------
Total liabilities $ 848,964 $ 848,104
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 3,490,947 3,513,036
---------- ----------
Total liabilities and
owners' equity $4,339,911 $4,361,140
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------ ------------------------
1997 1996 1998 1997
--------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 181,034 $ 90,348 $ 73,072 $ 73,340
Related party management fees (Note 3) 100,000 100,000 50,000 50,000
--------- --------- --------- ---------
Total expenses 281,034 190,348 123,072 123,340
Interest income/(expense) 1,586 1,223 (776) 488
--------- --------- --------- ---------
Net loss $(279,448) $(189,125) $(123,848) $(122,852)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
Total
----------
<S> <C>
Balance January 1, 1996 3,352,238
Capital contributions 202,310
Net loss for the year (189,125)
----------
Balance December 31, 1996 3,365,423
Capital contributions 404,972
Net loss for the period (279,448)
----------
Balance December 31, 1997 $3,490,947
Capital contributions (unaudited) 145,937
Net loss for the period (unaudited) (123,848)
----------
Balance June 30, 1998 (unaudited) $3,513,036
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------ ------------------------
1997 1996 1998 1997
--------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(279,448) $(189,125) $(123,848) $(122,852)
Increase (decrease) from changes in:
Due from affiliate (232,707) - (23,257) (6,522)
Accrued expenses 75,355 25,847 (44,515) (47,606)
--------- --------- --------- ---------
Net cash used in operating
activities (436,800) (163,278) (191,620) (176,980)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 404,972 202,310 145,937 196,376
Proceeds from notes to affiliate - - 43,655 -
--------- --------- --------- ---------
Net cash provided by
financing activities 404,972 202,310 189,592 196,376
Net increase (decrease) in cash and cash
equivalents (31,828) 39,032 (2,028) 19,396
Cash and cash equivalents at beginning
of period 39,032 - 7,204 39,032
--------- --------- --------- ---------
Cash and cash equivalents
at end of period $ 7,204 $ 39,032 $ 5,176 $ 58,428
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-38
<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 equity in
American. 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 $20 per unit.
Each warrant entitled the holder to purchase three 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
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-39
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however, in the opinion of management of the Program, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages six other programs under similar
servicing agreements. As documented within the servicing agreement, National is
to receive an annual fee equal to 1% of the original loan balance. National's
requirements under the servicing agreement include managing the assets of the
Program to assure that the purpose and activities of the Program are continued
for the investors. The Program incurred asset management expenses of $100,000,
$100,000, $50,000 and $50,000 for the years ended December 31, 1996 and 1997
and for the six months ended June 30, 1997 and 1998. Total accrued and unpaid
management fees as of December 31, 1997 and June 30, 1998 were $497,885 and
$537,885.
F-40
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
NOTES TO AFFILIATE
The Program received advances from National during 1998 amounting to $42,700.
These advances are evidenced by demand notes with interest at the rate of 10%
per annum.
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 $264,464 and $164,497 as of
December 31, 1997 and June 30, 1998. 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-41
<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-42
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS:
Land $ 2,000,000 $ 1,745,000
Cash and cash equivalents 4,099 7,886
Due from affiliate (Note 1) 104,528 118,430
----------- -----------
Total assets $ 2,108,627 $ 1,871,316
----------- -----------
----------- -----------
LIABILITIES:
Accounts payable $ 25,641 $ 14,094
Due to affiliate (Note 3) 188,344 181,178
Notes to affiliate (Note 3) - 18,500
Accrued property taxes (Note 3) 58,536 27,308
Accrued expenses 49,750 59,750
----------- -----------
Total liabilities 322,271 300,830
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 1,786,356 1,570,486
----------- -----------
Total liabilities and owners' equity $ 2,108,627 $ 1,871,316
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
Year Ended December 31, June 30,
----------------------------- -----------------------------
1997 1996 1998 1997
----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 115,620 $ 169,649 $ 35,610 $ 69,059
Land write-down (Note 5) 230,000 845,000 255,000 230,000
Related party management fees (Note 3) 50,000 50,000 25,000 25,000
----------- ----------- ----------- -----------
Total expenses 395,620 1,064,649 315,610 324,059
Interest income 824 1,965 65 479
----------- ----------- ----------- -----------
Net income (loss) $ (394,796) $(1,062,684) $ (315,545) $ (323,580)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
Total
-----------
<S> <C>
Balance January 1, 1996 $ 2,820,595
Capital contributions 262,572
Net loss for the year (1,062,684)
-----------
Balance December 31, 1996 2,020,483
Capital contributions 160,669
Net loss for the year (394,796)
-----------
Balance December 31, 1997 $ 1,786,356
Capital contributions (unaudited) 99,675
Net loss for the period (unaudited) (315,545)
-----------
Balance June 30, 1998 (unaudited) $ 1,570,486
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
Year Ended December 31, June 30,
----------------------------- ------------------------------
1997 1996 1998 1997
------------ ----------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (394,796) $(1,062,684) $ (315,545) $ (323,580)
Adjustment to reconcile net income
(loss) to net cash provided by (used in)
operating activities -
Real estate property write-down 230,000 845,000 255,000 230,000
Increase (decrease) from changes in:
Due from affiliate (104,528) - (13,902) (2,813)
Accounts payable (4,283) 29,924 (11,547) (4,284)
Accrued expenses 54,454 (19,834) (28,394) (15,759)
----------- ----------- ----------- -----------
Net cash used in operating activities (219,153) (207,594) (114,388) (116,436)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 160,669 262,572 99,675 76,125
Proceeds from notes to affiliate - - 18,500 -
----------- ----------- ----------- -----------
Net cash provided by
financing activities 160,669 262,572 118,175 76,125
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (58,484) 54,978 3,787 (40,311)
Cash and cash equivalents at beginning
of period 62,583 7,605 4,099 62,583
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period $ 4,099 $ 62,583 $ 7,886 $ 22,272
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash paid during the period for interest $ - $ - $ - $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-46
<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 equity in
American. 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 $20 per unit. Each warrant entitled the holder to purchase three
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
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-47
<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..
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however, in the opinion of management of the Program, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages seven other programs under similar
servicing agreements. As documented within the servicing agreement, National
is to receive an annual fee equal to 1% of the original loan balance.
National's requirements under the servicing agreement include managing the
assets of the Program to assure that the purpose and activities of the
program are continued for the investors. The Program incurred asset
management expenses of $50,000, $50,000, $25,000 and $25,000 for the years
ended December 31, 1996 and 1997 and for the six months ended June 30, 1997
and 1998. Total accrued and unpaid management fees as of December 31, 1997
and June 30, 1998 were $188,344 and $181,178.
F-48
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
NOTES TO AFFILIATE
The program received advances from National during 1998 amounting to
$18,457. These advances are evidenced by demand notes with interest at the
rate of 10% per annum.
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 $58,536 and $27,308 as of
December 31, 1997 and June 30, 1998. 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.
Based on an appraisal done in June 1998, the appraised value of the land
had decreased in 1998 by approximately 13% due to a change in the map of the
property to include a wetlands/habitat area, reducing the number of lots to 465
in 1998. Due to this decrease, an additional $255,000 writedown in the cost of
the land was recorded during the six months ended June 30, 1998.
F-49
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Cypress Lakes "Trudy Pat"
Program (the "Cypress Lakes 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 Cypress
Lakes 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
May 22, 1998
F-50
<PAGE>
THE CYPRESS LAKES PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS:
Land $5,200,000 $5,200,000
Cash and cash equivalents 148,068 20,542
Due from affiliate (Note 1) - 175,336
----------- -----------
Total assets $5,348,068 $5,395,878
----------- -----------
----------- -----------
LIABILITIES:
Accrued property taxes (Note 3) 180,193 204,404
Notes to affiliate (Note 3) - 47,046
Accrued expenses - 119,500
----------- -----------
Total liabilities $ 180,193 $ 370,950
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 5,167,875 5,024,928
----------- -----------
Total liabilities and owners' equity $5,348,068 $5,395,878
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
THE CYPRESS LAKES PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, -----------------------------
----------------------------- June 30,
1997 1996 1998 1997
------------ ----------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 254,272 $ 120,114 $ 165,596 $ 140,454
Related party management fees (Note 3) 140,000 140,000 70,000 70,000
----------- ----------- ----------- -----------
Total expenses 394,272 260,114 235,596 210,454
Interest income 1,919 5,323 1,218 987
----------- ----------- ----------- -----------
Net loss $(392,353) $(254,791) $(234,378) $(209,467)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
THE CYPRESS LAKES PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
Total
-----------
<S> <C>
Balance January 1, 1996 $5,398,074
Capital Contributions 8,579
Net loss for the year (254,791)
-----------
Balance December 31, 1996 5,151,862
Capital Contributions 408,366
Net loss for the period (392,353)
-----------
Balance December 31, 1997 5,167,875
Capital Contributions (unaudited) 91,431
Net loss for the period (unaudited) (234,378)
-----------
Balance June 30, 1998 (unaudited) $5,024,928
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
THE CYPRESS LAKES PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
Year Ended December 31, June 30,
-----------------------------
1997 1996 1998 1997
------------ ----------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(392,353) $(254,791) $(234,378) $(209,467)
Increase (decrease) from changes in:
Due from affiliate - - (175,336) -
Accrued expenses 56,682 (137,803) 143,711 44,798
----------- ----------- ----------- -----------
Net cash used in operating
activities (335,671) (392,594) (266,003) (164,669)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 408,366 8,579 91,431 183,231
Proceeds from notes to affiliate - - 47,046 -
----------- ----------- ----------- -----------
Net cash provided by
financing activities 408,366 8,579 138,477 183,231
Net increase (decrease) in cash
and cash equivalents 72,695 (384,015) (127,526) 18,562
Cash and cash equivalents at beginning
of period 75,373 459,388 148,068 75,373
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period $ 148,068 $ 75,373 $ 20,542 $ 93,935
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash paid during the period for interest $ - $ - $ - $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
THE CYPRESS LAKES 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 Cypress Lakes "Trudy Pat" Program (the "Program") in the
amount of $14,000,000 by selling undivided tenant-in-common interests in such
loan to 832 investors. In July of 1995, on behalf of the Cypress Lakes Program
investors, National foreclosed on the property and took title to the property
("Cypress Lakes") involved in the Cypress Lakes Program. Cypress Lakes currently
consists of 686 acres of raw land. The development rights granted include 1,330
single-family residential lots; an 18-hole golf course, clubhouse, and tennis
courts. The property is located in Contra Costa County, California, which is
located along the northeastern shore of San Francisco Bay and is currently held
in trust by National on behalf of the Cypress Lakes Investors. The Cypress
Lakes property was recently appraised at $5,200,000 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 Cypress Lakes 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 equity in
American. 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 $20 per unit.
Each warrant entitled the holder to purchase three 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
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.
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.
F-55
<PAGE>
THE CYPRESS LAKES PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however in the opinion of the Property's management, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages seven 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 $140,000,
$140,000, $70,000 and $70,000 for the years ended December 31, 1996 and 1997 and
for the six months ended June 30, 1997 and 1998. As of June 30, 1998 there were
no outstanding management fees.
NOTES TO AFFILIATE
The program received advances from National during 1998 amounting to
$46,850. These advances are evidenced by demand notes with interest at the rate
of 10% per annum.
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant effect
on the financial position of the Program.
F-56
<PAGE>
THE CYPRESS LAKES PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $180,193 and $204,404 as of
December 31, 1997 and June 30, 1998. 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-57
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Palmdale/Joshua Ranch
"Trudy Pat" Program (the "Palmdale/Joshua Ranch 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
Palmdale/Joshua Ranch 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
May 24, 1998
F-58
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
---------- -----------
(unaudited)
<S> <C> <C>
ASSETS:
Land $2,700,000 $2,700,000
Cash and cash equivalents 98,898 199
Due from affiliate (Note 1) - 132,373
---------- -----------
Total assets $2,798,898 $2,832,572
---------- -----------
---------- -----------
LIABILITIES:
Accounts payable $ 42,527 $ 35,527
Due to affiliate (Note 3) 3,100 100
Notes to affiliate - 7,220
Accrued property taxes (Note 3) 107,216 63,343
Accrued Expenses - 104,500
---------- -----------
Total liabilities 152,843 210,690
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 2,646,055 2,621,882
---------- -----------
Total liabilities and owners' equity $2,798,898 $2,832,572
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, ----------------
----------------------- June 30,
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 306,484 $ 469,910 $ 157,376 $ 104,883
Related party management fees (Note 3) 150,000 150,000 75,000 75,000
------------ ------------ ------------ ------------
Total expenses 456,484 619,910 232,376 179,883
Interest income 1,008 4,222 74 702
------------ ------------ ------------ ------------
Net income (loss) $ (455,476) $ (615,688) $ (232,302) $ (179,181)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
Total
-----
<S> <C>
Balance January 1, 1996 $ 2,775,289
Capital contributions 517,423
Net loss for the year (615,688)
---------------
Balance December 31, 1996 2,677,024
Capital contributions 424,507
Net loss for the year (455,476)
---------------
Balance December 31, 1997 2,646,055
Capital contributions (unaudited) 208,129
Net loss for the period (unaudited) (232,302)
---------------
Balance June 30, 1998 (unaudited) $ 2,621,882
---------------
---------------
</TABLE>
See accompanying notes to financial statements.
F-61
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- ------------------------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (455,476) $ (615,688) $ (232,302) $ (179,181)
Increase (decrease) from changes in:
Due from affiliate - - (132,373) (12,500)
Accounts payable 42,527 - (7,000) -
Accrued expenses (32,582) (34,432) 57,627 (44,909)
------------- ------------- ------------- -------------
Net cash used in operating activities (445,531) (650,120) (314,048) (236,590)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 424,507 517,423 208,129 255,364
Proceeds from notes to affiliate - - 7,220 -
------------- ------------- ------------- -------------
Net cash provided by
financing activities 424,507 517,423 215,349 255,364
Net increase (decrease) in cash and cash
equivalents (21,024) (132,697) (98,699) 18,774
Cash and cash equivalents at beginning
of period 119,922 252,619 98,898 119,922
------------- ------------- ------------- -------------
Cash and cash equivalents
at end of period $ 98,898 $ 119,922 $ 199 $ 138,696
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Cash paid during the period for interest $ - $ - $ - $ -
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-62
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1992 National Investors Financial, Inc. ("National"), represented by
NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Palmdale/Joshua Ranch "Trudy Pat" Program (the "Program") in
the amount of $15,000,000 by selling undivided tenant-in-common interests in
such loan to 1011 investors. In October of 1993, on behalf of the
Palmdale/Joshua Ranch Program investors, National foreclosed on the property and
took title to the property ("Palmdale/Joshua Ranch") involved in the
Palmdale/Joshua Ranch Program. Palmdale/Joshua Ranch currently consists of 794
acres of raw land. The land consists of 539 proposed single-family lots and 472
acres of open space and proposed streets. The property is located in Palmdale,
California, which is approximately 37 miles north of Los Angeles. The property
is currently held in Trust by National on behalf of the Palmdale/Joshua Ranch
investors. The Palmdale/Joshua Ranch property was recently appraised at
$5,390,000 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 Esperanza 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 equity in
American. 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 $20 per unit. Each warrant entitled the holder to purchase three
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.
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.
F-63
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however in the opinion of the Property's management, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages seven 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 $150,000,
$150,000, $75,000, and $75,000 for the years ended December 31, 1996 and 1997
and for the six months ended June 30, 1997 and 1998. Total accrued and unpaid
management fees as of December 31, 1997 and June 30, 1998 were $3,100 and $100.
NOTES TO AFFILIATE
The program received advances from National during 1998 amounting to
$7,200. These advances are evidenced by demand notes with interest at the rate
of 10% per annum.
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant effect
on the financial position of the Program.
F-64
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $107,216 and $63,343 as of
December 31, 1997 and June 30, 1998. 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-65
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Stacey Rose A and B "Trudy
Pat" Programs (the "Stacey Rose Programs") (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 Stacey
Rose 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
May 22, 1998
F-66
<PAGE>
THE STACEY ROSE PROGRAMS
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS:
Land $ 320,000 $ 320,000
Cash and cash equivalents - 339
Due from affiliate (Note 1) - 27,000
---------- ----------
Total assets $ 320,000 $ 347,339
---------- ----------
---------- ----------
LIABILITIES:
Due to affiliate (Note 3) $ 31,275 $ 33,276
Notes to affiliate (Note 3) - 15,292
Accrued property taxes (Note 3) 37,703 29,709
Accrued expenses - 22,500
---------- ----------
Total liabilities $ 68,978 $ 100,777
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 251,022 246,562
---------- ----------
Total liabilities and owners' equity $ 320,000 $ 347,339
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE>
THE STACEY ROSE PROGRAMS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------- ------------------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 9,200 $ 8,442 $ 4,370 $ 4,594
Related party management fees (Note 3) 4,003 4,003 2,002 2,002
--------- --------- --------- ---------
Total expenses 13,203 12,445 6,372 6,596
Interest expense - - 38 -
--------- --------- --------- ---------
Net loss $ (13,203) $ (12,445) $ (6,410) $ (6,596)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE>
THE STACEY ROSE PROGRAMS
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
Total
-----
<S> <C>
Balance January 1, 1996 $ 276,670
Net loss for the year (12,445)
---------
Balance December 31, 1996 264,225
Net loss for the period (13,203)
---------
Balance December 31, 1997 251,022
Capital contributions (unaudited) 1,950
Net loss for the period (unaudited) (6,410)
---------
Balance June 30, 1998 (unaudited) $ 246,562
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE>
THE STACEY ROSE PROGRAMS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------- -------------------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,203) $ (12,445) $ (6,410) $ (6,596)
Increase (decrease) from changes in:
Due from affiliate - - (27,000) -
Accrued expenses 13,203 12,445 16,507 (6,596)
---------- ---------- --------- ---------
Net cash used in operating
activities - - (16,903) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions - - 1,950 -
Proceeds from notes to affiliate - - 15,292 -
---------- ---------- --------- ---------
Net cash provided by
financing activities - - 17,242 -
Net increase in cash and cash equivalents - - 339 -
Cash and cash equivalents at beginning
of period - - - -
---------- ---------- --------- ---------
Cash and cash equivalents
at end of period $ - $ - $ 339 $ -
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
THE STACEY ROSE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1988 National Investors Financial, Inc. ("National"), represented by
NASD registered securities broker-dealers, completed the funding on two real
estate loans for the Stacey Rose "Trudy Pat" Programs (the "Programs") by
selling undivided tenant-in-common interests in such loans to investors. The
Stacey Rose A loan was in the amount of $85,000 to two investors and the Stacey
Rose B loan was in the amount of $315,300 to 28 investors. In October 1992, on
behalf of the Stacey Rose Program investors, National foreclosed on the property
and took title to the property ("Stacey Rose") involved in the Stacey Rose
Programs. Stacey Rose is currently raw land which is zoned for approximately
160 single-family residential units. The property is located in Victorville,
California, and is currently held in trust by National on behalf of the Stacey
Rose Investors. The Stacey Rose property was recently appraised at $1,600,000
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 Programs,
which consists of the Stacey Rose 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 equity in
American. 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 $20 per unit.
Each warrant entitled the holder to purchase three 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 Programs are
currently capitalizing the associated costs and recording these costs as due
from 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 Programs consider all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents.
LAND
Land is carried at cost. 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.
F-71
<PAGE>
THE STACEY ROSE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Programs, whose income
or losses are included in the investors' respective tax returns.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however in the opinion of the Property's management, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Programs are currently managed, subject to a servicing agreement, by
National. National also currently manages seven 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 $4,003,
$4,003, $2,002 and $2,002 for the years ended December 31, 1996 and 1997 and for
the six months ended June 30, 1997 and 1998. Total accrued and unpaid
management fees as of December 31, 1997 and June 30, 1998 were $31,275 and
$33,276.
NOTES TO AFFILIATE
The program received advances from National during 1998 amounting to
$15,250. These advances are evidenced by demand notes with interest at the rate
of 10% per annum.
LAWSUITS
The Programs are, 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 Programs.
F-72
<PAGE>
THE STACEY ROSE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of 37,703 and 29,709 as of
December 31, 1997 and June 30,1998. 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
Programs to make additional capital contributions. Such contributions are only
recorded to the extent of cash received.
F-73
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Esperanza "Trudy Pat"
Program (the "Esperanza 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
Esperanza 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
May 24, 1998
F-74
<PAGE>
THE ESPERANZA PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS:
Land $ 270,000 $ 270,000
Cash and cash equivalents 7,191 3,753
Due from affiliate (Note 1) - 24,500
---------- ----------
Total assets $ 277,191 $ 298,253
---------- ----------
---------- ----------
LIABILITIES:
Due to affiliate (Note 3) $ 38,750 $ 41,250
Accrued property taxes (Note 3) 16,731 19,647
Accrued Expenses - 21,000
---------- ----------
Total liabilities $ 55,481 $ 81,897
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 221,710 216,356
---------- ----------
Total liabilities and owners' equity $ 277,191 $ 298,253
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-75
<PAGE>
THE ESPERANZA PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------- ------------------------
1997 1996 1998 1997
---------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 5,537 $ 5,001 $ 2,916 $ 2,681
Related party management fees (Note 3) 5,000 5,000 2,500 2,500
---------- --------- --------- ---------
Total expenses 10,537 10,001 5,416 5,181
---------- --------- --------- ---------
Interest income 144 142 62 71
--------- --------- --------- ---------
Net income (loss) $ (10,393) $ (9,859) $ (5,354) $ (5,110)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-76
<PAGE>
THE ESPERANZA PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
Total
----------
<S> <C>
Balance January 1, 1996 241,962
Net loss for the year (9,859)
----------
Balance December 31, 1996 232,103
Net loss for the year (10,393)
----------
Balance December 31, 1997 221,710
Net loss for the period (unaudited) (5,354)
Balance June 30, 1998 (unaudited) $ 216,356
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE>
THE ESPERANZA PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
-------------------
Year Ended December 31, June 30,
------------------------------
1997 1996 1998 1997
---------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,393) $ (9,859) $ (5,354) $ (5,110)
Increase (decrease) from changes in:
Due from affiliate - - (24,500) -
Accrued expenses 10,537 9,951 26,416 5,181
---------- --------- --------- ---------
Net cash provided by (used in)
operating activities 144 92 (3,438) 71
Net increase (decrease)
in cash and cash equivalents 144 92 (3,438) 71
Cash and cash equivalents at beginning
of period 7,047 6,955 7,191 7,047
---------- --------- --------- ---------
Cash and cash equivalents
at end of period $ 7,191 $ 7,047 $ 3,753 $ 7,118
---------- --------- --------- ---------
---------- --------- --------- ---------
Cash paid during the period for interest $ - $ - $ - $ -
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE>
THE ESPERANZA PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1988 National Investors Financial, Inc. ("National"), represented by
NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Esperanza "Trudy Pat" Program (the "Program") in the amount
of $500,000 by selling undivided tenant-in-common interests in such loan to 42
investors. In December of 1990, on behalf of the Esperanza Program investors,
National foreclosed on the property and took title to the property ("Esperanza")
involved in the Esperanza Program. Esperanza is currently raw land which is
zoned for various commercial activities, including retail and office buildings,
with a minimum building site area of 10,000 square feet. The property is
located in Victorville, California and is currently held in Trust by National on
behalf of the Esperanza investors. The Esperanza property was recently
appraised at $530,000 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 Esperanza 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 equity in
American. 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 $20 per unit. Each warrant entitled the holder to purchase three
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
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.
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.
F-79
<PAGE>
THE ESPERANZA PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however in the opinion of the Property's management, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages seven 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 $5,000,
$5,000, $2,500, and $2,500 for the years ended December 31, 1996 and 1997 and
for the six months ended June 30, 1997 and 1998. Total accrued and unpaid
management fees as of December 31, 1997 and June 30, 1998 were $38,750 and
$41,250.
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant effect
on the financial position of the Program.
F-80
<PAGE>
THE ESPERANZA PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $16,731 and $19,647 as of
December 31, 1997 and June 30, 1998. 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-81
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
SUBSCRIPTION ORDER FOR UNITS
I am subscribing for _______ Units at $20.00 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 125,000 Units at $20.00 per
Unit, and that each Unit consists of one share of common stock and three
warrants to purchase three 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 former tenant-in-common 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.)
<TABLE>
<CAPTION>
INVESTOR INFORMATION
<S> <C>
Name of Investor
-------------------------------------------------
Name of Joint Investor
-------------------------------------------------
Street address
-------------------------------------------------
City/State/Zip
-------------------------------------------------
Business Telephone Number
-------------------------------------------------
Home Telephone Number
-------------------------------------------------
- ------------------------------------------- -------------------------------------------------
Investor's Tax I.D. No./Social Security No. Joint Investor's Tax I.D. No./Social Security No.
- ------------------------------------------- -------------------------------------------------
Signature of Investor Signature of Joint Investor
Date: Date:
-------------------------------------- --------------------------------------------
</TABLE>
<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
1-800-590-7772 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.
I-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............................... $ 2,508
NASD Fees.......................................... $ 1,350
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.
** 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
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
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*
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
24.1 Power of Attorney (see signature page)
99.1 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.
II-2
<PAGE>
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 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-3
<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
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Newport Beach, State of California,
on October 6, 1998.
AMERICAN FAMILY HOLDINGS, INC.
By /s/ David G. Lasker
-------------------------------------------
David G. Lasker,
Co-Chairman of the Board
POWER OF ATTORNEY
Each person whose signature appears appoints each of David Lasker and James
Orth, his agent and attorney-in-fact, with full power of substitution to execute
for him and in his name, in any and all capacities, all amendments (including
post-effective amendments) to the Registration Statement to which this power of
attorney is attached.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Co-Chairman of the Board
President
Chief Financial Officer October 6, 1998
/s/ David G. Lasker Chief Accounting Officer
- ---------------------------------
David G. Lasker
Co-Chairman of the Board
Chief Executive Officer
/s/ James N. Orth Secretary October 6, 1998
- ---------------------------------
James N. Orth
Executive Vice President October 6, 1998
/s/ L.C. "Bob" Albertson, Jr. Director
- ---------------------------------
L.C. "Bob" Albertson, Jr.
/s/ Charles F. Hanson Director October 6, 1998
- ---------------------------------
Charles F. Hanson
/s/ Dudley Muth Director October 6, 1998
- ---------------------------------
Dudley Muth
/s/ James G. LeSieur, III Director October 6, 1998
- ---------------------------------
James G. LeSieur, III
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
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
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*
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
24.1 Power of Attorney (see signature page)
99.1 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.
</TABLE>
<PAGE>
EXHIBIT 1.1
AMERICAN FAMILY HOLDINGS, INC.
$5,000,000 OF UNITS
WHOLESALING AGREEMENT
[Name and Address of Wholesaler]
Dear Sir:
American Family Holdings, Inc., a Delaware corporation (the "Corporation"),
proposes to offer and sell to investors, upon the terms and conditions set forth
in the Prospectus dated _______________, 1998, and as the same may be amended or
supplemented from time to time (the "Prospectus"), Units (consisting of one
share of Common Stock and one warrant to purchase three shares of Common Stock)
aggregating $2,500,000, $20 per Unit (the "Offering"). The Offering will not be
completed if the Acquisition described in the Prospectus is not completed.
You are hereby requested to perform, on an exclusive basis, the wholesaling
activities related to the public offering of the Units and by your execution of
a counterpart of this letter in the place indicated, you agree to use your best
efforts, consistent with the terms of this Offering as set forth in the
Prospectus, to perform the services customarily performed by persons conducting
wholesaling services for similar offerings, in accordance with the following
terms and conditions:
1. SOLICITATION AND SOLICITATION MATERIAL. Solicitation and other
activities by you hereunder shall be undertaken only in accordance with
applicable laws and regulations and the terms hereof. Accompanying this letter
is a copy of the Prospectus which you may use to familiarize yourself with the
terms of this Offering. Additional copies of the Prospectus will be sent to you
in reasonable quantities upon your request. No person is authorized to use any
solicitation material other than that referred to in the Prospectus and no
person is authorized to use any solicitation material in any state where such is
prohibited by law.
2. COMPENSATION. As a compensation for services rendered in connection
with your activities, the Corporation hereby agrees to pay to you a commission
equal to two percent of the sales price of the Units sold by broker-dealers
through your efforts or through the efforts of any officer or employee of the
Corporation whose assistance is made available to you. Payment of the
compensation described in this Paragraph 2 is subject to the provisions of
Paragraph 3 hereof.
3. CONDITIONS FOR PAYMENT OF SALES COMPENSATION. All commissions payable
by the Corporation under Paragraph 2 above are subject to acceptance by the
Corporation of the Subscription Agreements from potential investors and the
Corporation specifically reserves the right to reject any such Agreement. In
the event that the Offering is not completed or if the transactions referred to
herein and in the Prospectus are not consummated for any reason, and, as a
result thereof, all subscription payments are refunded to all potential
investors, no commission will be due or payable to you. Commissions to be paid
to you pursuant to Paragraph 2 hereof shall be paid by the Corporation to you
within 15 days following the completion of the Acquisition. There is no minimum
number of Units which must be sold.
4. REPORTS. You agree to provide the Corporation progress reports on
your sales activities on a regular basis, such basis to be mutually agreed upon
among the parties hereto.
5. UNAUTHORIZED INFORMATION AND REPRESENTATIONS. Neither you nor any
other person is authorized by the Corporation or any other person to give any
information or make any representation in connection with this Agreement or the
Offering other than those contained in the Prospectus furnished by the
Corporation. You agree not to publish, circulate or otherwise use any other
advertisement or solicitation material under any circumstances
<PAGE>
unless you have obtained the prior written agreement of the Corporation and
such materials have been approved by counsel to the Corporation and by any
relevant securities regulatory authorities.
6. BLUE SKY QUALIFICATIONS. The Corporation assumes no obligation or
responsibility with respect to the qualification of the Units or the right to
solicit purchases of the Units under the laws of any state or other
jurisdiction. Services to be performed by you hereunder are to be performed
only within the states or other jurisdictions in which solicitations by
broker-dealers are qualified to be made. [The Corporation has listed the
[Units][Common Stock and warrants] on the ______________ and, as such, believes
their offer and sale is exempt from blue sky regulation in all states other than
_______________.]
7. GENERAL. You hereby represent that you are a member in good standing
of the National Association of Securities Dealers, Inc. and that you will
continue such qualification during the term of this Agreement. Upon your
acceptance of this Agreement, you agree to comply with any applicable
requirements of the Securities Act of 1933, as amended (the "Act"), and of the
Securities Exchange Act of 1934, as amended, and the published rules and
regulations thereunder, any applicable rules of the National Association of
Securities Dealers, Inc. and the rules and regulations of all state securities
authorities, as applicable.
8. TERMINATION. This Agreement shall be deemed to have been entered into
as of _______________, 1998 and it may be terminated by written or telegraphic
notice to you from the Corporation upon 60 days prior written notice and, in any
case, will terminate at the close of business on ___________, 199_ (unless
extended thereafter by the Corporation), PROVIDED that all compensation payable
to you under the terms and conditions hereof shall be paid when due, although
this Agreement shall have theretofore been terminated.
9. EXCLUSIVE AGREEMENT. You will provide to the Corporation the services
described herein on an exclusive basis, and the Corporation hereby agrees that
it will employ no other person or entity to perform such wholesaling services
during the term of this Agreement.
10. INDEMNIFICATION.
(a) The Corporation agree to indemnify and hold harmless you and
each person who controls you within the meaning of the Act, against any
losses, claims, damages or liabilities, joint or several, to which you may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Prospectus; or (ii) the omission or alleged omission to
state in the Prospectus a material fact required to be stated therein or
necessary to make the statements therein in the light of the circumstances
under which they were made not misleading; and will reimburse you for any
legal or other expenses reasonably incurred by you in connection with
investigating or defending any such loss, claim, damage, liability or action,
provided, however, that you shall not be indemnified for any losses,
liabilities or expenses arising from or out of an alleged violation of
federal or state securities laws unless (1) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee, (2) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction
as to the particular indemnitee or (3) a court of competent jurisdiction
approves a settlement of the claims against a particular indemnitee. In any
claim for indemnification for federal or state securities law violations, the
party seeking indemnification shall place before the court the position of
the Securities and Exchange Commission and the position, if applicable, of
any state securities regulatory authority in any jurisdiction in which Units
were sold with respect to the issue of indemnification for securities law
violations. The Corporation shall not incur the cost of that portion of any
insurance, other than public liability insurance, which insures any party
against any liability the indemnification of which is herein prohibited.
(b) You agree to indemnify and hold harmless the Corporation
against any losses, claims, damages or liabilities to which the Corporation
may become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereto) arise out of
or are based upon (i) any untrue statement or alleged untrue statement of a
material fact in any communication between you, your representatives or
agents and any investor, or (ii) the omission or alleged omission to state a
material fact required to be stated in any
2
<PAGE>
communication between you, your representatives or agents, and any investor,
or necessary to make the statements to said investor not misleading.
(c) Promptly after receipt by an indemnified party under this
Paragraph 10 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereto is to be made against any
indemnifying party under this Paragraph 10, notify in writing the
indemnifying party of the commencement thereof; and the omission so to notify
the indemnifying party will relieve it from any liability under this
Paragraph 10 as to the particular item for which indemnification is then
being sought but not from any other liability which it may have to any
indemnified party. In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will not be liable to such indemnified party
under this Paragraph 10 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation. If any such indemnifying party elects to
defend any such action, such indemnifying party shall not be liable to any
such indemnified party on account of any settlement of such claim or action
effected without the consent of such indemnifying party. Any indemnified
party may, at its own cost and expense, participate at any time in any claim
or action covered by this Paragraph 10.
11. MISCELLANEOUS. In the event that any dispute arises between you and
the Corporation out of or by reason of this Agreement, then and in that event
such parties do hereby agree that said dispute shall be arbitrated in accordance
with the then existing rules of the American Arbitration Association in Orange
County, California, and that any award rendered thereunder, including attorneys'
fees and costs to the prevailing party, may be entered in any court of competent
jurisdiction, state or federal, including attorneys' fees and costs to the
prevailing party.
This Agreement constitutes the entire Agreement between you and the
Corporation and any change, amendment or alteration to this Agreement shall be
ineffective unless reduced to writing and executed by both parties. This
Agreement shall be governed by California law without giving effect to conflicts
of law or choice of law provisions. Each party agrees to perform any further
acts and execute and deliver any other documents which may reasonably be
necessary to carry out the terms of this Agreement.
It is expressly understood that no representations have been made in
connection with this Agreement other than as herein set forth, except those
representations contained in the Prospectus provided to you.
Very truly yours,
AMERICAN FAMILY HOLDINGS, INC.,
a Delaware corporation
By
--------------------------
David G. Lasker, President
Agreed and Accepted By:
- ----------------------------------
By -------------------------------
Name
-------------------------
Title
-------------------------
Date: __________________, 1998
3
<PAGE>
EXHIBIT 1.2
AMERICAN FAMILY HOLDINGS, INC.
$2,500,000 OF UNITS
SELLING AGREEMENT
Dear Sir or Madam:
American Family Holdings, Inc., a Delaware corporation (the "Corporation"),
proposes to offer and sell to qualified investors, upon the terms and conditions
set forth in the Prospectus, dated the date upon which the Corporation's
Registration Statement (of which the Prospectus is a part) is declared effective
by the Securities and Exchange Commission, and as the same may be amended or
supplemented from time to time (the "Prospectus"), units, consisting of one
share of Common Stock and a warrant to purchase one share of Common Stock
("Units") aggregating $2,500,000 sold as described in the Prospectus, at $20 per
Unit.
You are invited to participate on a nonexclusive basis in this public
offering of Units and by your execution of the confirmation attached hereto, you
agree to use your best efforts, consistent with the terms of this offering as
set forth in the Prospectus, to find purchasers for the Units who are acceptable
to the Corporation, in accordance with the following terms and conditions:
1. PERSONS SOLICITED. You may only solicit the persons whose names and
addresses are set forth on Exhibit A hereto. Subscriptions will not be accepted
from any other persons.
2. SOLICITATION AND SOLICITATION MATERIAL. Solicitation and other
activities by you hereunder shall be undertaken only in accordance with
applicable laws and regulations and the terms hereof. Accompanying this letter
is a copy of the Prospectus which you may use to familiarize yourself with the
terms of this offering. Additional copies of the Prospectus will be sent to you
in reasonable quantities upon your request. No person is authorized to use any
solicitation material other than that referred to in the Prospectus and no
person is authorized to use any solicitation material in any state where such
use is prohibited by law.
3. MANNER OF MAKING OFFERS. Offers will be made only by delivery of a
copy of the Prospectus to a prospective purchaser (an "Offeree"). Before you
receive a Subscription Agreement from an Offeree you should verify that the
Offeree has received, read and is familiar with the Prospectus.
4. COMPENSATION. As compensation for services rendered in soliciting and
obtaining purchasers of the Units, the Corporation has agreed to pay to you a
commission equal to five percent. Such commissions will be evidenced by the
appearance on the Subscription Agreements which have been accepted by the
Corporation of the name of your firm as the Broker-Dealer having solicited such
purchases. You agree that all funds received by you with respect to any
Subscription Agreement shall be promptly transmitted, by the end of the next
business day after receipt, to First Trust of California, N.A., Global Escrow
Deposit Services, 550 South Hope Street, Suite 500, Los Angeles, California
90071, Attention: Brad E. Scarbrough. You will agree to instruct investors to
make checks payable to "First Trust of California, N.A., as Escrow Agent for
American Family Holdings, Inc. Unit Offering". Under no circumstances may you
withhold any portion of the purchase price received from a purchaser of Units to
be applied toward payment of your commission. It is expressly understood that
any and all costs and other related matters which you incur other than those
which the Corporation agrees in writing shall be reimbursed will be your sole
responsibility. In the event that the Corporation decides in the future to
provide compensation in the form of cash sales incentives, such payments would
only be made pursuant to applicable regulatory requirements and approval; if
such items were approved and instituted, your firm would be required to control
the distribution of such items to persons associated with your firm and your
firm would be required to reflect the value of such items on your books and
records.
<PAGE>
5. CONDITIONS FOR PAYMENT OF SALES COMPENSATION. All commissions and
agreed reimbursements of expenses payable by the Corporation under Paragraph 4
above are subject to acceptance of the Subscription Agreement by the Corporation
and the Corporation specifically reserves the right to reject any such
Agreement. In the event that the Acquisition described in the Prospectus is not
completed or if the transactions referred to herein and in the Prospectus are
not consummated for any reason, all subscription payments shall be refunded to
all investors and no commission will be due or payable to you. There is no
minimum number of Units which must be sold. Commissions and agreed
reimbursements of expenses to be paid to you pursuant to Paragraph 4 hereof
shall be paid by the Corporation to the Broker-Dealer as shown on the
Subscription Agreement within 15 days following the closing of the offering.
6. UNAUTHORIZED INFORMATION AND REPRESENTATIONS. Neither you nor any
other person is authorized by the Corporation or any other person to give any
information or make any representations in connection with this Agreement or the
offering of the Units other than those contained in the Prospectus furnished by
the Corporation. You agree not to publish, circulate, or otherwise use any
other advertisement or solicitation material under any circumstances.
7. BLUE SKY QUALIFICATIONS. The Corporation assumes no obligation or
responsibility with respect to the qualification of the Units or the right to
solicit purchases of the Units under the laws of any state or other
jurisdiction, but the Corporation will advise you in writing as to the states or
other jurisdictions in which it is believed that solicitations of purchases of
the Units may be made under the applicable blue sky or securities laws.
Solicitations are to be made only by Broker-Dealers, agents and salesmen
qualified to act as such for such purpose within the states or other
jurisdictions in which they make such solicitations.
8. GENERAL. You hereby represent that you are a member in good standing
of the National Association of Securities Dealers, Inc. ("NASD") and that you
will continue such qualification during the term of this Agreement. Upon your
acceptance of this Agreement and in your soliciting purchases of the Units, you
agree to comply with any applicable requirements of the Securities Act of 1933,
as amended, the Securities Exchange Act of 1934, as amended, and the published
rules and regulations thereunder, and the rules and regulations of all state
securities authorities, as applicable. You agree to comply with the rules and
regulations of the NASD including all applicable Conduct Rules. In reference to
those Conduct Rules, you agree in recommending the purchase, sale or exchange of
Units to a participant, you will have reasonable grounds to believe that the
Corporation is suitable for the participant, and that, prior to participating in
the sale of Units hereunder, you shall have reasonable grounds to believe that
all material facts related to the offering are fully and accurately disclosed
and provide a basis for evaluating the offering, and that prior to any purchase,
you shall inform the prospective participant of all relevant facts relating to
the liquidity and marketability of the Corporation. You agree that each
Subscription Agreement will be executed by a principal of your firm. You
acknowledge your obligation to assure the adequacy and accuracy of the material
facts relating to, without limitation, items of compensation, physical
properties, tax aspects, financial stability and expenses of the Corporation,
the Corporation's conflict and risk factors, and appraisals and other pertinent
reports.
9. TERMINATION. This Agreement may be terminated by written or
telegraphic notice to you from the Corporation and, in any case, will terminate
at the close of business at the end of the 180th day following the date of the
Prospectus (unless extended thereafter by the Corporation, provided that all
compensation payable to you under the terms and conditions hereof shall be paid
when due, although this Agreement shall have theretofore been terminated).
10. LIABILITY OF PARTICIPATING BROKER-DEALERS AND INDEMNIFICATION.
Nothing herein contained shall constitute Program and the Broker-Dealers, or any
of them, an association, partnership, unincorporated business or other separate
entity.
(a) The Corporation agrees to indemnify and hold harmless you and
each person who controls you within the meaning of the Securities Act of 1933,
as amended (the "Act"), against any losses, claims, damages or liabilities,
joint or several, to which you may become subject, under the Act or otherwise,
insofar as
2
<PAGE>
such losses, claims, damages or liabilities (or actions in respect thereto)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in the Prospectus, (B) in any
state securities or "blue sky" application or other document executed by the
Corporation specifically for that purpose or based upon written information
furnished by the Corporation filed in any state or other jurisdiction in
order to qualify any or all of the Units or perfect exemptions from
qualification under the securities laws thereof (any such application,
document or information being hereinafter called a "Blue Sky Application");
or (ii) the omission or alleged omission to state in the Prospectus or in any
Blue Sky Application a material fact required to be stated therein or
necessary to make the statements therein in the light of the circumstances
under which they were made not misleading; and will reimburse you for any
legal or other expenses reasonably incurred by you in connection with
investigating or defending any such loss, claim, damage, liability or action,
provided, however, that you shall not be indemnified for any losses,
liabilities or expenses arising from or out of an alleged violation of
federal or state securities laws unless (1) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee, or (2) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction
as to the particular indemnitee or (3) a court of competent jurisdiction
approves a settlement of the claims against a particular indemnitee. In any
claim for indemnification for federal or state securities law violations, the
party seeking indemnification shall place before the court the position of
the Securities and Exchange Commission and the position, if applicable, of
any state securities regulatory authority in any jurisdiction in which Units
were sold with respect to the issue of indemnification for securities law
violations. The Corporation and the General Partner shall not incur the cost
of that portion of any insurance, other than public liability insurance,
which insures any party against any liability the indemnification of which is
herein prohibited.
(b) You agree to indemnify and hold harmless the Corporation, and its
officers, directors and other controlling persons, against any losses, claims,
damages or liabilities to which the Corporation or such General Partner may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of a material fact in
any communication between you, your representatives or agents and an investor,
or (ii) the omission or alleged omission to state a material fact required to be
stated in any communication between you, your representatives or agents and any
investor, or necessary to make the statements to said investor not misleading.
(c) Promptly after receipt by an indemnified party under this
Paragraph 10 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereto is to be made against any indemnifying party
under this Paragraph 10, notify in writing the indemnifying party of the
commencement thereof; and the omission so to notify the indemnifying party will
relieve it from any liability under this Paragraph 10 as to the particular item
for which indemnification is then being sought but not from any other liability
which it may have to any indemnified party. In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will not be liable to such
indemnified party under this Paragraph 10 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. If any such indemnifying
party elects to defend any such action, such indemnifying party shall not be
liable to any such indemnified party on account of any settlement of such claim
or action effected without the consent of such indemnifying party. Any
indemnified party may, at its own cost and expense, participate at any time in
any claim or action covered by this Paragraph 10.
(d) You agree that you will perform appropriate due diligence in
respect to the offering, and that you will not rely on any due diligence
performed by ___________________________ in its capacity as wholesaler of the
Units.
11. MISCELLANEOUS. You shall retain on behalf of the Corporation, in your
files, for a period of at least four years, information which will establish
that each purchaser of Units meets the applicable suitability standards set
forth in the Prospectus.
3
<PAGE>
In the event that any dispute arises between you and the Corporation
out of or by any reason of this Agreement, then and in that event such parties
do hereby agree that said dispute shall be arbitrated in accordance with the
then existing rules of the American Arbitration Association in Orange County,
California, and that any award rendered thereunder, including attorneys' fees
and costs to the prevailing party, may be entered in any court of competent
jurisdiction, state or federal, including attorneys' fees and costs to
prevailing party.
This Agreement constitutes the entire agreement between you and the
Corporation and any change, amendment or alteration to this Agreement shall be
ineffective unless reduced to writing and executed by both parties. This
Agreement shall be governed by California law without giving effect to conflicts
of law or choice of law provisions. Each party agrees to perform any further
acts and execute and deliver any other documents which may reasonably be
necessary to carry out the terms of this Agreement.
It is expressly understood that no representations have been made in
connection with this Agreement other than as herein set forth, except those
representations contained in the Prospectus or the Sales Literature provided to
you.
Very truly yours,
AMERICAN FAMILY HOLDINGS, INC.,
a Delaware corporation
By
--------------------------
David G. Lasker, President
4
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
4220 Von Karman, Suite 110, Newport Beach, California 92660
Dear Sir or Madam:
We hereby confirm our acceptance of the terms and conditions of the foregoing
Selling Agreement. We hereby acknowledge receipt of the Prospectus referred to
in the foregoing Agreement and confirm that in executing this confirmation we
have relied upon such Prospectus and upon no other representations whatsoever,
written or oral. We confirm that we are members in good standing of the
National Association of Securities Dealers, Inc. and that we will comply with
the Conduct Rules of that association, and we are qualified to act as a
securities broker-dealer in all states or jurisdictions in which we intend to
solicit purchasers of Units, as indicated below.
<TABLE>
<S> <C> <C> <C>
/ / Alabama / / Illinois / / Montana / / Puerto Rico
/ / Alaska / / Indiana / / Nebraska / / Rhode Island
/ / Arizona / / Iowa / / Nevada / / South Carolina
/ / Arkansas / / Kansas / / New Hampshire / / South Dakota
/ / California / / Kentucky / / New Jersey / / Tennessee
/ / Colorado / / Louisiana / / New Mexico / / Texas
/ / Connecticut / / Maine / / New York / / Utah
/ / Delaware / / Maryland / / North Carolina / / Vermont
/ / District of Columbia / / Massachusetts / / North Dakota / / Virginia
/ / Florida / / Michigan / / Ohio / / Washington
/ / Georgia / / Minnesota / / Oklahoma / / West Virginia
/ / Hawaii / / Mississippi / / Oregon / / Wisconsin
/ / Idaho / / Missouri / / Pennsylvania / / Wyoming
</TABLE>
OR
/ / All jurisdictions in the United States
OR
/ / All jurisdictions in the United States except
- --------------------------------------------------------------------------------
(The foregoing does not indicate Blue Sky status of the Offering)
- ---------------------------------- -----------------------------------
Broker-Dealer Name Date
- ---------------------------------- -----------------------------------
By: (Authorized Signature:
President, Partner or Proprietor) (Main Office Address)
- ---------------------------------- -----------------------------------
(Print or Type Name) (City and State)
- ---------------------------------- -----------------------------------
(Print or Type Title) (Telephone Number)
<PAGE>
EXHIBIT 4.2
AMERICAN FAMILY HOLDINGS, INC.
(A Delaware Corporation)
Warrant to Purchase
Shares of Common Stock
1. GRANT OF WARRANT. For value received, American Family Holdings, Inc.,
a Delaware corporation ("Company"), hereby grants to _______________ or his
registered assigns ("Holder"), the right to purchase from the Company
("Warrant") _____ shares ("Shares") of Company Common Stock, $0.001 par value,
("Common Stock"). The per share exercise price for such Warrant shall be 80% of
the Average Trading Price for the Common Stock on the trading date of the
Warrant first becomes exercisable ("Exercise Price"). For purposes of this
Agreement, the term "Average Trading Price" means the average of the closing
trading prices for the Common Stock for the 20 consecutive trading days (whether
or not trades actually occur on such dates) prior to the date the Warrants first
become exercisable.
2. RIGHT AND MANNER OF EXERCISE. This Warrant shall be exercisable for a
20 trading day period commencing on the first trading day of the first full week
after the six month anniversary of the Issuance Date (as herein defined) (the
"Exercise Period"). The Holder may elect to exercise this Warrant anytime
during the Exercise Period only as to all or any of the Shares by delivering
written notice of exercise to the Company (as provided in Section 11) in the
form attached hereto as Exhibit A accompanied by a certified or bank cashier's
check in an amount equal to the Exercise Price, as such may have been adjusted
pursuant to the terms of this Agreement, multiplied by the number of Shares
being purchased. For purposes of this Agreement the term "Issuance Date" shall
mean fifth business day after the consummation of the Acquisition described in
the prospectus included in the Company's Registration Statement on Form S-4
filed by the Company with the U.S. Securities and Exchange Commission in October
1997.
3. RESERVATION AND AVAILABILITY OF SHARES. The Company will at all times
reserve and keep available, free from preemptive rights, out of the aggregate of
its authorized but unissued shares of Common Stock for the purpose of enabling
it to satisfy any obligation to issue Shares upon exercise of this Warrant the
full number of Shares deliverable upon the exercise or conversion of the entire
outstanding amount of this Warrant. Before taking any action which would cause
an adjustment pursuant to Section 5 reducing the Exercise Price, the Company
will take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue fully paid and
non-assessable Shares at the Exercise Price as so adjusted. The Company
covenants that all Shares which may be issued upon exercise of this Warrant
will, upon issue, be fully paid and non-assessable and free from all taxes
liens, charges security interests with respect to the issue thereof
4. ISSUANCE OF SHARES AND NEW WARRANT. If the purchase rights evidenced
by this Warrant are exercised, one or more certificates for the Shares shall be
issued as soon as practicable thereafter to the Holder exercising such rights.
Upon such issuance, this Warrant will be cancelled and, if appropriate, reissued
reflecting the remaining number of Shares which may be purchased upon exercise
of the balance of this Warrant.
5. ADJUSTMENT OF EXERCISE PRICE/ANTI-DILUTION. The Exercise Price and
the number and kind of securities purchasable upon the exercise of this Warrant
shall be subject to adjustment from time to time upon the happening of the
events enumerated in this Section 5.
5.1. STOCK SPLITS AND COMBINATIONS. If the Company shall at any time
subdivide or combine its outstanding Common Stock, or fix a record date for
payment of a dividend in Common Stock or other securities of the Company
exercisable, convertible or exchangeable for Common Stock (in which latter event
the maximum number of shares of Common Stock issuable upon the exercise,
conversion or exchange of such securities shall be deemed to have been
distributed), after that subdivision, combination or dividend, the number of
Shares shall be adjusted to that number of Shares which is determined by (A)
multiplying the number of shares of Common Stock purchasable immediately prior
to such adjustment by the Exercise Price in effect immediately prior to such
adjustment, and then (B) dividing that product by the Exercise Price in effect
immediately after such adjustment. If the Company shall at any time subdivide
the outstanding shares of Common Stock or fix a record date for payment of a
dividend in Common Stock or other securities exercisable, convertible or
exchangeable into shares of Common Stock, the Exercise Price then in effect
immediately before that subdivision or dividend shall be proportionately
decreased, and, if the Company shall at any time combine the outstanding shares
of Common Stock, then the
<PAGE>
Exercise Price in effect immediately before that combination shall be
proportionately increased. Any adjustment under this Section 5.1 shall
become effective at the close of business on the date the subdivision or
combination becomes effective or the dividend is distributed.
5.2 RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If the Shares
issuable upon exercise of the Warrant shall be changed into the same or a
different number of shares of any other class or classes of securities, whether
by capital reorganization, reclassification, or otherwise (other than a
subdivision or combination or payment of dividend of securities provided for
above), the Holder of this Warrant shall, on its exercise, be entitled to
purchase for the same aggregate consideration, in lieu of the Shares which the
Holder would have become entitled to purchase but for such change, a number of
shares of such other class or classes of securities which such Holder would have
been entitled to receive as the holder of that number of Shares subject to
purchase by the Holder on exercise of this Warrant immediately before that
change.
5.3 REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If
at any time there shall be a capital reorganization of the Common Stock (other
than a subdivision, combination, payment of dividend, reclassification or
exchange of Common Stock provided for above), or merger or consolidation of the
Company with or into another corporation, or the sale of the Company's
properties and assets as, or substantially as, an entirety to any other person,
then, as a part of such reorganization, merger, consolidation or sale, lawful
provision shall be made so that the Holder of this Warrant shall thereafter be
entitled to receive upon exercise of this Warrant, during the period specified
in this Warrant and upon payment of the Exercise Price then in effect, the
number of Shares or other securities or property of the Company, or of the
successor corporation resulting from such merger or consolidation, to which a
Holder of the Shares issuable upon exercise of this Warrant would have been
entitled in such capital reorganization, merger, or consolidation or sale if
this Warrant had been exercised immediately before that capital reorganization,
merger, consolidation, or sale. In any such case, appropriate adjustment (as
determined in good faith by the Company's Board of Directors) shall be made in
the application of the provisions of this Warrant with respect to the rights and
interests of the Holder of this Warrant after the reorganization, merger,
consolidation, or sale such that the provisions of this Warrant (including
adjustment of the Exercise Price then in effect and number and kind of
securities purchasable upon exercise of this Warrant) shall be applicable after
that event in relation to any securities purchasable after that event upon
exercise of this Warrant.
5.4 MINIMUM EXERCISE PRICE ADJUSTMENT. No adjustment in the Exercise
Price shall be required unless such adjustment would require an increase or
decrease of at least one-half of one percent (0.005) or more of the Exercise
Price, provided, however, that any adjustments which by reason of this
Subsection 5.4 are not required to be made shall carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 5
shall be made to the nearest cent or to the nearest one-hundredth of a Share as
the case may be.
6. NOTICES TO HOLDER. Upon any adjustment of the Exercise Price pursuant
to Section 5, the Company within 20 days thereafter shall cause to be given to
the Holder pursuant to Section 11 hereof written notice of such adjustment,
which notice shall set forth a brief statement of the facts requiring such
adjustment and set forth the computation by which such adjustment was made.
Where appropriate, such notice may be given in advance and included as a part of
the notice required to be mailed under the other provisions of this Section 6.
In the event of any of the following:
6.1 the Company shall authorize the issuance to its holders of shares
of Common Stock of rights or warrants to subscribe for or purchase shares of
Common Stock or of any other subscription rights or warrants; or
6.2 the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets (other than
cash dividends not exceeding $0.01 per share of Common Stock payable during any
three-month period or distributions or dividends payable in shares of Common
Stock); or
6.3 any consolidation or merger to which the Company is a party and
for which approval of any shareholder of the Company is required, or of the
conveyance or transfer of the properties and assets of the Company as, or
substantially as, an entirety, or of any reclassification or change of
outstanding shares of Common Stock issuable upon exercise of this Warrant (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination); or
6.4 the voluntary or involuntary dissolution, liquidation or winding
up of the Company; or
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6.5 the Company proposes to take any action (other than actions of
the character described in Subsection 5.1 except as required under Subsection
6.3 above) which would require an adjustment of the Exercise Price pursuant
to Section 5;
then the Company shall cause to be given to the Holder, at least 20 days (or ten
days in any case specified in Subsections 6.1 or 6.2 above) prior to the
applicable record date hereinafter specified, a written notice stating (i) the
date as of which the holders of record of shares of Common Stock to be entitled
to receive any such rights, warrants, or distribution is to be determined, or
(ii) the date on which any such consolidation, merger, conveyance, transfer,
dissolution, liquidation, or winding up is expected to become effective, and the
date as of which it is that holders of record of shares of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property, if any, deliverable upon such reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation, or winding up. The failure to
give the notice required by this Section 6 or any defect therein shall not
affect the legality or validity of any distribution, right, warrant,
consolidation, merger, conveyance, merger, dissolution, liquidation, or winding
up, or the vote upon any such action.
7. TRANSFERS. The holder acknowledges that this Warrant and the Common
Stock underlying this Warrant have been registered with the Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "Act").
8. FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issued in connection with any exercise of this Warrant. In lieu of the issuance
of such fractional share, the Company shall make a cash payment equal to the
then fair market value of such fractional share as determined in good faith by
the Company's Board of Directors.
9. PRIVILEGE OF STOCK OWNERSHIP. The Holder shall for all purposes be
deemed to have become the holder of record of Shares issued upon an exercise of
this Warrant on, and the certificate evidencing such Shares shall be dated, the
date upon which the holder presents to the Company a notice of an intent to
exercise this Warrant pursuant to Section 2 together with a certified or bank
cashier's check for the Exercise Price. Prior to exercise of this Warrant, the
holder shall not be entitled to any rights as a shareholder of the Company,
including (without limitation) the right to vote, receive dividends or other
distributions, exercise preemptive rights or be notified of shareholder
meetings, and such holder shall not be entitled to any notice or other
communication concerning the business or affairs of the Company except as
otherwise provided herein.
10. SUCCESSORS AND ASSIGNS. The terms and provisions of this Warrant
shall inure to the benefit of, and be binding upon the Company and the Holder
hereof and their respective successors and assigns.
11. NOTICES. All notices, requests, demands and other communications
(collectively, "Notices") under this Warrant shall be in writing and shall be
deemed to have been duly given on the date of service if served personally on
the party to whom Notice is to be given, or on the third business day after the
date of mailing if mailed to the party to whom Notice is to be given, by first
class mail, registered to the Holder, at his address as shown in the Company
records; and if to the Company, at its principal office. Any party may change
its address for purposes of this Section by giving the other party written
Notice of the new address in the manner set forth above.
12. GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to principles
of conflicts of laws.
13. LOSS OR MUTILATION OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company regarding the loss, theft, mutilation or destruction
of this Warrant and upon delivery of appropriate indemnification with respect
thereto or upon surrender or cancellation of the mutilated Warrant, the Company
will make and deliver to the Holder a new Warrant of like tenor.
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14. AMENDMENTS. The Company may amend this Warrant without the consent of
Holders to cure ambiguities or to add provisions that enhance the rights of all
Holders, provided that the Company may not amend this Warrant to increase the
number of Shares issuable upon its exercise. Adjustments pursuant to Section 5
hereof shall not be deemed amendments for this purpose.
Dated: _______________, 199__ AMERICAN FAMILY HOLDINGS, INC.
By
--------------------------
David G. Lasker, President
By
--------------------------
James N. Orth, Secretary
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ASSIGNMENT
FOR VALUE RECEIVED, the undersigned sell(s), assign(s), and transfer(s) unto
_______________________, of ___________________________, the right to purchase
__________ Shares evidenced by the within Warrant, and does hereby irrevocable
constitute and appoint __________________ to transfer such right on the books of
the Company, with full power of substitution.
DATED: ______________________, 199_
- -----------------------------------
SIGNATURE
- -------------------------------------------------------------------------------
NOTICE:
The signature to this Assignment must correspond with the name as written
upon the face of the within Warrant, in every particular, without alteration
or enlargement or any change whatsoever.
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EXHIBIT A
EXERCISE NOTICE
AMERICAN FAMILY HOLDINGS, INC.
4220 Von Karman Avenue
Suite 110
Newport Beach, California 92660
Gentlemen:
The undersigned hereby elects to purchase, pursuant to the provisions of
the American Family Holdings, Inc. Warrant dated ______________, 1998 held by
the undersigned, _____ shares of the Common Stock of American Family Holdings,
Inc.
A certified or cashier's check as payment of the purchase price of
$__________ per share of Common Stock (based on the average closing market price
of the Common Stock as defined in the Warrant) in U.S. funds required under such
Warrant accompanies this Exercise Notice.
DATED: _____________________ , 1999
Signature: __________________________
Address: __________________________
__________________________
Tax I.D. No. __________________________
<PAGE>
EXHIBIT 5.1
[Arter & Hadden LLP letterhead]
October 6, 1998
66944/66608
American Family Holdings, Inc.
4220 Von Karman Avenue
Suite 110
Newport Beach, California 92660
Re: Registration Statement on Form SB-2
-----------------------------------
Gentlemen:
We have acted as special counsel to American Family Holdings, Inc. (the
"Company") in connection with the preparation and filing with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, of a
Registration Statement on Form SB-2 (the "Registration Statement") relating to
the public offering by the Company of up to 125,000 units, each unit consisting
of one share of Common Stock and warrants to purchase three shares of Common
Stock for a period of 20 consecutive trading days at a per share purchase price
equal to 80% of the average closing price for the 20 trading dates preceding the
six month anniversary of the issuance of the units, and the public offering by
the Company of the 375,000 shares of Common Stock underlying the units.
In so acting, we have examined and relied upon the original or copies,
certified or otherwise identified to our satisfaction, of such corporate
records, documents, certificates, and other instruments, and such factual
information otherwise supplied to us by the Company as in our judgment are
necessary or appropriate to enable us to render the opinion expressed below.
On the basis of and subject to the foregoing, we are of the opinion the
Units, when issued and sold pursuant to the Registration Statement and
Prospectus, will, under the laws of the State of Delaware, upon payment therefor
in accordance with the terms of the Registration Statement and the Prospectus,
be duly and validly issued, fully paid, and non-assessable. We consent to the
use of this opinion as an exhibit to the Registration Statement and to the use
of our name under the headings "Legal Matters" in the Preliminary Prospectus
forming a part of the Registration Statement.
Very truly yours,
/s/ Arter & Hadden LLP
<PAGE>
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 July 17, 1998, relating
to the financial statement of American Family Holdings, Inc., as of June 30,
1998; and our reports dated February 24, 1998 relating to the financial
statements of the Oceanside Program, the Yosemite/Ahwahnee Programs, the Mori
Point Program' the Sacramento/Delta Greens Program, the Cypress Lakes Program,
the Palmdale/Joshua Ranch Program, the Esperanza Program and the Stacey Rose
Programs 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
Los Angeles, California
October 6, 1998
