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As filed with the Securities and Exchange Commission on March 30, 1998
Registration No. 333-37161
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
to
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
AMERICAN FAMILY HOLDINGS, INC.
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
(Address of principal executive offices)
David G. Lasker, President
American Family Holdings, Inc.
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
(Name and address of agent for service)
Copy to:
David R. Decker, Esq.
Arter & Hadden LLP
700 South Flower Street, 30th Floor
Los Angeles, California 90017
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AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM OF FORM S-4 PROSPECTUS CAPTION OR LOCATION
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside
Cover Page of Prospectus........................... Cover of Registration Statement; Cross-Reference
Sheet; Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page of
Prospectus......................................... Prospectus Summary; Reports to Shareholders
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information.............................. Prospectus Summary; Risk Factors; Business and
Properties; Background and Reasons for the
Acquisition
4. Terms of The Transaction........................... Prospectus Summary; Background and Reasons for
the Acquisition; Comparison of Tenancy-in-
Common Interests and Shares; Comparisons of
Programs and Company; Description of Shares;
Shares Eligible for Future Sale; Federal Income Tax
Consequences; Appraisals and Fairness Opinion
5. Pro Forma Financial Information................... Prospectus Summary; Financial Statements
6. Material Contracts with the Company being
Acquired........................................ Background and Reasons for the Acquisition;
Interests of Certain Persons in the Acquisition
7. Additional Information Required for Reoffering by
Persons and Partied Deemed to be Underwriters..... Not Applicable
8. Interests of Named Experts and Counsel............ Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.... Fiduciary Responsibility and Indemnification
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants....... Not Applicable
11. Incorporation of Certain Information by
Reference......................................... Not Applicable
12. Information with Respect to S-2 or S-3
Registrants....................................... Not Applicable
13. Incorporation of Certain Information by
Reference......................................... Not Applicable
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AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
(continued)
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<CAPTION>
ITEM OF FORM S-4 PROSPECTUS CAPTION OR LOCATION
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14. Information with Respect to Registrants
other than S-3 or S-2 Registrants............ Prospectus Summary; Business and Properties;
Selected Financial Information; Management's
Discussion and Analysis of Financial Condition and
Results of Operations
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies.... Not Applicable
16. Information with Respect to S-2 or
S-3 Companies................................ Not Applicable
17. Information with Respect to Companies other
than S-3 or S-2 Companies.................... Prospectus Summary; Business and Properties;
Background and Reasons for the Acquisition;
Selected Financial Information; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Financial Statements
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are being Solicited........... Prospectus Summary; Voting Procedures; Interests
of Certain Persons in the Acquisition; Principal
Shareholders; Management Following the
Acquisition
19. Information if Proxies, Consents or
Authorizations are Not to be Solicited or in
an Exchange Offer............................ Not Applicable
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<PAGE>
CONSENT SOLICITATION STATEMENT/PROSPECTUS
IF YOU ARE AN INVESTOR IN ANY OF THE FOLLOWING, YOUR VOTE IS VERY IMPORTANT
SACRAMENTO/DELTA GREENS "TRUDY PAT" PROGRAM
OCEANSIDE "TRUDY PAT" PROGRAM
YOSEMITE/AHWAHNEE I "TRUDY PAT" PROGRAM
YOSEMITE/AHWAHNEE II "TRUDY PAT" PROGRAM
MORI POINT "TRUDY PAT" PROGRAM
AMERICAN FAMILY HOLDINGS, INC.
- - PROPOSED ACQUISITION OF PROGRAM PROPERTIES
American Family Holdings, Inc. (the "Company") is offering shares of its
stock in exchange for the assets (including cash on hand), certain
liabilities and business activities owned by investors in five former "Trudy
Pat" programs managed by National Investors Financial, Inc. ("National").
For this proposed acquisition, the company will issue $[20,012,475] in the
form of [2,001,248]shares of common stock arbitrarily valued at $10 per
Share. The stock will be listed for trading on the ___________ under the
symbol "___." The purpose of the transaction is to consolidate the
operations of the programs, improve the ability to sell or obtain financing
for development of the programs' properties, and provide the investors with
liquidity for their investments.
In each of the programs, the investors will vote on whether to approve the
acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF
THE FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION IN ORDER FOR IT TO
TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation of votes started on _______, 1998 and expires at 5:00
p.m., pacific time, on __________, 1998 unless extended. Call 1-800-590-7772
with questions.
SPECIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
(CONTINUED ON INSIDE COVER PAGE)
--------------------------
THE TRANSACTION AND SECURITIES HAVE NOT BEEN APPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION
OR THE ATTORNEY GENERAL OF THE STATE OF NEW YORK
NONE OF THESE HAS DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
The date of this Prospectus is _______________, 1998
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- - If a trading market develops, the initial trading price for the stock will
likely be substantially below the arbitrary value of $10 per share assigned to
the Company's shares for purposes of the acquisition. Thus, the value of the
shares you receive may be less than you might receive if the property of your
program were sold.
- - Principal stockholders of National and the executive officers of the
Company will hold approximately [18.23]% of the Company's stock for which they
paid $0.01 per share and will receive annual cash compensation aggregating
$660,000 as officers and employees of the Company. National will be relieved of
its servicing and asset management obligations and will no longer earn servicing
and asset management fees of approximately $650,000 annually. However, the
Company will still owe National over $1,300,000 of accrued but unpaid fees and
expenses.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event. If
so, National believes a tax loss is the probable result for most of you.
- - The Company must have additional cash to fund its proposed operations.
If it cannot obtain such funding from the sale of its securities or certain
of its properties, it will be no more successful than the programs have been
individually in completing the development of some or all of the properties.
You should study the "Risk Factors" beginning on page __.
OFFER OF ADDITIONAL STOCK TO INVESTORS
The Company is also offering $10,000,000 of units at $10 each. Each unit
consists of one share of common stock and one warrant to purchase two
additional shares. The offer is being made exclusively to current investors
in the programs. The offer is being made on a first-come, first-served basis
by separate prospectus which accompanies this prospectus.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Proposal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Summary Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . 2
Exchange Value/Allocation of Shares . . . . . . . . . . . . . . . . . 6
Current Status of the Programs. . . . . . . . . . . . . . . . . . . . 8
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Experience of Management. . . . . . . . . . . . . . . . . . . . . . . 10
Organization Chart. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Alternatives to the Acquisition . . . . . . . . . . . . . . . . . . . 12
Fairness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Fairness Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
National's Recommendation . . . . . . . . . . . . . . . . . . . . . . 15
Summary of Features of the Acquisition. . . . . . . . . . . . . . . . 15
Benefits to National and Company Founders . . . . . . . . . . . . . . 17
Summary of Business Plan. . . . . . . . . . . . . . . . . . . . . . . 18
Comparison of the Programs and the Company. . . . . . . . . . . . . . 19
Tax Consequences of Acquisition . . . . . . . . . . . . . . . . . . . 23
Conflicts of Interest Related to the Acquisition. . . . . . . . . . . 23
Conditions to Acquisition . . . . . . . . . . . . . . . . . . . . . . 24
Consequences if Acquisition Not Approved. . . . . . . . . . . . . . . 25
Delivery of Stock Certificates. . . . . . . . . . . . . . . . . . . . 25
Supplements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Consent Solicitation/Summary of Voting Procedures . . . . . . . . . . 25
No Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . 27
No Right to Program Books and Records . . . . . . . . . . . . . . . . 27
Concurrent Offering . . . . . . . . . . . . . . . . . . . . . . . . . 27
Summary Financial Information . . . . . . . . . . . . . . . . . . . . 28
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Risks of the Acquisition. . . . . . . . . . . . . . . . . . . . . . . 30
The nature of your investment will change. . . . . . . . . . . . . 30
The exchange value of the programs may not be the
amount you would net if the properties were sold
in a cash sale transaction. . . . . . . . . . . . . . . . . . . . 30
The shares may trade at prices substantially below the
arbitrarily determined exchange value of $10 per share. . . . . . 31
There may be conflicts of interest in National's structuring
the acquisition . . . . . . . . . . . . . . . . . . . . . . . . . 31
You do not have independent advisors representing you
in structuring this transaction . . . . . . . . . . . . . . . . . 33
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(continued)
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The transaction may not be tax-free. . . . . . . . . . . . . . . . 33
The company may incur significant additional debt. . . . . . . . . 34
The Board of directors will have the ability to change
investment, financing and other policies of the company without
shareholder consent . . . . . . . . . . . . . . . . . . . . . . . 34
You will have no dissenters' rights in connection with
the acquisition . . . . . . . . . . . . . . . . . . . . . . . . . 34
The company has no operating history . . . . . . . . . . . . . . . 34
Your voting rights will change . . . . . . . . . . . . . . . . . . 35
Cash distribution policies will be changed . . . . . . . . . . . . 35
The method of management compensation will be changed. . . . . . . 35
Holders of a majority of tenancy-in-common interest
bind a program. . . . . . . . . . . . . . . . . . . . . . . . . . 35
National's judgment regarding the conflicting Yosemite/
Ahwahnee appraisals may be incorrect. . . . . . . . . . . . . . . 35
Real Estate Risks Associated with All Properties. . . . . . . . . . . 36
There are significant delinquent property taxes. . . . . . . . . . 36
Units or certain assets must be sold to raise working capital. . . 36
Federal, state and local environmental and other laws
may require expensive hazardous substance clean-up or
removal as well as expensive public improvements. . . . . . . . . 36
If there is an uninsured loss, the company could lose its
investment, profits or cash flow from a property. . . . . . . . . 37
The development of additional projects may occur . . . . . . . . . 37
The California economy has fluctuated broadly in the past
few years . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
When the acquisition is completed, National and its
principals will be owed $1,381,881 by the company . . . . . . . . 37
Real Estate Risks of Specific Properties. . . . . . . . . . . . . . . 37
Sacramento/Delta Greens. . . . . . . . . . . . . . . . . . . . . . 37
Permits to develop the properties need to be obtained . . . . . 37
Holding an inventory of residential lots at
the Sacramento/Delta Greens property may cause
the company to incur substantial carrying
costs until the lots can be sold . . . . . . . . . . . . . . . 38
Risks of residential development. . . . . . . . . . . . . . . . 38
Additional specific risks . . . . . . . . . . . . . . . . . . . 38
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Oceanside Property. . . . . . . . . . . . . . . . . . . . . . . . . . 39
Holding an inventory of residential lots at the Oceanside
property may cause the company to incur substantial carrying
costs until the lots can be sold. . . . . . . . . . . . . . . . . 39
Risks of residential development . . . . . . . . . . . . . . . . . 39
Additional specific risks. . . . . . . . . . . . . . . . . . . . . 39
Yosemite/Ahwahnee Properties. . . . . . . . . . . . . . . . . . . . . 39
Permits to develop the timeshare aspect of the resort
have not yet been obtained. . . . . . . . . . . . . . . . . . . . 39
Risks affecting operation of a golf course . . . . . . . . . . . . 40
Resort development is unpredictable for a variety of reasons and
could result in losses . . . . . . . . . . . . . . . . . . . . . . 40
Risks relating to timeshare operations . . . . . . . . . . . . . . 40
Risks relating to recreational vehicle park operations . . . . . . 41
Additional specific risks. . . . . . . . . . . . . . . . . . . . . 41
Mori Point Property . . . . . . . . . . . . . . . . . . . . . . . . . 41
Permits to develop the property have not yet been
obtained. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Resort development is unpredictable for a variety of reasons and
could result in losses. . . . . . . . . . . . . . . . . . . . . . 41
Additional specific risks . . . . . . . . . . . . . . . . . . . . 42
Anti-Takeover Provisions and Limitation of Director Liability . . . . 42
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. . . . . . . . . . 42
The Board is divided into three classes serving staggered
three year terms. . . . . . . . . . . . . . . . . . . . . . . . . 42
There are restrictions on certain business combinations
with interested parties . . . . . . . . . . . . . . . . . . . . . 43
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. . . . . . . 43
The Delaware law, as well as the charter documents, limit
the liability of directors and officers to shareholders . . . . . 43
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TABLE OF CONTENTS
(continued)
<TABLE>
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BACKGROUND AND REASONS FOR THE ACQUISITION . . . . . . . . . . . . . . . . 44
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Management of the Programs since Foreclosure. . . . . . . . . . . . . 48
Efforts to Dispose of the Properties. . . . . . . . . . . . . . . . . 51
Alternatives to Acquisition . . . . . . . . . . . . . . . . . . . . . 53
Comparison of Alternatives. . . . . . . . . . . . . . . . . . . . . . 56
Terms of the Acquisition. . . . . . . . . . . . . . . . . . . . . . . 58
Calculation of Exchange Value . . . . . . . . . . . . . . . . . . . . 59
Allocation of Shares among the Programs . . . . . . . . . . . . . . . 61
Allocation of Shares among Investors. . . . . . . . . . . . . . . . . 64
Company Shares Held by Affiliates or Employees of National. . . . . . 64
Historical Compensation for Servicing and Property Management/
Effect of Acquisition . . . . . . . . . . . . . . . . . . . . . . 65
Historical Cash Distributions to Investors. . . . . . . . . . . . . . 66
Features of the Acquisition Considered by National. . . . . . . . . . 66
Conditions to the Acquisition . . . . . . . . . . . . . . . . . . . . 69
Recommendation of National and Fairness Determination . . . . . . . . 69
Fairness in View of Conflicts of Interest . . . . . . . . . . . . . . 72
Consequences if the Acquisition is Not Approved . . . . . . . . . . . 72
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . . 73
Costs and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 73
Appraisals and Fairness Opinion . . . . . . . . . . . . . . . . . . . 74
Experience of Independent Valuator. . . . . . . . . . . . . . . . . . 74
DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
COMPARISON OF TENANCY-IN-COMMON INTERESTS AND SHARES . . . . . . . . . . . 78
COMPARISONS OF PROGRAMS AND COMPANY. . . . . . . . . . . . . . . . . . . . 84
VOTING PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Time of Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Record Date and Outstanding Votes . . . . . . . . . . . . . . . . . . 91
Approval Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Investor Ballot and Vote Required . . . . . . . . . . . . . . . . . . 92
Investor Representations on Ballot. . . . . . . . . . . . . . . . . . 93
Revocability of Consent . . . . . . . . . . . . . . . . . . . . . . . 93
Solicitation of Votes; Solicitation Expenses. . . . . . . . . . . . . 94
No Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . 94
No Right to Program Books and Records . . . . . . . . . . . . . . . . 94
Issuance of Certificates for Acquisition Shares . . . . . . . . . . . 94
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INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION AND CONFLICTS OF INTEREST. 95
Benefits to National. . . . . . . . . . . . . . . . . . . . . . . . . 95
Company Shares Owned by National's Principals and Other
Company Management. . . . . . . . . . . . . . . . . . . . . . . . . 96
Other Benefits to Shareholders of National. . . . . . . . . . . . . . 96
Lack of Independent Representation of Investors . . . . . . . . . . . 97
Features Discouraging Potential Takeovers . . . . . . . . . . . . . . 98
Allocation of Services and Expenses . . . . . . . . . . . . . . . . . 98
Non-Arm's-Length Agreements . . . . . . . . . . . . . . . . . . . . . 98
Competition with the Company from Other Programs Organized
by National . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION . . . . . . . . . . . . . . . 99
Fiduciary Responsibility of National. . . . . . . . . . . . . . . . . 99
Indemnification of Officers and Directors of the Company. . . . . . . 99
Officers and Directors Insurance. . . . . . . . . . . . . . . . . . . 100
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 100
BUSINESS AND PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . 101
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Business of the Company . . . . . . . . . . . . . . . . . . . . . . . 101
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Consolidation of the Programs . . . . . . . . . . . . . . . . . . . . 104
The Residential Development Industry. . . . . . . . . . . . . . . . . 104
The Lodging and Recreation Industry . . . . . . . . . . . . . . . . . 105
The Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . 108
The Consolidated Business Plan. . . . . . . . . . . . . . . . . . . . 109
Priority of Projects and Estimated Timetable. . . . . . . . . . . . . 115
Types of Borrowing Required . . . . . . . . . . . . . . . . . . . . . 117
Impact of Interest Rates on the Company . . . . . . . . . . . . . . . 118
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 119
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES. . . . . . . . . . . . . . . . 119
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . 119
Financing Policies. . . . . . . . . . . . . . . . . . . . . . . . . . 120
Miscellaneous Policies. . . . . . . . . . . . . . . . . . . . . . . . 121
Working Capital Reserves. . . . . . . . . . . . . . . . . . . . . . . 121
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CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . 122
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Results of Operations - The Oceanside Program . . . . . . . . . . . . 125
Results of Operations - The Yosemite/Ahwahnee Programs. . . . . . . . 126
Results of Operations - The Mori Point Program. . . . . . . . . . . . 126
Results of Operations - The Sacramento/Delta Greens Program . . . . . 126
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . 127
Historical Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . 129
New Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . 130
MANAGEMENT FOLLOWING THE ACQUISITION . . . . . . . . . . . . . . . . . . . 130
Executive Officers and Directors. . . . . . . . . . . . . . . . . . . 132
Directors and Executive Officers Compensation and Incentives. . . . . 135
Stock Incentive Plan. . . . . . . . . . . . . . . . . . . . . . . . . 136
401(k) Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . 138
Limitation of Liability and Indemnification . . . . . . . . . . . . . 139
PRIOR PROGRAMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
SECONDARY MARKET FOR TENANCY-IN-COMMON INTERESTS . . . . . . . . . . . . . 142
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . . . 142
Director and Officer Stock Ownership. . . . . . . . . . . . . . . . . 143
DESCRIPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . 143
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Certain Shareholder Voting Requirements . . . . . . . . . . . . . . . 145
Transfer Agent and Registrar. . . . . . . . . . . . . . . . . . . . . 145
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<TABLE>
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THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Offering of Acquisition Shares. . . . . . . . . . . . . . . . . . . . 145
Concurrent Offering . . . . . . . . . . . . . . . . . . . . . . . . . 146
APPRAISALS AND FAIRNESS OPINION. . . . . . . . . . . . . . . . . . . . . . 147
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Experience of Independent Appraisers. . . . . . . . . . . . . . . . . 149
May 1997 Appraisals . . . . . . . . . . . . . . . . . . . . . . . . . 149
The Mentor Appraisal. . . . . . . . . . . . . . . . . . . . . . . . . 150
Conflicting Yosemite/Ahwahnee Properties' Appraisals. . . . . . . . . 151
On-Going Relationships. . . . . . . . . . . . . . . . . . . . . . . . 151
Updates/Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
FEDERAL INCOME TAX CONSEQUENCES. . . . . . . . . . . . . . . . . . . . . . 152
Qualification of the Acquisition as a Qualifying Section 351
Transaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Federal Income Tax Consequences of the Acquisition. . . . . . . . . . 155
Federal Income Tax Consequences to Investors After the
Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
REPORTS TO SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . 158
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
FURTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
APPENDICES
Appendix 1 Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix 2 Selected Additional Appraisal Information. . . . . . . . . . A-2
Appendix 3 Prior Performance Schedules. . . . . . . . . . . . . . . . . A-3
</TABLE>
vii
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TABLE OF CONTENTS
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ACCOMPANYING THE PROSPECTUS
- - PROGRAM SUPPLEMENT
- - OFFICIAL INVESTOR BALLOT
- - Instructions to Investors on How to Complete the Official Investor Ballot
</TABLE>
viii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARIZES MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS ELSEWHERE IN THIS PROSPECTUS.
THE PROPOSAL
From 1987 to 1993 National Investors Financial, Inc. ("National")
arranged loans secured by first trust deeds on real estate and sold
fractional, tenancy-in-common interests in such loans to investors. National
coined the term "Trudy Pat" as a shorthand description for the TRUST DEED
LOAN PARTICIPATION programs. Pursuant to servicing agreements with each
investor, National has collected and distributed principal and interest
payments, if any, on the "Trudy Pat" loans, acted to take title on behalf of
the investors where loans have gone into default, and managed the properties
after the defaults.
American Family Holdings, Inc., a Delaware corporation (the "company" or
"we"), was founded by the principals of National. It has offered to acquire
the properties and cash reserves of the five "Trudy Pat" programs named on
the cover page of this prospectus for an aggregate exchange value of
$[20,012,475] in the form of [2,001,248] shares of its common stock
arbitrarily valued at $10 per share. The exchange values assigned each
program may not be the price at which that program's property could be sold
to a willing buyer. However, it is reflective of National's estimate of the
amount that would be available for distribution to that program's investors
after taking into account other program assets, as well as all outstanding
obligations of the program.
The Sacramento/Delta Greens property is vacant land to be developed for
residential lots. The Oceanside property is vacant land which has been
developed into residential lots of which 137 have been sold and built on, and
111 remain to be build on and sold. The Yosemite/Ahwahnee properties include
a golf course facility, some developed recreational vehicle spaces, some
developed residential lots, and vacant land to be developed into additional
recreational vehicle spaces and timeshare units. The Mori Point property is
vacant land to be developed into a hotel conference center facility.
By voting for the acquisition of your property in exchange for shares of
the company, you will also be approving the transfer to the company of cash
reserves, if any, in your program derived from sale of properties or
assessments paid, as well as the use of the cash reserves by the company to
further its overall business plan and not for distributions or for any
particular property.
<PAGE>
SUMMARY RISK FACTORS
The following is a summary of the potential disadvantages, adverse
consequences and risks of the acquisition. This summary is qualified in its
entirety by the more detailed discussion in the section entitled "Risk Factors"
contained in this prospectus beginning on page __.
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. If the acquisition is
completed, there will be a change in the nature of the investment of each
investor from holding a tenancy-in-common interest in real estate to holding
shares in an on-going company, the assets of which may be changed from time to
time without approval of investors. If the acquisition is completed, investors
will be able to liquidate their investments only by selling their shares on the
_____ or in private transactions, and they will not receive a return of their
investment in the form of liquidation proceeds through property sales. If the
acquisition is completed, investors will have an investment in an entity that is
larger than each of the programs and will thus lose relative voting power.
DIFFERENCES BETWEEN EXCHANGE VALUES AND SALES PRICE. Investors are
subject to the risk that the exchange value of a program does not reflect the
price a program's assets might bring in a sale. If the property of a program
were to be sold, the net proceeds of the sale and the amount finally
distributed to an investor in that program may be more or less than the
exchange value. There is no assurance that the future value of the shares
will continue to be greater than the most recent appraised value of the
property.
UNCERTAINTY REGARDING TRADING PRICE FOR THE SHARES. Initially, shares
may trade at prices substantially below the arbitrarily determined exchange
value of $10 per share or historical book value of the company's assets.
There is no guaranty that a liquid trading market will develop for the
shares, or be sustained. If a trading market develops for the shares, the
price of shares after the acquisition will likely decrease below the exchange
value per share of $10 due to a potentially large number of shares that
investors may sell immediately after the acquisition.
CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The founders of the
company, and specifically the principal shareholders of National, as well as
National itself, will be subject to conflicts of interest. The principal
shareholders and employees of National and the company, will hold approximately
[18.23]% of the company's outstanding stock for which they paid $0.01 per share.
Other founding shareholders will hold approximately [1.6]% of the company's
outstanding stock for which they also paid $0.01 per share. Thus, the
investors' total ownership interests in the programs' properties will be diluted
by the equity interest in the company held by the founders of the company. The
principal stockholders of National, and other
2
<PAGE>
executive officers of the company, will receive annual cash compensation
aggregating $660,000 as officers and employees of the company. National will
be relieved of its servicing and asset management obligations and will no
longer earn asset management or servicing related fees. However, the company
will still owe National over $1,300,000 of accrued but unpaid fees and
expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote, and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
Messrs. Lasker and Orth will be required to devote some of their time to
other projects for which National acts as servicing agent and asset manager.
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS. No independent party was
retained by National to negotiate on behalf of the investors. Therefore, terms
of the acquisition may be less favorable to investors and more favorable to
founders of the company which included the principal shareholders of National
than if the acquisition had been subject to arm's-length negotiation. Had an
independent party negotiated on behalf of each program, the terms of the
acquisition may have been more favorable to certain or all of the programs and
fewer shares and less favorable employment contracts may have been received by
the founders of the company.
TAX UNCERTAINTIES. The acquisition may not be a tax-free transaction to
investors. Due to uncertainties in the facts of this transaction, tax counsel
is unable to opine conclusively on the taxability of the acquisition to
investors. If the acquisition is a taxable transaction, an investor would
recognize gain or loss in 1998 equal to the difference between the investor's
tax basis in his interest in a program property, and the number of shares of the
company received valued at $10 per share. If the acquisition is treated as
taxable, National believes most investors would recognize a tax loss.
POTENTIAL CHANGE IN THE AMOUNT OF LEVERAGE. 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
3
<PAGE>
company to repayment instead of limited recourse debt which generally exposes
specific properties for the repayment of debt.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN INVESTMENT,
FINANCING AND CERTAIN OTHER POLICIES. 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.
NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS. If you vote
against the acquisition, and it is approved, you will not be able to object to
the acquisition and receive the appraised value of your tenancy-in-common
interest in your program's assets. You will have no choice other than to accept
shares for your interests.
COMPANY HAS NO OPERATING HISTORY. The company was formed within the past
year to take part in the acquisition of your property. It does not have the
benefit of operating for a long time. This means that shares in the company are
much riskier than ownership of shares of established companies. If the company
had been operating as if it owned the properties which it desires to acquire, it
would have experienced losses to date.
FUNDAMENTAL CHANGES IN THE BUSINESS PLAN. Rather than being focused on
a single property, the company will be an infinite life entity focused on the
management of at least five properties. The effect of this on investors is
two-fold. First, poor performance of a particular property may affect the
company's operations as a whole regardless of the performance of the other
properties. Second, there will be no particular time when an investor can
expect that a sale of any of the properties will result in cash distributions
to him or her.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes
or sales of a particular property. Those decisions will be made by the board
of directors or management. In addition, you will have an investment in an
entity that is larger than each of the programs and, thus, you will lose
relative voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, because of the borrowers' defaults there have been
no distributions from any of the programs, other than the Oceanside program, in
the past three years. Future cash distributions will be based on the company's
earnings and the decision of the board of directors to pay dividends.
Therefore, even if a property in which you formerly held an
4
<PAGE>
interest were to perform well, there is no assurance that there would be cash
distributions to you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National is
presently compensated for its services at the rate of one percent of the
principal amount originally invested in each program. In addition, additional
compensation has been accrued for property management services provided to the
Oceanside and Yosemite/Ahwahnee properties by officers and employees of National
in their capacities as officers of Oceanside Development, Inc. and Ahwahnee golf
Course & Resort, Inc. In the future, compensation will be paid to officers of
the company in the form of salaries, stock options and other benefits. These
salaries and other forms of compensation will be payable to management of the
company even if one or more of the properties acquired in the acquisition is
subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL USED ITS OWN JUDGMENT TO RESOLVE THE CONFLICTING YOSEMITE/
AHWAHNEE APPRAISALS. Faced with two conflicting appraisals for the
Yosemite/Ahwahnee properties, to determine the appraised values for these
properties for purposes of determining their exchange values, National's
management used the most conservative information presented in the appraisals
unless a change in circumstances or market conditions for a particular parcel
suggested one appraisal was more pertinent than the other. If the values
arrived at by National were too low for either program, the program's exchange
value would be too low and would result in too few shares being allocated to
that program in the acquisition. Conversely, if the values arrived at by
National were too high, the program would receive too large an allocation of
shares in the acquisition to the detriment of the investors in the other
programs.
THERE WILL BE SIGNIFICANT REAL ESTATE RISKS ASSOCIATED WITH THE COMPLETION
OF THE COMPANY'S PROPOSED BUSINESS PLAN, AS WELL AS ANTI-TAKEOVER RISKS. These
include (i) the need to raise additional cash funds to pay delinquent property
taxes on each of the properties, as well as keeping those property taxes current
in the future (without needed cash, one or more properties may still be lost at
a tax sale at below market prices), (ii) to pay for the costs associated with
obtaining permits and government approvals to develop the Mori Point and
Sacramento/Delta Greens properties (without such permits and approvals, such
properties might have to be sold at prices below May 1997 appraised values),
(iii) the cost of holding an inventory of residential lots at the Oceanside
(presently $30,000 per month) or Sacramento/Delta Greens
5
<PAGE>
(presently $10,000 per month) properties, and (iv) payment of over $1,300,000
accrued fees and expenses to National and its principals which are not being
forgiven in the acquisition. Additionally, there are specific risks related
to each of the programs' properties more specifically described in "Risk
Factors -- Real Estate Risks" and risks of management entrenchment found in
"Risk Factors -- Anti-Takeover Provisions and Limitation of Director
Liability."
EXCHANGE VALUE/ALLOCATION OF SHARES
The programs' properties have been appraised by the independent
appraisers identified on page __. The exchange value for a program property
is its appraised value (adjusted by increasing the appraised value by a
program's cash reserves and other assets, and reducing it by program
liabilities net of fees to be cancelled by National or its affiliates as a
part of the acquisition) multiplied by the arbitrary price of $10 per share.
The exchange value of a program is not the price a program might receive if
it elected to sell its property now rather than participate in the
acquisition proposed by the company. Net proceeds from such a sale price
might be higher or lower than the exchange value amount the company is
willing to pay. Due primarily to accrued liabilities of the programs'
investors, the exchange value for a property is lower than the appraised
value of a property used to determine the exchange value in all cases except
the Oceanside property. See "Background and Reasons for the Acquisition --
Calculation of Exchange Value."
National and the company believe that the programs, when unified and
operated together, have financial advantages for each other which increase
their potential, and which are not available to the programs individually due
to the limitations of the current tenancy-in-common form of ownership of the
programs' properties.
The number of shares to be assigned to each program was determined by
dividing the program's exchange value by the total exchange value of all the
properties and multiplying that fraction by the total number of shares to be
paid by the company.
The following table shows investors (i) the aggregate amount of unpaid
principal balance of loans owed to a program by the original borrower plus
accrued but unpaid interest on such balance as of the date the title to the
underlying property was obtained by National on behalf of the investors plus
all amounts paid by investors pursuant to mandatory assessments plus
voluntary investor advances, (ii) appraised real estate values, (iii)
adjustments to appraised values to arrive at (iv) exchange values, and (v)
the number and percentage of shares allocated to each program if the
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<PAGE>
acquisition is consummated. The information is as of December 31, 1997.
[to be updated to the month end prior to the final prospectus date]
<TABLE>
<CAPTION>
Adjustments % of Total
to Real Shares to be
Amount Real Estate Estate No. of Outstanding
Owed plus Appraised Appraised Exchange Shares After the
Name of Program Assessments Value(1) Value(2) Value Allocated(3) Acquisition(4)
- --------------- ------------ ------------ ------------ ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 6,038,716 $ 2,000,000 $ (63,499) $ 1,936,501 193,650 7.76%
Oceanside 27,100,000 2,850,000 2,025,714 4,875,714 487,571 19.53
Yosemite/Ahwahnee I 8,996,473 3,912,454 (706,787) 3,205,666 320,567 12.84
Yosemite/Ahwahnee II 19,344,964 6,253,121 (1,115,570) 5,137,552 513,755 20.58
Mori Point 12,420,000 5,500,000 (642,958) 4,857,042 485,704 19.45
TOTAL $73,900,153 $20,515,575 $20,012,475 2,001,248 80.16%
</TABLE>
- --------------------------
(1) Appraisals were conducted in May 1997. However, an appraisal of the
Yosemite/ Ahwahnee Properties was also conducted in October 1996, the
results of which conflicted with the May 1997 appraisal. Faced with
conflicting appraisals, to determine the appraised values for the
Yosemite/Ahwahnee properties for purposes of the above table, National's
management used the most conservative information presented in the
appraisals unless a change in circumstances or market conditions for a
particular parcel suggested one appraisal was more pertinent than another.
(2) The following table quantifies the asset and liabilities adjustments to
appraised values made in determining a Property's Exchange Value as of
December 31, 1997.
<TABLE>
<CAPTION>
Net Other
Book Assets Book Liabilities To Be Forgiven Assets and
Name of Program (12/31/97)* (12/31/97)* Amounts Liabilities
----------------------- ------------ ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Sacramento/Delta Greens $ 108,627 $ (309,237) $ 137,111 $ (63,499)
Oceanside 2,593,408 (1,271,694) 704,000 2,025,714
Yosemite/Ahwahnee I 602,891 (1,344,678) 35,000 (706,787)
Yosemite/Ahwahnee II 963,576 (2,149,146) 70,000 1,115,570
Mori Point 239,911 (882,869) 0 (642,958)
</TABLE>
* See balance sheets of each program in the accompanying financial
statements for details of book assets and book liabilities. There is
no mortgage debt on the properties of the Sacramento/Delta Greens and
Mori Point programs, and, after the acquisition, there will be no
mortgage debt on the other programs' properties.
(3) Represents [9.68%], [24.36%], [16.02%], [25.67] and [24.27%],
respectively, of the shares to be issued to investors in the acquisition.
(4) [85.83]% if all units offered to investors in the concurrent offering
are sold to investors. The other shares will be held by management and
other founders of the company.
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<PAGE>
Shares will be distributed to you in accordance with your pro rata
investment in a program (including assessments paid and interest accrued to you
through the date you took beneficial ownership of the property) after adjusting
the amounts to account for voluntary advances made by some investors. For
example
<TABLE>
If your Adjusted You will receive approximately the
Outstanding Investment is $10,000 in following number of company shares
<S> <C>
Sacramento/Delta Greens 320
Oceanside 162
Yosemite/Ahwahnee I 354
Yosemite/Ahwahnee II 265
Mori Point 399
</TABLE>
CURRENT STATUS OF THE PROGRAMS
Each of the programs began as tenancy-in-common, secured loan arrangements.
Each of the properties that secured the loans was independently appraised. Due
to the borrowers' defaults on the loans, the investors in each of the programs
are now the beneficial owners of the real estate that secured the loans. As the
servicing agent for the loans, National became the manager of the programs'
assets. Based on investors' stated preferences, National's objective has been
to recover all, or a substantial portion, of the investors' principal if the
properties were sold. The significant decline in real estate values in
California in the early 1990s (especially for undeveloped land) has made
attaining this objective unattainable at this time.
The properties owe a significant amount of delinquent property taxes
totalling over $[1,082,000] all together as of December 31, 1997. In
addition, working capital is needed in order to position the properties for
sale on terms that might be approved by a majority of investors. Only the
Oceanside property has been self-sustaining through sales of lots and newly
constructed homes. Other than that, only the golf course and recreational
vehicle park portions of the Yosemite/Ahwahnee properties have any operating
cash flow and that is not enough to cover operating expenses much less
provide working capital needed to conceptually plan, comply with the
governmental permitting requirements and eventually construct other
improvements on the land. The programs' tenancy-in-common agreements contain
provisions for voluntary and mandatory assessments. Investors in different
programs responded in varying degrees in both types of assessments but, even
with mandatory assessments, all did not live up to the agreement. At the
least, investors have demonstrated a reluctance to provide adequate working
capital through a mandatory assessment process. This reluctance on the part
8
<PAGE>
of investors to provide the necessary funding to position the assets of their
programs for a satisfactory disposition is one of the primary reasons why
National believes that none of the programs are capable of attaining a
maximum return of invested dollars in their present stand-alone status.
The Oceanside property may be able to be sold for cash approximating its
May 1997 appraised value. After a capital infusion of approximately $175,000 to
complete necessary engineering and the permitting process, the Sacramento/Delta
Greens property may also be sold for a cash price approximating its May 1997
value. Nevertheless, neither property can be sold for prices sufficient to
return all or a substantial portion of the investors' money at this time.
National believes that those properties should either be built out and sold as
single-family homes or sold in bulk when appropriate.
Without an infusion of approximately $3,700,000 of capital, the
Yosemite/Ahwahnee properties cannot reach a point where they are developed
enough to eliminate losses from operations, be attractive to a joint venture
partner or be sold for their aggregate May 1997 appraised value. National
believes that failure to continue to fund an increase in the number of
recreational vehicle spaces and to develop a timeshare facility and sales
program at the Yosemite/Ahwahnee properties will result in a serious
deterioration of their aggregate value.
At present, Mori Point is vacant land with a proposal to be developed into
a hotel/conference center. In order to continue the predevelopment effort,
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. Presently, this property
cannot be sold for an amount sufficient to return the investors' money.
Attempts have been made to sell or develop on a joint venture basis all or
portions of each of the properties. However, the offers have been rejected by
investors (in the case of Sacramento/ Delta Greens in 1994 and Mori Point in
1996) or inadequate (in the case of Oceanside) or not forthcoming at all (in the
case of the Yosemite/Ahwahnee programs). See "Background and Reasons for the
Acquisition -- Efforts to Dispose of the Properties." National continues to
offer the Oceanside property for sale directly to homebuilders in the area. The
Sacramento/Delta Greens property has been presented to several local area
homebuilders as recently as early 1997 without yielding any significant
negotiations toward a sale. National continues to explore the possibility of
selling this property, but, to date, no brokers have been hired because National
has the resources to identify potential buyers for a project of this type.
National has made no significant efforts to interest potential buyers or joint
venture partners in the
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<PAGE>
Yosemite/Ahwahnee properties because it does not believe the properties are
ready for sale until further development of the recreational vehicle spaces
and planned timeshare program is complete. Joint venture partners willing to
become associated with the unwieldy tenancy-in-common ownership structure
which requires so many persons to approve any significant action have been
difficult to locate. Currently, the Yosemite/Ahwahnee properties experience
a steady negative cash flow which few, if any, buyers are willing to accept.
No offers have been received. For a period of Year in 1992 to 1993, the Mori
Point property was listed with Grubb & Ellis, a reputable commercial broker.
No offers were received. The brokerage contract was not renewed, and no
recent efforts have been made to sell it because the investors instructed
National to continue to pursue obtaining the necessary governmental permits
to develop a hotel/conference center on the property.
The acquisition has been proposed because National and the company believe
that the properties, when combined and used or sold for their mutual benefit
instead of separately operated or sold, can be sold and/or developed in a way
that will increase the overall value available to investors. This proposal
provides an alternative way to achieve the investors' goal of achieving a return
of all or substantially all of their original principal. While there can be no
assurance that the company will achieve that goal for the investors through its
stock price, continuing to attempt to achieve the investors' goals for each
property separately does not appear to provide any likelihood of achieving that
objective. If the acquisition occurs, the properties and assets belonging to
the programs will all become assets of the company, and you will be shareholders
of the company. The value of the company will be reflected in the market value
of its shares. Thus, through the market value of the shares, you may receive a
higher percentage of your outstanding investment than you might receive if the
properties were operated or sold within their separate programs. However, it is
not known what the market price for the shares will be and therefore it cannot
be known whether the value of the shares allocated to each program will ever
exceed the price that the properties might bring in a cash sale. See
"Background and Reasons for the Acquisition -- Comparison of Alternatives" at
page __.
THE COMPANY
The company was formed on August 6, 1997 to conduct the acquisition. The
founding shareholders of the company are Yale Partnership for Growth and
Development, L.P. and J-Pat, L.P., family partnerships established by David
Lasker and James Orth, respectively, as well as other employees, consultants of
National, or the company. The company has no significant assets or liabilities
and no operating history. The company's principal executive offices are located
at
10
<PAGE>
4220 Von Karman Avenue, Suite 110, Newport Beach, California 92660, telephone
number 1-800-590-7772.
EXPERIENCE OF MANAGEMENT
The key executive officers are David G. Lasker, James N. Orth, L.C. "Bob"
Albertson and Mark C. Kawanami. Each of these officers does not have experience
in operating or developing each type of property to be acquired by the company.
However, collectively, they have the necessary experience to operate or develop,
or supervise the operation or development of, each type of property. Messrs.
Lasker and Orth have been principally responsible for management of the programs
since title to the properties was obtained from the original borrowers on behalf
of the investors. With regard to the proposed activities at the
Yosemite/Ahwahnee properties, they have been actively involved in obtaining
necessary permits and construction services, recreational vehicle membership
sales and site management, golf course management and marketing, lot sales and
timeshare studies. L.C. "Bob" Albertson, the Executive Vice President of the
company, has been involved as an executive in all aspects of the home building
industry for over 30 years. In that time, he has used traditional financing
arrangements, as well as options and non-recourse seller financing, to acquire,
and build residences on, real estate. Mark Kawanami, Vice President of the
company, has been involved in the financial aspects of the residential real
estate business for over ten years. None of the officers have extensive
experience in the development, marketing and management of a recreational
vehicle park or timeshare products. However, consultants will be hired to
provide those skills and services as needed. See "Management Following the
Acquisition" at page __.
In the last ten years, National sponsored 12 programs (including the five
discussed in this Prospectus) which offered tenancy-in-common interests in loans
secured by real estate located in California. Nine of such programs were public
programs having raised more than $100,000,000 from more than 6,000 investors and
three were private programs. The total amount of money raised from the private
offerings was approximately $900,000 from a total of 72 investors. Loans were
made to developers of 11 California properties. One-half of one percent of the
funds were used to make loans to developers of shopping centers, approximately
30% to developers of mixed use projects (commercial and residential) and
approximately 70% to developers of residential properties. All of the
properties involved previously undeveloped land. Of the amount loaned,
approximately $13,000,000 was distributed back to investors (all from public
programs and none from private programs). Of the 12 lending programs, ten
eventually were defaulted upon by the borrowers and two paid the
lender/investors in full as agreed. In National's opinion, the principal
adverse business development which caused
11
<PAGE>
such defaults was the precipitous decline in the value of real estate
throughout California brought about by the economic recession in recent
years.
ORGANIZATION CHART
After the acquisition, assuming none of the units is sold, 80.16% of the
company's outstanding shares will be owned by the investors and 19.84% will
be owned by the founders of the company. Management of the properties will
be coordinated through a to-be-formed wholly-owned subsidiary to be named
American Family Communities, Inc. Title to the properties will be held by,
and day-to-day operations will be conducted through four separate
wholly-owned subsidiaries of American Family Communities, Inc. The ownership
and organization of the company after the acquisition will be as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Yale
Partnership
for Growth and J-Pat, L.P. Consultants
All Programs' Development, (controlled by and other
Investors L.P. James Orth, a Employees of
(controlled by principal of National or
David Lasker, a National) Company
principal of
National)
------------ ------------------- ----------------- --------------
| | | |
| | | |
| | | |
|80.16% |8.01% |8.01% |3.82%
|(85.83% if |(5.72% if all |(5.72% if all |(2.73% if all
|all units sold) |units sold) |units sold) |units sold)
| | | |
---------------------------------------------------------------------------------------
American Family Holdings, Inc.
---------------------------------------------------------------------------------------
|
|100%
|
------------------------
American Family
Communities, Inc.(1)
------------------------
|
|100%
|
---------------------------------------------------
| | | |
-----------------------------------------------------------------
Delta Greens Yosemite Woods Oceanside Mori Point
Homes, Inc.(2) Family Resort, Homes, Destinations
Inc.(2) Inc.(2) Inc.(2)
-----------------------------------------------------------------
</TABLE>
12
<PAGE>
- ----------------------
(1) A subsidiary formed to coordinate the management and operation of the
properties.
(2) Subsidiaries formed to hold title to the various properties and to conduct
the day-to-day operations.
ALTERNATIVES TO THE ACQUISITION
The alternatives to the acquisition that National considered were (a)
continuing the operations of each of the programs under their respective
separate business plans, (b) liquidation of each of the programs either directly
or in the context of a bankruptcy, and (c) a bankruptcy reorganization of the
programs. It concluded that none of these alternatives would be as beneficial
to the investors as the acquisition. See "Background and Reasons for the
Acquisition -- Alternatives to the Acquisition" and "Comparison of Alternatives"
at pages __ and __.
FAIRNESS
From a financial point of view, the company and National believe the
terms of the acquisition are fair as a whole and to the investors in each of
the programs. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that
develops will be sustained;
- while the number of shares to be issued to reflect the exchange
value of a program is arbitrary, the trading price of such shares initially
is likely to be substantially below the $10 value arbitrarily assigned to
such shares. In our opinion, the exchange values offered to investors for
their assets allow for an equitable allocation of the [2,001,248] shares
among the programs. The disparity between exchange values and appraised
values results from adding the value of program cash reserves and other
assets, if any, to appraised values and deducting program liabilities
(principally accrued property taxes and other fees net of fees to be forgiven
by National);
- on completion of the acquisition the investors will hold over 80% of
the outstanding stock of the company while principals, employees, and
consultants of National will hold less than 20%. That 20% was purchased for
$.01 per share. National and its principals have forgiven, or will forgive at
the completion of the acquisition, over $3,000,000 of expenses and accrued fees
of which a total of approximately $1,400,000 was earned under the servicing
agreements for property management services and expenses after the loans
13
<PAGE>
defaulted. National believes that the amount paid for the property management
services is no greater than the amount that a third party would charge;
- the valuation of the real estate assets of each of the programs by
the independent appraisers;
- the probability that the transaction will either be tax-free to
investors or most likely yield a tax loss. Either way, National believes there
will likely be no out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have independent
representation in the structuring of the acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the programs were originally formed to have a two to four year
finite life and the investors expected to receive a return of their investment
from the original borrower, the company is an infinite life entity which will
not return the program investors' original investment based on a sale or
refinancing of the properties underlying the original programs. However, after
the borrowers defaulted on the "Trudy Pat" loans, the investors became
beneficial owners of the underlying properties with the need to complete
development, manage or otherwise ready the properties for sale. Those endeavors
had no fixed timetable and, thus, the finite life aspect of their original
investments was significantly changed. Therefore, the infinite life aspect of
the company is not viewed by National to be a material change from the
investors' CURRENT situation;
- the acquisition will cause fundamental changes in the individual
business plans of the programs. Rather than being focused on a single property,
the company will be focused on the management of at least five properties.
Thus, the poor performance of a particular property may affect the company's
operations as a whole regardless of the performance of the other properties.
Further, there will be no particular time when an Investor can expect its
interest to be automatically liquidated.
- investors will not be able to vote on changes to or dispositions of a
particular property or borrowing secured by a particular property. Those
decisions will be made by the Board of Directors or management. Further, as
investors in a larger entity, relative voting power will be diluted;
14
<PAGE>
- future cash distributions will be based on the company's earnings and
a decision of the Board of Directors to pay dividends rather than on the
performance or sale of a particular property;
- investors voting against the acquisition will have no alternative but
to accept shares in the company if the acquisition is approved by holders of a
majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a change
in management which is not favored by the Board of Directors of the company; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the shares in
the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __.
National reviewed the arbitrary value you will receive in connection with
the acquisition and compared it with what you might receive if (i) the programs'
properties were operated "as is," (ii) the programs' properties were sold in a
quick sale in three months or less, or (iii) the programs' properties were sold
at the appraised values used to determine the exchange values. Based on that
review, and even acknowledging that, initially, the company's shares issued in
the acquisition would likely trade substantially below their arbitrary $10
issuance value, National believes that there is a higher probability of
realizing value from the programs' assets through the acquisition than through
the other alternatives. This belief is based on the expectation that some
financing opportunities will become available based on the form of the entity
and the time pressure associated with forced sales or liquidation will be
relieved. See "Background and Reasons for the Acquisition -- Comparison to
Alternatives" and "Recommendation of National and Fairness Determination" at
pages __ and __. Based on this comparison, National concluded that the
acquisition is financially fair.
FAIRNESS OPINION
National hired Houlihan Valuation Advisers, an independent valuation firm,
to review the fairness of the acquisition. That firm's opinion (the "Fairness
Opinion") concludes that the allocation of the shares in the transaction (which
includes allocation of shares to the programs and principals, employees and
consultants of National and the company) is financially fair to you. See
"Appraisals and Fairness Opinion -- Fairness Opinion" at page __.
15
<PAGE>
NATIONAL'S RECOMMENDATION
While the acquisition was not negotiated at arms-length and National and
the principals of National will receive substantial benefits from the
acquisition, NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION. See "Interests of Certain Persons in the Acquisition and Conflicts
of Interest" at page __, "Background and Reasons for the Acquisition" at page
__, and "Appraisals and Fairness Opinion" at page __.
SUMMARY OF FEATURES OF THE ACQUISITION
POTENTIAL LIQUID TRADING MARKET FOR YOUR SHARES. After the acquisition,
shares will be listed on the ______________. While there can be no assurance
that a trading market will develop or be sustained, if a trading market
develops, you will have the opportunity to liquidate all or some of those shares
at your discretion. However, initially the shares are likely to trade at prices
substantially below the arbitrary $10 value assigned to them.
CONTROL OF THE TIMING OF LIQUIDATION OF YOUR INVESTMENT. You will be able
to control when you with to sell your shares. However, if no trading market
exists at the time, you may not be able to sell your shares. Under the current
programs, you have been subject to a majority vote to sell or retain the
property, regardless of whether or not the timing and decision were favorable to
you individually.
BENEFITS OF LISTED SHARES TO THE COMPANY. Listing of the shares on the
____ may provide benefits to the company which could enhance investor value.
The company may have access to public capital markets that the individual
programs do not have if the company is able to show potential for growth.
DIVERSITY MAY REDUCE RISK. Your investment will be spread over an initial
asset base of four different real estate projects (the two Yosemite/Ahwahnee
programs will be one project after the acquisition). However, the poor
performance of a particular property could negatively affect the performance of
the company even if the other properties are performing up to expectations.
Historically, all of the properties have operated at a loss. In order for the
company to be successful, it must obtain external financing or sell certain of
its assets to raise cash for operations.
PROPERTY MANAGEMENT. We have hired key real estate management
professionals who are experienced in real estate development, operation and
construction. While members of management have gained experience in the
operation of golf courses and recreational vehicle parks through the
16
<PAGE>
operation of the Yosemite/Ahwahnee properties, they do not have extensive
experience in timeshare or resort development, marketing or operations.
MODEST INCREASE IN MANAGEMENT COMPENSATION. National considered that the
total of salaries to be payable to the Company's officers and other employees
exceeds the total payable to National and its affiliates for servicing and asset
management services ($1,181,000 as opposed to $969,000, both of which include
the payroll for the Ahwahnee Country Club). The increase was not viewed as
significant since the original servicing fees were based on loan servicing which
is less labor-intensive than property development and management.
NO FURTHER LIABILITY FOR MANDATORY ASSESSMENTS. Your tenancy-in-common
agreement and servicing agreement will be cancelled by the acquisition, meaning
your exposure to mandatory assessments will cease. However, the company will be
required to obtain additional money from outside sources or the sale of certain
of its properties to be successful.
LIABILITY IS LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As beneficial
owners of the assets and businesses of the programs, you are not currently
effectively insulated from personal liability based on the operation of those
assets. As shareholders of a corporation, you will be.
NO CONTROL OVER TIMING OF SALE OF A PARTICULAR PROPERTY. No particular
group of investors will have the ability to control the timing of the sale of a
particular property as they do under the current program structure. Instead,
all Investors will be required to rely on the decisions of management regarding
the sale of a property.
PROCEEDS FROM SALE OF PROPERTIES. If a property is sold, the proceeds will
be used by the company to further the business plan of the company. Presently,
if a program property is sold in its entirety, the proceeds would go to
applicable investors directly as a return of their investment. If it is
refinanced, by majority vote the program investors presently have the power to
direct the use of refinancing proceeds.
ACQUISITION COULD TRIGGER TAXATION OF INVESTORS. Participation in the
acquisition may be a taxable event for investors. However, National intends to
treat the transaction as a tax-free transaction. To the extent that the
acquisition is determined to be taxable, National believes most investors would
be required to report tax losses. On the other hand, there generally would be
no taxable event to investors as the programs are currently structured until the
program property was sold. At such time, the amount returned to you would
result in either a tax loss or gain depending upon how much of your original
investment was returned to you.
17
<PAGE>
CASH DISTRIBUTIONS. Currently, if a property was sold, you would be
entitled to a distribution of the proceeds of such sale net of costs of sale and
accrued liabilities. After the acquisition, your distributions will be
dependent upon the earnings of the company and a decision of the board of
directors to make distributions in the form of dividends. You will not
automatically receive distributions upon the sale of any particular property.
See "Summary Risk Factors" in this Prospectus Summary and at page __ for
additional potentially negative aspects of the acquisition.
BENEFITS TO NATIONAL AND COMPANY FOUNDERS
MANAGEMENT AND COMPANY FOUNDERS WILL OWN APPROXIMATELY [18.23]% OF THE
COMPANY (APPROXIMATELY 14% IF ALL UNITS ARE SOLD IN THE CONCURRENT OFFERING).
These individuals paid $.01 per share for their company shares. In addition,
over the past several years, National and its affiliates have forgiven, and as a
result of the acquisition will forgive, an aggregate of over $3,000,000 of fees
and expenses due from the programs.
NATIONAL'S PRINCIPAL STOCKHOLDERS WILL OWN FOUNDERS' STOCK IN THE COMPANY
AND WILL RECEIVE SALARIES AS OFFICERS OF THE COMPANY. David Lasker and James
Orth will be President and Chief Executive officer, respectively, of the company
and entities they control will each own [8.01]% of the company's outstanding
shares ([5.72]% if all units are sold in the concurrent offering). These shares
are included in the shares described above as being owned by management and
company founders. Mr. Lasker and Mr. Orth also will receive annual salaries of
$180,000 plus other benefits. See "Management Following the Acquisition --
Directors and Executive Officers Compensation and Incentives" at page __.
AS A CONSEQUENCE OF THE ACQUISITION, THE INVESTORS WILL TERMINATE NATIONAL
AS SERVICING AGENT FOR THE PROGRAMS. This will relieve National of its ongoing
servicing obligations which National could unilaterally terminate if it elected
to do so.
THE COMPANY WILL OWE NATIONAL AND ITS PRINCIPALS AND EMPLOYEES $[1,381,881]
OF ACCRUED BUT UNPAID FEES AND EXPENSES DUE FROM THE PROGRAMS AFTER THE
ACQUISITION. If the company is successful, National will have the opportunity
to receive the portion of its accrued but unpaid fees and expenses which it has
not forgiven.
SUMMARY OF BUSINESS PLAN
Our objective is to preserve as much of the investors' original principal
as is possible and improve the value and performance of the properties currently
held by the programs in the following ways:
18
<PAGE>
- By developing selected properties for their highest and best use;
- By increasing the current cash flow from the operating assets;
- By maximizing the potential profit margins of for-sale products;
- By raising funds for the company's operations through a strategic
combination of sales of units to existing investors (see accompanying
prospectus) and the sale of selected real estate assets acquired from the
programs to outside buyers; and
- By acquiring other projects or assets which are consistent with our
objectives and business plan.
RESIDENTIAL DEVELOPMENTS. We plan to continue to build homes for sale on
the Oceanside Property and seek buyers for the remaining lots. By using the
funds available from the sale of the units or from the sale of certain assets of
the programs, we expect to complete the permitting process and start
construction of single-family lots of the Sacramento/Delta Greens project.
Alternatively, we may sell the project in bulk to raise operating funds. Cash
flow from sales of single-family homes and lots would continue our growth and
build value.
RESORT DEVELOPMENTS. We will enhance the value of Yosemite/Ahwahnee by
continuing to develop the project. While the project itself presently has
little cash available for capital improvements, we believe the highest potential
rewards lie in this segment of the company's asset base. By using the funds
available from the sale of the units or from the sale of certain assets of other
programs, we will aggressively seek timeshare approvals at Yosemite/Ahwahnee and
will continue to sell memberships and build recreational vehicle sites. Using
some of such funds, we will also continue to process the necessary approvals for
the Mori Point asset which we believe has the potential to attract hotel and
conference center industry-oriented joint venture partners or purchasers. In
the future, we may also target additional resort or over-night-stay projects for
potential acquisition or joint venture. See "Business and Properties --
Properties" at page __ and "-- Consolidation of the Programs" at page __ for
further details regarding all of the properties.
MANAGEMENT. The Board of Directors will oversee the management of the
company. After the acquisition all directors will be elected by the
shareholders. The Board will consist of six directors, including three
directors who are independent of the company. For background on management of
the company and their compensation, see "Management Following the Acquisition"
at page __.
19
<PAGE>
COMPARISON OF THE PROGRAMS AND THE COMPANY
The summary information below highlights a number of significant
differences between the programs and the company. See "Comparison of the
Programs and the Company" at page __.
FORM OF ORGANIZATION. The programs began as tenancy-in-common investments
in "Trudy Pat" loans. The company is a corporation which offers to investors
certain benefits such as limited liability and professional management which may
not be present to the same degree in the present ownership structure.
LENGTH OF INVESTMENT. When you invested in the "Trudy Pat" loan(s), you
expected to receive repayment of your loan in two to four years. After the
acquisition, the company will have no time limit to dispose of any assets, and
you will not receive net asset sales proceeds. Instead, sales proceeds will be
reinvested in the company. Your publicly-traded shares will replace the process
of liquidating program assets as your way to receive a return of your capital
and any profits.
DIVERSIFICATION. Each of the programs has real estate assets in a single
location. By contrast, the company will hold the real estate assets of all five
programs and will be more diversified both geographically and by type of
property. By owning shares, you will be invested in an on-going, diversified,
real estate operating company.
ADDITIONAL EQUITY. None of the programs are currently authorized to raise
additional funds, except through mandatory assessments. The company will have
more flexibility to raise capital to finance its business. We may issue
additional stock to raise money or to make new real estate investments. These
are traditional methods of acquiring capital, but this would dilute your
interests. Such stock could have priority in dividends distributions and
liquidation proceeds.
BORROWING POLICIES. Borrowing is difficult under the present program
structure. The company will be able to borrow to improve or expand its asset
base. However, borrowing may also increase the company's risk from leveraged
investments.
COMPENSATION, FEES AND DISTRIBUTIONS. National will stop earning servicing
fees under the program agreements in the aggregate amount of approximately
$650,000 per year. As of December 31, 1997, the Programs have accrued fees and
advances due to National and its principals and employees of $[2,327,992]. If
the acquisition is approved, National and its principals will cancel $946,111 of
these accrued fees and advances that it has made on behalf of program owners.
National and its principals will continue to be owed $1,381,881 will be assumed
and paid in the general course of the
20
<PAGE>
company's business. In addition, National also has represented that it was
owed fees and made advances to the programs totalling $2,191,614 which it
previously forgave prior to 1994. Since these fees and advances were incurred
and forgiven prior to 1994, they have not been accrued on the historical
balance sheets of the programs presented in this prospectus. National's
principals will own interests in the company and will also receive salaries as
officers of the company. National, itself, will receive shares in exchange
for its interests held as a "Trudy Pat" investor in each of the programs in the
same manner and at the same cost as all other "Trudy Pat" investors.
MANAGEMENT CONTROL AND RESPONSIBILITIES. Currently, National serves as
your servicing agent. Under its contract, it cannot be removed except by a
majority vote by investors in a particular program, which is generally an
extraordinary event. You will have greater control over the management of the
company than you had over the programs. You will be able to vote for certain
members of your Board of Directors every year. In the beginning, principals and
affiliates of National will control a maximum of 19.84% of the voting shares
(14.17% if all units are sold).
MANAGEMENT LIABILITY AND INDEMNIFICATION. The directors and officers of
the company will be entitled to potentially stronger indemnification from the
company for their actions than is presently the case for National in the program
agreements.
VOTING RIGHTS. Presently, you only have voting rights in the particular
program in which you are an investor. You can vote on matters involving
collection, servicing and administration of your investment as well as
termination of the servicing agreement. As a shareholder, you will have the
right to vote for directors and other matters according to applicable law or the
company's charter documents. When voting as a shareholder, your vote will
affect all of the businesses and properties owned by the company, which will
include the assets owned by all five programs. However, your relative voting
power will be reduced.
LIQUIDITY. The tenancy-in-common interests in the programs constitute
illiquid investments which are very difficult to sell. The shares are expected
to be listed on the _____ and be freely tradable.
TAX TREATMENT. The company will be taxed as a corporation. Currently, the
programs themselves are not taxpayers and file no program tax returns. Prior to
taking title to the properties, when income was allocated to a program investor
that was interest, National, as servicing agent, reported such income to the IRS
and the investors on Form 1099-INT. As tenancy-in-common owners of the
properties, the investors no longer receive Forms-1099 from National, but are
responsible for their pro rata share of any income, gain, loss or deductions
21
<PAGE>
attributable to their program's properties. If the company makes distributions
to shareholders, it will report the distributions on Form 1099-DIV whether or
not they are taxable.
OVERHEAD AND EXPENSES. Overhead and expenses of the programs are the
responsibility of the investors to the extent the applicable program does not
generate sufficient cash flow to cover them. They are billed individually to
investors in the form of assessments. To date, only the Oceanside program has
been completely self-funding. Investors will have no direct responsibility for
company overhead and expenses. Initially, overhead and expenses of the company
will be derived from proceeds of the sale of the units, if any, or the sale of
one or more of the company's assets. Future overhead and expenses will be
funded from cash flow from operations.
DILUTION. Investors in each program have voting power based on their
percentage of the funds contributed to the program. Since five programs will be
consolidated into the company, each investor's voting power will be
substantially reduced.
BUSINESS PLANS. Each of the programs has a separate business plan as
follows:
Sacramento/Delta Greens Finish permitting process,
provide for infrastructure and
the first phase of home
construction. Approximately
$3,000,000 of capital needed,
including $150,000 to complete
the engineering and permitting
process.
Oceanside Continue to build and sell homes
or sell existing lots in bulk,
plus acquire additional lots.
Approximately $700,000 of equity
capital needed plus $3,500,000
of construction funding.
Yosemite/Ahwahnee I & II Continue to operate golf course,
expand recreational vehicle
park, construct timeshare units,
and market these products and
services. Approximately
$3,700,000 of capital needed.
Mori Point Proceed with hotel/conference
center entitlement process which
will require the preparation of
a mitigation plan to protect the
habitat of an endangered
species. Approximately $500,000
capital needed.
22
<PAGE>
The business plan of the company is to consolidate the programs' plans,
raise some or all of the capital necessary to accomplish those plans through the
sale of units, if possible, as well as build homes on, or sell, the remaining
Oceanside lots and perhaps the Sacramento/Delta Greens property. The total
capital needed is approximately $11,400,000 which exceeds the maximum available
working capital if all of the units offered in the concurrent offering are sold.
The balance will have to be derived from debt financing, if available, sale of
company assets, or joint venture partners. The company believes the
Yosemite/Ahwahnee properties have the greatest profit potential. So, if working
capital or debt financing were in short supply, the company will concentrate its
efforts on the Yosemite/Ahwahnee properties.
DISTRIBUTIONS AND DIVIDENDS. As interest and principal was paid by the
borrowers, investors in the programs were entitled to distributions. As the
underlying properties of the programs are sold after title was taken on default
of the borrowers, investors in the programs will be entitled to distributions of
sale proceeds from programs in which they invested. The company has no present
plans to pay dividends to shareholders whether from earnings or for the sale of
properties. Dividends will be paid only when declared by the board of
directors.
TAX CONSEQUENCES OF ACQUISITION
The income tax consequences of the acquisition will depend primarily on
whether the acquisition qualifies for tax-free treatment under Section 351 of
the Internal Revenue Code. Arter & Hadden LLP, tax counsel to the company, is of
the opinion that the acquisition will qualify as tax-free if (i) the company is
not an investment company (tax counsel is of the opinion that the company is
not) and (ii) collectively, the investors in the programs control at least 80%
of the outstanding shares of the company immediately after the acquisition. The
determination of whether the 80% test is met depends on whether investors who
subsequently dispose of shares acquired in the acquisition are treated as not
being holders "immediately after the acquisition." Neither the company nor tax
counsel is in a position to determine whether investors who will acquire more
than 80% but who later sell some of those shares will or will not be deemed by
the taxing authorities to have held those shares "immediately after the
acquisition." Due to such uncertainty, tax counsel is unable to opine that the
acquisition will not create a taxable transaction for investors.
If the acquisition is tax-free, tax counsel is of the opinion that no
gain or loss will be recognized by the company or, generally, by the
investors as a result of the acquisition. If the acquisition does not
qualify as a tax-free transaction, tax counsel is of the opinion that the
company will recognize no gain or loss in the acquisition, but an investor
will recognize gain or loss
23
<PAGE>
upon receipt of shares. That gain or loss will be equal to the difference
between the tax basis of the investor's interest in the property transferred
and the fair market value of the shares received plus his or her share of any
nondeductible liabilities to which the properties are subject.
After the effective date, tax counsel is of the opinion that, as a separate
taxable entity, the company's taxable income will not flow through to the
investors for purposes of determining the investors' tax liabilities.
Distributions by the company to its shareholders will be taxable as a dividend
if the company has earnings and profits. Otherwise, distributions will
constitute non-taxable returns of capital to the extent of an investor's tax
basis in the shares and will be taxable gain to the extent the distribution
exceeds the tax basis.
CONFLICTS OF INTEREST RELATED TO THE ACQUISITION
National and the company will be subject to conflicts of interest relating
to the acquisition and the on-going operation of the properties. These include
- National will be relieved from its duties and related costs as
servicing agent and asset manager for the programs, thereby reducing its
overhead and allowing it to concentrate on other programs that it manages;
- the amount of $1,381,881] which will remain owing to National and its
principals after the acquisition;
- if the acquisition is completed, David Lasker and James Orth,
principals of National, will receive some or all of the following benefits:
stock ownership in the company (up to [8.01]% each), cash compensation in the
form of salaries ($180,000 per year each) subject to annual increases and
potential bonuses, potential incentive compensation, and the right to
participate in company-wide employee benefit programs;
- you did not have independent advisers representing you in structuring
the acquisition;
- neither the acquisition itself nor the employment agreements for the
officers of the company were negotiated at arm's-length;
- some persons will be employees of the company and National and will
not be able to devote 100% of their time to the company;
- certain provisions of the company's certificate of incorporation and
bylaws, as well as Delaware law, could be used by management of the company to
discourage or defeat efforts of third parties to take control of the company;
and
24
<PAGE>
- the services of David Lasker and James Orth will be required by
National in order for National to continue its servicing agent and asset
management responsibilities to other programs not included in the acquisition.
For a complete discussion of these conflicts, see "Interests of Certain
Persons in the Acquisition and Conflicts of Interest" at page __ and "Management
Following the Acquisition" at page __.
CONDITIONS TO ACQUISITION
The principal non-waivable conditions to the acquisition are
- approval of the acquisition by all of the programs through a majority
vote of the investors in each,
- receipt of a final Fairness Opinion from the independent valuator
regarding the actual allocation of shares,
- approval of the shares for listing on the _______________, and
- the issuance of policies of title insurance to the company.
CONSEQUENCES IF ACQUISITION NOT APPROVED
If the acquisition is not approved, National will ask investors to approve
the sale of the assets of each program for the best price possible, pay the then
outstanding obligations of the investors in the programs, and return any net
proceeds of the sale to the program's investors. If no sale acceptable to
investors in a particular program can be arranged, and if investors in that
program do not provide sufficient additional funds in a timely manner to pay
property taxes and cover National's current and accrued fees for servicing
related and property management services, then, as permitted by the servicing
agreements, National will consider resigning as servicing agent. As a last
resort, National may determine that bankruptcy protection and liquidation may be
in the best interest of investors of a particular program. Under California
law, as servicer, National is the investors' agent and has certain fiduciary
duties. The duties require National (i) to use reasonable care and diligence in
managing the programs, (ii) not to compete with investors without full
disclosure and consent, and (iii) not to obtain an adverse interest to the
investors without full disclosure and consent. National does not believe that
any of the foregoing actions would breach its fiduciary duties to investors. No
sale can take place without the approval of holders of a majority of the
interests in any particular program. If no acceptable sale is arranged and if
the investors in a program fail to make sufficient payments to keep the program
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<PAGE>
financially viable, National will have done all it can do to protect the
interests of that program's investors.
DELIVERY OF STOCK CERTIFICATES
The company will mail your shares to you shortly after the acquisition
becomes effective.
SUPPLEMENTS
Included with this prospectus is a supplement designed to focus solely on
your program, and the impact of this proposed acquisition on investors in your
program. Please review it prior to completing your ballot.
CONSENT SOLICITATION/SUMMARY OF VOTING PROCEDURES
RECEIPT OF CONSENTS. We must receive your ballot by 11:59 p.m., Pacific
Time, on ____________, 1998 (unless extended by the company) to be counted in
the vote on the acquisition.
VOTING. You are entitled to vote based on the amount you have invested in
a program, on the record date, ___________, 1998. Only investors on the record
date are entitled to vote. Voting will be on a program-by-program basis.
VOTES/OUTSTANDING INVESTMENT. On the record date, the following amounts of
outstanding investment, which correspond to votes, exist for each of the
programs:
<TABLE>
<CAPTION>
Outstanding Investment;
Name of Program Number of Votes
--------------- ---------------
[12/31/97]
<S> <C>
Sacramento/Delta Greens 6,038,716
Oceanside 27,100,000
Yosemite/Ahwahnee I 8,996,473
Yosemite/Ahwahnee II 19,344,964
Mori Point 12,420,000
</TABLE>
VOTE REQUIRED. In order for the acquisition to be approved,
investors holding a majority of the outstanding investment/votes in EACH of
the programs must approve the acquisition. Based on amounts of "Trudy Pat"
tenancy-in-common interests purchased in each program, National has the
following votes in each of the programs: 3,118 Sacramento/Delta Greens;
2,082 Oceanside; 2,373 Yosemite/Ahwahnee I; 46,454 Yosemite/Ahwahnee II; and
5,279 in Mori Point. It will cast all of its votes in favor of the
acquisition.
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<PAGE>
You may vote YES or NO or ABSTAIN on the acquisition. If you do not
submit a ballot or you send a ballot marked ABSTAIN, you will be counted as
having voted AGAINST the acquisition.
You may vote only using the ballot provided, and only during the
solicitation period, which ends __________, 1998 or at a later date the company
may announce. You must return the completed ballot to National before the
solicitation period expires. If we receive your ballot signed but unmarked, it
will be counted as a vote FOR the acquisition.
You may withdraw or change your ballot before the solicitation
period expires. You will need to complete and mail a substitute ballot, AND a
letter stating that you are revoking your previous vote.
INVESTOR'S REPRESENTATIONS. When you vote, you will be confirming
to the company that (i) you have received and reviewed the prospectus and the
applicable supplement, (ii) you understand that you will become a shareholder in
the company if the acquisition is completed, (iii) you have the power and
authority to vote as an investor, (iv) you understand that if you sign and send
in the ballot but do not indicate a vote, the ballot will be deemed to have been
voted IN FAVOR of the acquisition, and (v) if the acquisition is completed, to
the best of your knowledge, the company will acquire title to your interest in
the program's property free and clear of all liens and adverse claims other than
property taxes. By voting in favor of the acquisition, you are also voting to
terminate the tenancy-in-common agreement with other investors in your program
and the servicing agreement with National. Termination of the servicing
agreement relieves National of any future liabilities or responsibilities to the
program, but all amounts owing to National under the servicing agreement after
the acquisition will be assumed by the company.
NO DISSENTERS' RIGHTS
If you vote "NO" on the acquisition, and the acquisition is
approved, you will have no choice other than to take shares in the company. You
will not be entitled to object to the transaction and receive a cash payment for
your interest under the tenancy-in-common agreements governing the programs or
applicable law. See "Voting Procedures -- No Dissenters' Rights" at page __.
NO RIGHT TO PROGRAM BOOKS AND RECORDS
You have no rights under your program's tenancy-in-common agreement
or your servicing agreement, or under federal or state law, to obtain a list of
the names and addresses of the other investors in your program or to inspect
other books and records of your program. If you wish to communicate with the
other investors in your program, upon receipt of the material you wish mailed
together
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<PAGE>
with the amount of postage necessary to make such mailing, National
will promptly mail such communications to your program's investors.
CONCURRENT OFFERING
In addition to the Consent Solicitation, the company is
simultaneously offering up to 1,000,000 units at $10 per unit to be issued
exclusively to existing program investors. The offering is a "best efforts"
offering with no minimum number of units which must be sold. There is no
assurance that any proceeds will be received. No sales can be completed unless
the acquisition is approved. Each unit consists of one share and a warrant.
For a period of two years, each warrant entitles the holder to purchase two
shares of common stock at a per share purchase price equal to 80% of the closing
price for the company's common stock on the ______ on the trading date before
the warrant exercise date. NASD broker-dealers will receive an aggregate of
$0.70 per unit commission from the company for any units sold with their help.
If any funds are raised by the offering, they would be used to pay
offering expenses, acquisition expenses, property taxes due, and for working
capital, as detailed in the company's business plan. Any funds raised on
exercise of warrants would be used for working capital.
FOR ADDITIONAL INFORMATION ABOUT THE CONCURRENT OFFERING, SEE THE
PROSPECTUS WHICH ACCOMPANIES THIS CONSENT SOLICITATION STATEMENT AS A SEPARATE
DOCUMENT.
SUMMARY FINANCIAL INFORMATION
We are providing the following summary financial information to
aid you in your analysis of the financial aspects of the acquisition. This
information was derived from our pro forma and historical financial
statements (and related notes) found later in this prospectus and should be
read in conjunction with that information. See "Financial Statements"
beginning on page F-1. The historical financial statements for the full year
were audited; those showing pro forma information were not audited. The
unaudited financial information reflects all adjustments (consisting only of
normal recurring accruals) which are considered necessary to present fairly
the financial information for the periods. The results of any interim period
are not necessarily indicative of results for a full year, and historical and
pro forma results do not predict future results.
28
<PAGE>
<TABLE>
<CAPTION>
Company Pro Forma The Acquisition Historical
-------------------------- -------------------------------------------
Year Ended Years Ended
December 31, 1997 December 31
----------------- -------------------------------------------
The Acquisition 1997 1996 1995
--------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 5,193,012 $ 5,193,012 $ 6,213,299 $ 6,333,143
Cost of sales 4,081,530 4,081,530 5,224,186 5,346,735
--------------- ------------ ----------- ------------
Gross profit 1,111,482 1,111,482 989,113 986,408
Expenses:
Selling, general and
administrative 5,005,566 3,781,566 3,436,719 2,033,496
Land write-down 1,299,651 1,299,651 845,000 -
Management fees 0 650,000 650,000 650,000
--------------- ------------ ----------- ------------
Total expenses $ 6,305,217 $ 5,731,217 $ 4,931,719 $ 2,683,496
Net interest income 28,274 28,274 63,518 135,875
--------------- ------------ ----------- ------------
Net loss (5,165,461) $(4,591,461) $(3,942,606) $(1,561,213)
Net loss per share (2.07) N/A N/A N/A
Average number of shares
outstanding [ 2,496,566] N/A N/A N/A
Balance Sheet Data:
Cash and cash
equivalents 161,328 156,375 863,373 N/A
Total real estate 20,959,403 19,559,403 19,953,557 N/A
Total assets 25,106,613 23,596,673 25,869,260 N/A
Total debt 340,563 340,563 424,767 N/A
Total liabilities 5,012,699 5,958,81 4,415,241 N/A
Stockholders'/
owners' equity 20,093,914 17,637,863 21,454,019 N/A
Other Data:
Cash provided by
operating activities (1,586,022) (1,236,022) (616,257) 652,473
Cash used in
investing activities (163,264) (163,264) (186,211) (436,545)
Cash provided by
financing activities 691,102 691,102 642,815 115,311
</TABLE>
[NOTE THAT THE AVERAGE NUMBER OF SHARES OUTSTANDING WILL CHANGE AS WE
RECALCULATE EXCHANGE VALUES UNTIL WE GO EFFECTIVE. THAT'S WHY THEY ARE
BRACKETED.]
29
<PAGE>
RISK FACTORS
THE ACQUISITION INVOLVES CERTAIN RISKS. YOU COULD LOSE ALL, OR A
SIGNIFICANT AMOUNT OF THE REMAINING VALUE, OF YOUR INVESTMENT IF THE COMPANY
IS NOT SUCCESSFUL, IF THE STOCK MARKET DECLINES OR IF REAL ESTATE VALUES IN
CALIFORNIA DECLINE FURTHER. YOU SHOULD READ THIS ENTIRE PROSPECTUS,
INCLUDING THE SUPPLEMENT FOR YOUR PROGRAM. BEFORE COMPLETING THE
ACCOMPANYING BALLOT, YOU SHOULD ALSO CAREFULLY CONSIDER THE FOLLOWING RISKS,
WHICH APPLY TO ALL PROGRAMS AND THEIR INVESTORS.
IN THE FOLLOWING RISK FACTORS, AND ELSEWHERE IN THIS PROSPECTUS,
NATIONAL AND THE COMPANY OR THEIR REPRESENTATIVES HAVE MADE FORWARD-LOOKING
STATEMENTS REGARDING VARIOUS BUSINESS PLANS, TYPES OF INVESTMENTS TO BE MADE
AND HYPOTHETICAL RESULTS OF OPERATIONS OR SALES OF PROGRAM PROPERTIES. THE
STATEMENTS ARE QUALIFIED BY THE "RISK FACTORS" DISCUSSED BELOW. THESE
FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED.
YOU SHOULD NOT RELY ON THE COMPANY'S STATEMENTS OR PLANS AS A PREDICTION OF
ACTUAL RESULTS.
RISKS OF THE ACQUISITION
THE NATURE OF YOUR INVESTMENT WILL CHANGE. If the acquisition is
completed, your investment will no longer be a tenancy-in-common interest in
a particular program's property. (Recent appraised values for the properties
were: Sacramento/Delta Greens - $2,000,000; Oceanside - $2,850,000;
Yosemite/Ahwahnee I - $3,912,454; Yosemite/Ahwahnee II - $6,253,125; and
Mori Point -$5,500,000 for a total of $20,515,575). Instead, you will hold
shares in an on-going, publicly-traded real estate company whose assets may
be changed by the company's management without your approval. At $10 per
share, the arbitrary value assigned to the company's shares is $[20,012,475]
even though the shares to be delivered to you in the acquisition will likely
trade initially at prices substantially below $10 per share. You will be
able to liquidate your investment only by selling your shares on the
__________, and only if a trading market exists, or in private transactions.
If the market value of the shares does not reflect the fair market value of
the company's assets, you may not realize the full value of your investment.
You will not receive liquidation proceeds as individual program properties
are sold. As an investor in the larger company, rather than any individual
program, you will have less relative voting power.
THE EXCHANGE VALUE OF THE PROGRAMS MAY NOT BE THE AMOUNT YOU WOULD
NET IF THE PROPERTIES WERE SOLD IN A CASH SALE TRANSACTION. Appraisals
reflect conditions in the second quarter of 1997 (plus, for the
Yosemite/Ahwahnee I and II properties only, October 1996), and do not reflect
subsequent events. Exchange values reflect adjustments to appraised values
described in "Background and
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<PAGE>
Reasons for the Acquisition -- Calculation of Exchange Value" at page __.
Since the shares you receive may initially trade at prices substantially
below the arbitrarily determined exchange value of $10 per share, as a result
of this transaction, you could wind up with less money in the long-term than
if your program's property is sold for cash. The exchange value of the
shares the owners of Sacramento/Delta Greens, Yosemite/Ahwahnee I and II and
Mori Point will receive will be less than the appraised values of the
properties used to calculate exchange values. At any point in time, the
value of those shares might not exceed the appraised values of the properties
used to calculate exchange values at any particular time in the future.
Because of its cash position, the owners of the Oceanside property will
receive shares whose exchange values are greater than the most recent
appraised value. However, there is no assurance that the future value of the
shares will continue to be greater than the most recent appraised value of
the property.
THE SHARES MAY TRADE INITIALLY AT PRICES SUBSTANTIALLY BELOW THE
ARBITRARILY DETERMINED EXCHANGE VALUE OF $10 PER SHARE. The shares have
never been sold in a public securities market. There is no guaranty that a
liquid trading market will develop, or be sustained, for the shares. If the
shares trade, the initial trading price is likely to be substantially less
than the arbitrary $10 issuance price or the book value of the company's
assets. The market price of the shares would likely be less after the
acquisition if investors decide to sell a large number of the shares shortly
after the acquisition. Therefore, the shares may be worth less than $10 in
the open market.
THERE WERE CONFLICTS OF INTEREST IN NATIONAL'S STRUCTURING THE
ACQUISITION. The programs are not partnerships and, thus, National does not
have the fiduciary duties of a general partner in dealing with the programs.
However, as servicing agent for each of the programs, National has the
specific duties to investors set forth in the various servicing agreements.
In addition, under California law, as an agent, National is under a fiduciary
duty to investors (i) to use reasonable care, diligence and skill in its
work, (ii) not to compete with the investors' interests without full
disclosure to, and agreement from, the investors, and (iii) not to obtain an
interest adverse to the investors without full disclosure to, and consent
from, the investors.
After the acquisition, the executive officers of the company, which
include the principal shareholders of National, will hold approximately
[18.23]% of the company's stock for which they paid $0.01 per share. Other
company founders will hold approximately 1.6% of the outstanding shares of
the company for which they also paid $0.01 per share. Therefore, the
investors' total ownership interests in the programs' properties will be
diluted by the equity interest in the company to be held by the founders of
the company. The executive officers of the company will receive annual cash
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<PAGE>
compensation aggregating $660,000. National will be relieved of its servicing
and property management obligations (and cease to earn associated fees of
approximately $650,000 per year), but the company will still owe National and
its affiliates over $1,300,000 of accrued but unpaid fees and expenses. In
addition, the founders of the company may not always have the ability to make
decisions for the company without thinking of the consequences to themselves.
Completion of the acquisition will relieve National from its duties,
including fiduciary duties, and related costs as servicing agent for each of
the programs. These duties will be assumed by the company. This will permit
National to focus on its duties to other projects for which it serves and
performs the functions of servicing agent and asset manager. Since the
volume of its responsibilities will decrease with the acquisition, National
may be able to decrease some of the associated direct and variable costs. As
a consequence, investors of a particular program that may be unhappy with the
manner in which the company manages the property that was in their program
will not be able to vote to change management without the agreement of
investors from the other programs.
Despite the potential conflicts of interest, none of National, the
company or their controlling persons, believe that such conflicts had any
material affect on their recommendation to investors on the acquisition.
The charter documents contain a number of provisions that may have
the affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include, among others, a
classified board of directors where only one-third of the directors are
elected in any given year and directors serve three year terms; directors may
only be removed for cause and only by the affirmative vote of holders of not
less than two-thirds of the voting power of all outstanding shares; and
amendments to the anti-takeover provisions of the charter documents may only
be effected by the affirmative vote of holders of not less than two-thirds of
the voting power of all outstanding shares. This means that, if a group of
investors are unhappy with management's performance, it will take several
years to change the board of directors or it will require them to obtain the
support of a significant number of additional shareholders in order to be
able to meet the two-thirds test to change the anti-takeover provisions of
the charter documents.
Messrs. Lasker and Orth, as well as certain other employees of National
who will become employees of the company, will be required to provide
on-going attention to the properties of five other projects for which
National acts as servicing agent and asset manager. As a consequence, from
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<PAGE>
time to time Messrs. Orth and Lasker will be required to devote attention to
matters not related to the business of the company.
For additional information concerning the potential conflicts between
National, its principals and the investors and the procedures adopted to
mitigate the impact of these conflicts on the acquisition, see "Interests of
Certain Persons in the Acquisition and Conflicts of Interest" at page __,
"Background and Reasons for the Acquisition - Recommendation of National
and Fairness Determination" at page __, and "--Terms of the Acquisition" at
page __.
Despite the potential conflicts of interest, none of National, the
company or their controlling persons, believe that such conflicts had any
material affect on their recommendation to investors on the acquisition.
YOU DO NOT HAVE INDEPENDENT ADVISORS REPRESENTING YOU IN
STRUCTURING THIS TRANSACTION. The terms of the acquisition were not
negotiated at arm's-length and, therefore, may be less favorable to you and
more favorable to National and its principals. If the acquisition had been
negotiated by independent parties at arm's length, the principals of National
and the company might have been given fewer shares. Additionally, the
allocation of shares might have been more favorable to one program than
another. National did not retain an unaffiliated representative to act on
your behalf because it, as your agent, has attempted to take action to
protect your interests in the property. Neither National nor the programs had
additional funds to hire a separate representative for you.
THE TRANSACTION MAY NOT BE TAX-FREE. The Federal income tax
consequences of the acquisition will depend primarily on whether the
acquisition qualifies as a Section 351 transaction under the Internal Revenue
Code of 1986, as amended. If the acquisition qualifies under Section 351,
generally no gain or loss will be recognized by the investors upon the
receipt of shares in exchange their interest in the properties. If the
acquisition does not qualify under Section 351, investors generally will
recognize gain or loss. See "Federal Income Tax Consequences" at page __.
Among other requirements to qualify the acquisition under Section 351,
investors must be treated as owning 80% or more of the outstanding shares of
the company "immediately after the exchange." As discussed in "Federal Income
Tax Consequences - Qualification of the Acquisition as a Section 351
Transaction - 1. General Rules," this determination depends on whether
investors who subsequently dispose of shares are subject to the "step
transaction doctrine" with respect to such dispositions and their initial
acquisition of the shares.
Neither the company nor counsel to the company is in a position to
make a determination as to whether investors who will acquire more than 80%
of the outstanding shares of the company will or will not be subject to the
step
33
<PAGE>
transaction doctrine. Consequently, counsel to the company is unable to
opine as to whether the acquisition qualifies under Section 351. However,
because (i) investors will acquire 80% or more of the shares in the
acquisition, and (ii) the company is not aware of any facts which lead it to
believe that any subsequent disposition of shares by one or more investors
may be subject to the step transaction doctrine, the company intends to take
the position that the acquisition qualifies under Section 351. There can be
no assurance, however, that the IRS will not take a contrary position.
Investors should recognize that if a relatively small number of
investors subsequently dispose of their shares in transactions subject to the
step transaction doctrine, the acquisition will not qualify under Section 351.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, the properties will not be subject to any liens other than
possible mechanics' liens and liens imposed as a result of an aggregate of
approximately $[1,082,000] in property taxes owed as of December 31, 1997.
However, the Board of Directors could allow the company to borrow using the
company's real estate assets as security. The more debt a company has, the
more of its cash flow is necessary to be used to pay down such debt. If cash
flow cannot cover debt repayment, the company could lose those assets to
creditors. If potential lenders or providers of equity believe that the
company has too much debt, further financing may become unavailable or
prohibitively expensive. There is no limitation on the amount of debt the
company may incur. See "Policies with Respect to Certain Activities -
Financing Policies" at page __.
THE BOARD OF DIRECTORS WILL HAVE THE ABILITY TO CHANGE INVESTMENT,
FINANCING AND OTHER POLICIES OF THE COMPANY WITHOUT SHAREHOLDER CONSENT.
The Board will determine major acquisition, financing, debt and distribution
policies of the company. The Board may amend or revise these policies as
well as the business plan without shareholder approval. You will have no
direct control over these changes. See "Business and Properties" at page __
and "Policies with Respect to Certain Activities" at page __.
YOU WILL HAVE NO DISSENTERS' RIGHTS IN CONNECTION WITH THE ACQUISITION. If
the acquisition is approved, investors in any of the programs who vote against
the acquisition will not be entitled to dissenters' or appraisal rights under
the tenancy-in-common agreement or the Delaware or California law. Thus,
investors who do not approve of the acquisition have no choice other than to
accept shares in the company if the acquisition is approved by holders of a
majority of the tenancy-in-common interests in each of the programs. See
"Voting Procedures -- No Dissenter's Rights" at page __.
34
<PAGE>
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long time. This means that shares in the
company are much riskier than ownership of shares of established companies.
If the company had been operating as if it owned the properties which it
desires to acquire, it would have experienced losses to date.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on
changes or dispositions of a particular property. Those decisions will be
made by the board of directors or management. In addition, you will have an
investment in an entity that is larger than each of the programs and, thus,
you will lose relative voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the
expectation of investors that they would receive regular principal and
interest payments on their original investments, there have been no
distributions from any of the programs, other than the Oceanside program, in
the past three years due to the original borrowers' defaults. Future cash
distributions will be based on the company's earnings and the decision of the
board of directors to pay dividends. Therefore, even if a particular property
were to perform well, there is no assurance that there would be cash
distributions to you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National is
presently compensated for its services at the rate of one percent of the
principal amount invested in each program. In the future, compensation will
be paid to officers of the company in the form of salaries, stock options and
other benefits. These salaries and other forms of compensation will be
payable to management of the company even if one or more of the properties
acquired in the acquisition is subsequently sold.
HOLDERS OF A MAJORITY OF TENANCY-IN-COMMON INTEREST BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of the
outstanding interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE CONFLICTING YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT. As discussed in "Background and Reasons for the
Acquisition -- Exchange Values and Allocation of Shares to the Programs" at
page __, National reviewed the May 1997 appraisal of the Yosemite/Ahwahnee
properties which reflected an aggregate "as is" appraised value of
$20,916,000 ($8,050,000 for the Yosemite/Ahwahnee I property and $12,866,000
for the Yosemite/Ahwahnee II property) and the October 1996 appraisal which
reflected an "as is" aggregate appraised value of $4,000,000 (adjusted by
National to be $1,134,375 for the Yosemite/Ahwahnee I property and $2,864,625
for the Yosemite/Ahwahnee II property). However, an appraisal of the
Yosemite/Ahwahnee Properties was also conducted in October 1996, the results
of
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<PAGE>
which conflicted with the May 1997 appraisal. Based on such review, National
concluded that the Yosemite/Ahwahnee I and II properties had values of
$3,912,454 and $6,253,121, respectively. National believes its approach was
reasonable and has received an opinion from Houlihan Valuation Advisors that
the allocation of the shares among the programs is fair based on National's
conclusions as to appraised value. However, if the values arrived at by
National were too low for either program, the program's exchange value would
be too low and would result in too few shares being allocated to that program
in the acquisition. Conversely, if the values arrived at by National were
too high for either program, that program would receive too large an
allocation of shares in the acquisition to the detriment of the investors in
the other programs.
REAL ESTATE RISKS ASSOCIATED WITH ALL PROPERTIES
ALL OF THESE FACTORS CAN AFFECT OUR REVENUES, PROFITS AND DIVIDEND
DISTRIBUTIONS, IF ANY, AND THE VALUE OF YOUR INVESTMENT.
THERE ARE SIGNIFICANT DELINQUENT PROPERTY TAXES. If delinquent
property taxes are not timely paid, the company could lose one or more of the
properties to tax sales. Each of the programs' properties is subject to the
following delinquent property taxes as of December 31, 1997:
Sacramento/Delta Greens - approximately $45,000; Oceanside - approximately
$55,000 Yosemite/Ahwahnee (combined) - approximately $684,000; and Mori Point
- -approximately $298,000. Annual payments required for all the properties for
current taxes (including amounts currently due on five-year payment plans)
total approximately $248,000. In the case of Sacramento/Delta Greens and
Mori Point, National has entered into statutorily authorized 5-year payment
plans with the applicable taxing authorities. It plans to do the same with
Yosemite/Ahwahnee shortly.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL.
Unless a minimum of approximately $11,400,000 from sale of the units or from
sale of certain assets of the programs become available, the company will not
be able to proceed with its entire business plan. Additionally, if a minimum
of approximately $250,000 is not raised to pay current property tax
liabilities, then certain properties might be lost to tax sales before sales
to third parties can be arranged. The company will also need financing from
other sources to complete its plan. Financing sources are not predictable
and interest rates or other costs of financing may be prohibitive. Other
than a construction loan source for the Oceanside project, neither the
programs nor the company have received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
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<PAGE>
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay assessments for
streets, schools and parks which increase the cost of development. Increased
costs can have a negative affect on the company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS
INVESTMENT, PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry
customary insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. See "Business and Properties - Investments in Real Estate or Interests in
Real Estate" at page __. Real estate development involves more risks than in
the ownership and operation of established projects. Financing may not be
available on favorable terms for development projects; construction may not
be completed on schedule or budget; long-term financing may not be available
on completion of construction; and sites may not be sold on profitable terms.
THE CALIFORNIA ECONOMY HAS FLUCTUATED BROADLY IN THE PAST FEW
YEARS. We presently conduct all of our business in California. Our markets
have been affected by substantial fluctuations in local economic conditions,
interest rates, inflation, employment levels and regulations. California has
also experienced draught conditions, resulting in water conservation measures
and rationing. In the past, these conditions have caused local governments
to restrict residential development. California's climate and geology
present risks of natural disaster such as earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS
WILL BE OWED $1,381,881 BY THE COMPANY. This represents accrued fees and
expenses from the programs which National has not cancelled. This amount is
due and payable and the company intends to start paying it after the
Acquisition, but only from operating revenues or proceeds from the sale of
assets, but not from working capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SPECIFIC PROPERTIES
ALL OF THESE FACTORS CAN AFFECT OUR REVENUES, PROFITS AND DIVIDEND
DISTRIBUTIONS, IF ANY, AND THE VALUE OF YOUR INVESTMENT.
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<PAGE>
SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED.
Construction of the Sacramento/Delta Greens property will require the filing
of a final map and obtaining building permits from the city's real estate
planning authorities. The existing tentative map approval does not entitle
the property owner to build on the property. The tentative tract map for the
Sacramento/Delta Greens property requires that studies must be conducted to
identify any endangered species' habitat which may exist on the property. If
any are identified, changes to the tentative development plans will have to
be made and approved that will reduce or eliminate any damage to the habitat.
The longer this process takes, the longer it will be until the company can
make money from the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA
GREENS PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS
UNTIL THE LOTS CAN BE SOLD. Changing market conditions may increase the
difficulty of selling the lots. If the company chooses to build homes on the
lots, delays in construction, the lack of reasonably priced construction or
mortgage financing, and the general California economy could lengthen the
holding period for the lots. This would mean a delay in realizing cash from
the business operations. The average carrying costs, including property
taxes, management and servicing related fees, for this property has averaged
approximately $10,000 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represents over 8.4% of the assets of the company. Although there can be no
assurances, net revenues from Sacramento/Delta Greens may equal or exceed
$3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds
will not be available to (i) finance engineering and endangered species
studies (estimated by management to cost approximately $124,800), (ii)
finance planning for final approvals (estimated by management to cost
approximately $51,700), and (iii) finance utilities and roads and the
construction of homes (estimated by management to cost approximately
$3,000,000 on a phased basis). Another risk is whether the lots to be
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<PAGE>
developed will appeal to project builders and whether home financing will be
available. Finally, there is a risk that the development and sale of lots or
homes will be profitable.
ANY OF SUCH RISKS COULD MAKE THE PROPERTY, OR ANY PORTION OF IT,
UNSALABLE OR SIGNIFICANTLY REDUCE ITS VALUE TO A PROSPECTIVE PURCHASER.
OCEANSIDE PROPERTY
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE PROPERTY
MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN
BE SOLD. Changing market conditions may increase the difficulty of selling
the lots. If the company chooses to build homes on the lots, delays in
construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged $10,000
per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully compete.
Oceanside is a proposed residential development and represent over
21.75% of the assets of the company. Although there can be no assurances,
net revenues from Oceanside are expected to be in excess of $5,000,000 over
the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that enough investment
money may not be available to obtain a construction loan and begin
construction of the next tract of homes (estimated by management to be
approximately $700,000 of equity). There is also a risk that finished lots
or completed homes will not be marketable at a profit or that home financing
will not be available at affordable rates. There is also strong nearby
competition.
ANY OF SUCH RISKS COULD MAKE THE PROPERTY, OR ANY PORTION OF IT,
UNSALEABLE OR SIGNIFICANTLY REDUCE ITS VALUE TO A PROSPECTUS PURCHASER.
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YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE TIMESHARE ASPECT OF THE RESORT HAVE NOT YET
BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map on 45
remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Additional planned usage such as timeshare will
require extensive county and state approvals through the Departments of Real
Estate and Housing and Commercial Development.
RISKS AFFECTING OPERATION OF A GOLF COURSE. Increased
competition, seasonality, weather and course conditions will affect the
operations of the company. While no new golf courses have opened near the
Ahwahnee Golf Course, new courses could increase the competition and reduce
the rounds played. Seasonal variations may require the company to supplement
revenue at the golf course to meet operating expenses. Weather can
negatively affect the turf grass and reduce the number of rounds played.
Inflationary costs may not be offset by increased dues. Also, golf's success
depends on discretionary spending by consumers, which may be vulnerable to
regional and economic conditions, as well as to pleasure or destination
travel preferences by visitors and tourists. All of these factors could
reduce the amount of money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity
which may attract potential timeshare purchasers in the future. At this
time, the project does not rely on the golf course for its revenue. National
estimates that the value of the golf course will be less than 5% of the
assets of the company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND
COULD RESULT IN LOSSES. In addition to normal real estate risks, financing
is hard to obtain, and the lodging industry can be unpredictable, seasonal
and very competitive. Without additional financing or capital, the company
will not be able to develop its resort projects as part of its growth
strategy. Economic conditions, changes in travel patterns, extreme weather
conditions, labor and other variable costs can all affect revenues and
profits. For example, Spring through Fall at the Yosemite/Ahwahnee property
are the periods of highest occupancy. Seasonality can be expected to cause
quarterly fluctuations in the company's revenues.
The recreational vehicle park at Yosemite/Ahwahnee may generate as
much as ten percent of the revenue of the company, yet this portion of the
project represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
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<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.
We do not have an exchange network to enhance marketing appeal.
If we cannot offer such a network in the future, we may be at a competitive
disadvantage.
The timeshare industry is extremely competitive and we may not be
able to secure development financing on acceptable terms.
Timeshare development is planned for Yosemite/Ahwahnee. Since the
project is not yet permitted for timeshare, there has been no allocation of
assets. Should timeshare be approved, the company anticipates that a
significant portion of the revenue of the company will be derived from sales
of timeshare units, possibly in excess of 25%.
RISKS RELATING TO RECREATIONAL VEHICLE PARK OPERATIONS. Risks
relating to recreational vehicle parks are substantially the same as those
described above for timeshare projects.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds
will not be available to (i) make up for the current cash drain from
operations of the golf course (estimated by management at approximately
$150,000) annually, (ii) construct an additional planned 100 recreational
vehicle sites (estimated by management to cost approximately $700,000), and
(iii) obtain approvals for and construction of the first group of timeshare
units (estimated by management to cost approximately $3,000,000). There are
also a risk that the operation of recreational vehicle sites, timeshares and
golf course activities will not be profitable.
ANY OF SUCH RISKS COULD MAKE THE PROPERTY, OR ANY PORTION OF IT,
UNSALEABLE OR SIGNIFICANTLY REDUCE ITS VALUE TO A PROSPECTUS PURCHASER.
MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY HAVE NOT YET BEEN OBTAINED. If
needed permits for development are not obtained or reissued, the business
plan for the company will have to be revised or abandoned. Additionally, the
presence of two endangered species on the Mori Point property increases the
risks that necessary approvals may not be received if an acceptable habitat
mitigation plan cannot be developed. The permitting process with the
California Coastal Commission and applicable county or city real estate
planning agencies is expensive and time consuming. Mori Point had a
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specific plan and tentative map to build a hotel/conference center which
expired in 1991. These approvals must be reinstated prior to construction on
the property. Such reinstatement will be complicated by the existence of two
endangered species living on the property.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND
COULD RESULT IN LOSSES. In addition to normal real estate risks, financing
is hard to obtain, and the lodging industry can be unpredictable, seasonal
and very competitive. Without additional financing or capital, the company
will not be able to develop its resort projects as part of its growth
strategy. Economic conditions, changes in travel patterns, extreme weather
conditions, labor and other variable costs can all affect revenues and
profits. Seasonality can be expected to cause quarterly fluctuations in the
company's revenues. In the resort and hotel/conference center property at
Mori Point, we may be competing against well-known chains and extended-stay
inns.
Mori Point represents over 20% of the assets of the company and,
assuming it is operated as a hotel/conference center, its revenues may exceed
20% of the total revenues of the company upon completion of the project.
ADDITIONAL SPECIFIC RISKS. There is a risk that the city
government will not approve the property for its intended use. Capital to
conduct engineering and environmental studies in order to apply for and
obtain approvals for its use from the City is estimated to be approximately
$500,000. Capital will also be necessary for roads, utilities and other
infrastructure costs prior to construction. Finally, there is a risk that
the proposed hotel/conference center may not be profitable.
ANY OF SUCH RISKS COULD MAKE THE PROPERTY, OR ANY PORTION OF IT,
UNSALEABLE OR SIGNIFICANTLY REDUCE ITS VALUE TO A PROSPECTUS PURCHASER.
ANTI-TAKEOVER PROVISIONS AND LIMITATION OF DIRECTOR LIABILITY
Certain provisions of the charter documents may restrict changes in
control of the company's management. These provisions may make it more
difficult or expensive for another party to acquire and exercise control of
the company or to change its management, even if that change would be
beneficial to you. These provisions include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate of
incorporation, subject to the receipt of fair value, the Board of Directors
may issue shares in other classes or series and fix the rights, powers and
limitations associated with such shares. Although the Board of Directors has
no present intention of doing so, it could issue a class or series that
could, depending on its terms, impede a merger, tender offer or other
transaction that
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you might believe is in your best interest or in which you might receive a
premium for your shares over the then current market price. The issuance of
such shares could also dilute your voting power. See "Description of Shares"
at page __.
STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability
to change control of the company, even if you believe such a change is in
your best interests. See "Comparisons of Programs and Company --
Anti-Takeover Provisions" at page __.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% o the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company. See
"Comparison of Programs and Company -- Restrictions on Related Party
Transactions and Business Combinations" at page __.
SUPERMAJORITY VOTES. Changes to the company's certificate of
incorporation which cover anti-takeover provisions require the approval of
two-thirds of the company's voting stock. This restriction also may deter
potential purchasers who seek control of the company. See "Comparisons of
the Programs and the Company -- Anti-Takeover Provisions" at page __.
In addition to the anti-takeover provisions, the Delaware law, as
well as the charter documents, limit the liability of directors and officers
to shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements and limit
shareholders' claims against management. See "Fiduciary Responsibility and
Indemnification --Limitation on Liability of Directors and Officers of the
Company" at page __.
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CAPITALIZED TERMS USED THROUGHOUT THE REST OF THIS PROSPECTUS AND IN THE
ACCOMPANYING SUPPLEMENT ARE DEFINED IN THE GLOSSARY LOCATED AT THE END
OF THE PROSPECTUS, JUST BEFORE THE FINANCIAL STATEMENTS.
BACKGROUND AND REASONS FOR THE ACQUISITION
GENERAL
National is a California corporation that was formed in 1986.
National is a licensed real estate broker in the State of California.
Pursuant to a series of permits issued by the California Department of
Corporations, National offered fractionalized interests in loans secured by
deeds of trusts to investors who satisfied the suitability standards set
forth in the applicable offering materials and who could invest a minimum of
$2,000. The fractionalized interests were commonly referred to as trust deed
participation or "Trudy Pat" investments.
From 1988 through 1993, National arranged a number of loans for
various builders and land developers. In return, these borrowers offered
promissory notes and the security of a first deed of trust on their real
estate project(s) as collateral for a loan, normally at 50% or less
loan-to-value ratio (the ratio of the cumulative amount of the notes divided
by the value of the property as appraised by an independent qualified real
estate appraiser) for unimproved property and up to 85% loan-to-value of the
completed property (determined by independent appraisers) for property under
construction. The notes generally were short-term (two years), often with
extensions for one or two years at the option of the borrower and provided
interest to investors which was significantly higher than yields of other
types of investments available at the time. Pursuant to each servicing
agreement executed by each Investor, National was to receive a servicing fee
of one-twelfth of one percent of the initial amount of the note amount per
month.
Each Program has served as a separate investment vehicle for
Investors. Underwriting of a loan was based on an appraisal by an
independent real estate appraiser. In the case of each of the Programs, the
borrowers have defaulted on their loans and National has obtained title to
the real property securing the loans as the agent of and for the benefit of
the Investors in each of the Programs. The interests which each of the
Investors held in the real estate loans have been converted through the
foreclosure process into tenant-in-common interests in the underlying real
estate that formerly secured the loans. (For purposes of this discussion, the
term "foreclosure" includes, but is not limited to, taking title to real
estate constituting security for the applicable loans through exercise of a
power of sale under a deed of trust or through accepting a deed from the
applicable borrower.)
SERVICING FEES. The following table sets forth for each of the
programs the servicing fees National is entitled to receive pursuant to the
servicing agreements:
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<TABLE>
<CAPTION>
Initial Loan Annual Monthly
Program Amount Fee (1%) Fee (1/12 of 1%)
------- ------ -------- ---------------
<S> <C> <C> <C>
Sacramento/Delta Greens $ 5,000,000 $ 50,000 $ 4,167
Oceanside 30,000,000 300,000 25,000
Yosemite/Ahwahnee I 6,500,000 65,000 5,417
Yosemite/Ahwahnee II 13,500,000 135,000 11,250
Mori Point 10,000,000 100,000 8,333
</TABLE>
National continued to earn fees based on the original loan amounts even
though the loans were defaulted upon because it continued to provide services
to each of the Properties. The amounts earned by National after such
defaults were based on the servicing agreements plus, in the cases of
Oceanside and Yosemite/Ahwahnee Programs, additional amounts for property
management services in amounts comparable to the amount that would be charged
by an independent service provider. From the date of default through
December 31, 1997, the aggregate amounts of such fees accrued and collected
by National and its affiliates for each of the Programs as follows:
Sacramento/Delta Greens since March 1993, $237,500 earned, $8,257 collected;
Oceanside since November 1993, $1,970,000 earned, $1,200,000 collected;
Yosemite/Ahwahnee I since September 1995, $320,251 earned, $162,326
collected; Yosemite/Ahwahnee II since September 1995, $604,999 earned,
$335,067 collected; and Mori Point since August 1992, $533,333 earned,
$27,333 collected.
ORIGINAL "TRUDY PAT" DISCLOSURE AND SALES EFFORTS. Each "Trudy Pat"
offering was independent of another and extensive disclosure documents were
provided to each Investor. The disclosure documents provided investors with
specific details of the investment opportunity including: the nature of the
investment as a tenancy-in-common interest, a description of the property
used as security for the loan, type of property, value as appraised by an
independent qualified appraiser at the time of the initial funding of the
loan, terms of the loan, loan amount, loan-to-value ratio, interest rate,
borrower resume and experience, borrower financial statements, other
appraisal information, as well as a full disclosure of the risks involved
with the investment.
"Trudy Pat" interests were sold exclusively through participating NASD
member broker-dealers. At the time of purchase through their broker, all
Investors executed documents which included an acknowledgment of receipt of
the offering circular, a servicing agreement and a tenancy-in-common
agreement, as well as representations of their suitability as participants
according to the standards set forth in the offering documents and an
acknowledgment, confirmed by their broker, of their understanding of the
pertinent facts relating to the liquidity and marketability of their
interests. The servicing agreement provided for National to collect payments
from the borrower on behalf of the Investors and distribute the proceeds of
the collection net of National's servicing fees. The servicing agreements
also authorized National to take various remedial actions on behalf of
Investors in the event of a borrower default, subject to broad discretionary
powers and authorities. Pursuant to these provisions, National has
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undertaken a property management function on behalf of Investors after the
defaults for which it or certain of its affiliates have earned additional
compensation. The tenancy-in-common agreement explained the relationship
among the Investors and provided, among other things, that Investors would be
bound by certain decisions made by holders of a majority of the interests.
AMOUNTS FUNDED. In 1989, National completed the funding of a real estate
loan for the Sacramento/Delta Greens Program in an aggregate amount of
$5,000,000 by selling undivided tenant-in-common interests in such loan to
332 Investors. National completed the funding of similar real estate loans
for the Yosemite/Ahwahnee I Program (1989) in an aggregate amount of
$6,500,000 with 426 Investors; for the Mori Point Program (1990) in an
aggregate amount of $10,000,000 with 486 Investors; for the Yosemite/Ahwahnee
II Program (1992) in an aggregate amount of $13,500,000 with 837 Investors;
and for the Oceanside Program (1993) in an aggregate amount of $30,000,000
with 1,755 Investors. All of such offerings were sold pursuant to permits
issued by the California Department of Corporations and interests were sold
only to persons who were residents of the State of California. All of such
offerings were completed prior to the applicable loan defaults.
ORIGINAL APPRAISAL INFORMATION. At the time the "Trudy Pat" loans were
made, the Properties were appraised by independent appraisers obtained by the
borrowers. The appraisals were based on the borrowers' business plans. In
all cases, the "Trudy Pat" loans did not exceed 50% of the then current "as
is" appraised value for undeveloped land or, in the case of the Oceanside
Property which was a construction loan, 85% of "completed" appraised value
which was (and is) within standard construction loan parameters. The
following table sets forth the dated of the "Trudy Pat" loan appraisals, the
appraised values, the amount of the "Trudy Pat" loan, and the name of the
appraisers.
<TABLE>
<CAPTION>
Date of Appraised "Trudy Pat"
Program Appraisal Value Loan Amount Name of Appraiser
------- --------- ----- ----------- -----------------
<S> <C> <C> <C> <C>
Sacramento/Delta Greens 9/8/88 $10,530,000 (1) $ 5,000,000 Ray Mrotek, MAI
Oceanside 8/26/91(2) 82,170,000 (2) 30,000,000 Boznanski & Company, MAI
Yosemite/Ahwahnee I 3/22/89 13,080,000 (1) 6,500,000 R.W. Arnold, MAI
Yosemite/Ahwahnee II 3/25/90 15,460,000 (1) 7,000,000 R.W. Arnold, MAI
Yosemite/Ahwahnee II 9/20/92(3) 18,045,000 (1) 6,500,000 R.W. Arnold MAI
Mori Point 4/9/90 22,100,000 (1) 10,000,000 J. Allen Payne, MAI
</TABLE>
- -------------------
(1) Undeveloped land.
(2) Construction loans. Appraisal updated on November 22, 1991.
(3) Appraisal updated at this time.
The differences between the appraised values at the time the
"Trudy Pat" loans were made in the late 1980s and early 1990s and the
appraised values used to determine Exchange Values are due to on market
conditions, local economy, competition, interest
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rates, costs of construction, comparable prices and other factors taken into
account by appraisers. According to the Urban Land Institute, the Building
Industry Association and the Federal Deposit Insurance Corporation, the
significant recession in the California economy between 1990 and 1995 was the
primary cause of reduction in real estate values throughout the State of
California. That factor, along with the effects of some of the others,
caused the decrease in appraised values between the time of the "Trudy Pat"
loan appraisals and the appraisals used to determine Exchange Values.
APPRAISED VALUE AT OWNERSHIP DATES. Defaults occurred in each of the
above "Trudy Pat" loans and National took title to the Properties for the
benefit of the applicable investors. The following table sets forth for each
of the Programs the date title was obtained on behalf of Investors to the
underlying real estate ("Ownership Date"), the amount of unpaid principal at
the Ownership Date, the amount of unpaid interest at the Ownership Date, the
appraised value of such real estate at the Ownership Date, and the appraised
value of the Property used for purposes of calculating exchange values:
<TABLE>
<CAPTION>
As of Ownership Date
--------------------------------------------
Unpaid Unpaid Appraised Value
Ownership Principal Accrued Appraised for Exchange
Program Date Balance Interest Value(1) Value Calculations
- ------- ---- ------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens 3/93 $ 5,000,000 $ 425,000 $ 3,075,000 $ 2,000,000
Oceanside 11/93 30,000,000 0(2) 6,484,000 2,850,000
Yosemite/Ahwahnee I 9/95 6,087,159 1,867,470 9,325,000 3,912,454
Yosemite/Ahwahnee II 9/95 13,321,463 4,067,007 10,816,000 6,253,121
Mori Point 8/92 10,000,000 1,570,834 4,100,000 5,500,000
</TABLE>
- -------------------
(1) Each Property was appraised in the Spring of 1997 to determine its
value as of the Ownership Date.
(2) No delinquent interest at Ownership Date.
In the case of each of the Programs, current appraisals indicate
that the value of the Properties is significantly lower than the unpaid
principal and interest on the loans due principally to the deteriorating
market conditions for real estate which occurred throughout California.
Despite the limited additional funding available from Investors or otherwise,
National has attempted to maximize the value of the real estate assets while
seeking ways to convert them to distributable cash for Investors. See "--
Management of Programs Since Foreclosure."
-------------------------
Since taking title to the Properties, based on Investors' stated
preferences, National's objective has been to recover all, or a substantial
portion, of the Investors' principal. In the present and recent past real
estate market in California, none of National's efforts in this regard have
been successful. See "-- Management of the Programs since Foreclosure" and
"--Efforts to Dispose of the Properties." After reviewing various
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<PAGE>
alternatives (see "-- Alternative to the Acquisition" and "-- Comparison of
Alternatives"), National initiated and structured the Acquisition. The
proposed Acquisition involves the purchase by the Company of the real estate
assets of each of the Programs, the other assets of each of the Programs
including cash reserves and the assumption of certain liabilities of each of
the Programs. The Company proposes to use its Common Stock arbitrarily
valued at $10 per share. See "--Calculation of Exchange Value" and
"Allocation of Shares Among the Programs."
Except as described in this Prospectus, no contacts have been
received from any third parties regarding an acquisition of the assets of any
of the Programs, or a combination or merger of any of the Programs.
MANAGEMENT OF THE PROGRAMS SINCE FORECLOSURE
SACRAMENTO/DELTA GREENS PROGRAM. As the agent of and on behalf of the
Sacramento/Delta Greens Program Investors, National took title to the
Property of the Sacramento/Delta Greens (formerly "North Shores") Program in
March 1993. An appraisal of the Property's value was not obtained at the
time title was taken; however, in May 1997, National obtained appraisals to
determine the Property's value as of May 1997 and as of the date title to the
Property was taken. The Property is located in Sacramento, California, and
is held for the benefit of the Sacramento/Delta Greens Investors by National
Investors Land Holding Trust IV. Subsequent to the foreclosure, on behalf of
the Sacramento/Delta Greens Investors, National hired consultants and
engineers to determine the economic, political and environmental issues
surrounding the Property. It was determined that there was considerable
resistance to developing the Property into any duplex housing and, so, it has
been redesigned to include approximately 465 lots to be developed in multiple
phases as a single-family detached, entry-level housing product and the
revised tentative map has been accepted by the City of Sacramento. Attempts
have been made to find joint venture partners to assist in the financial
requirements for processing the final tract map, as well as to provide
capital for infrastructure. In 1994, a proposed joint venture was considered
and approved by Investors with a real estate developer located in Sacramento.
The agreement provided for payment of $6,400 per lot for each of the 596
lots planned at that time that was built on and sold (or a total of
$3,814,400) plus 50% of the profits derived from home sales. The transaction
was never concluded because of the developer's failure to fulfill its
obligations under the agreement. The agreement was terminated in 1995. No
brokers were used in this transaction. However, because of market conditions
through 1996, most builders in the area were attracted to real estate
projects that already had finished lots. National has not sought financing
from third party sources for the pre-construction costs, as such a loan, if
available at all to a tenant-in-common group, would have exposed the
Investors to loss of the Property unless a builder could be found to become
financially involved in the Property's development. National believes that
the Sacramento market for entry-level single-family residential housing has
improved. National is in the process of obtaining engineering for the final
subdivision map for the initial phase of the project and it is anticipated
that, subject to the availability of financing, the Property will be
developed and homes will be constructed in successive phases. See "--
Efforts to Dispose of the
48
<PAGE>
Properties" and "-- Alternatives to Acquisition" for a discussion of
alternatives considered for this Program by National.
Since foreclosure, National has considered continuing operation of
the Property (and, indeed, has operated, or planned for the operation of, the
Property prior to the proposed Acquisition) and sale of the Property for an
amount sufficient to repay the Investors. In addition, National continues to
consider, but has made no recommendations with respect to, prompt liquidation
or bankruptcy reorganization of the Program. National views liquidation or
bankruptcy as alternatives of last resort.
OCEANSIDE PROGRAM. Funding for the Oceanside Program was completed in
stages commencing in November 1991. The final stage of funding (amounting to
approximately $6,374,000) was completed in April 1993. In November 1993, due
to a default in the loan determined by the borrower's admission that funds
intended to be used to pay subcontractors had been diverted to corporate
overhead, National succeeded in obtaining the borrower's agreement to grant
the ownership of the Oceanside Properties to Oceanside Development, Inc.
("ODI"), a corporation formed to hold title to, and manage, the Oceanside
Property on behalf of the Oceanside Investors. An appraisal of the
Property's value was not obtained at the time title was taken; however, in
May 1997, National obtained appraisals to determine the Property's value as
of May 1997 and as of the date title to the Property was taken. An
experienced and reputable homebuilder was hired and, through 1997, a total of
114 homes in the Encore tract have been built and sold for a total of
approximately $18,000,000, net of building costs and selling expenses. The
builder obtained traditional construction loans for 30 of these homes from a
local bank. The rest were initially built from investor funds without the
need for construction financing. An additional 23 lots were sold at the end
of 1997 to that homebuilder for approximately $593,000 net of selling
expenses plus a $50,000 unsecured note due in October 1998. Principal and
interest in the aggregate amount of approximately $7,000,000 have also been
returned to Investors.
There are an additional 111 lots available on which homes can be built on
the Symphony tract, but an estimated $700,000 of equity is needed to qualify
for a traditional construction loan. National does not believe that equity
is available from the Investors. National has attempted to sell, and will
continue its efforts to sell, the Symphony tract to homebuilders in the area.
If a satisfactory sale of the Symphony tract does not occur, National
believes that the remaining lot inventory of the Program can be built-out
within a two to three year time frame based on current absorption rates and
prices. However, without significant increases in prices and sales velocity,
Investors would not likely receive a full return of their investment from the
completion of the construction and sales of homes on the remaining lots.
Since the original projections by the borrower were based on the construction
of a number of homes which exceeded the number of lots initially acquired
with loan proceeds, the Program has anticipated that more lots would be
acquired so that a sufficient number of homes could be constructed and sold
to provide for an acceptable monetary return to Investors. See "-- Efforts
to Dispose of the Properties" and "-- Alternatives to Acquisition" for a
discussion of alternatives considered for this Program by National.
49
<PAGE>
Since foreclosure, National has considered continuing operation of the
Property (and, indeed, has operated, or planned for the operation of, the
Property prior to the proposed Acquisition) and sale of the Property for an
amount sufficient to repay the Investors. In addition, National continues to
consider, but has made no recommendations with respect to, prompt liquidation
or bankruptcy reorganization of the Program. National views liquidation or
bankruptcy as alternatives of last resort.
YOSEMITE/AHWAHNEE PROGRAMS. Title to the Yosemite/Ahwahnee Programs'
Properties was obtained in September 1995. An appraisal of the Property's
value was not obtained at the time title was taken; however, in May 1997,
National obtained appraisals to determine the Property's value as of May 1997
and as of the date title to the Property was taken. The properties are
located in Madera County, California, approximately 46 miles northeast of
Fresno and 15 miles south of Yosemite National Park. Title to the 660-acre
portion of the project is held by National Investors Land Holding Trust VIII
for the benefit of the Yosemite/Ahwahnee II Program Investors and title to
the 990-acre parcel is held by National Investors Land Holding Trust IX as
the agent of and for the benefit of the Yosemite/Ahwahnee I Program Investors.
Upon completion of funding of the Yosemite/Ahwahnee II loan, the
Yosemite/ Ahwahnee I Investors were secured by a first deed of trust on the
660-acre portion and by a second deed of trust on the 990-acre portion. The
Yosemite/Ahwahnee II Investors were secured by a first deed of trust on the
990-acre portion and a second deed of trust on the 660-acre portion. After
the borrower's default, National foreclosed on the second deeds of trust as
the agent of and on behalf of the Investors in each Program. The first deeds
of trust were left in place to protect the Investors against subsequent
creditors. These will be "extinguished" as a part of the Acquisition.
Since taking over the operation of these Properties, National has
operated them as the agent of and on behalf of the Investors through a
corporation known as Ahwahnee Golf Course and Resort, Inc. Approximately
$3,000,000 has been funded by Investors' assessments in these Programs to
provide working capital to maintain, improve and further develop the project,
and to fund the negative cash flow from operations. National has attempted
to obtain conventional financing for the project without success due to the
fact that no title company would provide a lender's policy of title insurance
for the loan because of the tenancy-in-common relationship among the
Investors holding beneficial ownership of the Property. National has also
explored the possibility of a sale of the entire project; however, no offers
were forthcoming. National has continued its efforts to enhance the revenue
production from the golf course, club house and restaurant facilities, to
market and develop recreation vehicle sites, and to pursue additional
entitlements required to develop the remainder of the project, potentially as
a timeshare facility. The project is expected to experience negative cash
flow until and unless additional recreational vehicle sites are constructed
or until timeshare sales can commence. See "-- Efforts to Dispose of the
Properties" and "--Alternatives to Acquisition" for a discussion of
alternatives considered for this Program by National.
50
<PAGE>
Since foreclosure, National has considered continuing operation of the
Properties (and, indeed, has operated, or planned for the operation of, the
Properties prior to the proposed Acquisition) and sale of the Properties for
an amount sufficient to repay the Investors. In addition, National continues
to consider, but has made no recommendations with respect to, prompt
liquidation or bankruptcy reorganization of the Programs. National views
liquidation or bankruptcy as alternatives of last resort.
MORI POINT PROGRAM. The Mori Point Program Property was foreclosed on in
August 1992 after National, on behalf of the Investors, received relief from
the borrower's bankruptcy stay from the Bankruptcy Court. An appraisal of
the Property's value was not obtained at the time title was taken; however,
in May 1997, National obtained appraisals to determine the Property's value
as of May 1997 and as of the date title to the Property was taken. Title is
held by National Investors Land Holding Trust as the agent of and for the
benefit of the Investors. The Property was originally to be developed into a
hotel/conference center in Pacifica, California, which is approximately 15
miles southwest of San Francisco on the coast. National has endeavored to
negotiate alternative uses for the Property which would be supported by the
community and be more economically feasible than a hotel/conference center.
However, improvements in economic conditions in the Bay Area have recently
revived the potential for and are encouraging to segments of the hotel
industry. Reinstating the specific plan and tentative tract map that expired
under the original borrower's ownership will require approximately $500,000
in order to conduct the necessary environmental studies and mitigation of
habitat losses for two endangered species, as well as to complete the
required land planning, engineering and preliminary architectural plans.
Such funds are not currently available and would have to come from additional
capital submitted by the Program's Investor group or by an industry joint
venture partner. Since funds are not available to further define the use to
which the Property may be put, National has not attempted to obtain
pre-construction financing. Assuming such financing would be available under
the present tenant-in-common structure, there would be no potential source
for repayment of such loan other than the Investors. An offer from a
potential joint venture partner was received in early October 1996, but such
offer was rejected by Investors holding a majority of the interests. See "--
Efforts to Dispose of the Properties" and "-- Alternatives to Acquisition"
for a discussion of alternatives considered for this Program by National.
Since foreclosure, National has considered continuing operation of the
Property (and, indeed, has operated, or planned for the operation of, the
Property prior to the proposed Acquisition) and sale of the Property for an
amount sufficient to repay the Investors. In addition, National continues to
consider, but has made no recommendations with respect to, prompt liquidation
or bankruptcy reorganization of the Program. National views liquidation or
bankruptcy as alternatives of last resort.
51
<PAGE>
EFFORTS TO DISPOSE OF THE PROPERTIES
SACRAMENTO/DELTA GREENS PROGRAM. Subsequent to foreclosure on the
Property in 1993, the project manager presented the Property to several small
and medium sized builders in the Sacramento area. No significant interest
was shown by such builders at that time. However, in 1994, National
negotiated for, and received, a purchase offer and joint venture proposal
from a real estate company located in San Mateo, California, both of which
were rejected by the Investors because of the net amount of approximately
$3,000,000 was considered too low and the five year time period over which
the consideration was to be paid was considered too long. No brokers were
engaged. More recently, during the first half of 1997, National informally
presented the Property to several large homebuilders with presence in the
Sacramento area. While more interest was shown, again no significant steps
were taken by any of such builders to enter negotiations to acquire the
Property.
OCEANSIDE PROGRAM. In the second quarter of 1997, on behalf of the
Oceanside Program, National began the process of marketing the Symphony tract
lots on an "as-is" basis. No brokers were used in the marketing effort as
National has adequate knowledge of the builders in the area likely to be
interested. Through National, those efforts resulted in a preliminary offer
from a major homebuilder to buy the Symphony tract in bulk for approximately
$41,000 per lot, subject to due diligence. A sale escrow was opened but the
details of the offer were not submitted to the Oceanside Investors pending
completion of the buyer's due diligence. A sale at that price would not have
yielded an amount sufficient to return the Investors' capital. After
conducting due diligence, the potential buyer asserted that the cost to
finish the lots would be about $42,000 per lot instead of its original
estimate of approximately $26,000 per lot for such costs and attempted to
negotiate the price down to approximately $25,500 per lot, $15,000 less than
the preliminary offer. Before selling expenses and closing costs, that price
per lot would have yielded $2,830,500, approximately $20,200 less than the
May 1997 appraised value. Based on advice from consultants, National
believed the potential buyer's estimate of costs to finish the lots was too
high. Thereafter, the sale escrow was cancelled. Subsequent to the
Acquisition of the assets of the Oceanside Program, the Company may then
attempt to complete a sale of the Symphony tract, if appropriate.
YOSEMITE/AHWAHNEE I AND II PROGRAMS. The foreclosures took place in
September 1995. At that time, the Programs' Properties also included 47
finished one-to-three-acre estate lots available for sale. Two of those lots
were sold in mid-1996 for approximately $50,000 per lot to current owners of
contiguous lots. For working capital purposes, in February 1998, National
negotiated the sale of twelve of the estate lots to the independent project
manager for the Yosemite/Ahwahnee Properties for $255,100 ($21,250 per lot)
before closing costs. The Programs have the option to repurchase the lots
prior to January 1, 2001 for an aggregate of $300,000 for which a monthly
option payment of approximately $4,100 is required. The disparity in lot
prices between the 1996 sales and the 1998 sales is based on the value of
contiguous lots to existing homeowners to protect their homes and the fact
that the 1998 sale was a bulk sale designed to provide working capital for
the Programs. Although the estate lots were listed with local brokers, no
further offers were forthcoming and
52
<PAGE>
the listings have been allowed to expire. After the foreclosure, National
contacted several of the former borrowers' potential joint venture partners
and possible purchasers of the Properties, but no offers were forthcoming.
There have been no other recent sales efforts.
MORI POINT PROGRAM. After foreclosing, in 1993 the Property was listed
for sale with a national commercial brokerage firm to no avail. In January
1996, the Investors were offered a joint venture opportunity with an Orange
County-based property developer that National negotiated on their behalf.
Holders of a majority of the tenancy-in-common interests voted to turn down
the proposal because they did not want to risk losing the Property which the
developer had proposed be put up as collateral for a loan to further develop
the Property. There have been no recent efforts to sell the Property because
of the entitlement work that needs to be done before the Property's appraised
value could be realized through an orderly sale process. National continues
to seek possible joint venture development arrangements for the Property but
no proposals have been received.
-----------------------
Except as described above, there have been no offers during the last 18
months for the merger, consolidation, or combination of any of the programs
or for an acquisition of any of the Programs' assets. Thus, after careful
consideration, National has determined that none of the Properties belonging
to the Investors of any of the Programs may be sold in the current real
estate market in their respective present conditions for an amount sufficient
to return the investment to any of the Programs' Investors. National is
aware of no alternative which would yield such a return. While some
Investors in one or more of the Programs may be willing to sell at a
substantial loss, based on National's contacts with the Investors in each of
a Programs, National believes that a majority of such Investors are not
willing to sell at a substantial loss.
National has determined that, if the assets of the Programs are
consolidated, the funds that can be generated from the sale of units and one
or more of the Properties can be used to finance the continued development
and expansion of the Company. National believes the Company can be operated
in such a way as to permit the possibility of a greater return to all of the
Investors in the various Programs than they could receive on liquidation at
the present time. Cash from the sale of some of the Company's assets may
also be utilized to acquire other assets that are suitable for the Company's
plans for growth and increased value.
ALTERNATIVES TO ACQUISITION
Before deciding to recommend the Acquisition, National considered
alternatives in an effort to achieve the most favorable cash flow
distribution and the maximum Investor return. These alternatives were (i)
continued operation of each of the Programs under their respective business
plans under the existing tenancy-in-common structure, (ii) liquidation of
each of the Programs in an orderly manner or in a bankruptcy liquidation, and
(iii) a reorganization of the Programs in a bankruptcy proceeding. In the
context of analyzing a continuation of each Program, National considered the
difficulties involved in selling the Properties described above
53
<PAGE>
in "-- Efforts to Dispose of the Properties," and the difficulties in
obtaining outside financing described above in "-- Management of the
Properties Since Foreclosure."
Set forth below is the discussion of the alternatives to the Acquisition
considered by National. In addition to the alternatives described below, in
the course of managing the Properties, prior to determining that the
Acquisition should be proposed to Investors, National reviewed and, where
sufficiently specific, placed before applicable Program Investors for a vote,
opportunities to sell certain of the Properties, opportunities for certain of
the Programs to enter joint venture arrangements, and financing alternatives
for the Properties. These are discussed earlier under the captions "--
Management of the Programs since foreclosure" and "-- Efforts to Dispose of
the Properties." Neither National nor the Company is aware of any factors
not discussed in this Prospectus that materially and adversely affect the
value of the Shares to be received in the Acquisition for purposes of
comparisons to the alternatives.
CONTINUATION OF THE PROGRAMS. An alternative to the Acquisition
would be to continue the Programs. The Programs would remain separate groups of
tenancy-in-common investors, with their own assets and liabilities, governed by
their existing servicing agreement and tenancy-in-common agreement. Although
National would still be entitled to servicing fees on an on-going basis, as well
as accrued fees and expenses, National could discern no advantages to Investors
in achieving their objectives from the continued operation of the Programs under
their respective existing business plans. National rejected this alternative
because it was concluded that maintaining the Programs separately would likely
have the following negative results when compared with the benefits that
National perceived may be derived from the Acquisition: (i) a less efficient
and cost effective exit strategy for Investors wishing to liquidate their
investment at a future date; (ii) inability of individual Investors to control
the timing of the tax impact of the liquidation of their particular investment;
(iii) illiquidity of individual investments on a current basis due to the lack
of any established secondary market; (iv) difficulty in valuing the individual
investments due to the virtual non-existence of a secondary market for the
interests; (v) less flexibility and control in actively managing the real estate
underlying each of the Programs; (vi) access to capital for the Programs would
be limited primarily to Investor assessments; and (vii) without further
infusions of funds from Investors, each of the Properties could be lost in tax
sales for delinquent property taxes.
The capital needed to finish lots and provide for the infrastructure is
necessary for the Sacramento/Delta Greens Program. Continuing to build homes
and potentially acquiring additional lots are requirements for the Oceanside
Program. With respect to Yosemite/Ahwahnee, the business plan for those
Programs assumes that there will be a large infusion of additional capital to
support the expansion of the recreational vehicle park, construction of
timeshare units and very aggressive marketing of these and other products.
The Mori Point project needs funds to continue with the hotel/conference
center entitlement process. Unfortunately, there are limited sources of
outside capital to fund the financial demands of any of these business plans
independently. Absent the Acquisition which may provide the Company with
more traditional financing alternatives and which, through the sale of
certain portions of
54
<PAGE>
some of the real estate assets, could generate internal capital, THE MOST
LIKELY SOURCE OF CAPITAL TO COMPLETE THE BUSINESS PLANS OF THE RESPECTIVE
PROGRAMS IS MANDATORY ASSESSMENTS AND VOLUNTARY ADVANCES FROM "TRUDY PAT"
INVESTORS. ANY DELAY ON THE PART OF INVESTORS IN PROVIDING SUCH CAPITAL
WOULD HAVE A SIGNIFICANT NEGATIVE EFFECT ON THE SUCCESS OF ANY OF SUCH
BUSINESS PLANS, AND COULD RESULT IN THE LOSS OF SOME OF THE PROPERTIES IN TAX
SALES FOR DELINQUENT PROPERTY TAXES.
LIQUIDATION OF THE PROGRAMS. Another alternative available to National
is to proceed with a liquidation of each of the Programs and distribute the
net liquidation proceeds to the "Trudy Pat" Investors. National concluded
that there would be several disadvantages to using this strategy. A complete
liquidation of the Programs would deprive those Investors who do not desire
to liquidate their investment from participating in the benefits of future
performance and possible property value improvements. In the case of each of
the Programs, a sale in bulk in the near future of the applicable Properties
would yield a significant loss to each of the Investors.
The following table sets forth the appraised values used to calculate
Exchange Values, estimated liabilities and closing costs at ten percent of
appraised values, net cash from a sale of appraised values, unpaid principal
and unrepaid assessments and advances (out-of-pocket cash), and the cash loss
that would result from a sale at appraised values.
<TABLE>
<CAPTION>
Appraised Value Estimated Unpaid Principal
Used to Calculate Liabilities and Net Cash Plus Assessments Cash Loss
Name of Program Exchange Value(1) Closing Costs(2) from Sale Paid(4) from Sale
- --------------- ----------------- ---------------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $2,000,000 $400,610 $1,599,390 $ 5,625,860 $ (4,026,470)
Oceanside 2,850,000 (3) 3,886,714 27,100,000 (23,213,286)
Yosemite/Ahwahnee I 3,912,454 1,133,032 2,779,422(4) 7,079,176 (4,299,754)(4)
Yosemite/Ahwahnee II 6,253,121 1,810,882 4,442,239(4) 15,188,140 (10,745,901)(4)
Mori Point 5,500,000 1,192,958 4,307,042 10,607,595 (6,300,553)
</TABLE>
- --------------------------
(1) Appraisals were conducted in May 1997. However, an appraisal of the
Yosemite/Ahwahnee Properties was also conducted in October 1996,
the results of which conflicted with the May 1997 appraisal.
However, an appraisal of the Yosemite/Ahwahnee Properties was also
conducted in October 1996, the results of which conflicted with the
May 1997 appraisal.
(2) Net of book other assets. Includes estimated brokerage commissions,
estimated escrow, title policy, legal and other closing costs at 10%
of sale price; plus amounts due to National, affiliates of National
and other service providers for unpaid servicing and property
management fees and/or expenses advanced.
(3) Net other assets of $2,593,403 minus liabilities and closing costs
is a positive $1,036,714.
(4) If the Yosemite/Ahwahnee Properties could be sold for their May 1997
appraised values of $8,050,000 and $12,866,000, respectively (which
National believes to be unlikely in the near future due to the time
and costs required to develop the Properties), less liabilities,
amounts due National and estimated closing costs of ten percent, the
sale of the Yosemite/Ahwahnee I Property would yield net total cash
of approximately $6,468,213 and a cash loss of approximately
$610,963, and the sale of the Yosemite/Ahwahnee II Property would
yield net total cash of approximately $10,323,830 and a cash loss of
approximately $4,864,310.
55
<PAGE>
(4) Reflects unpaid principal at Ownership Date plus assessments and
advances paid through December 31, 1997.
A sale at such discounts would be contrary to National's and the
Investors' objectives to return all, or a significant portion, of the
Investors' principal. While a liquidation might be accomplished in a
bankruptcy proceeding, the complexities involved due to the "Trudy Pat"
format of the Programs, as well as the administrative and other costs, made
bankruptcy liquidation particularly unattractive. In addition, liquidation
of the Programs' Properties does not have certain other benefits of the
Acquisition, including (i) permitting Investors to hold their investment
until the time when liquidation is appropriate for their individual
investment and tax strategy, (ii) the opportunity to participate in
acquisition and financing opportunities existing in the real estate market
through equity ownership in the Company, (iii) the transaction costs and time
associated with the Acquisition are expected to be significantly less than
those which would be incurred in an orderly liquidation of the Programs'
assets, and (iv) the complete liquidation of the Programs would assure the
recognition of capital gains or losses by Investors depending on whether the
selling price of the Properties is more or less than their tax basis. See
"-- Expected Benefits of Acquisition -- Control of Timing of Liquidation" for
the estimated total capital loss that would be recognized for each of the
Programs if their respective Properties were sold in bulk for their appraised
value.
BANKRUPTCY REORGANIZATION. In addition to a liquidation in a bankruptcy
proceeding, National also considered attempting to use the bankruptcy laws to
reorganize the Programs to accomplish the consolidation goals of the
Acquisition subject to approval of the Bankruptcy Court. This approach was
not selected because (i) there was some question as to whether the Programs,
individually or collectively, met the conditions precedent to a successful
reorganization in a bankruptcy proceeding, and (ii) National determined that
the administrative costs and further delays would not be as beneficial to the
Investors as the Acquisition. Based on these determinations, National made
no effort to further quantify the advantages and disadvantages of a
reorganization proceeding under the Bankruptcy Laws.
COMPARISON OF ALTERNATIVES
To assist the Investors in evaluating the Acquisition, National compared
consideration to be received by Investors in each of the Programs in the
Acquisition per $10,000 of Adjusted Outstanding Investment to (i) value to
Investors if the Programs are operated "as is," (ii) sale of the Properties
at appraised values used in determining the Exchange Values and distributing
sale proceeds net of outstanding Program Investors' obligations, (iii)
liquidation of the applicable Program's assets outside of bankruptcy and (iv)
recognizing that, initially, the Shares would likely trade substantially
below the arbitrarily determined $10 per share assigned to the Shares for
purposes of the Acquisition, a range of market values for the Shares,
assuming completion of the Acquisition, based on 75% and 50% of the Company's
valuation of its Shares for purposes of the Acquisition. A bankruptcy
liquidation or reorganization was not included in National's final comparison
of alternatives because of National's belief that, due to the costs of
bankruptcy administration, such a liquidation or
56
<PAGE>
reorganization would be more expensive if supervised by a Bankruptcy Court
than if not. Since the value of the consideration for alternatives to the
Acquisition is dependent upon varying market conditions, no assurance can be
given that the range of estimated values indicated establishes the highest or
lowest possible values. However, National believes that it analyzed the
alternatives in good faith and that such analysis establishes a reasonable
framework for comparison.
The results of this comparative analysis are summarized in the table set
forth below. No assurance can be given that estimated values would be
realized through any of the designated alternatives. These estimated values
are based on certain assumptions that relate, among other things, to (i)
securities market conditions and factors affecting the value of securities of
real estate companies, (ii) National's estimate of the value of the
Properties if they continue to be operated "as is," (iii) National's
estimates of the selling price of each of the Program's Properties, assuming
a liquidation sale, that is, a sale in three months or less, and (iv) selling
costs in such a liquidation. Actual results may vary from those set forth
below based on numerous factors, including those listed above, as well as
interest rate fluctuations, general conditions in securities or real estate
markets, tax law changes, supply and demand for properties similar to those
owned by the Programs, the manner in which the Properties might be sold and
changes in availability of capital to finance acquisition of real property.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ESTIMATED IN
THE FOLLOWING TABLE AS A RESULT OF A VARIETY OF FACTORS, INCLUDING THOSE
DISCUSSED IN "RISK FACTORS."
<TABLE>
<CAPTION>
Sale at
Appraised Market Value of Shares Received
Values(2) Net of in Acquisition per $10,000 of
Exchange Program Liquidation Operated Adjusted Outstanding Investment
Value per Debts per Value per "As Is" Value Assuming Shares Trade at
$10,000 of $10,000 of $10,000 of per $10,000 of -------------------------------
Adjusted Adjusted Adjusted Adjusted 75% of 50% of
Outstanding Outstanding Outstanding Outstanding Exchange Exchange
Program Investment(1) Investment Investment(3) Investment(4) Value(5) Value (5)
------- ------------- ---------- ------------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $3,195 $2,639 $ 1,154 $1,154 $ 2,396 $ 1,599
Oceanside 1,624 1,294 1,294 1,294 1,218 812
Yosemite/Ahwahnee I 3,542 3,071 1,126 1,126 2,657 1,791
Yosemite/Ahwahnee II 2,646 2,288 839 839 1,985 1,323
Mori Point 3,988 3,536 1,504 1,504 2,991 1,994
</TABLE>
- --------------------------------
(1) Exchange Value is the Company's value assigned to each of the
Programs. EXCEPT IN THE CASE OF THE OCEANSIDE PROPERTY, EXCHANGE
VALUE IS LESS THAN THE APPRAISED VALUE USED TO DETERMINE EXCHANGE
VALUE BECAUSE Exchange Value takes into account other Program
assets, as well as obligations of the Program Investors, which would
have to be paid out of sale proceeds. Such obligations were not
taken into account in the appraisals. Exchange Value is represented
by Company shares of common stock arbitrarily valued at $10 per
share for purposes of the Acquisition.
(2) Except for the Oceanside Property, without additional capital
infusion, National does not believe the Programs' Properties are
currently salable at the appraised values used to determine Exchange
Values. The amount set forth in this column reflects the amount
57
<PAGE>
an Investor would receive per $10,000 of their Adjusted Outstanding
Investment if the Property were sold at this appraised value after
deducting from sale proceeds, closing costs and commissions of ten
percent, accrued but unpaid property taxes and other Program net
liabilities at December 31, 1997.
(3) For this purpose, except for the Oceanside Property, National
assumed that the Properties could be sold within three months at a
value equal to 50% of the appraised value used to compute Exchange
Values, then deducting all the same costs and net liabilities.
Notwithstanding the generally improving real estate market in
California, except for the Oceanside Property, due to the amount of
capital needed to bring the Programs' Properties to their highest
and best use, National believed it would take that sort of discount
to attract a buyer in three months. Based on recent experience,
National believed it could sell the Oceanside Property at its May
1997 appraised value in three months.
(4) Since the Investors in each of the Programs appear to National to be
unwilling to provide sufficient capital to complete the proposed
development of the Programs' Properties, the Properties cannot be
developed according to the original business plans. Thus, the
Operated "As Is" value assumes that Investors in each Program would
put up only sufficient additional funds to avoid losing the Property
for property tax delinquencies. Since none of the Properties has
positive cash flow, National believes that the Operated "As Is"
value for a Property does not exceed its liquidation value. Thus,
for purposes of the comparison, National assumed that the Operated
"As Is" value and liquidation value were the same for all
Properties.
(5) There are no real estate companies which are publicly-traded with an
asset base similar to that which the Company will have if the
Acquisition is completed. Thus, there is no comparable market
information from which to extrapolate a possible market value for
the Company's stock at any period after the completion of the
Acquisition. Therefore, solely for purposes of the comparison,
National arbitrarily assumed that, for a period of six months after
the Acquisition, the Company's stock would trade at 75% to Exchange
Value (or $7.50 per Share) and at 50% of Exchange Value (or $5.00
per Share).
TERMS OF THE ACQUISITION
STRUCTURE OF THE ACQUISITION. If the Acquisition is approved, it will
take the form of a purchase of the Properties and assets of each of the
Programs by the Company from the Investors using the Shares of the Company as
consideration for the purchase. As a part of the Acquisition, remaining
"Trudy Pat" encumbrances on any of the Properties will be released by
Investors so that the Company, through subsidiaries, will own the Properties
free and clear of all mortgage liens.
Each purchase is proposed to be effected pursuant to a purchase agreement
with each Program (acting through National as the agent) and the Company.
Pursuant to the purchase agreements, the Properties will be purchased "as is"
with no warranties, other than title, surviving the closing of the sale. The
Company will receive a deed to each of the Properties and new policies of
title insurance will be included with each transfer.
58
<PAGE>
The transactions described below will have occurred or will take place
simultaneously with, or shortly after, the closing of the Acquisition.
- The Company was formed as a Delaware corporation with family
partnerships of the principals of National (David Lasker and James Orth),
along with certain affiliates, consultants and employees of National and the
Company, as the founders. American Family Communities, Inc. will be formed
as a wholly-owned subsidiary of the Company to oversee all of the Programs'
Properties. Also, Delta Greens Homes, Inc., Oceanside Homes, Inc., Yosemite
Woods Family Resort, Inc., and Mori Point Destinations, Inc. will be formed
as second-tier subsidiary corporations of the Company to hold the Properties
of each of the Programs with the two Yosemite/Ahwahnee Programs being
combined into one subsidiary. Upon completion of the Acquisition, the
founders will hold 19.84% of the Company's outstanding Shares assuming that
no units are purchased pursuant to this Prospectus. See "Appraisals and
Fairness Opinion" for a discussion of the fairness of the transaction.
- The Shares of the Company issued pursuant to the Acquisition, as
well as those sold as part of the units pursuant to this Prospectus, will
have been approved for listing, upon notice of issuance, by the .
- Certificates for the Shares will be mailed to Investors after the
Acquisition is completed.
- Shares and warrants underlying the units purchased pursuant to this
Prospectus will be mailed to the Investors who purchase them and the funds in
the Escrow representing the purchase price of such units will be released to
the Company after the Acquisition is completed.
As a result of the Acquisition, the Investors will cease to own interests
in the Properties of the respective Programs in which they have invested.
After the Acquisition, through subsidiaries, the Company will own all of the
Properties, as well as the business and operations, owned by the Programs
prior to the Acquisition.
National may decide not to pursue the Acquisition at any time before it
becomes effective, whether before or after approval by the Investors.
EFFECTIVE TIME. If approved, the Acquisition is expected to be completed
(with title to the real estate being transferred to the applicable
subsidiary) on , 1998 (approximately five business days after the
planned date for tabulation of the votes of Investors in each Program (the
"Effective Time").
CALCULATION OF EXCHANGE VALUE
GENERAL. Shares in the Company will be allocated among the Programs pro
rata in accordance with Exchange Values. The Exchange Value of a Program is
its appraised value plus the book value of other assets at [December 31, 1997]
minus liabilities at [December 31, 1997] and plus the amount of accrued fees
and expenses to be forgiven by National as part of the
59
<PAGE>
Acquisition in the form of Company Shares arbitrarily valued at $10 per
Share. For purposes of the Sacramento/Delta Greens, Oceanside and Mori Point
Programs, the appraised value is at May 1997. For purposes of the
Yosemite/Ahwahnee I and II Programs, appraised values were derived by
National through a reconciliation of the May 1997 appraisal and the October
1996 appraisal. See "Appraisals and Fairness Opinion -- Conflicting
Yosemite/Ahwahnee Properties' Appraisals."
National also considered allocating the Shares among the Programs in
accordance with only May 1997 appraised values, and pursuant to an adjustment
to May 1997 appraised values system designed to reflect the greater liquidity
of the Oceanside Property, the need for, and availability of, working capital
to accomplish the business plans of the Programs, and the expected resistance
of Investors in the various Programs to assessments to provide working
capital that could not be borrowed. Allocating the Acquisition Shares based
exclusively on May 1997 appraised values was deemed inappropriate because (i)
the Yosemite/Ahwahnee Properties had an October 1996 appraisal with a
significantly lower valuation, causing National, the Company's auditors and
the Independent Valuator to conclude that the May 1997 appraisal was too high
and (ii) considering only the appraised values of the real estate did not
take into account other assets, liabilities and fees due to National for the
Programs. The adjusted May 1997 appraised value system was discarded as being
too subjective and too difficult to explain to Investors. Further, it did
not produce results materially different from the method selected.
Exchange Values were determined as of [December 31, 1997].
[Ultimately, as of a date within 30 days of the Prospectus date.] The
Exchange Values of the Programs do not necessarily reflect the aggregate
price at which Company Shares received in the Acquisition may be sold, nor
are they based solely on the Appraised Value of the real estate assets of
each Program. See "Risk Factors." The number of Shares to be issued to each
Program upon consummation of the Acquisition will equal the Exchange Value of
the Program divided by $10, an arbitrary amount chosen for the sole purpose
of allocating Shares and which is not intended to imply that such Shares will
trade at a price of $10 per Share.
The adjusted appraised value was selected for purposes of allocating the
Company's Shares offered for the Properties because National and the Company
believe that it most accurately reflects the relative values of the Programs
to each other. The following table summarizes the calculation of the
Exchange Value of each of the Programs:
<TABLE>
<CAPTION>
Appraised Value of Net Other Assets and
Name of Program Real Estate(1) + Liabilities(2) = Exchange Value(3)
--------------- ----------- ----------- --------------
<S> <C> <C> <C>
Sacramento/Delta Greens $ 2,000,000 $ (63,499) $ 1,936,501
Oceanside 2,850,000 2,025,714 4,875,714
Yosemite/Ahwahnee I 3,912,454 (706,787) 3,205,666
Yosemite/Ahwahnee II 6,253,121 (1,115,570) 5,137,552
Mori Point 5,500,000 (642,958) 4,857,042
</TABLE>
60
<PAGE>
- ------------------
(1) Reflects independent appraisals as of May 1997. However, an appraisal of
the Yosemite/ Ahwahnee Properties was also conducted in October 1996, the
results of which conflicted with the May 1997 appraisal. Faced with
conflicting appraisals, to determine the appraised values for the
Yosemite/Ahwahnee properties for purposes of the above table, National's
management used the most conservative information presented in the
appraisals unless a change in circumstances or market conditions for a
particular parcel suggested one appraisal was more pertinent than another.
(2) The following table quantifies the asset and liabilities adjustments to
appraised values made in determining a Property's Exchange Value as of
December 31, 1997.
<TABLE>
<CAPTION>
Book Assets Book Liabilities To Be Forgiven Net Other Assets
Name of Program (12/31/97)* (12/31/97)* + Amounts - and Liabilities
--------------- ----------- ---------- ------- ---------------
<S> <C> <C> <C> <C>
Sacramento/Delta Greens $ 108,627 $ (309,237) $ 137,111 $ (63,499)
Oceanside 2,593,408 (1,271,694) 704,000 2,025,714
Yosemite/Ahwahnee I 602,891 (1,344,678) 35,000 (706,787)
Yosemite/Ahwahnee II 963,576 (2,149,146) 70,000 (1,115,570)
Mori Point 239,911 (882,869) 0 (642,958)
</TABLE>
* See balance sheets of each Program in the accompanying financial
statements for details of book assets and book liabilities. There
is no mortgage debt on the Properties of the Sacramento/Delta Greens
and Mori Point Programs, and, after the Acquisition, there will be no
mortgage debt on the other Programs' Properties.
(3) As set forth in the table under "-- Alternatives to Acquisition --
Liquidation of the Programs" the potential cash returns to Investors
if the Properties could be sold for the appraised values used to
calculate the Exchange Value are as follows: Sacramento/Delta
Greens, $1,599,390; Oceanside, $3,886,714; Yosemite/Ahwahnee I,
$2,788,422; Yosemite/Ahwahnee II, $4,442,239; and Mori Point,
$4,307,042. In the unlikely event that the Yosemite/Ahwahnee
Properties could be sold at May 1997 appraised values, the potential
cash returns to Investors would be $6,428,213 for Yosemite/Ahwahnee
I and $10,323,830 for Yosemite/Ahwahnee II. In all cases, a cash
loss would result.
(4) Rounding may result in sums not adding.
As of the date of this Prospectus, neither National nor the Company
knows of any material change in the prospects or financial performance of any of
the Programs which will materially affect the value of the Shares to be received
by Investors in the Acquisition, the values assigned to the Programs for
purposes of comparison to the alternatives, or the fairness of the Acquisition
to the Investors.
No fractional Shares will be issued by the Company in connection
with the Acquisition. Each Investor who would otherwise be entitled to a
fractional Share will receive one Share for each fractional Share of 0.5 or
greater. No Shares will be issued for fractional Shares of less than 0.5.
61
<PAGE>
ALLOCATION OF SHARES AMONG THE PROGRAMS
The total number of Shares issued in the Acquisition will be equal
to the aggregate Exchange Value of the Programs divided by the arbitrary price
of $10. The number of Shares allocable to each Program will be determined by
multiplying the number of Shares allocable among all of the Programs by a
fraction, the numerator of which is the Exchange Value of the Program and the
denominator of which is the total Exchange Value of all of the Programs.
As of , 1998, the following table shows Investors (i) the
Amount Owed Plus Assessments which is the aggregate amount of the unpaid balance
of the loan owed to a Program by the original borrower plus accrued but unpaid
interest on such balance as of the Ownership Date of a Property plus all amounts
paid by Investors pursuant to mandatory assessments plus voluntary advances,
(ii) appraised real estate values, (iii) Exchange Values and (iv) the number and
percentage of Shares allocated to each Program are:
<TABLE>
<CAPTION>
% of Total
Adjustments to Shares to be
Amount Real Estate Real Estate Outstanding
Owed plus Appraised Appraised Exchange No. of Shares After the
Name of Program Assessments(1) Value(2) Value(3) Value Allocated(4) Acquisition(5)(6)
--------------- -------------- ----------- -------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 6,038,716 $ 2,000,000 $ (63,499) $ 1,936,501 193,650 7.76%
Oceanside 27,100,000 2,850,000 2,025,714 4,875,714 487,571 19.53
Yosemite/Ahwahnee I 8,996,473 3,912,454 (706,787) 3,205,666 320,567 12.84
Yosemite/Ahwahnee II 19,344,964 6,253,121 (1,115,570) 5,137,552 513,755 20.58
Mori Point 12,420,000 5,500,000 (642,958) 4,857,042 485,704 19.45
-------------- ----------- ---------- ---------- --------
TOTAL $73,900,153 $20,515,575 $20,012,475 2,001,248 80.16%
-------------- ----------- ---------- ---------- --------
-------------- ----------- ---------- ---------- --------
</TABLE>
- ------------------
(1) The tenancy-in-common agreements for each of the Programs provide
that the servicing agent for the loan (National) may make mandatory
assessments on the Investors to cover the operational costs of the
Program. Investors may also make voluntary advances under the
tenancy-in-common agreements to make up for mandatory assessments
which have not been paid by other Investors. As of [December 31,
1997], the following mandatory assessments and voluntary advances
have been paid to the Programs and are included in Amount Owed Plus
Assessments.
<TABLE>
<CAPTION>
Mandatory Voluntary
Name of Program Assessments Advances
- --------------- ----------- ---------
<S> <C> <C>
Sacramento/Delta Greens 538,970 86,890
Oceanside -0- -0-
Yosemite/Ahwahnee I 926,560 120,188
Yosemite/Ahwahnee II 1,853,941 155,230
Mori Point 549,380 58,215
</TABLE>
(2) Appraisals were conducted in May 1997. However, an appraisal of the
Yosemite/Ahwahnee Properties was also conducted in October 1996, the
results of which conflicted with the May 1997 appraisal. Faced with
conflicting appraisals, to determine the appraised values for the
Yosemite/Ahwahnee properties for purposes of the above table,
National's
62
<PAGE>
management used the most conservative information presented in the
appraisals unless a change in circumstances or market conditions for
a particular parcel suggested one appraisal was more pertinent than
another. See "Appraisals and Fairness Opinion -- Conflicting
Yosemite/Ahwahnee Properties' Appraisals."
(3) The adjustments were made by the Company to add back to the real
estate appraised values the book value of other program assets at
[December 31, 1997] to reduce that number by program liabilities at
[December 31, 1997], and to add back liabilities to National to be
forgiven by National as part of the Acquisition. See " --
Calculation of Exchange Value" at page for details as to the
adjustments.
(4) Represents [9.68%], [24.36%], [16.02%], [25.67%] and [24.27%],
respectively, of the shares to be issued in the Acquisition.
(5) 85.83% if all units are sold to investors. The other shares will be
held by management and other founders of the company.
(6) The founders of the Company include members of Company management,
as well as certain employees of National and consultants to the
Company and the Programs. The Company was formed, and shares were
purchased by the founders, prior to making the Acquisition proposed.
The total number of shares to be retained by the founders was
determined by reviewing the fees cancelled and to be cancelled, as
well as the additional value being brought to the Investors through
the Acquisition. A total of [495,318] shares of Company common
stock has been issued prior to the date of this Prospectus at $0.01
per share. See "Dilution" at page of the Prospectus. If the
Acquisition is completed, the following table sets forth the fees
which National and its principals have cancelled, or will cancel:
<TABLE>
<CAPTION>
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------- --------- ---------
<S> <C> <C> <C>
Sacramento/Delta Greens(a) $137,111 $500,000 $637,111
Oceanside(a) 704,000 -0- 704,000
Yosemite/Ahwahnee I(a) 35,000 72,158 107,158
Yosemite/Ahwahnee II(a) 70,000 1,157,867 1,227,867
Mori Point(a) -0- 461,589 461,589
-------- --------- ---------
TOTAL $ 946,111 $ 2,191,614 $ 3,137,725
-------- --------- ---------
-------- --------- ---------
</TABLE>
- ------------------
(a) The shares to be retained by the founders were not allocated to the
founders based on cancelled fees. However, if they had been so
allocated from the Programs based on cancelled fees,
(i) 20.30% of the total shares to be owned by the founders after
Acquisition ([100,550] shares) which will be held by the
founders of the Company would have been deemed allocated from
the Sacramento/Delta Greens Program.
(ii) 22.44% of the total shares to be owned by the founders after
the Acquisition ([111,149] shares) which will be held by the
founders of the Company would have been deemed allocated from
the Oceanside Program.
63
<PAGE>
(iii) 3.42% of the total shares to be owned by the founders
after the Acquisition ([16,940] shares) which will be held by
the founders of the Company would have been deemed allocated
from the Yosemite/Ahwahnee I Program.
(iv) 39.13% of the total shares to be owned by the founders after
the Acquisition ([193,818] shares) which will be held by the
founders of the Company would have been deemed allocated from
the Yosemite/Ahwahnee II Program.
(v) 14.71% of the total shares to be owned by the founders after
the Acquisition ([72,861] shares) which will be held by the
founders of the Company would have been deemed allocated from
the Mori Point Program.
ALLOCATION OF SHARES AMONG INVESTORS
The method utilized to allocate shares to the Investors will involve
two steps. The Shares will first be allocated among the Programs based upon the
Exchange Value of each of the Programs relative to the aggregate Exchange Value
of all of the Programs. National believes that the Exchange Values of the
Programs constitute a reasonable basis for allocating the Shares among all of
the Programs.
Next, the Shares allocable to a particular Program will be allocated
among the Investors pro rata in relation to each Investor's Adjusted Outstanding
Investment in a particular Program. An Investor's Adjusted Outstanding
Investment is calculated by adding the unpaid principal balance of the
Investor's original loan, the accrued but unpaid interest on the unpaid
principal balance to the Ownership Date, mandatory assessments paid, voluntary
advances made, plus interest at 10% per annum through the Record Date on
voluntary advances made, and deducting therefrom interest at 10% per annum
through the Record Date on mandatory assessments NOT paid. The basis for such
adjustments is found in Section 2.3 of each of the Programs' tenancy-in-common
agreements.
Once each Investor's Adjusted Outstanding Investment has been
calculated, that amount is divided by the aggregate Adjusted Outstanding
Investment for all Investors, and the resulting fraction is multiplied by the
number of Shares allocated the Program to determine the number of shares
allocated to each Investor.
All Shares allocated to Investors will be exactly equal to each
other, that is, they will all be part of a single class of common stock. As of
the date of this Prospectus, neither National nor the Company knows of any
material change in the prospects or financial performance of any of the Programs
which will materially affect the value of the Shares to be received by Investors
in the Acquisition, the values assigned to the Programs for purposes of
comparison to the alternatives, or the fairness of the Acquisition to the
Investors.
COMPANY SHARES HELD BY AFFILIATES OR EMPLOYEES OF NATIONAL
None of the Acquisition Shares or units described in this Prospectus
are allocable to National or any of its shareholders except to the extent of any
of National's investments in the Programs. None of the Company's founders hold
interests in any of the Programs'
64
<PAGE>
Properties. At December 31, 1997, National's investments were $3,118 in
the Sacramento/Delta Greens Program; $2,082 in the Oceanside Program; $2,373
in the Yosemite/Ahwahnee I Program; $46,454 in the Yosemite/Ahwahnee II
Program; and $5,279 in the Mori Point Program. In the Acquisition, National
will receive an aggregate of 1,817 Shares, reflecting 97 Shares, 41 Shares,
95 Shares, 1,383 Shares and 200 Shares, respectively, for its investments in
the Sacramento/Delta Greens Program, Oceanside Program, Yosemite/Ahwahnee I
Program, Yosemite/Ahwahnee II Program and Mori Point Program. As described
in "Terms of the Acquisition" above, the principal founders of the Company
were the family partnerships of David Lasker and James Orth, the principals
of National. Upon completion of the Acquisition, they will retain, in the
aggregate, [400,014] Shares, or [16.02]% of the outstanding Shares of the
Company assuming none of the units are sold or [11.42]% of the outstanding
Shares of the Company if all of the units are sold. National and the
management of the Company believe that this is a fair allocation of the
outstanding Shares of the Company after the Acquisition because it fairly
reflects the management efforts that have been brought to bear to accomplish
the Acquisition. The fairness of the allocation of shares to the founders of
the Company is included in the Fairness Opinion described later in this
Prospectus.
HISTORICAL COMPENSATION FOR SERVICING AND PROPERTY MANAGEMENT/EFFECT OF
ACQUISITION
The following table sets forth the servicing fees and property
management fees accrued by National, its officers, employees or affiliates, as
well as actually paid to National, during the years ended December 31, 1997,
1996, 1995 and 1994. In the case of the Oceanside Program, compensation to
National or any of its affiliates would have been from accrued servicing fees,
as well as annual salaries payable to the officers and employees of Oceanside
Development, Inc. ("ODI") and its general and administrative overhead costs. In
the case of the Yosemite/Ahwahnee I and II Programs, compensation to National or
any of its affiliates would have been from accrued servicing fees, as well as
accrued salaries payable to the officers and employees of Ahwahnee Golf Course
and Resort, Inc. ("AGCRI") and its general and administrative overhead costs.
<TABLE>
<CAPTION>
Actually Actually Actually Actually
Incurred Paid for Incurred Paid for Incurred Paid for Incurred Paid for
for Year Year for Year Year for Year Year for Year Year
Ended Ended Ended Ended Ended Ended Ended Ended
Name of Program 12/31/94 12/31/94 12/31/95 12/31/95 12/31/96 12/31/96 12/31/97 12/31/97
--------------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 50,000 $ -0- $ 50,000 $ -0- $ 50,000 $ -0- $ 50,000 $ 8,267
Oceanside 492,000 300,000 492,000 300,000 492,000 300,000 444,000 300,000
Yosemite/Ahwahnee I 65,000 10,000 84,051 -0- 150,800 101,626 148,439 60,700
Yosemite/Ahwahnee II 135,000 -0- 174,569 -0- 313,200 211,069 128,157 123,998
Mori Point 100,000 -0- 100,000 -0- 100,000 -0- 100,000 27,333
---------- ---------- --------- ---------- ---------- --------- --------- --------
Totals $ 842,000 $ 310,000 $ 906,620 $ 300,000 $1,106,000 $ 612,695 $ 990,596 $520,298
---------- ---------- --------- ---------- ---------- --------- --------- --------
---------- ---------- --------- ---------- ---------- --------- --------- --------
</TABLE>
If the Acquisition had been completed during the above periods,
National would not have been entitled to receive any further servicing fees and
officers and employees of ODI and AGCRI would not have been entitled to their
accrued compensation. The only compensation National or any of its affiliates
would have been entitled to receive would have
65
<PAGE>
been from salaries payable to officers and employees of the Company. No cash
would have been available to pay bonuses or dividends.
Based on original "Trudy Pat" loan amounts, the following table sets
forth the compensation, including employees of the Ahwahnee golf course, that
would have been allocable to the Programs had the Acquisition been completed
during the four years ended December 31, 1994, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Original
Loan
Name of Program Amount 1994 1995 1996 1997
--------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 5,000,000 $ 115,739 $ 115,738 $ 115,283 $ 115,283
Oceanside 30,000,000 284,739 284,739 284,739 284,739
Yosemite/Ahwahnee I 6,500,000 187,189 187,189 187,189 187,189
Yosemite/Ahwahnee II 13,500,000 312,375 312,375 312,375 312,375
Mori Point 10,000,000 283,676 283,676 283,676 283,676
------------ ------------ ------------ ------------ ------------
Total $65,000,000 $ 1,181,000 $ 1,181,000 $ 1,181,000 $ 1,181,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS
The following table sets forth the cash distributions made to
Investors during each of the years ended December 31, 1992, 1993, 1994, 1995 and
1996 and during the Year ended December 31, 1997:
<TABLE>
<CAPTION>
Prior to
Name of Program 1992 1992 1993 1994 1995 1996 1997 Total
- --------------- --------- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $1,654,013 $ 343,750 $ 0 $ 0 $ 0 $ 0 $ 0 $1,997,763
Oceanside
Principal $ 0 $ 0 $ 0 $375,000 $900,000 $900,000 $675,000 $2,850,000
Interest $ 0 $1,080,804 $3,145,869 $393,750 $ 0 $ 0 $ 0 $4,620,423
Yosemite/Ahwahnee I
Principal $ 45,000 $ 135,000 $ 103,085 $ 0 $ 0 $ 0 $ 0 $ 283,085
Interest $1,903,306 $ 920,794 $ 335,557 $ 4,756 $ 0 $ 0 $ 0 $3,164,413
Yosemite/Ahwahnee II
Principal $ 20,000 $ 60,000 $ 68,264 $ 0 $ 0 $ 0 $ 0 $ 148,264
Interest $ 592,498 $1,153,352 $ 688,303 $ 10,273 $ 0 $ 0 $ 0 $2,444,426
Mori Point
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $1,354,708 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $1,354,708
</TABLE>
66
<PAGE>
FEATURES OF THE ACQUISITION CONSIDERED BY NATIONAL
National believes that the Acquisition is the best way to obtain a
maximum recovery by Investors in each of the Programs. In reaching this
conclusion, National considered the following positive and negative factors:
LIQUIDITY THROUGH LISTING OF SHARES. The Company has applied for
listing of the Shares on the ______________. Listing the Shares is a condition
to the Acquisition. Thus, the Acquisition offers potential liquidity to the
Investors for all or some of their Shares if a trading market develops. There
is no guaranty that a liquid trading market will develop for the shares or that
it will be sustained. Although the Acquisition is not the only means by which
Investors could achieve liquidity in their investments in the Programs, National
believes that the Acquisition is preferable to the alternatives (described below
in "-- Alternatives to Acquisition") even though an indefinite period of time
may be required before the value of the Shares is stabilized and there is an
adequate demand from buyers for the Shares. National believes that a sale of
the Properties in the current market would result in unnecessary losses to
Investors. Investors should be aware, however, that initially the shares are
likely to trade at prices substantially below the arbitrary $10 per share
assigned to them for purposes of the Acquisition.
CONTROL OF TIMING OF LIQUIDATION. By creating freely tradable
equity securities in the Company, the Acquisition permits Investors to liquidate
all or a portion of their Shares when such liquidation best serves such
Investors. In addition, by controlling the timing of the liquidation of their
investments, Investors will have better control of the timing of the tax impact
of the liquidation. Furthermore, the Programs will not be forced to sell their
Properties currently and recognize the losses that would be generated by such
sales. If the Programs could be liquidated by selling off the Properties at the
appraised values used to calculate Exchange Values, such sales would result in
substantial cash losses to the Investors in each of the Programs. See table at
"-- Alternatives to Acquisition; Liquidation of the Programs." However, no
particular group of Investors will have the ability to control the timing of the
sale of a particular property as they do under the current program structure.
Instead, all Investors will be required to rely on the decisions of management
regarding the sale of a Property. Management's decisions will affect cash
available for distribution.
BENEFITS TO THE COMPANY OF LISTED SHARES. In addition to the
flexibility Investors will have to liquidate their interests at a time that best
suits their respective individual needs, National believes that having the
Shares of the Company listed for trading on the _______________ will provide
benefits to the Company itself which could enhance Investor value. The Company
may have access to outside capital in the form of debt or equity through the
capital markets that the individual Programs would not have. For example, it is
possible that the Company may be able to take advantage of its size in order to
access the capital markets for additional debt or equity investors to provide
expansion or completion of development and construction funding for the various
projects. The growth of the Company will be a capital-intensive process. The
Company, however, will need to be successful or show potential for success in
order to
67
<PAGE>
induce, if available, capital sources to enter into transactions with
it. Even in such cases, the cost of such capital may be high.
DIVERSITY OF INVESTMENT. The Acquisition will allow Investors to
participate in an investment portfolio of four properties rather than one
property. These Properties are in diverse geographic locations in California
and have different development orientation. The diversity of the Company's
portfolio spreads the risk of an investment in the Company over a broader group
of assets and reduces the dependence of the investment upon the performance of
any particular asset. However, the poor performance of a particular Property
may, nevertheless, negatively affect the performance of the Company even if all
the other Properties are performing well. Historically, all of the properties
have operated at a loss. In order for the company to be successful, it must
obtain external financing or sell certain of its assets to raise cash for
operations.
EXPERIENCE OF MANAGEMENT. The Company has employed key management
professionals that have expertise in real estate development, operation and
construction. While members of management have gained experience in the
operation of golf courses and recreational vehicle parks through the operation
of the Yosemite/Ahwahnee properties, they do not have extensive experience in
timeshare or resort development, marketing or operations. See "Management
Following the Acquisition."
MODEST INCREASE IN MANAGEMENT COMPENSATION. National considered
that the total of salaries to be payable to the Company's officers and other
employees exceeds the total payable to National and its affiliates for servicing
and property management services ($1,181,000 as opposed to $969,000 both of
which include the payroll for the Ahwahnee Country Club). The increase was not
viewed as significant since the original servicing fees were based on loan
servicing which is less labor-intensive than property development and management
ELIMINATION OF MANDATORY ASSESSMENTS. Completion of the Acquisition
will result in the cancellation of the servicing agreement and the
tenancy-in-common agreement for each of the Programs and National will no longer
be a Servicing Agent for the Investors. There will be no further assessments of
Investors of any kind pursuant to those agreements. However the Company will be
required to obtain additional financing from other sources in order for its
business plan to be successful.
LIMITATION OF INVESTOR LIABILITY. As beneficial owners of the
assets and businesses of the Programs, Investors currently are not effectively
insulated from personal liability based on the operation of those assets. Thus,
if an accident occurred, the damages of which were not wholly covered by
insurance, the individual Investors could be liable for the balance of the
damages. As shareholders of a corporation, there will be no such risk of
liability.
NO CONTROL OVER TIMING OF SALE OF A PARTICULAR PROPERTY. No
particular group of Investors will have the ability to control the timing of the
sale of a particular property as they do under the current program structure.
Instead, all Investors will be required to rely
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on the decisions of management regarding the sale of a Property. Management's
decisions will affect cash available for distribution.
PROCEEDS FROM SALE OF PROPERTIES. If a Property is sold or
refinanced, the proceeds will be used by the Company to further the business
plan of the Company. Presently, if a Program Property is sold in its entirety,
the proceeds would go to applicable Investors directly as a return of their
investment.
ACQUISITION COULD TRIGGER TAXATION OF INVESTORS. Participation in
the Acquisition may be a taxable event for Investors. However, National intends
to treat the transaction as a tax-free transaction. To the extent that the
Acquisition is determined to be taxable, National believes most Investors would
be required to report tax losses. On the other hand, there generally would be
no taxable event to Investors as the Programs are currently structured until the
Program Property was sold. At such time, the amount returned to Investors would
result in either a tax loss or gain depending upon how much of the original
investment was returned.
CASH DISTRIBUTIONS. Currently, if a Property was sold, an Investor
would be entitled to a distribution of the proceeds of such sale net of costs of
sale and accrued liabilities. After the Acquisition, an Investor's
distributions will be dependent upon the earnings of the Company and a decision
of the board of directors to make distributions in the form of dividends. An
Investor will not automatically receive distributions upon the sale of any
particular Property.
CONDITIONS TO THE ACQUISITION
The principal conditions to the Acquisition are: (i) approval of
the Acquisition by holders of a majority of the tenancy-in-common interests in
each of the Programs; (ii) commitment of a reputable title company to issue to
the Company an extended coverage policy of title insurance on each of the
parcels of real property owned by each of the Programs; (iii) receipt of the
Fairness Opinion from the Independent Valuator regarding the allocation of the
Shares among the Programs; and (iv) approval of the Shares for listing on the
_______________. No federal or state regulatory requirements must be complied
with or approval obtained in connection with the Acquisition. These conditions
may not be waived. National may decide not to pursue the Acquisition at any
time before it becomes effective, whether before or after approval by the
Investors.
RECOMMENDATION OF NATIONAL AND FAIRNESS DETERMINATION
While the Acquisition was not negotiated at arm's-length and
National and its principals will receive substantial benefits from it, National
believes the Acquisition to be fair to, and in the best interests of, each of
the Programs and the Investors therein. National recommends that the Investors
approve the Acquisition.
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There can be no assurance that the market value of the Shares will
ultimately be higher than the expected proceeds from liquidation. It is likely
that the Shares will trade substantially below the arbitrary value of $10 per
share assigned to them in the foreseeable future. Also, if many Investors were
to sell the Shares immediately after the Acquisition was completed, the price of
the Shares could drop even more significantly. In proposing the Acquisition,
National examined the alternatives discussed in "-- Alternatives to
Acquisition." Maintaining the current structure of each of the Programs, as
well as a prompt liquidation of each of the Programs, were outweighed by the
Company's (i) potential to provide improved liquidity to the Investors through
ownership of the Company's Shares; (ii) potential for growth; and (iii) the
possibility of increasing the value of the Company to permit the Investors who
elect not to sell their Shares promptly a chance to obtain a better return than
a liquidation of their Property would yield today.
Based on its analysis of the Acquisition, National believes that (i)
the terms of the Acquisition when considered as a whole are fair to the
Investors; (ii) the Shares offered to the Investors constitute fair
consideration for the Properties and other assets held in tenancy-in-common by
the Investors; and (iii) after comparing the potential benefits and detriments
of the Acquisition with those of the earlier described alternatives, the
Acquisition is more attractive to the Investors than such alternatives. These
beliefs are based upon National's analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon the Investors, a consideration
of the amount of the equity of the Company which will be held by consultants and
employees of National, the Company and the Programs, a comparison of the
potential benefits and detriments of the Acquisition and alternatives to the
Acquisition, a review of the financial condition and performance of the Programs
and the terms of the servicing agreements and the tenancy-in-common agreements
for each of the Programs.
More specifically, National's determination of financial fairness
was based on a consideration of the following positive and negative factors:
- the Shares offer an opportunity for individual Investor
liquidity while the tenancy-in-common interests do not, however, there is no
assurance that the Shares will have any liquidity, or that any liquid market
that develops will be sustained;
- while the number of Shares to be issued to reflect the Exchange
Value of a Program is arbitrary, the trading price of such Shares initially is
likely to be substantially below the $10 value arbitrarily assigned to such
Shares. In our opinion, the Exchange Values offered to Investors for their
assets allow for an equitable allocation of the [2,001,248] Shares among the
Programs. The disparity between Exchange Values and appraised values results
from adding Program cash reserves to appraised values, deducting Program accrued
property taxes and other fees net of fees to be forgiven by National;
- on completion of the Acquisition the Investors will hold over
80% of the outstanding stock of the Company while principals, employees, and
consultants of National will hold less than 20%. That 20% was purchased for
$.01 per share. National and its principals have forgiven, or will forgive at
the completion of the Acquisition, over
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$3,000,000 of expenses and accrued fees of which a total of $1,400,000 was
earned under the servicing agreements paid to it or for services and expenses
rendered in managing the properties after the loans defaulted. National
believes that the amount paid for the services is no greater than the amount
that a third party would charge;
- the valuation of the real estate assets of each of the Programs
by the independent appraisers;
- the probability that the transaction will either be tax-free to
Investors or most likely yield a tax loss. Either way, National believes there
will likely be no out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
Acquisition, the issuance of Shares to the founders of the Company and the
determination of management compensation and while you did not have independent
representation in the structuring of the Acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the Programs were originally formed to have a two to four
year finite life and the Investors expected to receive a return of their
investment from the original borrower, the Company is an infinite life entity
which will not return the Program Investors' original investment based on sale
or refinancing of the properties underlying the original Programs. However,
after the borrowers defaulted on the "Trudy Pat" loan, the Investors became
beneficial owners of the underlying properties with the need to complete
development, manage or otherwise ready the properties for sale. That
significantly changed the finite life aspect of their original investments.
Therefore, the infinite life aspect of the Company is not viewed by National to
be a material change from the Investors' CURRENT situation;
- the Acquisition will cause fundamental changes in the
individual business plans of the Programs. Rather than being focused on a
single Property, the Company will be focused on the management of at least five
Properties. Thus, the poor performance of a particular Property may affect the
Company's operations as a whole regardless of the performance of the other
Properties. Further, there will be no particular time when an Investor can
expect its interest to be automatically liquidated;
- Investors' voting rights will change. Investors will not be
able to vote on changes to or dispositions of a particular Property or borrowing
secured by a particular Property. Those decisions will be made by the Board of
Directors or management. In addition, due to the number of Investors in the
Company, a particular Investor's relative voting power will decline;
- Cash distribution policies will be changed. There have been no
distributions from any of the Programs, other than the Oceanside Program, in the
past three years due to the original borrower's defaults. Future cash
distributions will be based on
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the Company's earnings and the decision of the board of Directors to pay
dividends. Even if a particular Property were to perform well, there is no
assurance that there will be cash distributions;
- Holders of the majority of tenancy-in-common interests in a
particular Program can bind the Program, and Investors that vote against the
Acquisition will not be able to object to the Acquisition if a majority of the
Investors in all of the Programs approve the Acquisition; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers,
an independent valuation firm which addresses only the allocation of the Shares
in the Acquisition and not the amount of the consideration paid to Program
Investors in the Acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __.
National also believes that the Acquisition is procedurally fair for
the following reasons. First, the Acquisition is required to be approved by
Investors holding a majority of each Program's outstanding tenancy-in-common
interests in compliance with the provisions of the tenancy-in-common agreement
of each of the Programs, and is subject to certain non-waivable conditions set
forth under "Conditions to the Acquisition" above. Second, National believes
that the Exchange Values of the Programs have been determined according to a
process that is fair, because the process involved appraisals of all of the
Programs' Properties by independent appraisers. See "-- Calculation of Exchange
Value" and "Appraisals and Fairness Opinion." Other than as described in this
Prospectus, for purposes of determining fairness to Investors, neither National
nor the Company is aware of any factor or uncertainty that may materially affect
the value of the Shares to be received by Investors in the acquisition.
All of the above factors were used as support for National's belief
that the Acquisition is fair, substantively and procedurally. No special
emphasis was assigned to any of the factors.
National believes that there are no material differences in the
fairness analysis for any particular Program in comparison with any other.
FAIRNESS IN VIEW OF CONFLICTS OF INTEREST
Although National reasonably believes the terms of the Acquisition
are fair to the Investors, the principals of National have conflicts of interest
with respect to the Acquisition. These conflicts include, among others, (i) the
determination not to retain independent parties to act on behalf of the
Investors or the Programs (see "Risk Factors -- Risks of the Acquisition"), (ii)
the principal shareholders of National may realize substantial economic benefits
upon completion of the Acquisition (see "Management Following the Acquisition --
Directors and Executive Officers Compensation and Incentive"), and (iii)
National's relief from on-going obligations under the servicing agreements with
respect to each of the Programs (such relief is not susceptible to meaningful
quantification except to the extent that National may be able to reduce its
overhead allocated to the asset management for the Programs). It should be
noted that,
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prior to 1994, National forgave $2,191,614 of fees for the performance of
servicing agent and other project management-related activities under the
applicable servicing agreements, and will forgive an additional $946,111 of
similar fees upon the successful completion of the Acquisition. It
should be further noted that, at $10 per Share, the amount of fees cancelled by
National and its principals would be equal to over 300,000 Shares.
Additionally, National will not be entitled to any further servicing fee with
respect to the Properties which amounts, in the aggregate, to $650,000 annually.
To help mitigate the potential conflicts, National obtained the independent
appraisals and the Fairness Opinion. For a further discussion of the conflicts
of interest and potential benefits of the Acquisition to National and its
principal shareholders, see "Interests of Certain Persons in the Acquisition and
Conflicts of Interest -- Substantial Benefits to Affiliates of National."
CONSEQUENCES IF THE ACQUISITION IS NOT APPROVED
If the Acquisition is not consummated for any reason, National will
be unable to continue to manage the Programs without receiving contracted-for
fees and expenses. Thus, National will seek Investors' approval to sell each of
the Programs' Properties for the highest amount then available and distribute
the proceeds, net of selling expenses and fees due to National, to the Investors
in the respective Programs. If the Acquisition is not approved, National will
likely resign as servicing agent for each of the Programs unless a sale can be
consummated in less than three months. As a last resort, National may determine
that bankruptcy protection and liquidation may be in the best interests of one
or more of the Programs. No other transaction is currently being actively
considered as an alternative to the Acquisition. The Programs will, however,
pay the expenses of the Acquisition even if it is not approved.
ACCOUNTING TREATMENT
The transaction will be accounted for as a purchase by the
accounting acquiror the Yosemite/Ahwahnee Programs, of all of the investment
programs and the Company. As such, the assets and liabilities of the investment
programs being acquired, as well as those of the Company, will be recorded at
their fair values, while the assets and liabilities of the Yosemite/Ahwahnee
Programs will remain at their historical costs. The Yosemite/Ahwahnee Programs
have been treated as the accounting acquiror due to their underlying shareholder
group holding a greater interest in the Company, subsequent to the Acquisition,
than any other shareholder group involved in the Acquisition
COSTS AND EXPENSES
Costs and expenses incurred in connection with the Acquisition will
be allocated to the Programs on a pro rata basis in accordance with their
relative Exchange Values, whether or not the Acquisition is consummated. If the
Acquisition fails, such liabilities will remain owing for ultimate repayment at
the sale of the applicable Property. The following is a statement of ESTIMATED
costs and expenses that have been or are likely to be incurred by the Programs
and the Company in connection with the Acquisition.
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[COST ALLOCATION PENDING FINAL EXCHANGE VALUE CALCULATION. TOTAL
COSTS ARE ESTIMATED TO APPROXIMATELY $1,024,000.]
<TABLE>
<CAPTION>
Sacramento Yosemite/ Yosemite/
/Delta Greens Oceanside Ahwahnee I Ahwahnee II Mori Point Total
------------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Accounting $ $ $ $ $ $
Audit
Appraisal
Legal
Fairness opinion
Exchange fees
SEC filing fees
Printing
Mailing/copying
Investment
banking/
consulting
Meeting and travel
Solicitation fees
Miscellaneous
------------- ----------- ----------- ----------- ----------- --------
Total $ $ $ $ $ $
------------- ----------- ----------- ----------- ----------- --------
------------- ----------- ----------- ----------- ----------- --------
</TABLE>
APPRAISALS AND FAIRNESS OPINION
APPRAISALS. National engaged separate independent real estate
appraisal firms named at page __ to provide independent appraisals of the value
of the real estate in each Program. The appraisers were selected for their
knowledge of the real estate conditions in the four areas in which the Programs'
Properties are located. See "Appraisals and Fairness Opinion" for information
about the appraisers and the appraisals. Although National received independent
appraisals, it used its own judgment as to various portions of conflicting
appraisals received on the Yosemite/ Ahwahnee I and II Properties in order to
determine the appraised value for those Properties. The disparity between
Exchange Values and appraised values results from adding Program cash reserves
to appraised values and deducting Program accrued property taxes and other
accrued obligations net of fees to be forgiven by National.
National also engaged Houlihan Valuation Advisers, a well-known and
reputable independent valuation company (the "Independent Valuator"), to
determine the fairness of the allocation of shares in connection with the
Acquisition. The Independent Valuator did not pass upon the procedures used by
National and the Company to determine the fairness of the Acquisition. The
Independent Valuator has rendered a Fairness Opinion (attached as Appendix 1 to
this Prospectus) to the effect that the transaction, including the allocation of
Shares among the Programs, as well as the number of Shares to be held by
management and founders of the Company, is fair to Investors from a financial
point of view. See "Appraisals and Fairness Opinion -- Fairness Opinion."
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FAIRNESS OPINION
GENERAL. The Independent Valuator was engaged by National to
analyze certain aspects of the Acquisition and has delivered its written
determination, based on the review, analysis, scope and limitations described
therein, as to the fairness of the allocation of Shares pursuant to the
Acquisition, from a financial point of view, to the Investors in each of the
Programs (the "Fairness Opinion"). The full text of the Fairness Opinion is set
forth in Appendix A and should be read in its entirety. A development of a
fairness opinion is a complex analytical process. It is not easily susceptible
to partial analysis or summary description.
Neither National nor the Company imposed any conditions or
limitations on the scope of the Independent Valuator's investigation or methods
and procedures to be used in rendering the Fairness Opinion. The Company has
agreed to indemnify the Independent Valuator against certain liabilities arising
out of the Independent Valuator's engagement.
EXPERIENCE OF INDEPENDENT VALUATOR. The Independent Valuator is
regularly engaged in the valuation of businesses and their securities in
connection with a variety of business combination transactions and for estate,
tax, corporate and other purposes. The founding principals of the Independent
Valuator have been regularly engaged in business valuations for more than 20
years. National selected the Independent Valuator because of its experience and
reputation in connection with the valuation of business combination
transactions. Neither National nor the Company has any prior relationship with
the Independent Valuator and neither has present plans to retain the Independent
Valuator in the future.
MATERIALS REVIEWED. In preparing the Fairness Opinion, the
Independent Valuator reviewed and analyzed the following: (i) this Consent
Solicitation Statement/Prospectus; (ii) real estate appraisals with respect to
each of the Properties prepared by independent real estate appraisers; (iii)
feasibility studies with respect to the Yosemite/Ahwahnee Properties and the
Sacramento/Delta Green Property; (iv) audited financial statements for each of
the Sacramento/Delta Greens Property, the Mori Point Property, the Oceanside
Property, and the Yosemite/Ahwahnee I and II Properties, as well as unaudited
pro forma consolidated financial statements for the Company for the years ended
December 31, 1996 and 1997; (v) certain documents related to the "Trudy Pat"
loans on the Properties; and (vi) other documents and schedules pertinent to
their analysis. In addition, the Independent Valuator met with members of
management of the Company and National regarding matters pertinent to its
analysis, conducted site visits to each of the Properties, met with the general
manager of the Yosemite/Ahwahnee I and II Properties, and conducted such other
studies, analyses and inquiries as it deemed appropriate.
The Independent Valuator did not independently verify the accuracy
or completeness of the information supplied to it with respect to the Company or
the Properties and does not assume any responsibility with respect to that
information.
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ANALYSIS AND CONCLUSIONS. On behalf of the Investors in each of the
Programs, National requested that the Independent Valuator opine as to the
fairness, from a financial point of view, of the allocation of Shares pursuant
to the Acquisition, inclusive of Shares to be held or controlled by principals
of National, employees of National and the Company, as well as consultants to
certain of the Properties and National.
The Independent Valuator's analysis began with a determination of
the enterprise value of each of the Programs on a stand alone basis. The
enterprise value of most entities whose primary business purpose is owning real
estate is determined based on the adjusted book value (or net asset value)
approach. Therefore, the Independent Valuator deemed this to be a reasonable
methodology for determining the enterprise value of each of the Oceanside, Mori
Point, Yosemite/Ahwahnee I and II, and Sacramento/Delta Greens Programs on a
stand alone basis. In the adjusted book value approach, the estimated current
market value of individual assets and liabilities are substituted for their
carrying value on the Programs' financial statements (or book value). The
enterprise value is the resulting value of the equity after subtracting
liabilities from the market value of assets.
To determine the current net asset value of each of the Programs,
the Independent Valuator relied on the Appraisals to represent the market value
of the respective properties, except in the case of the Yosemite/Ahwahnee I and
II properties, wherein the Independent Valuator relied upon management's
reconciliation of the two existing appraisals. In either case, the Independent
Valuator assumed, without independent analysis or verification, that the
property values thus derived were representative of the current fair market
values of the respective properties. In determining net asset value, the
Independent Valuator used the book value as of December 31, 1997 for most of the
non-real estate assets. This was considered reasonable because the majority of
these assets consist of cash, restricted cash, accounts receivable, notes
receivable or amounts due from affiliates, which are relatively liquid and worth
approximately their book value. With respect to property and equipment
(excluding real estate), no appraisals were provided to the Independent
Valuator. Management believes the book value of property and equipment to be
reasonably indicative of its market value. Deferred membership selling expense
(an asset) and deferred revenues (a liability) which appear on the balance sheet
of the Yosemite/Ahwahnee Programs as of December 31, 1997 were eliminated
because these assets have no market value. Liabilities (except for deferred
revenues) were subtracted out at book value. In the net asset value
calculation, liabilities were not reduced by the estimated amounts to be
forgiven by National. Using the aforementioned methodology, the resulting net
asset values as of December 31, 1997 were as follows (rounded to the nearest
$000): $3,700,000 for Oceanside (or 19.2% of the combined net asset value);
$3,171,000 for Yosemite/Ahwahnee I (or 16.5% of the combined net asset value);
$5,710,00 for Yosemite/Ahwahnee II (or 29.7% of the combined net asset value);
$4,847,000 for Mori Point (or 25.2% percent of the combined net asset value);
and $1,799,000 for Sacramento/Delta Greens (or 9.4% of the combined net asset
value).
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However, in addition to their respective net asset values for the
Programs on a stand alone basis, the Independent Valuator also considered the
potential synergies among the Programs based on the business plan of the Company
after the Acquisition and how this should effect the overall allocation. In
this regard, the Independent Valuator reviewed the two feasibility studies for
the Yosemite/Ahwahnee I and II properties, as well as the Sacramento/Delta
Greens feasibility study. The Yosemite/Ahwahnee studies indicate that the
development of the property as a mixed use resort, with primary emphasis on the
sale of time share units, is feasible and could be expected to generate
significant positive cash flow over the next several years. However, additional
investment in infrastructure will be required before the project will become
cash flow positive. The feasibility study for the Sacramento/Delta Greens
property indicates that residential development on the property is feasible
based on expected home prices and absorption rates in spite of the fact that the
property is located near a high crime area which will impact selling prices.
While no feasibility study was prepared for the Mori Point property, the real
estate appraisal prepared for the property was performed on the basis of
expected returns from a hotel conference center development, which was the
concluded highest and best use. However, substantial additional funding will be
required to bring that project to fruition.
Unlike the other programs whose properties require substantial
additional capital in order to realize their development potential, the
Oceanside program has been generating positive cash flow. Its property is also
the most liquid. Therefore, the Independent Valuator believes that the fact
that Oceanside will receive approximately a 480 basis point percent premium to
what its allocation would be purely on the basis of its relative stand alone net
asset value is justified because of the value that its liquidity contributes to
the overall business plan the Company is expected to undertake after the
acquisition. This premium is further supported by the fact that there is a
possibility that the Oceanside Property could be sold for more than its
appraised value. On the other hand, the fact that the Yosemite/Ahwahnee I and
II Programs will collectively receive approximately 390 basis points less than
what they would receive purely on the basis of stand along net asset value is
justified because these Programs are currently operating at a loss and require
the largest amount of funding.
With respect to the 495,318 Founders Shares (as that term is defined
in the Fairness Opinion), the Independent Valuator was primarily concerned with
the 400,014 shares to be issued to the family limited partnerships under the
control of David Lasker and James Orth. For analytical purposes, the
Independent Valuator considered these shares as consideration for three separate
items. The first represents consideration for the approximately $946,000
forgiveness of indebtedness, which equates to 94,611 shares based upon an
assumed price of $10 per share. The second component relates to the
consideration for Messrs. Lasker and Orth in connection with their
responsibilities as officers of the Company. The Independent Valuator assumed
this number of shares would be approximately 50,000 shares, which represents the
approximate amount of shares to be issued to Mr. Albertson on the basis of arm's
length negotiations. The remaining 205,403 shares, or 8.23% of the total shares
to be issued in connection with the Acquisition,
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represents consideration for the role of Messrs. Lasker and Orth in structuring
and completing the Acquisition, which is reasonable given the fact that the
transaction they have structured should, among other things, enhance the
Investors' liquidity more than enough to offset the dilution resulting from the
issuance of the shares. Even though there is no guarantee that an active market
will develop for the Company's shares, when compared with likely discounts for
lack of marketability in excess of 30 percent for their current ownership
interests (based on historical studies), the Investors' liquidity should be
expected to be increased significantly.
ASSUMPTIONS. The Independent Valuator assumed that the financial
statements provided to it correctly reflect the financial results and condition
of the Company (on a pro forma basis) and the Properties for the time periods
covered in accordance with generally accepted accounting principles consistently
applied. The Independent Valuator further assumed that there has been no
material change in the financial results and condition of the Company (on a pro
forma basis) or the Properties since the date of the most recent financial
statements made available to it.
LIMITATIONS AND QUALIFICATIONS. The Independent Valuator was not
asked to and therefore did not solicit third party indications of interest in
acquiring all or any of the Properties. Furthermore, the Independent Valuator
did not negotiate the Acquisition or advise National or the Company with respect
to alternatives to the Acquisition, or select the method of determining the
allocation of the Shares or establish the allocations.
Further, the Independent Valuator expressed no opinion as to (a) the
fairness of the Acquisition (other than the fairness of the allocations) as
described above or the amounts or allocations of Acquisition Expenses; (b) the
prices at which the Shares may trade following the Acquisition or the trading
value of the Shares as compared with the current market value of the Programs'
Properties if liquidated in current real estate markets; and (c) alternatives to
the Acquisition.
In connection with preparing the Fairness Opinion, the Independent
Valuator was not engaged to, and consequently did not, prepare any written
report or compendium of its analysis for internal or external use beyond the
analysis set forth in Appendix 1. The Independent Valuator did not deliver any
additional written summary of its analysis.
COMPENSATION. The Independent Valuator has been paid a fee of
$35,000 for preparing the Fairness Opinion. In addition, the Independent
Valuator will be reimbursed for all reasonable out-of-pocket expenses, including
legal fees up to a maximum of $750, and indemnified against certain liabilities,
including certain liabilities under the federal securities laws. The fee was
negotiated between National and the Independent Valuator. Payment of the fee is
not dependent upon completion of the Acquisition. The Independent Valuator has
rendered no services to either National or the Company, or their Affiliates, in
the past.
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DIVIDEND POLICY
The Company has no plans to pay dividends in the foreseeable future.
Funds otherwise available for dividends will be utilized to potentially increase
Share value through acquisition and development. The effect of this policy will
be that, as Company real estate assets are sold, unlike in the Programs, no cash
distributions will be made to Investors.
COMPARISON OF TENANCY-IN-COMMON INTERESTS AND SHARES
The following summary compares a number of differences between the
ownership of tenancy-in-common interests in the Programs and Shares of the
Company and the effect relating thereto.
<TABLE>
<CAPTION>
Differing Factor Tenancy-in-Common Interests Shares
- ---------------- --------------------------- ------
<S> <C> <C>
GENERAL BUSINESS Each of the Programs commenced as opportunities The business of all five of the Programs will be
to participate in a loan secured by to-be-improved consolidated into the Company. The Company has
real property. The Programs are not broader investment objectives which will include
seeking to make additional loans or purchase new the sale or completion of the projects
properties. originally undertaken by the developers which
borrowed from Investors of the Programs, as well
as possibly expanding into other real estate
ventures. The current plans of the Company may
be recast at the discretion of the Board of
Directors without the consent of the
Shareholders.
DURATION The Programs were originally structured to have The Company will have perpetual life. It
the loans repaid over two to four years. intends to operate indefinitely and it has no
plans to liquidate assets to make returns of
capital to Investors.
79
<PAGE>
DISTRIBUTIONS AND The Programs were initially designed to yield The initial policy of the Company will be to
DIVIDENDS regular interest payments to the Investors and to preserve its cash resources for growth and
have the principal of the various loans repaid in internal development and, thus, the Company does
accordance with their respective terms, usually not plan to make dividend distributions in the
two to four years. foreseeable future. The Board of Directors has
the discretion to determine whether or not and
when to declare and pay dividends and the amount
thereof.
TAXATION The Programs are not tax payers and file no tax The Company will be taxed as a corporation and
returns. Prior to the Ownership Date, interest file corporate income tax returns.
income distributed to Investors was reported to Distributions to shareholders will be reported
the IRS and applicable state taxing authorities to the IRS and applicable state taxing
on Form 1099-INT. As tenancy-in-common owners of authorities on Form 1099-DIV whether or not such
the Properties, the Investors no longer receive distributions are taxable.
Form-1099 from National, but are responsible for
their pro rata share of any income, gain, loss or
deductions attributable to their Program's
Properties.
OVERHEAD AND Overhead and expenses of the Programs are the Investors will have no direct responsibility for
EXPENSES responsibility of the Investors to the extent the company overhead and expenses. Initially,
applicable Program does not generate sufficient overhead and expenses of the Company will be
cash flow to cover them. They are billed derived from proceeds of the sale of the units,
individually to investors in the form of if any, and the sale of one or more of the
assessments. To date, only the Oceanside program Company's assets. Future overhead and expenses
has been self-funding. will be funded from cash flow from operations.
80
<PAGE>
MANAGEMENT The business and affairs of each of the Programs The business and affairs of the Company are
are managed by National pursuant to the managed by the officers of the Company under the
applicable servicing agreement. National may be direction of the Board of Directors. The Board
terminated as the servicing agent by the vote of of Directors will ultimately be divided into
holders of a majority of the interests of a three classes serving staggered three year
particular Program. terms. One-third of the Board of Directors will
be elected annually by holders of the Shares to
serve for three year terms. Directors can be
removed from office by the affirmative vote of
the holders of at least a majority of the
then-outstanding Shares.
FIDUCIARY DUTIES None of the Programs are partnerships and, thus, Officers and Directors of the Company are
National does not have the common law fiduciary subject to the Delaware common law which imposes
duties that it would have if it were the general fiduciary duties of care, loyalty, good faith
partner of a partnership. However, as an agent, and fair dealing on the officers and directors
National has fiduciary-like duties to Investors of the Company.
to use reasonable care, skill and diligence in
its work, not to compete with Investors'
interests without consent, and not to take
adverse interests to Investors without consent.
81
<PAGE>
VOTING RIGHTS Under the tenancy-in-common agreements of each of Under the Charter Documents of the Company, the
the Programs, the Investors have voting rights Shareholders have voting rights with respect to
with respect to collection, servicing and (i) election of Directors; (ii) the sale or
administration of the Outstanding Investment of disposition of all or substantially all of the
the Programs, as well as termination of the assets of the Company at any one time; (iii) the
applicable servicing agreement. Each holder of a merger or consolidation of the Company; (iv) the
tenancy-in-common interest is entitled to vote on dissolution of the Company; and (v) certain
each matter presented to the Investors of a anti-takeover provisions.
particular Program. Approval of any matter Each Share entitles its holder to cast one vote
submitted to the Investors in a particular on each matter presented to holders of Shares.
Program requires approval of holders of a majority Approval of any matter submitted to holders of
of the tenancy-in-common interests of that Program. Shares generally requires the affirmative vote
of holders of a majority of the outstanding shares,
however, amendments to the anti-takeover
provisions of the Certificate of Incorporation
of the Company require a two-thirds vote.
SPECIAL MEETINGS None A special meeting of Shareholders may by called
by the Board of Directors of the Company, the
Chairman of the Board or the President only.
REDEMPTION The tenancy-in-common interests are not The Shares are not redeemable. The Shares can
redeemable. Investors in a particular Program be sold on the ________________ if an active
may only receive a return of their investment trading market exists.
upon the repayment of the applicable note or
other liquidation of all or part of the assets of
the Program.
VOTING DILUTION Investors in each Program have voting power based Since five programs will be consolidated into
on their percentage of the funds contributed to the Company, each investor's voting power will
the Program. be substantially reduced.
</TABLE>
82
<PAGE>
<TABLE>
<S> <C> <C>
LIQUIDATION RIGHTS In the event of the liquidation of a Upon liquidation of the Company,
particular Program, the assets of the the Shareholders will be entitled to
Program remaining after share ratably in any assets
satisfaction of all debts remaining after the satisfaction of
and liabilities of the Program, the obligations to creditors and any
satisfaction of expenses of liquidation preferences on any
liquidation of the assets of the Preferred Stock that may be then
Program and the establishment of a outstanding.
reasonable reserve in connection
therewith are distributed to the
Investors pro rata in accordance
with their respective percentage
interests in the applicable Program.
RIGHT TO COMPEL Holders of a majority of the The vote of Shareholders owning
DISSOLUTION tenancy-in-common interests in a at least a majority of the
particular Program may vote to outstanding shares in the Company
compel the sale of the Program's is sufficient to cause the
assets with the result that the dissolution of the Company.
Program will be dissolved.
LIMITED LIABILITY As tenancy-in-common owners of Shareholders are not generally
the assets of the Programs, the liable for obligations of the
Investors are NOT effectively Company.
insulated from personal liability
based on operation of those assets.
LIQUIDITY AND There is no organized secondary The Shares will be freely
MARKETABILITY market for the tenancy-in-common transferable and it is a condition to
interests held by Investors. Thus, the consummation of the
trading in the tenancy-in-common Acquisition that the Shares be
interests is sporadic and occurs approved for listing on the
solely through private transactions. ________________.
RESTRICTIONS ON There are certain restrictions on None.
TRANSFER transfer of the tenancy-in-common
interests.
CONTINUITY OF None of the Programs are designed The Charter Documents provide
EXISTENCE to have perpetual existence. for perpetual existence.
</TABLE>
83
<PAGE>
<TABLE>
<S> <C> <C>
FINANCIAL REPORTS None of the Programs are subject to The Company will be subject to
the reporting requirements of the the reporting requirements of the
Exchange Act. However, National, Exchange Act and will file annual
without obligation to do so, has and quarterly reports. The
endeavored to provide the Investors Company currently intends to
in each of the Programs with provide annual and quarterly
regular reports about such reports to its Shareholders.
Programs' respective activities.
PAYMENTS TO National is entitled to fees and While National and its Affiliates
NATIONAL AND ITS reimbursement of expenses for will hold Shares of the Company,
AFFILIATES services it renders to each of the the only form of compensation
Programs pursuant to the servicing paid to some of such persons will
agreements. be pursuant to their employment
agreements or otherwise. ONLY
$1,381,881 OF THE PAST DUE FEES AND
EXPENSES DUE TO NATIONAL AND ITS
PRINCIPALS WILL REMAIN AS LIABILITIES
OF THE COMPANY.
CERTAIN LEGAL RIGHTS Holders of a majority of the Delaware law affords shareholders
Outstanding Investment in a rights to bring derivative actions
Program must vote to terminate the when the officers or Directors of
servicing agreement between the Company have failed to
National and the Program Investors. institute an action to recover
damages and class actions to
recover damages. Shareholders
may also have rights to bring
actions in federal court to enforce
federal rights.
</TABLE>
84
<PAGE>
<TABLE>
<S> <C> <C>
INSPECTION OF BOOKS Holders of tenancy-in-common Under Delaware law, each
AND RECORDS interests in a Program have no Shareholder has the right, subject
contractual right to inspect books to certain reasonable standards, to
and records maintained by National obtain from the Company from
with regard to a Program. time to time upon reasonable
However, as the servicing agent for written demand for any purpose
the Investors, National permits reasonably related to the
them to review such books and Shareholder's interest as a
records on reasonable notice. Shareholder of the Company,
certain information regarding the
status of the business, affairs and
financial condition of the
Company. Pursuant to Rule 14a-7
under the Exchange Act, the
Shareholders will have the right to
obtain a list of Shareholders from
the Company whenever the
Company solicits proxies or
consents.
</TABLE>
COMPARISONS OF PROGRAMS AND COMPANY
The information below highlights a number of the significant
differences between the Programs and the Company relating to, among other
things, forms of organization, investment objectives, policies and
restrictions, asset diversification, capitalization, management structure and
investor rights. These comparisons are intended to assist Investors in
understanding how their investments will be changed if, as a result of the
Acquisition, their tenancy-in-common interests in the assets, liabilities and
businesses of their respective Programs are exchanged for Shares of the
Company.
85
<PAGE>
FORM OF ORGANIZATION
<TABLE>
<CAPTION>
Program Company
------- -------
<S> <C>
None of the Programs are organized business The Company is a Delaware corporation
entities such as corporations, partnerships or formed for the purpose of acquiring the
business trusts. Each commenced as an Programs' Properties, as well as investing in
opportunity to participate in a loan secured by and managing other real estate opportunities.
to-be-improved real property through a The Company will be taxed as a corporation.
tenancy-in-common investment mechanism.
Each Program remains as a tenancy-in-
common among its Investors. Investors are
individually responsible for the tax
consequences of a Program and the reporting
thereof.
</TABLE>
LENGTH OF INVESTMENT
<TABLE>
<CAPTION>
Program Company
------- -------
<S> <C>
An investment in any of the Programs Unlike the Programs, the Company intends to
originally was presented to Investors as an continue its operations for an indefinite time
opportunity to take a tenancy-in-common period and the Company has no specific plans
participation in a loan secured by real property. for the disposition of assets acquired through
As such, the investments were finite in length the Acquisition or subsequent acquisitions.
with the expectation that Investors' investments The Company is allowed to retain net sale or
were to be returned, with interest, within a two refinancing proceeds for new investments,
to four year period. capital expenditures, working capital reserves
or other appropriate purposes.
</TABLE>
NATURE OF INVESTMENT
<TABLE>
<CAPTION>
Program Company
------- -------
<S> <C>
Since the respective Ownership Date of each of The Shares constitute equity interests in the
the Programs, the Investors in such Programs Company. Each Shareholder will be entitled to
have been the beneficial owners (as tenants-in- its pro rata share of distributions made with
common) of the assets and the businesses of respect to the Shares. The distributions
the respective Programs. Actual title to the payable to Shareholders are not fixed in
Properties is held by various entities acting as amount and are only paid when declared by the
agents for the Investors in the several Board of Directors. The Company has no
Programs. present plans to pay distributions.
</TABLE>
86
<PAGE>
PROPERTIES AND DIVERSIFICATION
<TABLE>
<CAPTION>
Program Company
------- -------
<S> <C>
The investment portfolio of each of the The Company is authorized to own and acquire
Programs is limited to the assets acquired as of the Programs' Properties, make other
the applicable Ownership Date, as well as such investments and issue additional equity and
additional assets as may have been acquired debt securities to acquire additional assets.
with mandatory Investor assessments or
voluntary Investor advances since the
Ownership Date. None of the Programs have
the authority to raise additional funds from
third parties to expand its investment
portfolios.
</TABLE>
ADDITIONAL EQUITY AND DILUTION
<TABLE>
<CAPTION>
Program Company
------- -------
<S> <C>
None of the Programs are authorized to raise The Board of Directors may, in its discretion,
additional funds other than through the issue additional equity securities. The
assessment/advance process prescribed by the Company may sell additional equity from time
applicable tenancy-in-common agreement. to time to increase its available capital. The
Therefore, except to the extent that existing issuance of additional equity securities may
Investors in a particular Program pay result in a dilution of the interests of the
mandatory assessments or make voluntary Shareholders.
advances, no dilution of an Investor's interest
in the Program can occur.
</TABLE>
BORROWING POLICIES
<TABLE>
<CAPTION>
Program Company
------- -------
<S> <C>
Except to the extent authorized by vote of The Company is permitted to borrow, on a
Investors owning a majority of the tenancy-in- secured or unsecured basis, funds to advance
common interests in the loan to the original its business without limits. No shareholder
borrower, none of the Programs is authorized vote is required.
to borrow funds necessary, appropriate or
advisable to conduct its business and affairs.
Without such a majority vote, the only
additional funds which the Programs may raise
comes from mandatory assessments from, or
voluntary advances by, existing Investors.
</TABLE>
87
<PAGE>
RESTRICTIONS ON RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS
<TABLE>
<CAPTION>
Program Company
------- -------
<S> <C>
None of the applicable servicing agreements or Under Delaware law, transactions between the
tenancy-in-common agreements for the Company and one or more of its directors or
Programs restrict any of the Programs from officers, or between the Company or any
entering into business transactions with affiliate of a director or officer, are not void or
National or its affiliates. voidable if the transaction is approved in good
faith by a majority of the disinterested directors
or Shareholders based on full disclosure; or the
transaction is fair as to the Company as of the
time it is authorized, approved or ratified by
the Board of Directors, an appropriate
committee or the Shareholders. In addition,
the Company's Certificate of Incorporation, as
well as Delaware law, prohibit certain business
combinations with owners of more than 15%
of the outstanding voting stock of the
Company ("interested stockholders"), or an
affiliate of such person, within the three year
period immediately prior to the date on which
such stockholder became an interested
stockholder.
</TABLE>
88
<PAGE>
MANAGEMENT CONTROL AND RESPONSIBILITY
<TABLE>
<CAPTION>
Program Company
------- -------
<S> <C>
National acts as servicing agent for each of the The Board of Directors has exclusive control
Programs pursuant to servicing agreements over the Company's business and affairs
entered into with each of the Investors in each subject only to the restrictions in the Charter
Program. Pursuant to the servicing Documents. Shareholders have the right to
agreements, National is essentially invested elect members of the Board of Directors. The
with management authority to conduct the Directors are accountable to the Company as
business of each of the Programs. The fiduciaries and are required to exercise good
servicing agreements are terminable on 30 faith and integrity in conducting the
days' written notice, provided that the Investors Company's affairs. See "Fiduciary
do not have the power to terminate the Responsibility." The Shareholders have
servicing agreements unless and until all greater control over the management of the
amounts owed to National thereunder have Company than the Investors have over the
been paid in full. National does not need to Programs because members of the Company's
seek re-election but instead serves unless Board of Directors are elected by the
removed by the Investors, which is generally Shareholders.
an extraordinary event. Pursuant to the
tenancy-in-common agreements for each of the
Programs, matters concerning the collection,
servicing and administration of the
Outstanding Investment for each of the
Programs is governed by the will of Investors
holding more than 50% of the Outstanding
Investment. As servicing agent, National is
accountable as a fiduciary to each of the
Programs and is required to exercise good faith
and integrity in its dealings in conducting the
affairs of each of the Programs. See "Fiduciary
Responsibility."
</TABLE>
89
<PAGE>
MANAGEMENT LIABILITY AND INDEMNIFICATION
<TABLE>
<CAPTION>
Program Company
------- -------
<S> <C>
Pursuant to the servicing agreements, National The Company's Directors are not personally
is indemnified and held harmless by the liable for ordinary liabilities of the Company.
Investors from and against any and all The Charter Documents provide that a
liabilities for acts or omissions performed in Director's liability for breach of fiduciary duty
the course of its activities as servicing agent, is limited to the full extent allowable under
except as to such liabilities caused or Delaware law. The Charter Documents and
contributed to, in whole or in part, by any gross Delaware law provide indemnification rights to
negligence or willful misconduct on the part of Directors and officers who act in good faith,
National or its Agents. and in a manner reasonably believed to be in or
not opposed to the best interests of the
Company and, with respect to criminal actions
or proceedings, who act without reasonable
cause to believe their conduct was unlawful. In
addition, the Charter Documents indemnify
Directors and officers against amounts paid for
settlement, authorize the Company to advance
expenses incurred in defense upon receipt of an
appropriate undertaking to repay such amounts
if appropriate, and authorize the Company to
carry insurance for the benefit of the officers
and Directors. See "Fiduciary Responsibility."
</TABLE>
90
<PAGE>
ANTI-TAKEOVER PROVISIONS
<TABLE>
<CAPTION>
Program Company
------- -------
<S> <C>
Changes in management of any of the The Charter Documents contain a number of
Programs can be effected only by removal of provisions that may have the effect of delaying
National as the servicing agent by holders of a or discouraging a hostile takeover of the
majority of the Outstanding Investment in such Company. These provisions include, among
Programs. This would be an extraordinary others, (i) the power of the Board of Directors
event. to issue additional equity securities in the
Company; (ii) the classified Board of Directors
wherein only one-third of the Directors are re-
elected to the Board in any given year and
Directors serve three year terms; (iii) any
action required or permitted to be taken by
Shareholders of the Company must be effected
at a duly called annual meeting or a special
meeting unless such action requiring or
permitting stockholder approval is approved by
a majority of the Board of Directors; (iv)
special meetings of Shareholders may only be
called by a majority of the Board, a Chairman
of the Board or the President; (v) Directors
may only be removed for cause and only by the
affirmative vote of holders of not less than
two-thirds of the voting power of all
outstanding Shares; and (vi) amendments to the
anti-takeover provisions of the Certificate of
Incorporation may only be effected by the
affirmative vote of holders of not less than
two-thirds of the voting power of all
outstanding Shares. See "Description of
Shares."
</TABLE>
91
<PAGE>
VOTING RIGHTS
<TABLE>
<CAPTION>
Program Company
------- -------
<S> <C>
Holders of a majority of the Outstanding The Company's Board of Directors consists of
Investment in each Program may control three classes. Shareholders are entitled to elect
decisions respecting the collection, servicing one class of the Company's Board of Directors
and administration of such Outstanding at each annual meeting of the Company. In
Investment. Otherwise, investors in the addition, Shareholders have the power to
Programs have no voting rights. amend the Charter Documents by the votes
required therein, to dissolve the Company and
to approve business combinations between the
Company and other entities.
</TABLE>
LIMITED LIABILITY OF INVESTORS
<TABLE>
<CAPTION>
Program Company
------- -------
<S> <C>
As tenants-in-common in the respective Under Delaware law, Shareholders will not be
programs, the Investors are not effectively liable for Company debts or obligations. Upon
insulated from personal liability. Pursuant to issuance, the Shares will be fully paid and non-
the tenancy-in-common agreements, Investors assessable.
are susceptible to mandatory assessments.
</TABLE>
VOTING PROCEDURES
THE VOTE OF EACH INVESTOR IS IMPORTANT. EACH INVESTOR IS URGED TO
MARK, DATE AND SIGN THE INVESTOR BALLOT AND RETURN IT IN THE ENCLOSED
ENVELOPE.
TIME OF VOTING
The vote of the Investors with respect to the Acquisition will be
tabulated on _____________, 1998, unless such date is extended by the Company
in its sole discretion. The vote will be tabulated by National and verified
by BDO Seidman, LLP, which is not affiliated with the Company, the Programs
or National. See "Investor Ballot and Vote Required."
RECORD DATE AND OUTSTANDING VOTES
The Acquisition is being submitted for approval to those Investors
holding interests in the Programs as of the Record Date. The Record Date is
[_________________] for all Programs. At the Record Date, the following
number of votes were held of record by the number of Investors indicated
below.
92
<PAGE>
<TABLE>
<CAPTION>
[AT 12/31/97] Number of Votes
Number of Number of Votes Required for Approval
Program Investors Held of Record of Acquisition
- ------- --------- -------------- --------------
<S> <C> <C> <C>
Sacramento/Delta Greens 332 6,038,716 3,015,359
Oceanside 1,755 27,100,000 13,550,001
Yosemite/Ahwahnee I 426 8,996,473 4,498,237
Yosemite/Ahwahnee II 837 19,344,964 9,672,483
Mori Point 486 12,420,000 6,210,001
</TABLE>
Each Investor is entitled to one vote for each dollar (or fraction
thereof exceeding $0.50) of Outstanding Investment it has in the applicable
Program. Based on amounts of "Trudy Pat" tenancy-in-common interests
purchased in each program, National has the following votes in each of the
programs: 3,118 Sacramento/Delta Greens; 2,082 Oceanside; 2,373 Yosemite/
Ahwahnee I; 46,454 Yosemite/Ahwahnee II; and 5,279 in Mori Point. It will
cast all of its votes in favor of the acquisition.
APPROVAL DATE
The Prospectus and form of Investor Ballot constitutes National's
notice of the proposed Acquisition. Each Investor has until 11:59 p.m.,
Pacific Time, on ________________ [60 DAYS FROM THE DATE OF FIRST MAILING THE
PROSPECTUS OR PROPOSED ACQUISITION DATE], unless extended by the Company in its
sole discretion (the "Approval Date"), to inform the Company whether such
Investor wishes to approve or disapprove of his Program's participation in
the Acquisition. The Company and National ask that each Investor vote by
completing and returning the form of Investor Ballot accompanying this
Prospectus in the manner described below.
INVESTOR BALLOT AND VOTE REQUIRED
Investors who wish to vote "YES" for the Acquisition should
complete, sign and return the Investor Ballot relating to their interests
which accompanies this Prospectus. Each Investor's attention is directed to
the Investor Ballot and Instructions accompanying this Prospectus. Investor
Ballots must be delivered in person or by mail or by other delivery service
to National at the following address on, or prior to, the Approval Date:
National Investors Financial, Inc., Attention: Vivian Kennedy, 4220 Von
Karman Avenue, Suite 110, Newport Beach, California 92660.
Approval of the Acquisition by a Program requires the vote of
Investors holding a majority of the outstanding votes as of the Record Date.
National will tabulate the votes and such tabulation will be verified by BDO
Seidman, LLP. Abstentions will be tabulated with respect to the Acquisition
and related matters. Broker (or other custodian) non-votes, if any, are not
counted for purposes of determining whether the Acquisition and related
proposals have been approved. Abstentions and broker (or other custodian)
non-votes will have the effect of a vote
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<PAGE>
against the Acquisition. See table in "-- Record Date and Outstanding Votes"
for the number of votes which must be cast in favor of the Acquisition for it
to be approved by each respective Program.
Investors who sign and return the Investor Ballot without
indicating a vote will be deemed to have voted "YES" in favor of the
Acquisition.
Investors who wish to vote against the Acquisition should also
complete a Investor Ballot. The failure to return a Investor Ballot will
have the effect of a vote against the Acquisition.
If the Acquisition is approved by all Programs, Investors in all
Programs will receive Acquisition Shares whether they voted in favor or
against, or abstained from voting on the Acquisition.
All questions as to the form of all documents and the validity
(including time of receipt) of all approvals will be determined by National
and such determinations will be final and binding. National reserves the
absolute right to waive any of the defects or irregularities in any approval
of the Acquisition or preparation of the form of Investor Ballot. National's
interpretation of the terms and conditions of the Acquisition will be final
and binding. National shall be under no duty to give notification of any
defects or irregularities in any approval of the Acquisition or preparation
of the form of Investor Ballot and shall not incur any liability for failure
to give such notification.
INVESTOR REPRESENTATIONS ON BALLOT
When voting, an Investor will be confirming to the company that
(i) it has received and reviewed the Prospectus and the applicable
Supplement, (ii) it understands that it will become a shareholder in the
Company if the acquisition is completed, (iii) it has the power and authority
to vote as an Investor, (iv) it understands that if it signs the Ballot but
does not indicate a vote, the Ballot will be deemed to have been voted IN
FAVOR of the Acquisition, and (v) if the Acquisition is completed, to the
best of the Investor's knowledge, the Company will acquire title to its
interest in the Programs' Property free and clear of all liens and adverse
claims other than property taxes. By voting in favor of the Acquisition, an
Investor is concurrently voting to terminate the tenancy-in-common agreement
with other Investors in its Program and the servicing agreement with
National. Termination of the servicing agreement relieves National of any
future liabilities or responsibilities to the Program, but all amounts owing
to National under the servicing agreement which have not been cancelled by
National will be assumed by the Company.
REVOCABILITY OF CONSENT
Investors may withdraw or revoke their consent at any time prior
to the Approval Date. To be effective, a written, telegrahic, fax or telex
notice of revocation or withdrawal of the Investor Ballot must be received by
no later than the Approval Date, addressed as follows: National Investors
Financial, Inc., Attention: Vivian Kennedy, 4220 Von Karman Avenue, Suite
94
<PAGE>
110, Newport Beach, California 92660, telecopy number 714-752-9753. A notice
of revocation or withdrawal must specify the Investor's name and the name of
the Program to which such revocation or withdrawal relates.
SOLICITATION OF VOTES; SOLICITATION EXPENSES
Votes of Investors may be solicited by the management of National
or by third parties. Costs of solicitation will be allocated among the
Programs, pro rata in accordance with Exchange Values. No party will receive
any compensation contingent upon solicitation of a favorable vote or success
of the Acquisition.
NO DISSENTERS' RIGHTS
If the Acquisition is approved, Investors in any of the Programs
who dissent or abstain from consenting to the Acquisition will not be
entitled to dissenters' or appraisal rights under the tenancy-in-common
agreements or the Delaware or California law. Such rights, when they exist,
give the holders of securities the right to surrender such securities for an
appraised value in cash, if they oppose a merger or similar reorganization.
No such rights will be provided by National, the Programs, or the Company.
NO RIGHT TO PROGRAM BOOKS AND RECORDS
Investors have no rights under a Program's tenancy-in-common
agreement or servicing agreement, or under federal or state law, to obtain a
list of the names and addresses of the other Investors in a Program. If an
Investor wishes to communicate with the other Investors in a Program, upon
receipt of the material an Investor wishes mailed together with the amount of
postage necessary to make such mailing, National will promptly mail such
communications to a Program's Investors.
ISSUANCE OF CERTIFICATES FOR ACQUISITION SHARES
Promptly after the Effective Time, there will be issued and mailed
to former Investors of record at the Effective Time a certificate
representing the number of Shares to which such Investor is entitled.
If any certificate representing Shares is to be issued in a name other
than that in which an Investor is registered on National's books for each
Program as of the Effective Time, it will be a condition of such issuance
that the person requesting such change pay to the Company's transfer agent
any transfer fee or taxes required by reason of the issuance of a certificate
representing shares in any name other than that of the registered Investor,
or the person requesting such change establishes to the satisfaction of the
Company that any transfer tax has been paid or is not applicable.
95
<PAGE>
After the Effective Time, there will be no further registration of
transfers of tenancy-in-common interests that were issued and outstanding
immediately before such time and that were exchanged for Shares.
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION
AND CONFLICTS OF INTEREST
A number of potential conflicts of interest are inherent in the
relationship between National (and its shareholders) and the "Trudy Pat"
Investors. In recognition of these conflicts, and the resulting need to
independently determine that the allocation of Shares is fair to the Investors,
National and the Company engaged Houlihan Valuation Advisers, the Independent
Valuator, to render the Fairness Opinion and the independent appraisers named on
page __ to independently determine the value of the Properties. The conflicts
of interest are summarized below.
BENEFITS TO NATIONAL
The benefits of the Acquisition for National primarily reside in
the relief from its duties, including fiduciary duties, and related costs as
servicing agent for the Programs that are acquired by the Company. Asset
management for the Programs will no longer be necessary. This benefit is not
susceptible to meaningful quantification but it will reduce National's
overhead for managing the programs that have not paid National's servicing
fees. Although some of the Programs (Oceanside and Yosemite Ahwahnee I and
II) paid National its contractual fees for such activities, some of the
Programs (Sacramento/Delta Greens and Mori Point) accrued these fees and
other amounts due National. Without having current payments for such fees,
National frequently operated under financial constraints and unprofitably.
Additionally, without obligation to do so, National also advanced its own
funds to the Sacramento/Delta Greens, Mori Point and Yosemite/ Ahwahnee
Programs, for the benefit of those Investors. Aside from servicing-related
activities, specific operational functions performed by National's principals
and employees that will no longer be required to be performed by them relate
to construction disbursements, budget analysis, vendor and subcontractor
payments, accounting and bookkeeping, site inspections and work
verifications, insurance negotiations, bonding, property and use tax
coordination and payment, council and planning meeting attendance, political
involvement, consultant selection and management, securities, real estate and
specialty legal resource management, investor and broker administration and
tenancy-in-common-oriented communication and management. If the Acquisition
is approved, these duties will be undertaken by the Company's management.
See "Management Following the Acquisition --Directors and Executive Officers
Compensation and Incentives" for information about compensation to be
received by the identified persons for management services.
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Upon completion of the Acquisition, National can focus on its
duties on other projects for which it serves and performs the functions of
servicing agent and asset manager. Since the volume of its responsibilities
will decrease with the Acquisition, National may be able to decrease some of
the associated direct and variable costs.
COMPANY SHARES OWNED BY NATIONAL'S PRINCIPALS AND OTHER COMPANY MANAGEMENT
Family partnerships controlled by David G. Lasker and James N.
Orth (the shareholders of National) presently own, in the aggregate, [400,014]
shares of the Company's Common Stock. That represents over 75% of the
Company's outstanding stock. On the basis of a $10 per share value, such
shares would be deemed to have a value of $[4,000,014]. They paid,
out-of-pocket, $0.01 per share for the stock. National and its principals
have forgiven, or agreed to forgive if the Acquisition is completed, over
$3,000,000 of fees and expenses owned by the Programs. See the table set
forth in Note (a) to Note 6 to the table set forth in "Background and Reasons
for the Acquisition -- Allocation of Shares Among the Programs." After the
Acquisition, these family partnerships will each control 8.01% of the
Company's outstanding stock (5.72% if all the units are sold).
In addition, in the formation period of the Company, L.C.
Albertson, Jr., Executive Vice President of the Company, and Mark K.
Kawanami, Vice President of the Company, have purchased 54,118 and 1,000
shares, respectively, at $0.01 per share. Mr. Albertson will control [2.17]%
([1.55]% if all the units are sold) of the Company's outstanding stock after
the Acquisition, and Mr. Kawanami will control less than one percent.
OTHER BENEFITS TO SHAREHOLDERS OF NATIONAL
In addition to the Shares of the Company to be beneficially owned
by Mr. Lasker and Mr. Orth, they will receive the following additional
economic benefits if the Acquisition is completed:
<TABLE>
<CAPTION>
Mr. Lasker Mr. Orth
---------- ----------
<S> <C> <C>
Annual salary $ 180,000 $ 180,000
Bonus 2% of pre-tax 2% of pre-tax
profits, if any profits, if any
Additional Discretionary Bonus(1) up to 50% of up to 50% of
salary salary
Stock Options(2) 30,000 30,000
Participation in Company
employee benefit plans yes yes
5-year employment contract(3) yes yes
- ------------------
</TABLE>
(1) If certain budgeted performance attained.
(2) 10,000 to be issued at the completion of the Acquisition exercisable
at $10 per share; 10,000 to be issued on the first anniversary of
the Acquisition; and 10,000 to be issued on the second
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anniversary of the Acquisition. The last two groups are exercisable
at market value on date of grant.
(3) See "Management Following the Acquisition -- Employment Agreements."
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS
The independent appraisers have independently determined the value
of the Properties. National and the Company have used their respective
judgment to reconcile the disparity between the October 1996 and May 1997
appraisals of the Yosemite/Ahwahnee Properties in arriving at the Exchange
Values for the Yosemite/Ahwahnee I and II Programs. See "Background and
Reasons for the Acquisition -- Calculation of Exchange Value" and "Appraisals
and Fairness Opinion -- Conflicting Yosemite/Ahwahnee Properties'
Appraisals." Houlihan Valuation Advisors, the Independent Valuator, has
provided the Fairness Opinion. Neither the Company nor National has retained
any outside representatives to act solely on behalf of the Investors in
determining the terms and conditions of the Acquisition. National did not
engage an independent representative because it believes it can fairly
represent the interests of the Investors. Further, Investors have the
opportunity to vote on the Acquisition. No group of Investors was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be in place to safeguard the rights and interests of the
Investors. In addition, due to cost factors, no investment banker, attorney,
financial consultant or expert was engaged to represent the interests of the
Investors. National and its principals have been the parties responsible for
structuring all the terms and conditions of the Acquisition. Legal counsel
was engaged by National to assist with the preparation and documentation of
the Acquisition, including this Prospectus, and did not serve, or purport to
serve, as legal counsel for the Programs or the Investors. If another
representative or representatives had been retained for the Investors, the
allocation of the Shares may have been more favorable to certain Programs and
less favorable to others, and fewer Shares may have been allocated to
principals and other Affiliates of National. In addition, had separate
representation for each of the Programs been arranged by National, the terms
of the Acquisition may have been different. There is no way to quantify what
such differences might have been.
While independent representatives were not engaged to represent
the interests of the Programs in structuring the Acquisition, National
believes the procedures used to protect the financial interests of the
Investors are fair. For example, National received verification from Houlihan
Valuation Advisors of its view that permitting the Company's founders to hold
[19.84]% of the outstanding Shares of the Company upon completion of the
Acquisition is fair under the circumstances. In addition, the Shares will be
allocated among the Programs in accordance with their respective Exchange
Values, and within the Programs among the Investors pro rata in accordance
with their Adjusted Outstanding Investment in each of the Programs.
Recognizing the inherent conflict of interest of having National establish
these numbers independently (without active involvement from persons not
having a financial interest in the Acquisition), they engaged independent
appraisers to value the real estate assets owned by each of the Programs and
the Independent Valuator to render an opinion on the overall fairness of the
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allocation of Shares in the transaction, including the number of Shares in
the Company allocated to the programs, as well as to affiliates, employees,
and the principal shareholders of National and the Company. See "Appraisal
and Fairness Opinion."
FEATURES DISCOURAGING POTENTIAL TAKEOVERS
Certain features of the Charter Documents, as well as the Delaware
law, could be used by management of the Company to delay, discourage or
defeat efforts of third parties to take control of the Company, or acquire a
significant number of the Shares. See "Comparisons of Programs and the
Company -- Anti-Takeover Provisions."
ALLOCATION OF SERVICES AND EXPENSES
In addition to Messrs. Lasker and Orth, other employees of
National who will become employees of the Company currently provide investor
relations, accounting and office administration services related to the
operation of other programs which will not be included in the Acquisition.
These Programs were also formed by National. If the Acquisition is
consummated, these employees of National who will become employees of the
Company will continue to provide services related to non-participating
programs. As a result, possible conflicts of interest may arise regarding
allocation of services of these employees between the Company, National and
the non-participating programs. At this time, the allocation of services
between the Company and National's other programs is not susceptible to
meaningful quantification.
NON-ARM'S-LENGTH AGREEMENTS
All agreements and arrangements, including those relating to
compensation, between the Company and employees of the Company who are also
employees of National will not be the result of arm's-length negotiations.
COMPETITION WITH THE COMPANY FROM OTHER PROGRAMS ORGANIZED BY NATIONAL
National will retain the servicing agent and asset management
responsibilities for the following five other projects: two undeveloped
projects that are zoned for single-family residential use (totalling over 30
acres); an undeveloped 6-acre project that is zoned for commercial use,
located in Victorville, California; an undeveloped 660-acre project with a
vesting, tentative map for 1,330 single-family mixed units with a golf course
and amenities that is located in Contra Costa County, California; and an
undeveloped 800-acre project with an application for a vesting tentative
tract map for 539 single-family detached, large lot, equestrian-oriented
residential lots located in Palmdale, California. Some or all of these
projects may be available for future acquisition by the Company or its
subsidiaries. However, National will continue to apply time and resources to
the management of these projects. In order to do this, they will require the
on-going attention of Messrs. Orth and Lasker, as well as some of the
personnel expertise that may also be employed by the Company or its
subsidiaries. It is anticipated that there will be minimal conflicts;
however, National is committed to continue to
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provide the same quality of service for these projects as it currently does
on behalf of and for the benefit of the Programs.
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION
FIDUCIARY RESPONSIBILITY OF NATIONAL
The Programs are not partnerships and, thus, National does not
have the fiduciary duties of a general partner in dealing with the Programs.
However, as servicing agent for each of the Programs, National has the
specific duties to Investors set forth in the various servicing agreements.
In addition, under California law, as an agent, National is under a fiduciary
duty to Investors (i) to use reasonable care, diligence and skill in its
work, (ii) not to compete with the Investors' interests without full
disclosure to, and agreement from, the Investors, and (iii) not to obtain an
interest adverse to the Investors without full disclosure to, and consent
from, the Investors.
INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY
The directors and officers of the Company, in exercising the
powers and responsibilities of managing the Company, owe the Company and its
shareholders a duty of care and a duty of loyalty. However, under the
so-called "business judgment rule," which could apply to the officers and
directors of the Company, the officers and directors of the Company may not
be liable for errors in judgment or other acts or omissions made in good
faith which are done in a manner they believe to be in the best interests of
the Company and are performed with the care that an ordinarily prudent person
in a like position would use under similar circumstances. In the event any
legal action were brought against officers or directors of the Company, they
might be able to assert defenses based on the business judgment rule.
According to the Charter Documents, officers and directors and
other agents of the Company are entitled to indemnification from the Company
for any loss, damage or claim (including any reasonable attorneys' fees
incurred by such person in connection therewith) due to any act or omission
made by him or her, except in the case of fraudulent or illegal conduct of
such person. See "Management After the Acquisition -- Limitation of
Liability and Indemnification."
The indemnification provided by the Charter Documents is not
deemed to be exclusive of any other rights to which those indemnified may be
entitled under any agreement, vote of shareholders or directors, or
otherwise, and shall inure to the benefit of the heirs, executors and
administrators of such person. Any repeal or modification of the
indemnification provisions contained in the Charter Documents will not
adversely affect any right or protection of a director or officer of the
Company existing at the time of such repeal or modification.
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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 THE
SECURITIES MARKETS. ACCORDINGLY, FORWARD-LOOKING STATEMENTS SHOULD NOT BE
RELIED UPON AS A PREDICTION OF ACTUAL RESULTS.
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BUSINESS AND PROPERTIES
THE COMPANY
The Company was formed as a Delaware corporation named American
Family Holdings, Inc. on August 6, 1997 to conduct the Acquisition. It
currently files no reports with the Commission under the Exchange Act. It
will operate as a holding company, with actual day-to-day management of the
operations of the Properties being handled by a to-be-formed wholly-owned
subsidiary named American Family Communities, Inc. ("AFC"). Upon completion
of the Acquisition, the Properties will be held and operated through four
separate subsidiaries of AFC, namely Delta Greens Homes, Inc.
(Sacramento/Delta Greens Property), Yosemite Woods Family Resort, Inc.
(Yosemite/Ahwahnee Properties), Oceanside Homes, Inc. (Oceanside Property)
and Mori Point Destinations, Inc. (Mori Point Property).
BUSINESS OF THE COMPANY
Upon completion of the Acquisition, the Company will be a
diversified real estate company involved in the residential development
industry, as well as the lodging and recreational industries. Its overall
initial objective will be to consolidate the various business plans of the
Programs into a unified Company business plan with the ultimate goal of
creating sufficient value in the Company's Shares to allow for Investors in
the Programs to have the ability to recover a significantly larger portion of
their Outstanding Investments in such Programs than if the Acquisition did
not occur.
As a part of its plan, in the future the Company may seek to
acquire certain assets and properties that are synergistic or add value to
the Company in accordance with its overall business plan. Some of such
properties could be properties owned by tenants-in-common lenders in other
programs sponsored by National. It may also seek to acquire and develop
additional properties that take advantage of its expertise or its competitive
position in order to enhance its financial performance. Such additional
acquisitions may include, but are not limited to: (a) resort-oriented
properties, such as hotels; (b) extended-stay-oriented properties, such as
recreational vehicle or timeshare facilities; (c) leisure-oriented
properties, such as golf courses and recreation facilities; and (d)
residential development properties. The Company may also purchase or form
adjunct businesses to supplement and enhance these types of properties, such
as customer financing, loan servicing, mortgage brokerage, real estate
brokerage, property management, merchandising, marketing and
telecommunications. In making such acquisitions, to the extent possible, the
Company will attempt to use shares of its common stock for some or all of the
purchase price. This would result in a dilution of the voting power of
then-existing investors in the Company.
Some of the risks which the Company may face if it makes the
acquisitions described above include, but are not limited to: (a) the
professional service fees and financing costs which the Company would incur
to complete such acquisitions; (b) significant competition from other
resort-oriented, extended-stay oriented, leisure-oriented,
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and residential properties; (c) lack of management experience in operating
such businesses to the extent that experienced personnel cannot be acquired
at the time of the acquisition; (d) dilution of Investors' voting rights to
the extent that the Company's common stock is used for such acquisitions; and
(e) costs of on-going compliance with applicable government regulation of
consumer finance, real estate brokerage or telecommunications activities.
Any of such risks, together with additional risks which may be identified in
the future, could prevent the Company from accomplishing potential future
acquisitions.
PROPERTIES
The Company will purchase the Properties in their "as is"
condition from the Investors in the Programs, except that any remaining
Investors' liens will be removed. They are presently managed by National for
the Investors pursuant to servicing agreements which entitle National to
receive an annual servicing fee equal to one percent of the original
principal amount of the applicable "Trudy Pat" loan. Upon completion of the
Acquisition, the Company, through its subsidiaries, will own four Properties
which are described below.
SACRAMENTO/DELTA GREENS PROPERTY. The Sacramento/Delta Greens
Property consists of a 121-acre site in South Sacramento, California, located
approximately one-half mile east of Interstate 5. Title is held by National
Investors Land Holding Trust IV as the agent of and for the benefit of the
Program's Investors. Except for property tax liens, the Property is
unencumbered by liens and is subject to no leases, sales contracts or
options. It has a revised and approved tentative tract map from the City of
Sacramento for over 500 lots for the construction of single-family homes.
The area in which the Property is located is populated primarily by lower to
lower-middle income workers with combined family incomes of $25,000 to
$35,000. The nearby Meadowview has a reputation as a high crime area, but an
active community effort is underway to upgrade the community identity.
OCEANSIDE PROPERTY. The Oceanside Property consists of one
remaining tract of 111 residential lots known as the "Symphony" tract. Title
is held by ODI as the agent of and for the benefit of Oceanside Investors.
The Property is located in the east-central portion of the city of Oceanside,
California, some five miles east of the downtown area. There are several
homebuilding companies building competitive single-family residences in the
immediate area surrounding the property.
In addition to a property tax lien, the Property is presently encumbered
by a first lien in the amount of $27,100,000 which is held by National for
the benefit of the Oceanside Program's Investors. That lien will be
extinguished in the Acquisition so that the Company will own the Property
free of encumbrances other than property taxes. The Symphony tract of the
Property is for sale.
YOSEMITE/AHWAHNEE PROPERTIES. The Yosemite/Ahwahnee Properties
consist of approximately 1,650 acres divided into two parcels, one containing
660 acres and one containing 990 acres. The 660 acre parcel was intended to
be developed with 218 residential estate lots, 1-3 acres in size. Of the 58
completed lots in this portion of the property, 23 have been sold. The
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balance of the project consists of approximately 990 acres which has been
partially developed into an 18-hole golf course, a clubhouse and other
amenities. In addition, this portion contains a recreational vehicle
membership park developed for an eventual 600 spaces. It currently contains
54 "full hookup" sites with an additional 110 sites with full hookups under
construction. "Full hookups" are spaces that have water, sewer, electrical
and even cable service to the site. The Properties are located in Madera
County, California, approximately 46 miles northeast of Fresno and 15 miles
south of Yosemite National Park. Over the past few years, the Park has
averaged an annual visitor rate of 4.1 million people with the average group
size being approximately 3.3 people.
Title to the 660 acre parcel is held by National Investors Land
Holding Trust VIII for the benefit of the Investors in Yosemite/Ahwahnee II
Program. Title to the 990 acre parcel is held by National Investors Land
Holding Trust IX for the benefit of Investors in the Yosemite/ Ahwahnee I
Program. The 660 acre parcel is presently encumbered by a property tax lien
and a first trust deed held for the benefit of the Investors in the
Yosemite/Ahwahnee I Program. The 990 acre parcel is presently encumbered by
a property tax lien and a first trust deed held for the benefit of the
Investors in the Yosemite/ Ahwahnee II Program. The aggregate principal
balance due on the both parcels remains at approximately $20,000,000. The
trust deeds will be extinguished as part of the Acquisition so that there
will be no liens on the Properties except for taxes.
MORI POINT PROPERTY. The Mori Point Property consists of
approximately 105 acres oceanfront land located in Pacifica, California.
Pacifica is a coastal suburban community of approximately 40,000 residents
located about 15 miles from downtown San Francisco and 7.5 miles west of the
San Francisco International Airport. The site is bounded on the north by
Sharp Park Golf Course, which is a publicly-owned golf course operated by the
City of San Francisco; on the south by a 120-acre parcel known as the
"Quarry" which is approved for mixed-use development as part of Pacifica's
Redevelopment District; and on the east by the Pacific Coast Highway. There
is in excess of a quarter of a mile of oceanfront on the west. Except for a
property tax lien, the Property is unencumbered by liens and is subject to no
leases or sales contracts or options. Portions of this Property include
habitat for two endangered species. Development will not be permitted unless
it can be demonstrated that impact on the garter snake habitat can be
ultimately mitigated. The cost to develop and implement a mitigation plan is
expected to be expensive and potentially time-consuming. The Company
believes that the impact can be mitigated and that approvals from the
Department of Fish and Game can be obtained; however, if a satisfactory,
economical, mitigation plan cannot be developed, no development could take
place on the Property. National believes this would radically reduce its
value. Title to the Mori Point property is held by National Investors Land
Holding Trust for the benefit of Investors in the Mori Point Program.
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CONSOLIDATION OF THE PROGRAMS
Prior to the Acquisition, the Programs operated according to their
respective separate business plans. There have been many impediments to
achieving the objectives of Investors under those business plans. Upon
completion of the Acquisition, each of the Properties will be held in
subsidiaries of the Company with AFC coordinating the management according to
a unified business plan which is designed to maximize the value of the
Company's Shares. The economies of scale which will result from the
consolidation will allow AFC to introduce resources such as additional
management and development opportunities that would not have been
economically feasible for the individual Programs to obtain for themselves.
Further, the consolidation will also reduce the dependence of Investors in a
particular Program on the geographic or economic constraints which their
respective operations were subject to prior to the Acquisition. For example,
Sacramento/Delta Greens Investors are entirely dependent upon the economic
opportunities available from building entry-level homes in South Sacramento
submarket. That dependency will be substantially reduced by the Acquisition.
As another example, the Oceanside Investors are restricted to accepting the
economic opportunities available from building homes in Oceanside,
California, and acquiring additional lots. The Acquisition will allow for
Oceanside Investors to have geographical diversification in residential
development because of the Sacramento/Delta Greens Property, as well as being
diversified into the lodging and recreation industries as made available with
the Yosemite/Ahwahnee and the Mori Point Properties. This diversification
will reduce the Oceanside Investors dependence on homebuilding exclusively in
the Oceanside market. Conversely, the Yosemite/Ahwahnee and Mori Point
Investors' opportunities will be expanded and diversified as well to take
advantage of those represented by the Sacramento/Delta Greens and the
Oceanside Properties.
Upon completion of the Acquisition, the Company's resources can be
managed such that the operation of each of its subsidiaries contributes
meaningfully to the achievement of its consolidated business objectives.
Initially, the Company will be involved in two primary industries: (1) the
residential development industry, and (2) the lodging and recreation industry.
THE RESIDENTIAL DEVELOPMENT INDUSTRY
The Company anticipates that the demand for unimproved land will
increase in the near future and that unimproved properties with entitlements,
ready for physical improvements, will be in demand. In order to build homes,
land entitlements (necessary governmental approvals) must be obtained and
maintained in effect. Entitlements include development agreements, vesting
tentative maps and recorded maps. These give a developer the right to obtain
building permits to begin construction upon compliance with conditions that
are usually within the developer's control.
In order to acquire land for residential development while
conserving cash, the Company may utilize options to buy land (generally
requiring a payment that is a small fraction of the purchase price to hold
the property pending financing). Such payment usually is applied to the
purchase price. It will fund additional acquisitions whenever possible with
non-recourse seller financing which does not require a full payment of the
purchase price immediately. The risk of
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securing the availability of property through the use of options is that the
Company will be unable to exercise the option and lose the option payment.
The risk of seller non-recourse financing is the potential loss of the
property, loss of the downpayment and loss of funds spent on development if
there is a default on the loan by the Company.
The Company views land as a component of a home's cost structure,
rather than for its speculative value. Due to the cyclical nature of the
industry, the critical role of risk-management in land development, and the
low margins that are typical in today's homebuilding market, the Company will
seek to place more emphasis on the acquisition and development of residential
land to entitle and sell to merchant homebuilders as opposed to a primary
emphasis on the actual construction of homes. The Company intends to focus
its residential development operations primarily in the infill and emerging
market segments. Properties acquired by the Company through the Acquisition
will be in various stages of the approval process and development.
THE LODGING AND RECREATION INDUSTRY
This industry includes many distinct product categories, including
commercial lodging-oriented products such as hotels and conference centers,
recreation-oriented products such as golf courses, equestrian facilities,
sports complexes, marinas, theme parks, destination resorts, recreational
vehicle resorts, and vacation-oriented products such as timeshare resorts, to
name a few. Initially, the Company will focus on the future development of
an executive conference center and timeshare resort, and the operation of a
golf course and recreational vehicle and timeshare resorts.
THE EXECUTIVE CONFERENCE CENTER INDUSTRY
An Executive Conference Center is distinguished from general,
resort, institutional and academic conference centers by virtue of its
positioning within the target market to attract corporate executive meetings.
According to the International Association of Conference Centers ("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.
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At an Executive (Dedicated) Conference Center, groups are typically
composed of corporations, associations, and other organizations that emphasize
quality of accommodations and services over price. This type of facility was
developed primarily to satisfy upper-level management meetings and
education/training seminars. Facilities usually include sophisticated equipment
and are staffed with professional conference coordinators. Because of its
proximity to San Francisco and the Silicon Valley, the Company believes that the
Mori Point Conference Center could be positioned within this category of
facilities.
According to a recent report issued by the IACC and PKF Consulting
entitled "Conference Center Industry, A Statistical and Financial Profile -
North American 1996," since the recession in 1991 to year-end 1995, U.S.
conference centers have achieved a 27.2% increase in occupancy. This compares
to an 8.3% increase in occupancy for the overall lodging industry during the
same period. Except for resort conference centers, all types of conference
facilities have enjoyed double digit increases in occupancy since 1991.
According to the same sources, total revenue, measured on a per
occupied room basis, has grown approximately 20% for resort and executive
conference centers since 1991. For comparative purposes, cumulative inflation
during the same period was 11.9% and the total revenue for U.S. hotels grew only
10.4%.
The primary competitive lodging market for the proposed conference
center at Mori Point is comprised of four hotels with a total of 508 rooms. The
selection of the competitive supply was based on location, facilities and
amenities, room rate structure, and market orientation. These hotels are all
full-service hotels and conference centers which cater to group and leisure
demand emanating primarily from the Bay Area, but with a secondary component of
national business attracted to their coastal locations. The secondary
competitive lodging market is comprised of three group-oriented airport
properties with 1,865 guest rooms, rendering the total potential current
competition to 2,373 rooms.
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
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increased 85% since 1984 and recreational vehicles are well suited for such
weekend travel. All of the above information is derived from publications of
the California Travel Parks Association.
THE TIMESHARE INDUSTRY
THE MARKET. According to an American Resort Development Association
("ARDA") study, the leisure industry is primarily made up of two components for
overnight accommodations: commercial lodging establishments and timeshare or
"vacation ownership" resorts. For many vacationers, particularly those with
families, a lengthy stay at a quality commercial lodging establishment can be
very expensive, and the space provided to the guest relative to the cost
(without renting multiple rooms) is not economical for vacationers. First
introduced in Europe in the mid-1960s, ownership of vacation intervals has been
one of the fastest growing segments of the hospitality industry over the past
two decades.
The Company believes that the following factors have contributed to
the increased acceptance of the timeshare concept among the general public and
the substantial growth of the timeshare industry over the past 15 years:
- Increased consumer confidence resulting from consumer
protection regulation of the timeshare industry;
- The entrance of brand name national lodging companies to the
industry;
- Increased flexibility of timeshare ownership due to the growth
of exchange organizations;
- Improvement in the quality of both the facilities themselves
and the management of available timeshare resorts;
- Increased consumer awareness of the value and benefits of
timeshare ownership; and
- 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.
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According to ARDA, the three primary reasons cited by consumers for
purchasing a vacation interval are (i) the ability to exchange the vacation
interval for accommodations at other resorts through exchange networks (cited by
82% of vacation interval purchasers), (ii) the money savings over traditional
resort vacations (cited by 61% of purchasers) and (iii) the quality and appeal
of the resort at which they purchased a vacation interval (cited by 54% of
purchasers). The ARDA study also indicated that vacation interval buyers have a
high rate of repeat purchases. In addition, customer satisfaction increases
with length of ownership, age, income, multiple location ownership and
accessibility to vacation interval exchange networks. The Company plans to
create a timeshare facility at the Yosemite/Ahwahnee Property to take advantage
of expected growth in the timeshare industry as the baby-boom generation enters
the 40-55 year age bracket, the age group which purchased the most vacation
intervals in 1994.
TIMESHARE EXCHANGE COMPANIES. Exchange privileges simply represent
the opportunity for timeshare owners to place their timeshare interval in a pool
and exchange it for a comparable timeshare elsewhere. The ability to do this is
the single most important motivation for timeshare purchases, and appears
especially important to educated consumers, who look forward to opportunities to
learn through travel.
According to ARDA, two exchange companies dominate the industry.
These are Resort Condominiums International, which started in 1974 and controls
about two-thirds of the market, and Interval International, which began in 1976
and controls most of the remaining one-third. Both systems operate similarly.
They compete to sign up new resorts; once a resort is affiliated with one or the
other company, anyone who purchases a timeshare at the resort is automatically
signed up with the exchange. Timeshare owners must renew their membership with
the exchange company every year for about $75. Exact figures are not available,
but it is estimated that about 75% of timeshare owners are affiliated with an
exchange company.
A timeshare owner wishing to make an exchange places his time in the
exchange system and requests a location and time to exchange into. Exchange
requests generally cost less than $100. Time placed in the exchange system does
not have to be used in order for the person who places it to receive the
exchange they request, and it is not a one-for-one trade.
THE BUSINESS STRATEGY
The Company's objective is to become one of North America's leading
developers and operators of timeshare and recreational vehicle resort
properties, utilizing its residential assets and the units offered in the
concurrent offering to create the necessary cash flow and capital to do so. The
Company does not currently own or operate any timeshare or recreational vehicle
resort properties. After the Acquisition, the Company will own the
Yosemite/Ahwahnee Programs and their assets. On behalf of Investors in those
Programs, National currently operates a 54 site recreational vehicle park and is
expanding the park with the addition of another 100 sites. Additionally,
National is investigating the feasibility of future timeshare facilities on the
site as well.
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The Company expects that it will have a competitive advantage by
virtue of the location advantages of the Yosemite/Ahwahnee and Mori Point
Properties. By striving to meet this objective, the Company expects that it
will be capable of enhancing the value and financial performance of the
businesses and assets currently held by the Investors in separate Programs
through the consolidation which the Acquisition will provide.
In order to meet its objectives, the Company intends to (i)
develop the Properties for their highest and best use, thereby maximizing the
value of the Company's asset base; (ii) increase the current cash flow from
the Company's consolidated operations, thereby enhancing the value of the
Company's businesses; (iii) maximize the profit margins of tangible and
intangible for-sale products by lowering costs and promoting efficiencies
through economies of scale; (iv) raise funds through a strategic combination
of the sale of units to Investors and the sale of selected real estate assets
acquired from the Programs to outside parties in order to finance the
Company's operations and expansion; and (v) generate revenues through lateral
expansion by acquiring complimentary projects and assets which are consistent
with the Company's objectives and business plans (external growth).
EXTERNAL GROWTH STRATEGY. When appropriate, and assuming market
acceptance for the Company's Shares, it is intended that growth through
acquisitions will be initially achieved through (i) the issuance of Shares of
the Company to the seller of the asset(s) to be acquired or (ii) the utilization
of options to purchase real estate assets. Preserving cash may be preferable
even though such transactions may result in the dilution of the current
Shareholders.
THE CONSOLIDATED BUSINESS PLAN
It is anticipated that the Company will have approximately
$161,000 of liquidity if none of the units are sold in the separate offering
being conducted currently with this Consent Solicitation, and approximately
$8,900,000 if all units are sold. The Company will seek additional liquidity
from the sale of one or more of the Company's assets or a combination
thereof. If one or more Properties have to be sold by the Company at a
substantial discount from the original "Trudy Pat" loan amount to raise cash
for Company operations, which would enhance overall shareholder value, the
Company believes such a sale would make sense and will attempt it. Although
National attempted to develop the Properties after foreclosure, except for
the Oceanside Program, the other Programs generally were faced with obstacles
which National 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.
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Furthermore, particularly in the case of the Yosemite/Ahwahnee Properties,
lack of adequate financing prevented a more aggressive marketing of the golf
course and recreational vehicle portions of the Properties, as well as a
slowdown in the sale of the estate lots. The Company and National believe
that these disadvantages will disappear when the Properties are owned by a
single corporation.
If the Company attains liquidity from the sale of units or certain
of the Properties, and if management is correct in its belief that third party
financing would become available to the Company through the Acquisition (which
eliminates the tenancy-in-common form of ownership), it will then conduct the
following activities in such a manner so as to maximize positive cash flow in
the most expeditious way. If such liquidity is not attained, the Company's
business plan will likely be no more successful than the individual Programs
have been since their respective Ownership Dates.
THE SACRAMENTO/DELTA GREENS PROPERTY. It is the intent of the
Company to develop the Property in phases. Depending on the availability of
working capital from the sale of units and/or assets, the Company will seek to
obtain final map approval from the City of Sacramento for 50 lots by the second
quarter of 1998. The necessary infrastructure (main road and utilities) can
then be built along with finished lots, model homes and the first phase of
productions homes. The Company believes that the first home sales can occur
within six months of obtaining the final map. It will cost nearly $3,000,000
for the infrastructure and first phase of home construction. Subject to receipt
of government approvals and construction occurring on a timely basis, the
project is expected to generate cash flow by the fourth quarter of 1998, and to
become profitable by the second quarter of 1999. Depending on the amount, the
Company may provide these funds internally should no outside financing sources
be available. Once the first phase of homes has been built and are selling, the
Company will begin processing the final map for the next parcel of 50 lots and
will begin an aggressive program to sell this and other parcels to merchant
builders so as to accelerate the cash flow and profitability to the Company and
its Shareholders. If the Company is unable to obtain such approvals, the
construction of homes will not be possible and sale of the Property in bulk at a
price below that which would be obtainable if the Property were developed into
homes would be necessary to move the Property off the Company's books.
The material risks associated with the development of the
Sacramento/Delta Greens Property are (i) as of [DECEMBER 31, 1997],
approximately $[45,000] of property taxes are owed for the current year and for
the fourth payment of a 5-year payment plan and must be kept current in order to
avoid loss of the Property for delinquent taxes; (ii) funds must be available to
cover the delinquent property taxes, as well as costs of obtaining final map
approval from the City of Sacramento and construction of necessary roads and
utilities, finished lots, model homes and the first phase of production homes;
(iii) a substantial sales and marketing effort will be necessary to sell homes
constructed on the Property if a bulk sale of the lots is not made; (iv) the
Property is located in a lower income residential area that has had a reputation
as a high crime area; and (v) increasing government fees and assessments for
streets, schools, parks and other
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infrastructure requirements could increase the cost of lots to the Company
thereby increasing the sales price of the lots which will delay market
absorption.
Real estate values in the area of the Property have improved in
1997. However, the Property is located in the South Sacramento area which is
primarily populated with lower income residents. The general population of the
Sacramento area has been growing in recent years, indicating that housing demand
should continue to improve. However, there can be no assurance that the Company
will be able to develop the Property in a manner that is ultimately profitable.
There are currently 230 active subdivisions in the Sacramento
market. Eleven of those are within ten miles of the Property and are designed
to provide single-family housing at a cost comparable to that proposed for the
Property.
THE OCEANSIDE PROPERTY. The Company has completed the construction
and recent sale of the Encore tract. The Company will also continue to pursue
the buildout of the Symphony tract and aggressively seek a potential buyer as
soon as possible after the Acquisition is completed. If the Company conducts
the buildout, it is estimated that approximately $700,000 of equity financing
will be required plus approximately $3,500,000 of construction financing. The
Company believes that the latter should be available from traditional
construction lenders.
Assuming that a potential buyer for the entire Symphony tract cannot
be located promptly, the risks associated with pursuing the buildout of the
Symphony Tract are (i) rising governmental fees and assessments may increase the
cost of construction; (ii) construction financing would be required to complete
the buildout and unpredictable financing costs could increase the cost of
construction; (iii) the Property could be lost in a tax sale if units are not
sold in the accompanying offering or certain assets are not sold by the Company
in order to meet its working capital (including any delinquent property taxes)
needs; (iv) competition in the area; and (v) approximately $55,000 of current
property taxes must be provided for.
The Property is located in the eastern portion of Oceanside,
California. It is primarily a bedroom community for employment centers in
Southern Orange County and San Diego County, California. According to the
California State Employment Development Department, the unemployment rate in
both of those counties has declined. The number of housing units under
construction in the Oceanside area has been improving since 1995.
Competition for lots and new homes in the area of the Property is
strong. The principal competition is from large homebuilders (such as Centex,
Kaufman & Broad Homes, Lennar Homes, and Greystone Homes) which are able to
initiate expensive and broad-based marketing campaigns. There are three
directly competing tracts and approximately 14 total projects offering homes of
comparable quality and price within a ten mile radius of the Property.
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.
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Recreational vehicle development presents additional cash flow and
profit opportunities. In addition to the existing 54 recreational vehicle
sites, the Company intends to complete the construction of 100 more. Revenue
from membership sales and dues is expected to continue to increase in 1998 based
on investing an additional amount of about $700,000 in the construction of the
new recreational vehicle sites. Additional revenues can be generated from the
financing of the installment purchases of memberships, since most memberships
are purchased on an installment basis over a two to seven year time frame.
There are virtually no competitive recreational vehicle resorts in
the immediate area of the Property. The recreational vehicle park is a member
of Coast to Coast Resorts, AOR and Western Horizons. These affiliations are
important marketing tools. They allow members reciprocal use of many other
recreational vehicle camp resorts located regionally and across the country.
Bass Lake Resort, the nearest competitor, consists of 175 sites and is located
about 12 miles from the Property's site. It has about 1,900 members and has
been operational since 1984. On the other hand, the Yosemite/Ahwahnee
recreational vehicle park has been fully operational since August 1996 with 54
sites and has over 280 members to date. The Company intends to aggressively
expand this membership base. The Bass Lake recreational vehicle resort is of
significantly lesser quality than the Yosemite/Ahwahnee recreational vehicle
park. It is older with deferred maintenance, has no golf course and lacks space
for any additional amenities or expansion.
The timeshare industry continues its significant growth pace,
particularly for developments that are well located near natural amenities, like
the Yosemite/Ahwahnee Property. A prominent timeshare industry consultant has
evaluated the project and has recommended a 170-unit timeshare development on
the Property. The Company will begin the processing of permits and licenses
with the appropriate agencies as soon as possible. Final approval is expected
to take about a year before construction can begin. An initial investment of
approximately $3,000,000 will be required to begin timeshare construction and an
aggressive marketing program. If the Company is unable to obtain necessary
permits to develop the timeshare aspect of the Property, it will not be able to
go forward with such development and a potentially significant future source of
revenue will be lost.
In terms of timeshare competition, the Property has none. As of
October 1996, there were 15 timeshare projects in California with active
marketing and sales programs. They include six from the Desert-Palm Springs
and Big Bear Mountain ski areas, four from the Lake Tahoe area and the
remaining five in other scattered locations. There is one relatively small
project of 13 units near Bass Lake, run by Worldmark, a timeshare operator
located in Seattle. That project is of no competitive consequence because of
its size and lack of comparable amenities. There is no present or planned
direct competition in the immediate vicinity from any of the major companies
involved in the timeshare industry such as Marriott, Hyatt, Four Seasons,
Disney or Hilton.
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Since 1995, a significant amount of capital has been used for
improvements to the golf course. The golf course is considered to be a primary
amenity to attract future timeshare sales. Annual revenues have increased over
200% since 1995 and rounds played have more than doubled. Additional revenues
are a natural bi-product from the golf course for the ancillary products like
food, liquor and clothing.
There are also no comparable golf courses in the area. A nine-hole
course exists approximately five miles from the Property. It offers a
recreational facility primarily for local players but has no resort-type
amenities or room for expansion. In addition, there is another nine-hole course
just inside Yosemite Park near the Wawona Hotel. It is designed and used
primarily for tourist day stop and family-type entertainment. For persons
seeking a golf-related vacation or the challenges of a regulation course,
neither nine-hole course would be viewed as competitive.
The principal risks involved in the Yosemite/Ahwahnee Properties are
(i) as of December 31, 1997, approximately $654,000 of property taxes are
delinquent and must be brought current or a statutory five-year payment plan
must be arranged with the County of Madera to avoid loss of the Properties for
delinquent property taxes; (ii) the need for substantial working capital to
operate and develop the recreational vehicle facility, the proposed timeshare
development, and the golf course facility; (iii) assuming that working capital
is available to accomplish the business plan, high marketing costs could
adversely affect profitability; (iv) due to the remote location and the resort
nature of the project, financing costs for development will be less readily
available and likely more expensive than financing costs for traditional
residential development projects in more heavily populated areas; and (v)
permits to develop the proposed timeshare aspects of the Property must be
obtained or that aspect of the Company's business plan will have no chance for
success.
The Company believes that the economic outlook for the golf course
operation is favorable. Given its proximity to Yosemite National Park and the
fact that the nearest comparable golf facility is approximately 15 miles away,
the Company expects that, with proper marketing, the use of the golf course will
increase. With regard to the recreational vehicle facility and the proposed
timeshare project, given its location in the much travelled, highly desirable
area near Yosemite Park, the Company believes that with proper marketing it will
be able to attract users of resort property to either the recreational vehicle
facility or the proposed timeshare units. Presently, California has a strong
economy with relatively low unemployment. The income demographics for the
products being offered at the Yosemite/Ahwahnee Properties range from $35,000 to
over $50,000 annually, and, according to the California Travel Parks
Association, there are 5,100,000 households in California with incomes over
$35,000 and 3,100,000 households in California with incomes exceeding $50,000.
THE MORI POINT PROPERTY. The Company will continue with the
proposed development plan for a hotel/conference center on the Property.
Because of its proximity to San Francisco and the Silicon Valley, the Company
considers that the Mori Point Property could be positioned competitively within
the executive conference center category of facilities. Furthermore, it
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presents itself as an outstanding timeshare location. Detailed plans for the
development of the Property do not exist at this time. Therefore, an accurate
cost to develop the facility, as well as a timetable, is not possible. A study
of the endangered species' habitat and any potential mitigation measures is
being conducted as are other environmentally-related issues like traffic
impacts. It is anticipated that over $500,000 will be needed by the Company to
complete the permitting process and deal with any other environmental concerns.
Within 12-18 months from completion of the Acquisition, the Company will
determine whether it can obtain governmental approvals to complete the
development of the Property. During that period, it will consider whether it
will be necessary to sell the Property or enter into a joint venture agreement.
If the Company were to move forward to construct the hotel/conference center, it
is estimated that approximately $40,000,000 of external funding would be
required. If the Company is unable to obtain such permits, the development of a
hotel/conference center in the Property (and the location of potential joint
venture partners for such development) will not be possible. That will result
in the need to sell the Property at a price below the Property's value if it
could be developed into a hotel/conference center in order to remove the
Property from the Company's books.
The material risks associated with the development of the Mori Point
Property are (i) potential loss of the Property for delinquent property taxes
which, as of December 31,1997, amount to $298,000, of which $142,000 are due in
April 1998, unless funds can be generated to keep current on the payment plan
for delinquent property taxes worked out with the local taxing authority; (ii)
the Tentative Tract Map and Specific Plan for the Property have expired and new
entitlements must be processed which is costly and time-consuming; (iii) two
endangered species are located on the Property requiring the preparation of an
acceptable plan to mitigate disruption of their habitats and there is no
assurance that acceptable mitigation plans can be proposed; (iv) if an
acceptable mitigation plan cannot be developed, the Property will have little
value to the Company and it will be difficult to sell at any cost; and (v) if
the necessary permits to develop the Property can be obtained, there is no
assurance that the Company will be able to successfully develop the Property
into a hotel/conference center or find a partner to assist in such project.
The Property is oceanfront property in the town of Pacifica,
California, located approximately ten miles from downtown San Francisco and five
miles from San Francisco International Airport. The San Francisco Bay Area has
enjoyed an economic boom for the last few years and it is on the cutting edge of
the emerging knowledge-based economy in the United States. The Bay Area is a
favorite destination for both tourists and conventioneers. It is desired for
its scenery, restaurants, mild climate, and varied types of entertainment.
The following table, based on information contained in the May 1997
appraisal of the Mori Point Property by PKF Consulting, provides a summary of
the current primary and second competition of the proposed executive conference
center for Mori Point.
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<TABLE>
<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.
PRIORITY OF PROJECTS AND ESTIMATED TIMETABLE
If adequate working capital is available from the sale of units, the
Company will bring delinquent property taxes current and begin work on all of
the Properties promptly after the Acquisition is completed. If adequate working
capital is not raised from a sale of units, the Company plans to sell one or
more of the Sacramento/Delta Greens, Oceanside or Mori Point Properties to raise
such working capital. Sale prices for Sacramento/Delta Greens and Mori Point
may be below the appraised values used to determine the Exchange Values because
of the need to obtain governmental and approvals prior to their development.
The Company believes the Oceanside Property is salable because National
continues to discuss sale of the Property with interested potential buyers. The
Company believes both Sacramento/Delta Greens and Mori Point can be sold at
prices that would not be approved by the respective Programs' Investors.
Efforts to find such sales were never conducted by National because of the
Investors' desire to receive as nearly a full return of principal as possible.
While such prices might not have been attractive to the Programs' Investors,
they could provide needed cash capital to move the Company forward.
Approximately $11,400,000 would be required for the Company to
obtain the necessary permits and complete the development activities for all of
the Properties, except for construction financing required to actually build a
hotel/conference center on the Mori Point Property and construction financing
for the remaining tract of the Oceanside Property. The Company is concurrently
attempting to raise $10,000,000 from the sale of
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units in the Company to existing Investors. Any funds from such offering
would be focused on the development of the Yosemite/Ahwahnee Properties as
the Company considers the Yosemite/Ahwahnee Properties to have the most
potential for a long-term profits. Thus, in an environment with limited
working capital, any costs for the development or construction of any of the
other Properties would assume lesser priority in order to maximize the
potential of the Yosemite/Ahwahnee Properties.
If enough funds are raised from the sale of the units to fulfill the
Yosemite/Ahwahnee Properties' initial requirements (approximately $3,700,000),
the balance of the offering proceeds would be applied to the Sacramento/Delta
Greens, Mori Point and Oceanside Properties, in that order.
The Company plans on financing as many of the costs of the
Properties as possible from third party lenders or by entering into joint
venture development agreements with third parties. There are currently no
committed sources of external financing or prospective joint venture partners.
However, as stated above, the Company believes that third party lenders will be
more willing to provide financing where it can obtain title insurance which was
not generally available in the tenancy-in-common ownership structure. To the
extent that external sources of financing or joint venture partners are not
available on reasonable terms, the Company plans to sell one or more of the
Sacramento/Delta Greens, Oceanside or Mori Point Properties to raise operating
capital.
The Company proposes to finance development of each of the
Properties in the following order of priority and manner:
YOSEMITE/AHWAHNEE PROPERTIES. Amount needed: $3,700,000. Funds
would come first from the unit offering proceeds. Balance, if any, from third
party financing, if available, or from sale of one or more of the Oceanside,
Sacramento/Delta Greens or Mori Point Properties.
SACRAMENTO/DELTA GREENS. Amount needed: initially, $175,000 to
complete the permitting and approval process. If the Company conducts the
construction of the homes, approximately $3,000,000 of capital will be needed
for the permitting, approvals, infrastructure and to build the initial phase of
homes. Funds for the permitting process would come first from unit offering
proceeds, a joint venture partner, or from sale of the Oceanside Property, with
construction funding to come from a traditional third party construction lender.
MORI POINT. Amount needed: initially: $500,000 to complete the
permitting and approval process. If the Company conducts the construction of
the hotel/conference center, approximately $3,000,000 of equity plus
approximately $40,000,000 of construction financing. Funds to complete the
permitting process would come from unit offering proceeds, a joint venture
partner in return for a profit participation, or sale of Oceanside or the
Sacramento/Delta Greens Properties. Funds for the equity portion would also
come
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from those sources. Construction funds would come from traditional
construction lenders, perhaps with the assistance of a joint venture partner.
OCEANSIDE. Amount needed: initially, approximately $700,000 to
provide equity for the construction of the infrastructure and the first phase of
homes, with approximately $3,500,000 construction financing coming from
traditional construction lenders. Such lenders were available when the Encore
tract was being built. The $700,000 would come from unit offering proceeds,
joint venture partners, or, as a last resort, sale of the Sacramento/Delta
Greens or Mori Point Properties
Cash flow from operations cannot be counted upon to provide funding
for the continued development of the Programs Properties. Cash flow from sales
of Properties, such as a potential of approximately $3,000,000 from the sale of
the remaining Oceanside lots, would constitute a source for such financing.
Except for operating costs and property tax payments, the Company does not
anticipate any other capital or cash commitments. Pending property taxes will
be brought current, including applicable interest, from the proceeds of the unit
offering. Pursuant to statute, the Company will either enter into (in the case
of the Yosemite/Ahwahnee Properties) or succeed to (in the case of the other
Properties) payment plans which permit back property taxes to be paid over a
five year period. To the extent that cash capital is not available to make
timely payments under such plans, the Company believes that the Properties can
be sold at amounts in excess of property taxes that are due.
The Company's plans for the development of the Yosemite/Ahwahnee
Properties currently targets mid-1998 for the completion of 100 additional
recreational vehicle sites and the readiness of the initial timeshare units for
sale. Thereafter, additional recreational vehicle sites and timeshare units
will be built from cash flow. If funds are available either from external
sources or the unit offering, the Company estimates that the Sacramento/Delta
Greens Property will involve approximately three years to complete the
permitting process, construction and sell out to homebuyers or other builders in
the area. The Mori Point permitting process will require up to two years.
Assuming necessary permits to develop a hotel/conference center are obtained, a
sale of the Property or its development with a joint venture partner will be
solicited. The construction and sale of the remaining 111 lots and homes on the
Oceanside Property will take approximately two years if a bulk sale to another
developer is not sooner arranged. THERE IS NO ASSURANCE THAT THE ABOVE
ESTIMATED TIMETABLES FOR ANY OF THE PROPERTIES CAN BE MET.
TYPES OF BORROWING REQUIRED
The Company has not sought any financing, and will not commence the
search for financing unless and until the Acquisition is successfully completed.
At that time, the Company anticipates that it will seek infrastructure financing
and construction financing. Infrastructure financing is designed to provide
borrowed funds to construct roads, install utilities and other things necessary
for a Property to function in the manner anticipated. For example, a
residential development requires the installation of roads, sidewalks, sewer
lines, water lines, and power lines for it to be able to function as a
community. The principal risks involved in
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infrastructure financing involve the cost (usually higher for infrastructure
loans than construction or permanent financing loans) and the risk that there
will be no replacement financing in the form of construction or permanent
loans available when the loan is due resulting in a default.
Construction loans involve the financing necessary to actually build
a proposed project once the infrastructure is in place. As with infrastructure
financing, it is secured by the real estate meaning the failure to generate
sales or operating cash flow sufficient to pay the loans will result in a
default and a potential loss of the land which has been provided as collateral.
While less risky than infrastructure loans, construction loans usually bear a
higher interest rate than permanent loans do. See "-- Impact of Interest Rates
on the Company."
IMPACT OF INTEREST RATES ON THE COMPANY
The Company intends to use traditional construction loan financing
for the buildout of the lots and homes on its Sacramento/Delta Greens and
Oceanside Properties, as well as for the construction of the timeshare units
beyond the initial models. If interest rates rise during the construction of
and prior to the sell out of the completed homes, then the prices of the homes
would have to be increased or the Company would have to absorb the increased
cost and associated decrease in profits. If prices are increased, some buyers
may be priced out of the market in, which case the Properties would have less
potential buyers and could suffer from a decline in volume of homes sold. In
addition, the sale of homes is dependent on adequate and competitive buyer
financing. Higher interest rates for potential homebuyers will result in a
decrease and velocity of homes sold. The Company may also consider some
infrastructure financing, for roads and utilities, for the Sacramento/Delta
Greens Property. If that occurs, then higher interest rates will negatively
affect the profitability of the Property. A falling interest rate environment
will have the opposite effect on these two Properties.
The Company intends to use its working capital to perform the
planning, engineering and other approval work for the Mori Point Property. It
also intends to use working capital and internally generated funds to finalize
the construction of an additional 100 recreational vehicle sites, as well as the
initial costs for the timeshare approvals and initial model construction for the
Yosemite/Ahwahnee Properties. In these cases, a rising or falling interest rate
environment will have little or no direct affect on those Properties. If the
Company decides later to use a construction loan to build the initial timeshare
models, then a change in interest rates will have the same affect as stated
above relative to the construction of the Sacramento/Delta Greens and Oceanside
Properties.
INSURANCE
Management of the Company believes that each of the Properties is
adequately insured for title, property and casualty matters.
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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. Some of such properties could be
properties owned by tenant-in-common lenders in other programs sponsored by
National. Such properties may include resort properties (in the development
phase or completed), residential properties (in the development phase), or
such other types of properties as the Board of Directors may from time to
time in its sole discretion deem to be appropriate investments for the
Company. The Company expects that most of its initial investments will be
located in the State of California, although there is no requirement that
such be the case. In making such acquisitions, to the extent possible, the
Company will attempt to use shares of its common stock for some or all of the
purchase price. This would result in a dilution of the voting power of
then-existing investors in the Company.
The Company has no policy with regard to whether it will acquire assets
primarily for possible capital gain or primarily for income. It will acquire
the Properties in the Acquisition and properties in the future in the manner
deemed by the Board of Directors to be in the best
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interests of the Company and its shareholders in making profits. The Company
has no specific policy as to the percentage of assets which will be
concentrated in any specific property; however, the Board of Directors will
use its best efforts to diversify the Company's investment portfolio as much
as possible.
INVESTMENTS IN REAL ESTATE MORTGAGES. While the Company will emphasize
equity real estate investments, it may, in its discretion, invest in
mortgages and other interests related to real estate. The Company does not
presently intend to invest in mortgages, but may do so. The mortgages which
the Company may purchase may be first mortgages or junior mortgages and may
or may not be insured by a governmental agency.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES. The Company may also invest in securities of entities engaged in
real estate activities or securities of other issuers, including for the
purpose of exercising control over such entities. However, the Company has no
present plans to make any such investment in securities. In any event, the
Company does not intend that its investments in securities will require it to
register as an "investment company" under the Investment Company Act of 1940,
and the Company would divest itself of such securities before any such
registration would be required.
JOINT VENTURES. The Company may enter into joint ventures or
partnerships or other participations with real estate developers, builders,
owners and others for the purpose of obtaining or retaining equity interests
in a particular property.
OFFERING SECURITIES IN EXCHANGE FOR PROPERTY. The Company may offer its
securities in exchange for a property in which it wishes to invest.
REPURCHASING ITS OWN SHARES. The Company may purchase or repurchase
Shares from any person for such consideration as the Board of Directors may
determine in its reasonable discretion, whether more or less than the
original issuance price of such Share or the then trading price of such Share.
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
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Company's debt. The Board has not established any maximum debt limit for the
Company, although it intends to act prudently in borrowing funds for Company
operations.
LENDING POLICIES. The Company may, at any time, make mortgage loans
secured by properties of the type in which the Company may invest, subject to
restrictions on related party transactions contained in the Delaware General
Corporation Law.
MISCELLANEOUS POLICIES
REPORTS TO SHAREHOLDERS. The Company will be subject to the reporting
requirements of the Exchange Act and will file annual and quarterly reports.
The Company currently intends to provide annual and quarterly reports to its
Shareholders.
COMPANY CONTROL. The Board of Directors has exclusive control over the
Company's business and affairs subject only to restrictions in the Charter
Documents and the Delaware General Corporation Law. Shareholders have the
right to elect members of the Board of Directors. The Directors are
accountable to the Company as fiduciaries and are required to exercise good
faith and integrity in conducting the Company's affairs.
WORKING CAPITAL RESERVES
The Company will attempt to maintain working capital reserves (and when
not sufficient, access to borrowing) in amounts that the Board of Directors
determines to be adequate to meet the normal contingencies in connection with
the operation of the Company's business and investments.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
[DECEMBER 31], 1997 after giving effect to the completion of the Acquisition.
<TABLE>
<CAPTION>
[DECEMBER 31], 1997
-------------------
Pro Forma
Acquisition
-----------
<S> <C>
DEBT:
Capital lease obligations . . . . . . . . $ 340,563
----------------
Total debt . . . . . . . . . . . . . 340,563
STOCKHOLDERS' EQUITY:
Common Stock(1) . . . . . . . . . . . . . 2,497
Additional paid-in capital(1) . . . . . . 40,223,137
Accumulated deficit(2). . . . . . . . . . (20,131,720)
----------------
Total stockholders' equity . . . . . 20,093,914
----------------
Total capitalization. . . . . . . . . . . $ 20,434,477
----------------
----------------
</TABLE>
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- ---------------------
(1) Gives pro forma effect to the Acquisitions and the conversion of investor
interests into common stock ownership in the Company.
DILUTION
Assuming completion of the Acquisition, the following table sets forth on a
pro forma basis as of December 31, 1997, with respect to the founders,
consultants and existing Program Investors, a comparison of the number and
percentage of Shares purchased and cash or other consideration paid and the
average price per share.
<TABLE>
<CAPTION>
Acquisition
-----------------------------------------------------------
Average
Price per
Shares Purchased Total Consideration Share
---------------- ------------------- -----
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Founders and Consultants 495,318 20% $951,064(1) 5% $ 1.92
Program Investors 2,001,248 80 17,637,863 95 8.81
---------- --- ---------- --- ---------
Total 2,496,566 100% $18,588,927 100% $ 7.45
---------- --- ---------- --- ---------
---------- --- ---------- --- ---------
</TABLE>
- ---------------------
(1) Amount consists of $4,953 of cash and $946,111 of fees that have been
incurred since 1994 that will be forgiven by National and its principals
upon the successful completion of the Acquisition.
SELECTED FINANCIAL INFORMATION
The following selected financial information should be read in
conjunction with the discussion set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and all of the
financial statements included elsewhere in this Prospectus. The pro forma
financial information is not necessarily indicative of what the actual
financial position and results of operations of the Company would have been
as and for the periods indicated, nor does it purport to represent the future
financial position and results of operations for future periods.
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<TABLE>
<CAPTION>
Company Pro Forma The Acquisition Historical
----------------- --------------------------
Year Ended Years Ended
December 31, 1997 December 31, 1997
----------------- -----------------
The Acquisition 1997 1996 1995
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 5,193,012 $ 5,193,012 $ 6,213,299 $ 6,333,143
Cost of sales 4,081,530 4,081,530 5,224,186 5,346,735
--------------- -------------- -------------- ---------------
Gross profit 1,111,482 1,111,482 989,113 986,408
Expenses:
Selling, general and
administrative 5,005,566 3,781,566 3,436,719 2,033,496
Land write-down 1,299,651 1,299,651 845,000 -
Management fees 0 650,000 650,000 650,000
--------------- -------------- -------------- ---------------
Total expenses $ 6,305,217 $ 5,731,217 $ 4,931,719 $ 2,683,496
Net interest income 28,274 28,274 63,518 135,875
--------------- -------------- -------------- ---------------
Net loss (5,165,461) $ (4,591,461) $ (3,942,606) $ (1,561,213)
Net loss per share (2.07) N/A N/A N/A
Average number of
shares outstanding [ 2,496,566] N/A N/A N/A
Balance Sheet Data:
Cash and cash
equivalents 161,328 156,375 863,373 N/A
Total real estate 20,959,403 19,559,403 19,953,557 N/A
Total assets 25,106,613 23,596,673 25,869,260 N/A
Total debt 340,563 340,563 424,767 N/A
Total liabilities 5,012,699 5,958,810 4,415,241 N/A
Stockholders'/
owners' equity 20,093,914 17,637,863 21,454,019 N/A
Other Data:
Cash provided by
operating activities (1,586,022) (1,236,022) (616,257) 652,473
Cash used in investing
activities (163,264) (163,264) (186,211) (436,545)
Cash provided by
financing activities 691,102 691,102 642,815 115,311
</TABLE>
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<TABLE>
The Acquisition Historical The Acquisition Historical
-------------------------------------- -----------------------------------
Years Ended Years Ended
December 31 December 31
-------------------------------------- -----------------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
Investment Program Investment Program
Data Data
<S> <C> <C> <C> <C> <C> <C> <C>
Oceanside Mori Point
- --------- ----------
Cash and cash Cash and cash
equivalents $ 145,072 $ 660,207 $ N/A equivalents $ 7,204 $ 39,032 $ N/A
Real estate 3,322,329 3,219,920 N/A Real estate 4,100,000 4,100,000 N/A
Total assets 5,443,408 7,938,216 N/A Total assets 4,339,911 4,139,032 N/A
Total debt - 3,910 N/A Total debt - - N/A
Total liabilities 1,271,694 1,207,402 N/A Total liabilities 882,869 807,514 N/A
Total owners' equity 4,171,714 6,730,814 N/A Total owners'equity 3,457,042 3,331,518 N/A
Revenues 4,290,850 5,490,180 5,920,600 Revenues - - -
Gross margin 461,868 515,020 624,859 Gross margin - - -
Net Loss 1,857,850 548,675 367,219 Net Loss 279,448 189,125 146,867
Ahwahnee Sacramento/Delta
- -------- ----------------
Greens
------
Cash and cash Cash and cash
equivalents $ - 101,551 $ N/A equivalents $ 4,099 $ 62,583 $ N/A
Real estate 10,137,074 10,404,135 N/A Real estate 2,000,000 2,230,000 N/A
Total assets 11,704,727 11,499,429 N/A Total assets 2,108,627 2,292,583 N/A
Total debt 340,563 420,857 N/A Total debt - - -
Total liabilities 3,495,010 2,141,259 N/A Total liabilities 309,237 259,066 N/A
Total owners' equity 8,209,717 9,358,130 N/A Total owners' equity 1,799,390 2,033,517 N/A
Revenues 902,162 723,119 412,543 Revenues - - -
Gross margin 649,614 474,093 361,549 Gross margin - - -
Net Loss 2,059,368 2,078,604 915,537 Net Loss 394,796 1,062,684 131,590
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
"Selected Financial Information" as well as the financial statements listed
in the index on page F-1. If approved by the Investors in the five former
"Trudy Pat" programs, the programs discussed below will be acquired by the
Company. Except for historical information contained herein, the matters
discussed in this report contain forward-looking statements that involve
risks and uncertainties that could cause results to differ materially.
RESULTS OF OPERATIONS - THE OCEANSIDE PROGRAM
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
For the year ended December 31, 1997, the net loss amounted to
$1,857,850 compared to a net loss of $548,675 for the year ended December 31,
1996. The change of results are primarily from the following factors: a
decrease in revenue of $1,199,330, which has been offset by a decrease in
cost of sales of $1,146,678, an increase in selling, general and
administrative expenses of $171,725 and a writedown in the real estate
inventory of $1,069,651.
Revenues decreased in 1997 by $1,199,330 or 22% as compared to 1996.
The decrease was caused by 11 less homes being sold in 1997 as compared to
1996, which has been partially offset by an increase in the average selling
price of each home of approximately five percent. This increase in average
price is principally due to the recovery in the California real estate market
in 1997. In addition, the company sold the remaining two undeveloped phases
of the Encore project during 1997.
Cost of sales decreased in 1997 by $1,146,678 or 23% as compared to 1996
primarily due to the decrease in the number of houses sold discussed above.
Selling, general and administrative expenses increased $171,725 (20%)
due to an increase in the sales incentives provided on houses sold during
1997 as compared to 1996. The increase is also due to increases in salaries
and wages and consulting fees paid to employees and consultants in 1997
compared to 1996.
Based on the net proceeds received from the sale of the remaining
inventory lots during 1997, the Program wrotedown its real estate inventory
to its estimated fair value resulting in a $1,069,651 charge against income
during the year ended December 31, 1997.
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RESULTS OF OPERATIONS - THE YOSEMITE/AHWAHNEE PROGRAMS
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
For the year ended December 31, 1997, the net loss amounted to $2,059,368,
compared to a net loss of $2,078,604 for the year ended December 31, 1996. The
change of results is primarily from the following factors: an increase in
revenues of $179,043 which has been offset by an increase in selling, general
and administrative expenses of $136,466 and an increase in interest expense of
$19,819.
The increase in revenues of $179,043 (25%) was primarily due to the
operation of the golf course for the entire period of 1997, while it was closed
for refurbishing for a portion of the year ended December 31, 1996, as well as
an increase of $85,615 of recreational vehicle memberships during 1997.
The increase in selling, general and administrative expenses of $136,466
(6%) is a result of the increased operations of the golf course and the
increased recreational vehicle membership sales effort during 1997 as compared
to 1996.
RESULTS OF OPERATIONS - THE MORI POINT PROGRAM
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
No sales activity occurred during the period on this property location.
There were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses increased from $190,348 for the
year ended December 31,1996 to $281,034 at December 31, 1997, an increase of
$90,686. The operating expenses primarily consist of property taxes and
consulting fees related to feasibility studies performed on the property.
Property tax expense increased by $26,405 due to an increase in the assessed
property value, while consulting fees significantly increased as the Program
explored various development and entitlement options for the property.
Management fees were consistent for both years at $100,000 per year. These fees
were for the management and administration of the property.
RESULTS OF OPERATIONS - THE SACRAMENTO/DELTA GREENS PROGRAM
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
No development activity occurred during the periods on this property.
There were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses decreased from $169,649 for the
year ended December 31, 1996 to $115,620 at December 31, 1997, a decrease of
$54,029. The difference is a result of the employment of consultants during
1997 to perform studies related to the proposed development of the property.
Management fees were consistent for both years at $50,000 per year.
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Due to a decrease of approximately 35% in the median prices of homes in the
communities surrounding Sacramento/Delta Greens during 1996 and a decrease in
the number homes zoned for this property during 1997, impairment losses of
$845,000 and $230,000 were recorded on the property's financial statements
during the periods presented. Originally, 596 homes were zoned for this
property, while 534 homes are currently zoned for this property.
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Acquisition on a pro forma basis as of December 31,
1997, the Company will have approximately $161,000 of unrestricted cash
available to operate the Company and develop its owned real estate. The Company
is also attempting to raise additional funds by offering units for sale in
conjunction with the Acquisition, which if fully subscribed would result in net
proceeds of approximately $8,900,000.
In addition to the methods discussed above, the Company anticipates
creating additional liquidity through the following methods on an as needed
basis:
(a) Obtain additional mortgage debt against the Properties: At December
31, 1997, the Company had no debt and approximately $1,082,000 of delinquent
property taxes levied against its real estate, some of which is being paid
pursuant to statutorily permitted 5-year payment plans. Based on its lack of
significant leverage, the Company believes that some liquidity can be generated
through additional borrowings, if necessary. The Company believes that mortgage
debt will be available to it, when it was not available to National on behalf of
the Programs, because of the elimination of the tenancy-in-common ownership
structure. This will make available lenders' policies of title insurance which
are not available under the current structure.
(b) Obtain additional funding by selling off additional Properties: The
Company believes some of the Properties, or portions thereof, can be sold to
generate sufficient liquidity to develop the remaining Properties. In
conjunction with this strategy, the remaining 23 parcels of the Encore property,
a development within the Oceanside Program, were sold during October 1997 for
net proceeds of $593,115. Except for the Oceanside Property which, based on
recent negotiations, the Company believes to be readily salable at approximately
the appraised value used to calculate Exchange Values, the Company believes that
the sale of the Sacramento/Delta Greens or Mori Point Properties would be
possible in bulk at prices discounted from the May 1997 appraisal values but for
more than the property taxes due.
(c) Reduce development capital needs through joint venture arrangements:
The Company believes that, due to the elimination of the tenancy-in-common
ownership structure which was cumbersome for potential partners, it will be able
to enter into joint venture arrangements to develop and operate one or more of
its current properties.
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(d) Conserve development capital by slowing down the currently planned
development process: If the Company is unable to raise sufficient
development funds utilizing the methods discussed above, the pace of property
development can be slowed until necessary internal or external funding is
generated.
Listed below is a summary, by project, of the estimated time period to
develop each project as well as the projected external financing needed to
complete development:
YOSEMITE/AHWAHNEE
The Company would develop and construct 170 vacation homes on currently
entitled lots which would be sold as time share intervals. The Company expects
that it will require an initial amount of approximately $3,700,000 of funding
for this development phase which would last for approximately 6 years. The
source of funds is intended to be proceeds of the unit offering, third party
financing or sale of one of the Oceanside, Sacramento/Delta Greens or Mori Point
Properties. In addition, the Company plans to continue to develop the
recreational vehicle park, which should be self-funding from sales of currently
available recreational vehicle memberships. Although the Company currently does
not have the proper entitlements to develop the remaining raw land within the
resort, the Company does anticipate eventually developing this land subsequent
to the completion of the other projects occurring within the resort which have
been described above.
OCEANSIDE
The Company could start developing the Symphony project residential
homes. The Symphony project consists of 111 lots upon which the Company
projects building single family homes principally containing 3 to 4 bedrooms.
The Company anticipates that funds which have been generated from the Encore
tract, along with approximately $700,000 of equity funding and an estimated
maximum of $3,500,000 of construction financing, will be sufficient to
develop Symphony, which should be completed within approximately two years
from the date of commencement.
MORI POINT
The Company anticipates developing a state of the art business
conference center located near San Francisco, California. The Company
anticipates that approximately $500,000 and 1.5 years is needed to complete
the entitlement and mapping process. If construction commences upon
completion of the entitlement/mapping process, the Company anticipates that
the business conference center would be operational by 2001. The business
conference center will consist of multiple meeting rooms, restaurant, indoor
and outdoor facilities, which is expected to require approximately
$40,000,000 of external funding. Due to the significant development funding
required for this project, the Company anticipates that it will seek a joint
venture development partner to reduce the funding required of the Company.
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SACRAMENTO/DELTA GREENS
The property is zoned for a single-family housing project, consisting of
approximately 465 homesites, in Sacramento, California. The total expected
funding needs for this project are approximately $3,000,000, with completion of
the project currently estimated for approximately 10 years after commencement.
LIQUIDITY SUMMARY
The Company expects to meet its short- and long-term liquidity
requirements through the methods described above in addition to cash
generated from the operations of the resort properties once these properties
are operational. The Company believes that the liquidity sources described
above will be adequate to satisfy the cash requirements of the Company for
the 12 months following the completion of the Acquisition.
HISTORICAL CASH FLOWS
THE OCEANSIDE PROGRAM
The Oceanside Program continued its development and sale of houses on the
Encore site during 1997 and decided to sell the remaining 23 undeveloped lots on
its Encore site at the end of 1997. This sale caused a decrease in the number
of houses sold by the Program from 30 in 1996 to 19 in 1997 and was the
significant factor causing the decrease in cash flows from operations of
$1,002,238 in 1996 to $297,288 in 1997. The Program continued limited
development of the Symphony site during 1996 and 1997 and repaid the line of
credit utilized to build houses on the Encore site during 1997.
THE YOSEMITE/AHWAHNEE PROGRAM
The Yosemite/Ahwahnee Programs experienced significant cash outflows from
operations during 1996 and 1997 due to the property of the Programs being in a
very early stage of development. As the property continues to progress toward
being fully developed, the amount of operational cash outflows should decrease
as a larger customer base will utilize current and future resort amenities.
These operational outflows, as well as the minimal expenditures made by the
Programs to expand the recreational vehicle park of the property, were funded by
contributions from current investors of the Programs.
THE MORI POINT AND SACRAMENTO/DELTA GREENS PROGRAMS
The Mori Point and Sacramento/Delta Greens Programs continued to explore
opportunities for development of their real estate assets during 1996 and 1997.
The expenditures made to investigate various development opportunities were paid
for by contributions from current investors of each Program.
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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 FOLLOWING THE ACQUISITION
The Company will operate under the direction of the Board, the members
of which are accountable to the Company and its shareholders as fiduciaries.
The Board will be responsible for the management and control of the affairs
of the Company; however, the executive officers of the Company and its
subsidiaries will manage the Company's and its subsidiaries' day-to-day
affairs and the acquisition and disposition of investments, subject to the
Board's supervision. The Company currently has six directors; it must have at
least one and may have no more than nine directors. As a matter of policy,
the Company will maintain at least two Independent Directors on the Board;
that is, persons who are not employed by or otherwise affiliated with the
Company prior to becoming directors. The Board will then be divided into
three classes serving staggered three year terms. See "Comparisons of
Programs and the Company -- Anti-Takeover Provisions."
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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
operating aspects by participating in the management of the Yosemite/Ahwahnee
Properties. To the extent a property needs skills not possessed by management,
or cannot be efficiently provided by management, consultants will be hired to
provide those skills and services.
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EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
Director Term
Name Age Position Expires(1)
- ---- --- -------- ----------
<S> <C> <C> <C>
David G. Lasker 52 Co-Chairman of the Board, 2000
President and Chief Financial
Officer
James N. Orth 50 Co-Chairman of the Board, 2000
Chief Executive Officer and
Secretary
L.C. "Bob" Albertson, Jr. 54 Executive Vice President of the 1999
Company and President and
Chief Executive Officer of
American Family Communities,
Inc., Director
Mark K. Kawanami 34 Vice President N/A
Charles F. Hanson 61 Director 1999
Dudley Muth 58 Director 1998
James G. LeSieur, III 56 Director 1998
</TABLE>
(1) Elected in 1997.
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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JAMES ORTH - Co-Chairman of the Board, Chief Executive Officer and
Secretary of the Company. Since 1986, Mr. Orth has been Executive Vice
President and a member of the Board of Directors of National Investors
Financial, Inc. Prior to that, in 1980, he was a founding member of NIF
Securities, Inc., a securities broker-dealer oriented to the capitalization
of start-up and second-stage business ventures. In addition, he has been a
founder and executive officer of a variety of companies specializing in
financial management, marketing and distribution. From 1969 through 1976,
Mr. Orth was employed by IBM Corporation as a marketing representative and
territory manager. From 1978 to 1980, he was vice president and branch
manager of ENI Corporation, an oil and gas exploration company. He received
a Bachelor of Science in Mathematics-Statistics, French and Economics from
the University of Wyoming in 1969 and did post-graduate work in the
MBA-Finance program at the University of Colorado.
L.C. "BOB" ALBERTSON, JR. - Executive Vice President and Director of the
Company, President and Chief Executive Officer of American Family
Communities, Inc., a wholly-owned subsidiary of the Company. Mr. Albertson
is responsible for the operation of the Company's Properties and the
implementation of the Company's business plan. Mr. Albertson is a 32-year
veteran of the homebuilding industry. From 1985 to 1996, he served as
President of Presley Homes, Southern California Region, a large
publicly-traded homebuilding company. From 1981 to 1983, he was President of
Barrett American, Irvine, a publicly-traded homebuilding company based in
Great Britain. Mr. Albertson is President of HomeAid America, a non-profit
organization supported by the National Association of Homebuilders. From
1985 to 1986, he served as President of the Building Industry
Association/Orange County Region.
MARK K. KAWANAMI - Vice President of the Company and Vice President of
Finance of American Family Communities, Inc., a wholly-owned subsidiary of
the Company. From 1996 to 1997, he was Corporate Controller for California
Pacific Homes, Inc. From 1995 to 1996, he was Director of Finance and
Administration for Creative Design Consultants, Inc. From 1991 to 1995, he
was Assistant Treasurer/Assistant Controller for A-M/Greystone Homes. After
leaving public accounting in 1989, Mr. Kawanami held two other finance
positions with Southern California homebuilders. From 1986 to 1989, he was
with the accounting firm of KPMG Peat Marwick (independent accountants) where
he earned his CPA. Mr. Kawanami received a Bachelor of Arts degree in
Economics from the University of California, Los Angeles, in 1985.
CHARLES F. HANSON - Director of the Company. Since 1989, Mr. Hanson has
served as Co-Chairman of the Board of Larson Training Centers, Inc., a
vocational training company with campuses in the Cities of Orange and Carson,
California. Also, since 1994, he has served as an independent marketing
director for a major pharmaceutical company. In 1991, he developed Coastal
Pacific Commercial Corporation, a consulting company to the real estate
industry. From 1987 to 1989, Mr. Hanson was associated with CIS Corporation,
a New York stock exchange listed company and a leading equipment leasing
firm, as Vice President and National Sales Manager. In 1985, he developed
Half-Time Associates, Inc., a national seminar company. From 1983 to 1985,
Mr. Hanson was associated with Integrated Resources, Inc. as Vice President,
Director of Marketing. Prior positions at Integrated Resources, Inc.
included Senior Executive Vice President of Integrated Resources Equity Corp.
and Executive Vice President, National
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Sales Manager and Director of Marketing for Integrated Resources Energy
Group. Mr. Hanson received his Liberal Arts degree from the University of
Washington. He is Registered Principal with the NASD and is licensed with
the New York Stock Exchange.
DUDLEY MUTH - Director of the Company. Mr. Muth's career includes over
20 years of extensive experience in the field of corporate management, law,
securities and real estate. From June 1993 through May 1997, Mr. Muth served
as a consultant on real estate and securities matters and as Vice President
of Drake Capital Securities, Inc. He recently rejoined Drake Capital
Securities, Inc. to direct all compliance and legal activities. From March
1990 until June 1992, he served as president of First Diversified Financial
Services, Inc., a syndicator of all-cash investments in California real
estate. From June 1987 until February 1990, he was President of USREA/WESPAC
which controlled two public real estate investment trusts. From January 1985
to May 1987, Mr. Muth was President of Cambio Equities Corporation and Cambio
Securities Corporation. From October 1982 to December 1984, he served as
Executive Vice President of Angeles Corporation. From July 1977 through
September 1979, he was Vice President and Director of Compliance for The
Pacific Stock Exchange, Inc. In 1967, he began his career in the tax
department of Arthur Andersen & Co. Mr. Muth received his Bachelor of Arts
degree in Economics from Pomona College, his M.B.A. in accounting from UCLA
Graduate School of Management, and his J.D. from the University of Southern
California. He is a member of the California State Bar and a Registered
Principal with the NASD.
JAMES G. LESIEUR, III - Director of the Company. From April 1991 to the
present, Mr. LeSieur has been President and Chief Executive Officer of
Sunwest Bank, Tustin, California. Prior to that, he was Executive Vice
President and Chief Financial Officer of Sunwest Bank from December 1985 to
March 1991, and held other responsible officer positions with that bank from
September 1975 to November 1985. Before joining Sunwest Bank, he was with
Arthur Young & Company (independent accountants). He received a Bachelor of
Science degree from Purdue University and an M.B.A. degree from Wharton
Graduate School of University of Pennsylvania.
COMMITTEES OF THE BOARD OF DIRECTORS
EXECUTIVE COMMITTEE. In due course, the Board of Directors will
establish an executive committee (the "Executive Committee") which will be
granted the authority to acquire and dispose of real property and the power
to authorize, on behalf of the full Board of Directors, the execution of
certain contracts and agreements. The Company expects that the Executive
Committee will ultimately consist of the co-Chairmen of the Board of
Directors and two Independent Directors.
AUDIT COMMITTEE. The audit committee will consist of two Independent
Directors and one "inside" director (the "Audit Committee"). The Audit
Committee will make recommendations concerning the engagement of independent
auditors, review with the independent auditors the plans and result of the
audit engagement, approve professional services provided by the independent
auditors, review the independence of the independent auditors, consider the
range of audit and non-audit fees and review the adequacy of the Company's
internal accounting controls.
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COMPENSATION COMMITTEE. In due course, the Board of Directors will
establish a compensation committee (the "Compensation Committee") to
determine compensation, including awards under the Company's Stock Incentive
Plan for the Company's executive officers. The Company expects that the
Compensation Committee will ultimately consist of two Independent Directors.
Until the Committee is established, the Independent Directors will serve as
the Compensation Committee.
NOMINATING COMMITTEE. In due course, the Board of Directors will
establish a nominating committee (the "Nominating Committee") to nominate
persons to serve on the Company's Board of Directors as vacancies arise. The
Nominating Committee will ultimately consist of three directors, at least two
of whom will be Independent Directors
DIRECTORS AND EXECUTIVE OFFICERS COMPENSATION AND INCENTIVES
The Company will compensate designated key managers of the Company with
cash compensation and certain incentives including stock option and bonus
plans. The below table sets forth the estimated annual base salary to be paid
to the Chief Executive Officer, President and Vice Presidents, as well as the
stock options for the officers and directors.
<TABLE>
<CAPTION>
Annual Common Stock
Name Position Salary(1) Options
- ---- -------- --------- -------
<S> <C> <C> <C>
David G. Lasker* Co-Chairman of the Board, $180,000 30,000(2)
President and Chief Financial
Officer
James N. Orth Co-Chairman of the Board, $180,000 30,000(2)
Chief Executive Officer and
Secretary
L.C. "Bob" Albertson, Jr. Executive Vice President and $200,000 30,000(2)
Director of the Company;
President and Chief Executive
Officer of American Family
Communities, Inc., Director
Mark K. Kawanami Vice President of the Company; $100,000 5,000(2)
Vice President of Finance of
American Family Communities,
Inc.
Charles F. Hanson Director -- 2,500(3)
Dudley Muth* Director -- 2,500(3)
James G. LeSieur, III* Director -- 2,500(3)
</TABLE>
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<PAGE>
- ---------------
* Initial members of Audit Committee.
(1) Employment Agreements for Messrs. Lasker, Orth and Albertson contain
provisions for bonus payments based on performance criteria.
(2) 10,000 to be issued upon completion of the Acquisition to Messrs.
Lasker, Orth and Albertson and 10,000 additional options to be issued to
each of them on the first and second anniversaries of the Acquisition.
These options are nonqualified stock options which are not issued
pursuant to the Company's 1997 Stock Option and Incentive Plan. They
have a ten year term. Messrs. Lasker, Orth and Albertson may exercise
options for 3,333 shares immediately. Mr. Kawanami's options will be
issued upon completion of the Acquisition and he may exercise options
for 1,250 shares immediately. They are exercisable at $10 per Share.
Options issued at later dates will be exercisable at market value on the
date of issuance.
(3) To be issued upon completion of the Acquisition. These options are
issued pursuant to the Company's 1997 Stock Option and Incentive Plan.
They have a ten-year term and are exercisable one year from the date of
grant at $10 per Share. The number of options is determined by formula
for the Independent Directors.
STOCK INCENTIVE PLAN
The Company has established a stock incentive plan (the "Stock Incentive
Plan") to enable executive officers, key employees and directors of the
Company and its subsidiaries to participate in the ownership of the Company.
The Stock Incentive Plan is designed to attract and retain executive
officers, other key employees and directors of the Company and its
subsidiaries and to provide incentives to such persons to maximize the
Company's value, as well as cash flow, available for distribution. The Stock
Incentive Plan provides for the award to such executive officers and
employees of the Company and its subsidiaries of stock-based compensation
alternatives such as restricted stock, nonqualified stock options and
incentive stock options and provides for the grant to Independent Directors
of nonqualified stock options on a formula basis.
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:
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NONQUALIFIED STOCK OPTIONS will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the
date of grant (but not less than par value), and usually will become
exercisable in installments after the grant date. Nonqualified stock options
may be granted for any reasonable term.
INCENTIVE STOCK OPTIONS, if granted, will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of fair market value
of Common Stock on the grant date and a ten year restriction on their term,
but may be subsequently modified to disqualify them from treatment as an
incentive stock option.
RESTRICTED STOCK is Common Stock of the Company which may be awarded to
key employees of the Company by the Compensation Committee, subject to such
restrictions on the exercise of full ownership as such Committee may
determine. Restrictions may relate, among other things, to duration of
employment, Company performance and individual performance
Promptly after the Closing of the Acquisition, the Company expects to
issue to certain officers, directors and key employees of the Company and its
subsidiaries options to purchase an aggregate of 7,500 shares of Common Stock
pursuant to the Stock Incentive Plan. The term of each of such options will
be ten years from the date of grant and they will be exercisable one year
after the date of grant at a price per share equal to the public offering
price per Share in the Offering. The expected allocations of the options to
such persons is as presented above in the "Directors and Executive Officers
Compensation and Incentives." Except for those options, the Company does not
plan to grant options under the Stock Incentive Plan until after the first
year of operations.
NO CRITERIA FOR ISSUANCE OF OPTIONS OR RESTRICTED STOCK HAVE YET BEEN
DEVELOPED BY THE COMPENSATION COMMITTEE. There is no maximum number of
options that a single individual may receive.
185,000 shares of Common Stock, subject to adjustment, will be reserved
for issuance under the Stock Incentive Plan. There is no limit on the number
of awards that may be granted to any one individual (other than Independent
Directors who annually receive a fixed number of options automatically)
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.
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The employer (either the Company or its affiliate) will be entitled to
claim a federal income tax deduction on account of the exercise of a NQSO.
The amount of the deduction is equal to the ordinary income recognized by the
participant. The employer will not be entitled to a federal income tax
deduction on account of the grant or the exercise of an ISO. The employer
may claim a federal income tax deduction on account of certain dispositions
of Common Stock acquired upon the exercise of an ISO.
401(k) PLAN
The Company intends to establish a qualified retirement plan, with a
salary deferral feature designed to qualify under Section 401 of the Code
(the "401(k) Plan"). The 401(k) Plan will permit the employees of the
Company and the Operating Partnership to defer a portion of their
compensation in accordance with the provisions of Section 401(k) of the Code.
The 401(k) Plan will allow participants to defer up to 15% of their eligible
compensation on a pre-tax basis subject to certain maximum amounts. Matching
contributions may be made in amounts and at times determined by the Company.
Amounts contributed by the Company for a participant will vest over a period
of years to be determined and will be held in trust until distributed
pursuant to the terms of the 401(k) Plan.
Employees of the Company and its subsidiaries will be eligible to
participate in the 401(k) Plan if they meet certain requirements concerning
minimum age and period of credited service. All contributions to the 401(k)
Plan will be invested in accordance with participant elections among certain
investment options. Distributions from participant accounts will not be
permitted before age 591/2, except in the event of death, disability, certain
financial hardships or termination of employment.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Lasker
and Orth for a term of five years, Mr. Albertson for a term of three years,
and Mr. Kawanami for a term of one year, each subject to automatic one year
extensions unless terminated. The agreements provide for signing bonuses of
$25,000 each for Messrs. Lasker, Orth and Albertson and for initial annual
salary compensation as follows: Messrs. Lasker and Orth, each $180,000; Mr.
Albertson $200,000; and Mr. Kawanami $100,000. Each of the agreements for
Messrs. Lasker and Orth provides for annual increases of the greater of ten
percent per annum or the increase in the consumer price index for the
metropolitan area in which Newport Beach, California, is located and Mr.
Albertson's provides for annual salary increases of $25,000 per year for the
second and third years of his agreement. In addition, the salaries may be
raised at the discretion of the Board upon recommendation of the Compensation
Committee. No criteria other than prudent stewardship of Company resources
exist for the exercise of such discretion. Each agreement also contains
provisions for discretionary bonus consideration and a fixed bonus equal to
two percent of pre-tax profits in the case of Messrs. Orth, Lasker and
Albertson, and up to 20% of base salary for Mr. Kawanami. In addition,
Messrs. Lasker, Orth and Albertson may receive discretionary bonuses of up to
50% of base salary if certain to-be-budgeted financial results are exceeded.
Except to the extent required to carry on pre-existing duties to investors in
other
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programs managed by National or other pre-existing real estate investments,
each agreement includes provisions restricting the officers from competing
with the Company during the term of such employment. Each agreement also
provides for certain salary and benefit continuance for six months if the
officer is permanently disabled; and, provides for a severance payment in the
amount of 2.99 times for Messrs. Lasker, Orth and Albertson, and .5 times for
Mr. Kawanami, the officer's average salary and bonus over the past five years
(or such shorter time as the officer was employed), payable in 18 equal
monthly installments for Messrs. Lasker, Orth and Albertson, and no more than
six equal monthly installments for Mr. Kawanami. Change of control is
generally defined to include a consolidation in the hands of one Person of
40% or more of the voting securities of the Company, a business combination
after which the existing shareholders of the Company hold less than 51% of
the voting securities of the resulting entity, or a change in membership of
the Board of Directors resulting in 50% or more of the Board of Directors not
being nominated by management.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Charter Documents limit the liability of the Company's
directors to the Company and its stockholders for money damages to the
fullest extent permitted from time to time by Delaware law. Delaware law
presently permits the liability of directors to a corporation or its
shareholders for money damages to be limited, except (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders; (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; (iii) for unlawful
distributions to stockholders; and (iv) for any transaction from which the
director derived an improper benefit.
The Company's By-Laws require the Company to indemnify its directors,
officers and certain other parties (collectively "agents") to the fullest
extent permitted from time to time by Delaware law. The Company's
Certificate of Incorporation and By-Laws also permit the Company to indemnify
its agents who have served another corporation or enterprise in various
capacities at the request of the Company. The Delaware law presently permits
a corporation to indemnify its agents against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service to or at the request of the Company, unless it is established that:
(i) the act or omission of the indemnified party was material to the matter
giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; (ii) the indemnified party
actually received an improper personal benefit; or (iii) in the case of any
criminal proceeding, the indemnified party had reasonable cause to believe
that the act or omission was unlawful. Indemnification may be made against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by the director or officer in connection 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
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personal benefit was improperly received. The termination of any proceeding
by conviction, or upon a plea of NOLO CONTENDERE or its equivalent, or an
entry of any order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard
of conduct required for indemnification to be permitted. Indemnification
under the provisions of the Delaware law is not deemed exclusive to any other
rights, by indemnification or otherwise, to which an officer or director may
be entitled under the Company's Charter or By-Laws, or under resolutions of
shareholders or directors, contract or otherwise.
The Company will apply for a directors and officers liability insurance
policy in an amount of $5,000,000. The directors and officers liability
insurance insures (i) the directors and officers of the Company from any
claim arising out of an alleged wrongful act by such persons while acting as
directors and officers of the Company and (ii) the Company to the extent that
it has indemnified the directors and officers for such loss.
PRIOR PROGRAMS
None of the executive officers of the Company have participated in the
operation of an entity with similar objectives to those of the Company,
although each of such officers has skills and experience in one or more of
the types of property to be acquired and operated by the Company. See
"Management Following the Acquisition -- Executive Officers and Directors"
for biographical information about the executive officers.
In the last ten years, National sponsored 12 programs which offered
tenancy-in-common interests in loans secured by real estate located in
California. Nine of such programs were public programs having raised more than
$100,000,000 from more than 6,000 investors and three were private programs.
The total amount of money raised from the private offerings was approximately
$900,000 from a total of 72 investors. Loans were made to developers of 11
California properties. One-half of one percent of the loans were made to
developers of shopping centers, approximately 30% to developers of mixed use
projects (commercial and residential) and approximately 70% to developers of
residential properties. All of the properties involved previously undeveloped
land. Of the amount loaned, approximately $13,000,000 was distributed back to
investors (all from public programs and none from private programs). Of the 12
lending programs, ten eventually were defaulted upon by the borrowers and two
paid the lender/investors in full.
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, Joshua Ranch "Trudy Pat" Program,
Arciero-Diamond Ridge "Trudy Pat" Program, Esperanza "Trudy Pat" Program,
Stacey Rose "A" "Trudy
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Pat" Program, Stacey Rose "B" "Trudy Pat" Program, and Franklin Meadows
"Trudy Pat" Program. None of such programs have been required to file
reports with the Commission.
Only the Yosemite/Ahwahnee Properties and the Cypress Lakes property
have been acquired through foreclosure in the past three years. Detailed
information regarding the Yosemite/Ahwahnee Properties may be found at
"Business and Properties -- Properties -- Yosemite/Ahwahnee Properties." The
Cypress Lakes property is located in Contra Costa County, California, and
consists of approximately 660 acres which were intended to be developed into
an 18-hole golf course along with 1,330 residential units.
In National's opinion, the principal adverse business development which
caused 10 of the 12 "Trudy Pat" loans to default was the precipitous decline
of the value of real estate throughout California brought about by the
economic recession that commenced in California in the early 1990s. The
decline in real estate values changed the economics of the projects planned
by the developers so that they were no longer able to project profitability
for themselves. Further, the availability of traditional financing for
construction was significantly reduced due to (i) the savings and loan
association failures of the late 1980s and (ii) bank regulatory requirements
which tightened the availability of credit generally and substantially
increased the amount of equity required as a prerequisite to obtaining a real
estate development loan.
With real estate values down and the availability of credit
substantially reduced, the "Trudy Pat" borrowers elected to cut their losses
and default on the loans. 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. It was regularly reported in the financial press that all types of
California real estate lenders in the 1990s suddenly found themselves to be
owners of, instead of lenders secured by, real estate. In order to divest
themselves of such real estate, lenders, as well as government agencies such
as the Federal Savings and Loan Insurance Corporation ("FSLIC") (now defunct)
and the Federal Deposit Insurance Corporation which took over the FSLIC,
literally "dumped" real estate into the market. Such activity depressed real
estate values because the supply of real estate in all categories available
for sale vastly exceeded demand.
Certain prior performance schedules are included as Appendix 3 to this
Prospectus. Schedule A shows, as of December 31, 1997, general information
about certain programs. Schedule B shows, as of December 31, 1997,
compensation paid to National or its affiliates by each of the "Trudy Pat"
programs. Schedule C shows, as of December 31, 1997, the annual operating
results of certain programs. 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 and Property Management/Effect of Acquisition." and "-- Historical
Cash Distributions to Investors" for
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further information about compensation paid to National and its affiliates
and distributions to Investors in the Programs.
SECONDARY MARKET FOR TENANCY-IN-COMMON INTERESTS
There is no organized market for the tenancy-in-common interests held by
Investors in the Programs. Any transfers of such interests must be privately
negotiated among willing parties.
PRINCIPAL SHAREHOLDERS
The following tables set forth information as of the date hereof as to
each person or entity who owns of record or is known by the Company to own
beneficially five percent or more of the Company's outstanding voting
securities and information as to the securities ownership of management. All
stock ownership shown below is direct unless otherwise indicated.
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
Percent of All
Name and Address Common Stock Voting Shares Outstanding, Assuming
---------------- ------------ -----------------------------------
Acquisition
Acquisition Completed and All
Completed Only Units Sold
-------------- ----------
<S> <C> <C> <C>
Yale Partnership for Growth
and Development, L.P.(1) [200,007] [8.01]% [5.72]%
4220 Von Karman Avenue
Suite 110
Newport Beach, CA 92660
J-Pat, L.P.(2) [200,007] [8.01]% [5.72]%
4220 Von Karman Avenue
Suite 110
Newport Beach, CA 92660
</TABLE>
- ---------------
(1) As manager of the general partner, Mr. Lasker controls this partnership
and has sole voting and investment power.
(2) As manager of the general partner, Mr. Orth controls this partnership and
has sole voting and investment power.
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DIRECTOR AND OFFICER STOCK OWNERSHIP
<TABLE>
<CAPTION>
Percent of
Percent Class if
of Class if Acquisition
Acquisition Completed Common
Common Completed and All Stock Percent
Name/Position Stock Only Units Sold Options of Class
------------- ----- ---- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
David G. Lasker, President, Chief
Financial Officer and Director(2) [200,007] [8.01]% [5.72]% 10,000(1) 23.53%
James Orth, Chief Executive
Officer, Secretary and Director(3) [200,007] [8.01]% [5.72]% 10,000(1) 23.53%
L.C. "Bob" Albertson, Jr. Executive
Vice President, Director 54,118 [2.17]% [1.55]% 10,000(1) 23.53%
Mark K. Kawanami 1,000 .04% .03% 5,000(1) 11.77%
Charles F. Hanson, Jr., Director -- -- -- 2,500 5.88%
Dudley Muth, Director -- -- -- 2,500 5.88%
James G. LeSieur III, Director -- -- -- 2,500 5.88%
Directors and Officers as a group [455,132] [18.23]% [13.02]% 42,500 100.00%
</TABLE>
- ---------------
(1) Messrs. Lasker, Orth and Albertson each may exercise options to purchase
3,333 shares presently, and Mr. Kawanami, 1,250 shares. In addition, each
of Messrs. Lasker, Orth and Albertson will be issued 10,000 options on the
first anniversary of the Acquisition and 10,000 options on the second
anniversary of the Acquisition.
(2) Mr. Lasker controls Yale Partnership for Growth and Development, L.P. which
owns the Shares reported. He has sole voting and investment power.
(3) Mr. Orth controls J-Pat, L.P. which owns the Shares reported. He has sole
voting and investment power.
DESCRIPTION OF SHARES
The following description of the Shares and other capital stock of the
Company does not purport to be complete but contains a summary of portions of
the Company's Certificate of Incorporation and is qualified in its entirety
by reference to the Company's Certificate of Incorporation.
GENERAL
The total number of shares of stock which the Company has authority to
issue is 12,000,000 shares, of which 10,000,000 are shares of Common Stock,
$0.001 par value per share
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<PAGE>
("Common Stock"), and 2,000,000 are shares of Preferred Stock, $0.001 par
value per share ("Preferred Stock"). The Board of Directors is authorized to
provide for the issuance of shares of Preferred Stock in one or more series,
to establish the number of shares in each series and to fix the designation,
powers, preferences and the rights of such series and the qualifications,
limitations or restrictions thereof.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of any other
shares or series of shares of Preferred Stock, holders of Common Stock will
be entitled to receive distributions on such Common Stock if, as and when
authorized and declared by the Board of Directors of the Company out of
assets legally available therefor and to share ratably in the assets of the
Company legally available for distribution to its Shareholders in the event
of its liquidation, dissolution or winding-up after payment of, or adequate
provision for, all known debts and liabilities of the Company.
Each outstanding share of Common Stock entitles the holder to one vote
on all matters submitted to a vote of Shareholders, including the election of
directors, and, except as otherwise required by law or except as provided
with respect to any other class or series of shares of stock, the holders of
such shares of Common Stock will possess the exclusive voting power. There
is no cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of Common Stock can elect all
of the directors then standing for election and the holders of the remaining
shares, if any, will not be able to elect any directors. Holders of Common
Stock have no conversion, sinking fund, redemption rights or any preemptive
rights to subscribe for any securities of the Company.
PREFERRED STOCK
The Preferred Stock may be issued from time to time in one or more
series as authorized by the Board of Directors. Prior to issuance of shares
of each series, the Board of Directors by resolution shall designate that
series to distinguish it from all other series and classes of stock of the
Company, shall specify the number of shares to be included in the series and
shall set the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption. Subject to the express
terms of any other series of preferred stock outstanding at the time and
notwithstanding any other provision of the Certificate of Incorporation, the
Board of Directors may increase or decrease the number of shares of, or alter
the designation or classify or reclassify, any unissued shares of any series
of Preferred Stock by setting or changing, in any one or more respects, from
time to time before issuing the shares, and the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other 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.
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<PAGE>
WARRANTS
The only presently existing warrants will be issued as part of the
units. Each warrant will have a two year life, is immediately exercisable,
and will allow the holder to purchase two shares of Common Stock for a per
share purchase price equal to 80% of the closing price for the Company's
Common Stock on the trading date immediately preceding the warrant exercise
date. These warrants are detachable from the units immediately on issuance
and contain appropriate anti-dilution clauses and will be fully transferable
from the date of the close of the Acquisition. The Common Stock issued upon
exercise of these warrants has been registered under the Securities Act and,
when issued, will be freely tradable. The Company does not intend to list
the warrants on any market or exchange.
CERTAIN SHAREHOLDER VOTING REQUIREMENTS
The Company's Certificate of Incorporation requires the concurrence of
the holders of two-thirds of the voting power of the outstanding voting stock
to amend specified provisions of the Company's Certificate of Incorporation
and By-Laws, which provide that (i) shareholders generally may not call a
special meting of shareholders or act by written consent; (ii) subject to
applicable law, the Company's Board of Directors will be divided into three
classes, the effect of which is that only approximately one-third of the
Board will be elected each year; (iii) directors may be removed by the
Shareholders only for cause and only upon the affirmative vote of two-thirds
of the voting power of the outstanding voting stock; (iv) a vote of
two-thirds of the voting power of the outstanding voting stock not held by an
"interested stockholder" is required for the approval of specified types of
business combinations; and (v) subject to applicable law, holders of Common
Stock will not be entitled to cumulative voting of shares for the election of
directors. These provisions, together with a classified Board of Directors
and the authorization to issue Preferred Stock on terms designated by the
Board of Directors, could be used to defend against certain business
combinations not favored by the Board of Directors (so-called "hostile
takeovers").
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
American Stock Transfer & Trust Company.
THE OFFERING
OFFERING OF ACQUISITION SHARES
Subject to the conditions set forth in this Prospectus, the Company is
offering to Investors in the Programs an aggregate of [2,001,248] Shares
("Acquisition Shares") in exchange for all of the real estate, certain of the
liabilities and business of all of the Programs. The Acquisition Shares will
be allocated to the Programs based on Exchange Values and will be further
allocated
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<PAGE>
within each of the Programs pro rata in respect of the Adjusted Outstanding
Investments of the Investors in the respective Programs. For example,
<TABLE>
<CAPTION>
If your Adjusted Outstanding You will receive the following number
Investment is $10,000 in of Acquisition Shares
------------------------ ---------------------
<S> <C>
Sacramento/Delta Greens 320
Oceanside 162
Yosemite/Ahwahnee I 354
Yosemite/Ahwahnee II 265
Mori Point 399
</TABLE>
No sales commission will be paid by any party in connection with the
exchange of the Acquisition Shares for the real estate of the Programs.
Immediately after the approval of the Acquisition, as agent of and on
behalf of the Investors, National or an affiliated entity will execute the
acquisition agreements for the Properties of each of the Programs and title
to each of the Properties will pass to the Company in accordance with
California real estate law. In addition, certificates for the Acquisition
Shares will be prepared by the Company's Transfer Agent and Registrar, and
promptly mailed to all Investors of record.
CONCURRENT OFFERING
In addition to the Consent Solicitation, the company is simultaneously
offering up to 1,000,000 units at $10 per unit to be issued exclusively to
existing program investors. The offering is a "best efforts" offering with
no minimum number of units which must be sold. There is no assurance that
any proceeds will be received. No sales can be completed unless the
acquisition is approved. Each unit consists of one share and a warrant. For
a period of two years, each warrant entitles the holder to purchase two
shares of common stock at a per share purchase price equal to 80% of the
closing price for the company's common stock on the ______ on the trading
date before the warrant exercise date. NASD broker-dealers will receive an
aggregate of $0.70 per unit commission from the company for any units sold
with their help.
If any funds are raised by the offering, they would be used to pay
offering expenses, acquisition expenses, property taxes due, and for working
capital, as detailed in the company's business plan. Any funds raised on
exercise of warrants would be used for working capital.
FOR ADDITIONAL INFORMATION ABOUT THE CONCURRENT OFFERING, SEE THE
PROSPECTUS WHICH ACCOMPANIES THIS CONSENT SOLICITATION STATEMENT AS A
SEPARATE DOCUMENT.
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<PAGE>
APPRAISALS AND FAIRNESS OPINION
GENERAL
Exchange Values were determined as of _________, 1998
[THE MONTH-END BEFORE MAILING OF THIS PROSPECTUS] and have been assigned to
each of the Programs solely to establish a method of allocating the Shares
for purposes of the Acquisition. The Exchange Values were determined by
National and the Company. The starting point for the Exchange Values was the
independent appraised value of each of the Program's real estate; however,
due to the significant disparity between the May 1997 and the October 1996
appraised values of the Yosemite/Ahwahnee I and II Properties, management of
National and the Company had to reconcile those appraisals to arrive at
Exchange Values for the Yosemite/Ahwahnee I and II Properties. See "--
Conflicting Yosemite/Ahwahnee Properties' Appraisals" for adjustments to the
appraised values of the Yosemite/Ahwahnee Properties that were made to arrive
at those Exchange Values. Such appraised values were determined for the
Programs by the following appraisers:
<TABLE>
<CAPTION>
Name, Address of Appraisers
Name of Program and Date of Appraisal
--------------- ---------------------
<S> <C>
Sacramento/Delta Greens David E. Lane, Inc.
9851 Horn Road, Suite 150
Old Mills Winery Office Park
Sacramento, California 95827
Date: May 1997
Oceanside Boznanski & Company
283 North Rampart Street
Suite A
Orange, California 92868
Date: May 1997
Yosemite/Ahwahnee I and II Arnold Associates
751 West 18th Street
Post Office Box 272
Merced, California 95341
Date: May 1997
and
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<PAGE>
Name, Address of Appraisers
Name of Program and Date of Appraisal
--------------- ---------------------
The Mentor Group, Inc.
4333 Park Terrace Drive
Suite 200
Westlake Village, California 91361
Date: October 1996
Mori Point PKF Consulting
425 California Street
San Francisco, California 94104
Date: May 1997
</TABLE>
The aggregate appraised values of the assets covered by all appraisals
(as the Yosemite/Ahwahnee appraisals were reconciled by National and the
Company) is $20,515,575.
The above appraisers were selected because of their respective
reputations and experience in appraising the value of real estate of the type
involved. In addition, in the cases of Arnold Associates and Boznanski &
Company, the original borrowers had used these companies for the appraisals
delivered to the lenders (Investors) at the time the original "Trudy Pat"
loan was made. National felt their prior experience with the
Yosemite/Ahwahnee Properties and the Oceanside Property, respectively, might
provide some cost savings to their respective Programs.
National then engaged Houlihan Valuation Advisors, 2029 Century Park
East, Suite 2890, Los Angeles, California 90067, the Independent Valuator, to
render an opinion that the allocation of Shares among the Programs, as well
as the number of Shares retained by management of the Company and other
founders of the Company, is fair to the Investors from a financial point of
view. The Fairness Opinion is attached as Appendix 1 to this Prospectus.
The Fairness Opinion and appraisals have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. Copies may be
obtained without charge by writing to Vivian Kennedy, National Investors
Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport Beach, California
92660.
National did not impose any limitations on the scope of the
investigations of the independent appraisers or the Independent Valuator to
enable them to render their respective appraisals and the Fairness Opinion.
National and the Company determined the consideration to be paid to the
Investors. The Independent Valuator has no obligation to update its Fairness
Opinion. Neither National nor the Company plans to request an update at
present. There is no contract, agreement or understanding between National
or the Company on the one hand and the Independent Valuator on the other hand
regarding any future engagement.
The Fairness Opinion is discussed in detail in "Background and Reasons
for the Acquisition -- Appraisals and Fairness Opinion."
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<PAGE>
EXPERIENCE OF INDEPENDENT APPRAISERS
Each of the independent appraisers is a member in a nationally recognized
society such as the American Institute of Real Estate Appraisers ("MAI"). Each
has been involved in the appraisal of real estate in California for many years.
National believes that each of the independent appraisers is recognized among
such appraiser's peers as being well experienced in appraising the type of real
estate it was asked to value. National selected the appraisers because of the
appraisers' respective experience and reputation in connection with real estate
assets of the nature they were, respectively, asked to value.
MAY 1997 APPRAISALS
On behalf of the Programs, National engaged the independent appraisers
identified in "-- General" above in the Spring of 1997 to appraise the "as is,"
highest and best use, value of the real estate portfolio of the applicable
Program. Each of the independent appraisers has consented to reference to the
appraisals in this Prospectus.
SUMMARY OF METHODOLOGY. In the case of the real estate in the
Sacramento/Delta Greens Program, the independent appraiser determined that the
sales comparison, land residual, and discounted cash flow methods for appraising
real estate were appropriate to use. In the case of the real estate in the
Oceanside Program, the independent appraiser determined that the sales
comparison and land residual methods for appraising real estate were appropriate
to use for the 111 partially finished residential lots in the Symphony tract.
In the case of the real estate in the Yosemite/Ahwahnee I and II Programs, the
independent appraiser determined that the sales comparison, income and cost
methods for appraising real estate were appropriate to use on various portions
of the Properties. In the case of the real estate in the Mori Point Program,
the independent appraiser determined that the discounted cash flow, ground rent
capitalization and sales comparison methods for appraising real estate were
appropriate to use. See Appendix 2 for definitions of these appraisal methods.
In conducting each of the appraisals, representatives of the several
appraisers reviewed and relied upon, without independent verification, certain
information provided by National, including, but not limited to: applicable
financial information; property descriptions; historical acquisition
information; title information relating to encumbrances; and such other
information as was requested by the appraiser and available to National.
Representatives of each of the appraisers performed site inspections on the real
estate of each of the Programs in 1997. In the course of these visits, any
physical facilities were inspected and information on the local market, as well
as the subject property, was gathered.
Where appropriate, applicable government records were reviewed and
information was gathered from applicable government officials. As appropriate,
historical operating statements for certain of the Properties were reviewed.
Each appraiser then estimated the value of the real estate of the
applicable Programs based on the approaches to valuation described above.
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<PAGE>
CONCLUSION AS TO APPRAISED VALUE. Based on the valuation methodology used
by each of the appraisers, the estimated "as is" value of the real estate for
each of the Programs is as follows:
<TABLE>
<CAPTION>
Real Estate "As Is" Ownership Date Real Estate
Name of Program Value Conclusion(1) Value Conclusions
- --------------- ------------------- --------------------------
<S> <C> <C>
Sacramento/Delta Greens $ 2,000,000 $ 3,075,000
Oceanside 2,850,000 6,484,000(2)
Yosemite/Ahwahnee I and II 20,916,000 19,641,000
Mori Point 5,500,000 4,100,000
-------------- --------------
TOTAL $ 31,266,000 $ 33,300,000
-------------- --------------
-------------- --------------
</TABLE>
- --------------
(1) See Appendix 2 for a description of each appraiser's conclusion with regard
to the valuation methods selected and with regard to separately
identifiable portions of the Property of each program.
(2) Since the Ownership Date, a significant number of lots have been sold.
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS. Each appraisal report was
prepared in accordance with the Uniform Standards of Professional Appraisal
Practice. Each appraiser utilized certain assumptions to determine the
appraised value of the Properties.
See Appendix 2 for a discussion of the assumptions, limitations and
qualifications of the appraisals.
THE MENTOR APPRAISAL
In the Fall of 1996, National hired The Mentor Group, Inc. ("Mentor") to
appraise the "highest and best use" value of the Yosemite/Ahwahnee Properties as
a guide for planning purposes. As of October 10, 1996, using primarily the cost
approach, Mentor determined the "as is" value of the subdivision portion of the
Properties to be $530,000 and the "as is" value of the balance (deemed excess
land) as $3,460,000 for an aggregate appraised value of approximately
$4,000,000. Mentor determined that the highest and best use of the Properties,
as of the appraisal date, was to hold the project for future study or project
implementation. In the Spring of 1997, National hired Arnold Associates to
determine the "as is" value of the Properties assuming that they were developed
at their highest and best use, recognizing that, to achieve highest and best
use, it would take a substantial continued investment in the Properties and a
significant amount of time.
In conducting the appraisal, representatives of The Mentor Group reviewed
and relied upon, without independent verification, certain information provided
by National, including, but not limited to: applicable financial information;
property descriptions; historical acquisition information; title information
relating to encumbrances; and such other information as was requested by the
appraiser and available to National. Representatives of the appraiser performed
site inspections on the real estate of each of the Programs in the Fall of 1997.
In the course of
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<PAGE>
these visits, any physical facilities were inspected and information on the
local market, as well as the subject property, was gathered.
Where appropriate, applicable government records were reviewed and
information was gathered from applicable government officials. As appropriate,
historical operating statements for certain of the Properties were reviewed.
The appraiser then estimated the value of the real estate of the
Yosemite/Ahwahnee Properties based on the approaches to valuation described
above.
CONFLICTING YOSEMITE/AHWAHNEE PROPERTIES' APPRAISALS
Faced with the significant disparity between the Yosemite/Ahwahnee
valuation conclusions of The Mentor Group and Arnold Associates, in order to
arrive at an Exchange Value for the Yosemite/Ahwahnee Properties, National used
its judgment regarding the two appraisals as follows:
First, with regard to the Ahwahnee Country Club portion of the combined
Properties, National judged the Arnold Associates appraisal as more reasonable
due to a doubling in the number of golf course rounds played since the Mentor
appraisal. Thus, the Arnold appraisal of $4,480,000 for this portion of the
Properties was used to determine the aggregate value for purposes of calculating
Exchange value.
Second, with regard to the Ahwahnee recreational vehicle park portion,
National accepted the Arnold Associates appraisal as more reasonable due to the
significant increase in membership sales from approximately 50 to over 150 since
the Mentor appraisal. Thus, the Arnold appraisal of $3,886,000 for this portion
of the Properties was used to determine the aggregate appraised value for
purposes of calculating Exchange Value.
Third, with regard to Phase I of the Ahwahnee Country Club Estate lots and
the balance of the land, National accepted the conservative Mentor appraisals of
$530,000 and $1,269,575, respectively, as more reasonable due to the time and
costs required to develop these parcels.
Fourth, the aggregate revised appraisal was allocated between the Yosemite/
Ahwahnee I and II Programs in accordance with the Property held by each Program.
National deemed this allocation reasonable because the portions of the Property
allocated to each Program could be reconciled to the appraisals. This
allocation yielded a revised appraised value of $3,912,454 to the
Yosemite/Ahwahnee I Property and $6,253,121 to the Yosemite/Ahwahnee II
Property.
ON-GOING RELATIONSHIPS
Each of the appraisers was paid a fee for its appraisals deemed to be
reasonable by National. The fees for such appraisals were paid out of funds
available to the respective Programs through cash flow or assessments. In
addition, each appraiser was reimbursed for reasonable travel and other
out-of-pocket expenses incurred in making site visits and in preparing
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<PAGE>
the valuations. The fees were negotiated between National and each of the
appraisers and payment thereof is not dependent upon completion of the
Acquisition. Neither National nor the Company has retained any of the
appraisers in the past, although the borrower in the Oceanside Program used
Boznanski & Company and the borrower in the Yosemite/Ahwahnee I and II
Programs used Arnold Associates in connection with the original "Trudy Pat"
loans. National and the Company may engage one or more of the appraisers to
provide appraisal and other services in the future. There is no contract,
agreement or understanding between National or the Company on the one hand
and any of the appraisers on the other hand regarding any future engagement.
UPDATES/CHANGES
None of the appraisers have any obligation to update their appraisals and,
at present, neither National nor the Company plan to obtain updates. Except for
improvement in revenues from operations of the golf course at the
Yosemite/Ahwahnee Properties since the date of the Mentor appraisal, neither
National nor the Company are aware of any conditions which have changed since
the date of the appraisals which may affect appraised values.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material Federal income tax
consequences of the Acquisition to the Investors and the Company. It is based
on the Internal Revenue Code of 1986, as amended, the Income Tax Regulations,
judicial decisions, current positions of the Treasury Department and the
Internal Revenue Service contained in published Revenue Rulings and Revenue
Procedures, and current administrative positions of the Service, any of which
could be materially and adversely changed, possibly on a retroactive basis, at
any time.
It is impractical to summarize all potential Federal, state, local and
foreign tax consequences of the Acquisition. Accordingly, the following
discussion does not address any aspect of state, local or foreign law or Federal
estate or gift tax matters. Moreover, the following discussion does not address
special considerations that may apply (i) to certain classes of Investors
including, without limitation, Investors who are insurance companies, financial
institutions, securities dealers, foreign persons or Investors who receive
Shares as compensation, or (ii) to Investors subject to special rules including,
without limitation, the personal holding company tax, the accumulated earnings
tax, the tax on unrelated business taxable income of tax-exempt entities, and
the S corporation rules. The Federal income tax consequences to any particular
Investor may be affected by matters not discussed below. Consequently, the
following discussion should not be regarded as a complete analysis of all the
possible tax consequences or as a substitute for consultation by Investors with
their own tax advisors.
No advance rulings have been or will be obtained from the Service with
respect to any aspect of the Acquisition. Counsel to the Company, Arter &
Hadden LLP, is unable to give an opinion as to whether the Acquisition
transaction will be a tax-free or taxable transaction.
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<PAGE>
Counsel has delivered its opinion to the Company to the effect that the
discussion under "Federal Income Tax Consequences" accurately reflects the
law as of the date of this Prospectus. No other opinion of counsel has been
or will be obtained with respect to any tax aspect of the Acquisition.
Unlike an advance ruling, counsel's opinion is not binding on the Service and
provides no assurance that the Service will not challenge an Investor's or
the Company's tax treatment of the Acquisition. In the event of such a
challenge, an Investor or the Company may be adversely affected and
personally may incur substantial legal and accounting fees and costs even if
the challenge proves to be unsuccessful. The adverse consequences might not
be the same for all Investors.
Upon receipt of a written request, a copy of the opinion will be
transmitted promptly, without charge, by the Company. Requests should be
addressed to Vivian Kennedy, National Investors Financial, Inc. 4220 Von Karman
Avenue, Suite 110, Newport Beach, California 92660.
INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE ACQUISITION AS THEY
RELATE TO THEIR PERSONAL TAX SITUATIONS.
QUALIFICATION OF THE ACQUISITION AS A SECTION 351 TRANSACTION
1. GENERAL RULES. The Federal income tax consequences of the Acquisition
will depend primarily on whether the Acquisition qualifies as a Section 351
transaction. (All "Section" references in this summary are to the specified
Section of the Code.) The Company intends to treat the Acquisition as a
qualifying Section 351 transaction.
The Acquisition will qualify under Section 351 if (i) the Company is
not an "investment company," and (ii) collectively, the Investors in the
Programs who transfer the Properties to the Company in exchange for Shares and
Investors who acquire units are in "control" of the Company "immediately after
the exchange." The Company's transfer of the Properties to its subsidiary
corporations in Section 351 transfers will not invalidate the Acquisition from
qualifying as a Section 351 transaction. See, e.g., Revenue Ruling 77-449,
1977-2 C.B. 110.
(a) INVESTMENT COMPANY. The Acquisition will not qualify under
Section 351 if the Company is an "investment company" as defined in Section
351(e). Counsel to the Company is of the opinion that the Company is not an
investment company for this purpose.
(b) CONTROL. The Investors (all of whom will transfer property or
cash to the Company in exchange for Shares) must be in "control" of the Company
immediately after the exchange. The term "control" is defined in Section 368(c)
as stock possessing at least 80% of the total combined voting power of all
classes of stock entitled to vote and at least 80% of the total number of shares
of all other classes of stock of the corporation. Investors will acquire 80% or
more of the Shares of the Company (which is the only class of stock of the
Company) and, accordingly, will acquire "control" of the Company.
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<PAGE>
(c) IMMEDIATELY AFTER THE EXCHANGE. The Investors also must be in
control of the Company "immediately after the exchange." This requirement of
Section 351 has been the subject of considerable litigation, remains uncertain
in certain respects, and is subject to a case-by-case analysis of the facts and
is subject to the application of the "step transaction doctrine" to those facts.
This uncertainty is compounded because the courts have not universally agreed
upon all of the components that are used in determining whether the step
transaction doctrine should be applied.
The principal concern raised by the possible application of the
step transaction doctrine to the Acquisition is that it may cause a sufficient
number of Investors, who will own 80% or more of the outstanding Shares on the
Effective Date, to be treated as owning less than 80% "immediately after the
exchange." This may occur if Investors in transactions CONTEMPLATED BY THEM ON
THE EFFECTIVE DATE dispose of Shares after the Effective Date. This also could
occur if the Company issues additional Shares after the Acquisition in a
transaction subject to the step transaction doctrine. The Company does not
intend to issue any additional Shares with respect to which the step transaction
may apply.
Under the step transaction doctrine, if an Investor's subsequent
disposition of Shares and his receipt of Shares in the Acquisition are treated
as elements of a single integrated transaction of the Investor, the Investor is
not treated as holding his Shares "immediately after the exchange." If, as a
result of the application of this doctrine, a sufficient number of Investors are
not treated as holding their Shares "immediately after the exchange," the
Acquisition would not qualify under Section 351. Courts generally have
enunciated three tests to determine whether the step transaction doctrine may be
applied to disqualify a transaction under Section 351, and one court may apply
one of the following tests while another court applies another test:
(i) END RESULT TEST: Under this test, ostensibly separate
transactions are combined when it appears that they were really components steps
of a single transaction and that each of the steps was intended to be taken for
the purpose of reaching a specific end result.
(ii) MUTUAL INTERDEPENDENCE TEST: Under this test, the courts
consider whether steps are so interdependent that the legal relationships
created by one transaction would be fruitless without the completion of the
entire series of transactions. Unlike the end result test, the mutual
interdependence test focuses on the relationships of the steps, not merely on
the end result
(iii) BINDING OBLIGATION TEST: Under this test, a transaction
will be aggregated with another transaction if there is a binding commitment
to do the other transaction.
2. APPLICATION TO THE ACQUISITION. The potential application of the step
transaction doctrine to Investors' acquisitions and subsequent dispositions of
their Shares depends on the specific facts and circumstances with respect to
each Investor who disposes of Shares. Neither the Company nor counsel to the
Company is in a position to make a determination as to whether Investors who
acquire at least 80% of the Shares will or will not be subject to the step
transaction
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doctrine. Consequently, counsel to the Company is unable to opine as to
whether the Acquisition qualifies under Section 351. However, because (i)
Investors will acquire 80% or more of the Shares in the Acquisition, and (ii)
the Company is not aware of any facts which lead it to believe that any
subsequent disposition of Shares by one or more Investors may be subject to
any of the step transaction tests discussed above, the Company intends to
take the position that the Acquisition qualifies under Section 351. There
can be no assurance, however, that the Service will not take a contrary
position.
Investors should recognize that if a relatively small number of Investors
subsequently dispose of their Shares in transactions subject to the step
transaction doctrine, the Acquisition will not qualify under Section 351.
Investors will acquire [80.16]% of the Shares of no units are sold, and will
acquire 85.83% of the Shares if all of the units are sold. See "Prospectus
Summary -- Exchange Value/Allocation of Shares." Accordingly, depending on the
number of units sold, if any, if Investors dispose of more than [0.17]% to more
than [5.84] % of the Shares in transactions subject to the step transaction
doctrine, the Acquisition will not qualify under Section 351. Conversely, if
Investors who acquire 80% or more of the Shares are not subject to the step
transaction doctrine, counsel to the Company is of the opinion that the
Acquisition will qualify under Section 351.
FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION
1. TAX CONSEQUENCES TO INVESTORS OF A SECTION 351 TRANSACTION. If the
Acquisition qualifies under Section 351, the tax consequences to the Investors
will include the following:
(a) Pursuant to Section 351(a), no gain or loss will be recognized by
Investors in a Program which transfers a Property to the Company in exchange for
Shares. Sections 357(b) and 357(c) provide special gain recognition rules if
one or more properties subject to liabilities are contributed to a corporation
for the principal purpose of tax avoidance or for other than a bona fide
business purpose, or if such liabilities exceed the tax basis of the contributed
properties. Because of the nature and amount of the liabilities which will be
assumed by the Company, it is not anticipated that any Investor will recognize
gain under these rules.
(b) Pursuant to Section 358, an Investor's tax basis in his Shares on
the Effective Date generally will equal the sum of the tax basis of his
interests in the Properties at that time and any gain recognized by him (none is
anticipated) in the Acquisition. However, an Investor's tax basis in his Shares
will be reduced by the amount of his share of any liabilities to which the
Properties are subject, except to the extent that the payment of such
liabilities would have been deductible.
(c) Pursuant to Section 1223(1), an Investor's holding period in his
Shares will be determined by including ("tacking") the holding period of his
real estate interests in the Properties if his interests in the Properties are
held by him as capital assets or Section 1231(b) assets. An Investor's
interests in the Properties may constitute a combination of capital assets and
Section 1231(b) assets, for which tacking of holding periods is allowed, and
non-capital assets, for which tacking of holding periods is not allowed. In
such event, it may be necessary to
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<PAGE>
make an allocation under Section 1223(1), with the result that the tax basis
of each Share received by the Investor will be divided for holding-period
purposes. See Rev. Rul. 85-164, 1985-2 C.B. 117.
2. TAX CONSEQUENCES OF ACQUISITION TO THE COMPANY OF A SECTION 351
TRANSACTION. If the Acquisition qualifies under Section 351, the tax
consequences to the Company will include the following:
Pursuant to Section 1032, no gain or loss will be recognized by the
Company on its receipt of the Properties in exchange for the issuance of Shares.
(b) Pursuant to Section 362(a), the initial tax bases of the Company
in the Properties on the Effective Date will equal the sum of the tax bases of
the Investors in the Properties on the Effective Date and any gain recognized by
the Investors (none is anticipated) in the Acquisition.
(c) Pursuant to Section 1223(2), the Company's holding periods in the
contributed Properties will include ("tack") the holding periods of the
Investors in the Properties.
3. TAX CONSEQUENCES OF PURCHASE OF UNITS. No gain or loss will be
recognized by an Investor with respect to the purchase of units for cash. An
Investor's $10 tax basis for each unit is divided between the Share and warrant
to purchase Shares based on the relative fair market value of the Share and the
warrant on the Effective Date. Each Investor should consult and rely on his own
tax advisor for purposes of determining the allocation of tax basis between the
Share and the warrant. The holding periods of the Share and warrant
constituting a unit will commence on the day after the Effective Date.
4. TAX CONSEQUENCES IF THE ACQUISITION DOES NOT QUALIFY UNDER SECTION
351. As discussed above, the Company intends to report the Acquisition as a
qualifying under Section 351. However, if for any reason the Acquisition does
not qualify, the tax consequences will include the following:
(a) INVESTORS.
(i) An Investor will recognize gain or loss upon his receipt of
Shares in exchange for his real estate interests in the Properties transferred
by the Programs. The amount of gain or loss will equal the difference between
the tax basis of his interests in the Properties on the Effective Date and his
amount realized in the Acquisition. The amount realized generally will equal
the sum of the fair market value on the Effective Date of the Shares he acquires
and his share of any liabilities to which the Properties are subject. The
character of an Investor's gain or loss will depend on his holding periods with
respect to his interests in the Properties and whether such interests are
capital assets, Section 1231(b) assets or non-capital assets.
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(ii) An Investor's initial tax basis in the Shares he acquires
will be equal to the fair market value of the Shares on the Effective Date. An
Investor's holding period of such Shares will commence on the day after the
Effective Date, with no tacking of his holding periods for his interests in the
Properties sold to the Company.
(b) COMPANY. The Company will not recognize any gain or loss upon
the receipt of contributed Properties of the Programs in exchange for the
issuance of Shares. The initial tax basis of the Company in the Properties
generally will be equal to the sum of the fair market value of the Shares on the
Effective Date and the amount of liabilities to which the Properties are
subject. The Company's holding periods in the Properties will commence on the
day after the Effective Date.
FEDERAL INCOME TAX CONSEQUENCES TO INVESTORS AFTER THE EFFECTIVE DATE
1. SHAREHOLDERS NOT TAXABLE ON COMPANY'S INCOME. The Company is a C
corporation ( a "regular" corporation, rather than an S corporation) and is a
separate entity from the Shareholders for tax purposes. Consequently, the
Company will file its own income tax returns and pay tax on its taxable income.
The Company's taxable income will not flow through to the shareholders for
purposes of determining their tax liabilities.
2. DISTRIBUTIONS TO SHAREHOLDERS. Distributions by the Company to the
Shareholders will be taken into account in determining their tax liabilities.
In general, distributions will be taxable as dividend income to the extent of
the Company's current or accumulated "earnings and profits" (as calculated for
Federal income tax purposes). Any distributions to a Shareholder in excess of
earnings and profits (i) will constitute a non-taxable return of capital to the
extent of his tax basis in his Shares, and (ii) will be treated as taxable gain
from the sale or exchange of the Shares to the extent the distribution exceeds
the tax basis of his Shares. The character of such gain will depend on the
Investor's holding period for such Shares and whether the Shares are held as a
capital asset (subject to the "collapsible corporation" rules discussed below).
3. DISPOSITION OF SHARES; EXERCISE OF WARRANTS.
(a) SHARES. If an Investor disposes of Shares in a taxable
transaction, the Investor generally will recognize gain or loss equal to the
difference between the tax basis of his Shares and the amount realized in the
disposition. The character of such gain or loss generally will depend on the
Investor's holding period for such Shares and whether the Shares are held as a
capital asset. The "collapsible corporation" rules of Section 341 may apply
under some circumstances to convert capital gain into ordinary income. However,
even if the Company were treated as a collapsible corporation, any capital gain
recognized by an Investor would not be converted into ordinary income unless (i)
the Investor owns (taking into account certain attribution rules) at certain
times more than 5% of the outstanding stock of the Company, or (ii) the
Investor's stock is attributed to another shareholder who owns at certain times
more than 5% the outstanding stock of the Company.
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(b) WARRANTS. No gain or loss will be recognized by an Investor upon
his receipt of Shares pursuant to the exercise of warrants. The tax basis of
such Shares will be equal to the sum of the exercise price and the tax basis of
the warrants. The holding period for Shares will commence on the date of
exercise of the warrants. An Investor will recognize a loss if a warrant
expires without being exercised in an amount equal to the tax basis of the
warrant. An Investor generally will recognize gain or loss upon the
disposition of a warrant in an amount equal to the difference of the amount
realized upon disposition and the tax basis of the warrant.
REPORTS TO SHAREHOLDERS
The Company intends to provide periodic reports to Shareholders regarding
the operations of the Company over the course of the year. Financial
information contained in all reports to Shareholders will be prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles. The Company's annual report, which will include financial
statements audited and reported upon by independent public accountants, will be
furnished within 120 days following the close of each fiscal year. Summary
information regarding the quarterly financial results of the Company will be
furnished to Shareholders on a quarterly basis.
Investors have the right under applicable federal and Delaware laws to
obtain information about the Company and, at their expense, may obtain a list of
names and addresses of all of the Shareholders to be used for a proper purpose.
In the event that the Commission promulgates rules and/or in the event that the
applicable ________________ Exchange rules and regulations are amended so that,
taking such changes into account, the Company's reporting requirements are
reduced, the Company may cease preparing and distributing certain of the
aforementioned reports, if the directors determine such action to be in the best
interests of the Company and if such cessation is in compliance with the rules
and regulations of the Commission.
LEGAL MATTERS
Certain legal matters, including the legality of the Shares and the units
and the description of federal income tax consequences contained under "Federal
Income Tax Consequences," will be passed upon for the Company by Arter & Hadden
LLP, Los Angeles, California.
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
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Registration Statement and have been so included in reliance upon such reports
given upon the authority of that firm as experts in accounting and auditing
FURTHER INFORMATION
This Consent Solicitation Statement/Prospectus does not contain all the
information set forth in the Registration Statements on Forms S-4 and the
exhibits relating thereto which the Company has filed with the Commission, in
Washington, D.C., under the Securities Act, and to which reference is hereby
made. The Registration Statement and the exhibits and schedules forming a part
thereof filed by the Company with the Commission can be inspected and copies
obtained at the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D. C. 20549, at prescribed
rates, and electronically through the Commission's Electronic Data Gathering,
Analysis and Retrieval system at the Commission's Website (http://www.sec.gov).
All summaries contained herein of documents which are filed as exhibits to
the Registration Statements are qualified in their entirety by this reference to
those exhibits. The Company has not knowingly made any untrue statement of a
material fact or omitted to state any fact required to be stated in the
Registration Statements, including this Prospectus, or necessary to make the
statements therein not misleading.
GLOSSARY
"Acquisition" means the purchase of the assets, liabilities and business of
each of the Programs in exchange for Shares.
"Acquisition Expenses" means all of the costs and expenses incurred by the
Company or the Programs in connection with the Acquisition including such
expenses as: (i) preparation, printing, filing and delivering of the
Registration Statement and the Prospectus; (ii) the filing fees payable to the
Securities and Exchange Commission and to the National Association of Securities
Dealers, Inc.; (iii) costs associated in transferring to the Company title to
the Properties and providing the Company with title insurance with respect to
each of the Properties; (iv) the escrow arrangements, including the compensation
to the Escrow Agent; (v) the fees and costs incurred by the Company in listing
its Shares on the ______________; (vi) fees and costs of the Company's counsel
and independent auditors; (vii) fees and costs of independent appraisers and the
Independent Valuator; (viii) all expenses incurred in connection with the
solicitation of Investor votes regarding the Acquisition; and (ix) other
expenses related to the offering of the units.
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"Adjusted Outstanding Investment" means the Outstanding Investment of an
Investor adjusted to take into account the interest owed, or due to be received,
as the case may be, on voluntary advances to the applicable Program made in lieu
of mandatory assessments which certain other Investors failed to make.
"Affiliate" means, with respect to any Person, (i) any Person directly or
indirectly controlling, controlled by or under common control with such Person,
(ii) any Person owning or controlling ten percent or more of the outstanding
voting securities of such Person; (iii) any officer, director, member (in the
case of a limited liability company) or partner of such Person or of any Person
specified in (i) or (ii) above; and (iv) any company in which any officer,
director, member or partner of any Person specified in (iii) above is an
officer, director, member or partner.
"Charter Documents" means the Certificate of Incorporation and By-Laws of
the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any similar law or provision enacted in lieu thereof, unless the
context indicates otherwise.
"Commission" means the Securities and Exchange Commission.
"Company" means American Family Holdings, Inc., a Delaware corporation.
"Directors" means persons authorized to manage and direct the affairs of
the Company and who are members of the Board of Directors of the Company.
"Effective Time" means the date and time as of which the Acquisition is
completed, and title to the Properties has passed to the Company.
"Escrow" means the account established by the Company with the Escrow Agent
wherein the funds received from Investors desiring to purchase units are held
pending completion of the Acquisition.
"Escrow Agent" means First Trust of California, N.A.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Value" means the price in the form of Shares, valued at $10 per
Share, by the Company, that the Company is willing to pay for the assets,
liabilities and business of a Program for purposes of allocating Shares among
the Programs in the Acquisition. Exchange Value of a Program is calculated as
follows: appraisal value of real estate plus book value of other assets minus
liabilities plus the amount of accrued fees and expenses to be forgiven by
National in the Acquisition.
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"Fairness Opinion" means the opinion of the Independent Valuator to the
Programs as to the fairness, from a financial point of view, of the Acquisition
transaction to the Investors.
"Independent Director" means a Director of the Company whose primary
business or professional affiliations, if any, are with organizations not
affiliated with the Company. As of the date of the Prospectus, there are no
Independent Directors.
"Independent Valuator" means Houlihan Valuation Advisors.
"Investor" means a Person that purchased a tenancy-in-common interest in
one of the "Trudy Pat" loans, secured by a deed of trust, that formed the basis
of one of the Programs.
"Investor Ballot" means the ballot accompanying this Prospectus to be used
by the Investor to vote its wishes to approve or disapprove participation of a
particular Program in the Acquisition, and to subscribe for units.
"IRS" or "Service" means the U.S. Internal Revenue Service.
"NASD" means the National Association of Securities Dealers, Inc.
"National" means National Investors Financial, Inc., the company which
organized, and acts as servicing agent for the Investors in, each of the
Programs.
"ODI" means Oceanside Development, Inc., the entity formed to hold title to
the Oceanside Property for the benefit of Investors in the Oceanside Program and
to supervise continued development.
"Outstanding Investment" means the sum of the unpaid principal balance owed
to an Investor as of the Ownership Date plus accrued but unpaid interest on such
balance as of the Ownership Date plus all amounts paid by the Investor pursuant
to mandatory assessments called for by National plus all amounts voluntarily
advanced by an Investor on behalf of Investors who failed to honor a demand for
an advance from National.
"Ownership Date" means, with respect to a particular Program Property, the
date on which title to the Property in question was taken and controlled for the
benefit of the Investors in such Program.
"Person" means any natural person, partnership, corporation, limited
liability company, association or other legal entity.
"Program" means any one of the following: Sacramento/Delta Greens Program,
Mori Point Program, Oceanside Program, Yosemite/Ahwahnee I Program or
Yosemite/Ahwahnee II 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
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trust on real property. Such group of Persons is bound together only by a
servicing agreement with National and a tenancy-in-common agreement among
themselves. The tenancy-in-common agreements permit holders of a majority of
the Outstanding Investments in a particular Program to bind the Program on
certain decisions including the sale of the Program's Property.
"Property" or "Properties" means the interests in real property held by one
or more of the Programs or the Company.
"Prospectus" means this Consent Solicitation Statement/Prospectus which is
included in the Registration Statement filed with the Commission in connection
with the issuance of the Shares in the Acquisition.
"Record Date" means the date five days before the date of this Prospectus.
"Registration Statement" means the Company's registration statement on Form
S-4 containing the Prospectus, filed with the Commission in the form in which it
becomes effective, as the same may be at any time and from time to time
thereafter amended or supplemented.
"Securities Act" means the U.S. Securities Act of 1933, as amended.
"Shares" means common stock in the Company.
"Shareholder" means a Person holding Shares.
"Solicitation Period" means the period commencing on the date this Consent
Solicitation Statement/Prospectus is first mailed or delivered to Investors and
continuing until the later of (i) ___________, 199_ [60 DAYS FROM THE DATE THE
PROSPECTUS IS MAILED] and (ii) such later dates as may be selected by the
Company.
"Trudy Pat" means trust deed loan participation. With regard to the
Programs, Trudy Pat refers to the loans, secured by first deeds of trust, in
which fractional, tenancy-in-common, interests were purchased by the applicable
Investors. Each Program started out as a "Trudy Pat" loan.
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FINANCIAL STATEMENTS
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRO FORMA COMBINED FINANCIAL INFORMATION:
Pro Forma Combined Balance Sheet as of December 31, 1997 ............................ F-3
Notes to Pro Forma Combined Balance Sheet ........................................... F-4
Pro Forma Combined Statement of Operations for the year ended December 31, 1997 ..... F-6
Notes to Pro Forma Combined Statement of Operations ................................. F-7
AMERICAN FAMILY HOLDINGS, INC.
Report of Independent Certified Public Accountants ................................. F-9
Balance Sheet as of December 31, 1997 ............................................... F-10
Notes to Balance Sheet .............................................................. F-11
THE OCEANSIDE PROGRAM
Report of Independent Certified Public Accountants .................................. F-13
Balance Sheet as of December 31, 1997 ............................................... F-14
Statements of Operations for two years ended December 31, 1997 and 1996 ............. F-15
Statements of Owners' Equity for two years ended December 31, 1997 and 1996 ......... F-16
Statements of Cash Flows for two years ended December 31, 1997 and 1996 ............. F-17
Notes to Financial Statements ....................................................... F-18
THE YOSEMITE/AHWAHNEE PROGRAMS
Report of Independent Certified Public Accountants .................................. F-22
Balance Sheet as of December 31, 1997 ............................................... F-23
Statements of Operations for two years ended December 31, 1997 and 1996 ............. F-24
Statements of Owners' Equity for two years ended December 31, 1997 and 1996 ......... F-25
Statements of Cash Flows for two years ended December 31, 1997 and 1996 ............. F-26
Notes to Financial Statements ....................................................... F-27
THE MORI POINT PROGRAM
Report of Independent Certified Public Accountants .................................. F-33
Balance Sheet as of December 31, 1997 ............................................... F-34
Statements of Operations for two years ended December 31, 1997 and 1996 ............. F-35
Statements of Owners' Equity for two years ended December 31, 1997 and 1996 ......... F-36
Statements of Cash Flows for two years ended December 31, 1997 and 1996 ............. F-37
Notes to Financial Statements ....................................................... F-38
THE SACRAMENTO/DELTA GREENS PROGRAM
Report of Independent Certified Public Accountants .................................. F-41
Balance Sheet as of December 31, 1997 ............................................... F-42
Statements of Operations for two years ended December 31, 1997 and 1996 ............. F-43
Statements of Owners' Equity for two years ended December 31, 1997 and 1996 ......... F-44
Statements of Cash Flows for two years ended December 31, 1997 and 1996 ............. F-45
Notes to Financial Statements ....................................................... F-46
</TABLE>
F-1
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED BALANCE SHEET
The following unaudited Pro Forma Combined Balance Sheet as of
December 31, 1997 and the Pro Forma Combined Statement of Operations for the
year ended December 31, 1997 have been prepared to reflect the acquisitions
of the assets, certain liabilities and business of the Oceanside Program, the
Yosemite/Ahwahnee Programs, the Mori Point Program and the Sacramento/Delta
Greens Program (collectively, "The Acquisition"). The unaudited Pro Forma
Balance Sheet has been prepared as if The Acquisition had been consummated as
of December 31, 1997. The unaudited Pro Forma Statement of Operations for
the year ended December 31, 1997 has been prepared as if The Acquisition
occurred at the beginning of the period presented. The unaudited Pro Forma
Combined Financial Statements and related notes should be read in conjunction
with the audited financial statements contained elsewhere in this Prospectus.
The unaudited Pro Forma Combined Financial Statements are not necessarily
indicative of what the actual financial position or results of operations
would have been for the respective periods if the transactions had been
consummated on the dates indicated, nor does it purport to represent the
future financial position or results of operations of the Company.
F-2
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31, 1997
------------------------------------------------------------------
The Pro Forma Pro Forma
Company Programs(1) Adjustments Combined
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
THE ACQUISITION
ASSETS:
Real estate, net ............................. $ - $19,559,403 $ 1,400,000(2) $ 20,959,403
Cash and cash equivalents .................... 3,901 156,375 1,052(4) 161,328
Restricted cash .............................. - 1,421,670 - 1,421,670
Notes receivable ............................. - 403,028 403,028
Goodwill ................................... - - 1,023,521(3) 1,128,508
104,987(4)
Property and equipment ....................... - 385,151 385,151
Deferred membership selling expense .......... - 538,993 - 538,993
Other assets ................................. - 108,532 108,532
Due from affiliate ........................... - 1,023,521 (1,023,521)(5) -
Deferred acquisition costs ................... 1,023,521 (1,023,521)(3) -
Total assets ............................... 1,027,422 23,596,673 25,106,613
LIABILITIES:
Deferred membership revenue .................. - 1,181,577 1,181,577
Capital lease obligations .................... - 340,563 340,563
Accounts payable and other liabilities ....... - 2,108,678 2,108,678
Due to affiliate ............................. 1,023,521 2,327,992 (1,023,521)(5) 1,381,881
(946,111)(4)
Total liabilities .......................... 1,023,521 5,958,810 5,012,699
STOCKHOLDERS' EQUITY:
Common Stock ................................. 391 0 2,001(2) 2,497
105(4)
Additional paid-in-capital ................... 3,510 0 39,167,582(2) 40,223,137
1,052,045(4)
Accumulated deficit .......................... - - (20,131,720)(2) (20,131,720)
Owners' equity ............................... - 17,637,863 (17,637,863)(2) -
Total stockholders' equity ................. 3,901 17,637,863 20,093,914
Total liabilities and
stockholders' equity ..................... 1,027,422 23,596,673 25,106,613
</TABLE>
F-3
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED BALANCE SHEETS
PRO FORMA ADJUSTMENTS
These pro forma adjustments reflect the completion of the Acquisition. The
following sets forth the adjustments:
(1) Reflects the historical combined balance sheets of the Programs as of
December 31, 1997.
(2) To record the fair market value of the stock issued to the investment
programs being acquired in conjunction with the Acquisition in accordance
with the following schedule:
<TABLE>
<S> <C>
Historical equity of Yosemite/Ahwahnee $ 8,209,717
Add: Fair value of shares issued to entities being acquired 11,669,257
Fair value of stock issued in Acquisition $19,878,974
Less: Fees to be forgiven to the programs being acquired (841,111)
Less: Par value of stock issued (2,001)
Net increase to additional paid-in-capital and accumulated deficit $19,035,862
Add: Par value of stock issued 2,001
Less: Historical book value of investment programs (17,637,863)
Purchase price of investment programs in excess of
book value to be allocated $1,400,000
</TABLE>
Due to the majority of the Company's shares being owned by the investors in
the Ahwahnee/Yosemite I and II Programs subsequent to the Acquisition, this
entity is considered the acquiror in the transaction. This excess purchase
price is due to the appraised value of the land held by the Mori Point
Program being $1,400,000 greater than its carrying value on the program's
historical financial statements. Although the appraised value of the land
held by the Oceanside Program is approximately $470,000 less than its
current book value, management has assumed that the fair value of the land
approximates its book value based upon offers to buy the property received
subsequent to the preparation of the appraisal. For disclosure purposes in
this pro forma balance sheet, the net increase to additional paid in
capital and accumulated deficit has been allocated between these two
accounts to reflect the carryover of the accumulated deficit of the
Yosemite/Ahwahnee Programs at the date of the Acquisition of $20,131,720.
(3) To reclass the various professional fees incurred to consummate the
transaction ($1,023,521) to goodwill. As the value of the consideration
given to the program investors and the Company is equal to the fair value
of assets received, no goodwill other than the costs of the acquisitions
should be recorded.
(4) To reflect the issuance of 105,215 shares of common stock of the Company to
the Company's founders and consultants in conjunction with the Acquisition
recorded as its fair market value of $10 per share. The fair value of
these shares less the cash paid for them, have been allocated between the
forgiveness of the amount owed by the Programs to the founders ($946,111)
and the cost of organizing the transaction ($104,987). The forgiveness of
accrued expenses upon successful completion of the Acquisition is
summarized by the following:
<TABLE>
<CAPTION>
Sacramento/
Ahwahnee ODI Mori Point Delta Greens TOTAL
-------- -------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Total fees and
advances due to
National $841,763 $800,000 $497,885 $188,344 $2,327,992
Amounts forgiven
by National 105,000 704,000 - 137,111 946,111
-------- -------- ---------- ------------ ----------
Total due to
National after
Acquisition $736,763 $ 96,000 $497,885 $ 51,233 $1,381,881
-------- -------- ---------- ------------ ----------
-------- -------- ---------- ------------ ----------
</TABLE>
(5) To eliminate intercompany receivables and payables.
F-4
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED BALANCE SHEETS
(6) Segment Information
American Family Holdings, Inc. ("American") has two reportable segments:
vacation and leisure resort properties and residential home properties.
The vacation and leisure resort property is used to generate revenue
through a recreational vehicle membership plan, as well as a golf course
and resort operation. The residential home properties segment derives its
revenue from the development and sales of residential housing and lots.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
<TABLE>
<CAPTION>
SEGMENT ASSETS December 31, 1997
Vacation and Residential Home
Leisure Resort Development All Other Total
-------------- ---------------- --------- ----------
<S> <C> <C> <C> <C>
Segment Assets 11,704,727 5,443,408 7,848,538 24,996,673
</TABLE>
<TABLE>
<S> <C>
RECONCILIATION OF ASSETS
Total assets for reportable segments 24,996,673
Cash 4,953
Goodwill 1,128,508
Elimination of receivables from corporate headquarters (1,023,521)
----------
Consolidated total assets after adjustments 25,106,613
----------
----------
</TABLE>
F-5
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The pro forma combined statements of operations presented below reflect
the acquisition as previously described as if it occurred at the beginning of
the periods presented. The Company was omitted from the statements presented
below since it had no operations during the periods presented.
<TABLE>
<CAPTION>
Year ended December 31, 1997
--------------------------------------------------
Pro Forma Pro Forma
Programs(1) Adjustments Combined
----------- ------------- -----------
<S> <C> <C> <C>
THE ACQUISITION
Revenues $ 5,193,012 $ 5,193,012
Cost of sales 4,081,530 4,081,530
Gross profit 1,111,482 1,111,482
Selling, general and
administrative 3,781,566 350,000(2) 5,005,566
650,000(3)
224,000(4)
Land write down 1,299,651 1,299,651
Management fees 650,000 (650,000)(3) 0
----------- -----------
Total expenses 5,731,217 6,305,217
Interest income (expense) 28,274 28,274
Net income (loss) (4,591,461) (5,165,461)
Net loss per
common share(5) (2.07)
</TABLE>
F-6
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
PRO FORMA ADJUSTMENTS
(1) Reflects the historical combined statements of operations of the Programs
for the year ended December 31, 1997.
(2) To reflect the replacement of National as asset manager of the investment
programs with the new management structure of the Company:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Officers and staff salaries to be included in selling, $ 806,000
general andadministration after Acquisition
Officers salaries included in selling, general and $(456,000)
administration prior to Acquisition
Pro forma adjustment to selling, general and administration $ 350,000
</TABLE>
(3) To reflect the cancellation of the servicing agreements between National
and the investment programs and the reclass of this associated overhead to
administrative expenses.
(4) To amortize goodwill arising from the Acquisition over its estimated useful
life of 5 years.
(5) Net loss per share is based on 2,496,566 weighted average number of shares
outstanding and does not include any warrants to be issued in conjunction
with the company's units offering.
(6) Segment Information
American Family Holdings, Inc. ("American") has two reportable segments:
vacation and leisure resort properties and residential home properties.
The vacation and leisure resort property is used to generate revenue
through a recreational vehicle membership plan, as well as a golf course
and resort operation. The residential home properties segment derives its
revenue from the development and sales of residential housing.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. However, in the
calculation of the pro forma loss for these segments, American officers
salaries, management fees and acquisition expenses were excluded.
<TABLE>
<CAPTION>
December 31, 1997
Vacation and Residential Home
Leisure Resort Development All Other Total
--------------- ---------------- --------- ----------
<S> <C> <C> <C>
Revenues 902,162 4,290,850 5,193,012
Segment profit/(loss) (1,795,368) (1,665,850) (674,243) (4,135,461)
</TABLE>
F-7
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(6) Segment Information (continued)
<TABLE>
<CAPTION>
Profit or Loss Reconciliation December 31, 1997
<S> <C>
Total profit or loss for reportable segments (4,135,461)
Adjustment for expenses not included in segment loss:
Officers salaries (806,000)
Amortization of goodwill (224,000)
Total pro forma loss after adjustments (5,165,461)
</TABLE>
F-8
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Family Holdings, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of American Family Holdings,
Inc. as of December 31, 1997. The balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, based on our audit, the balance sheet referred to above
presents fairly, in all material respects, the financial position of American
Family Holdings, Inc. of as of December 31, 1997 in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-9
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash........................................................ 3,901
Deferred acquisition costs.................................. 1,023,521
---------
Total assets.............................................. 1,027,422
---------
---------
LIABILITIES
Due to affiliate............................................ 1,023,521
STOCKHOLDERS' EQUITY (Note 2):
Preferred Stock, shares authorized - 2,000,000;
issued and outstanding 0.................................. -
Common Stock, $0.001 par value; shares authorized -
10,000,000; shares issued and outstanding - 390,103....... 391
Additional paid in capital................................ 3,510
---------
Total stockholders' equity............................... 3,901
---------
Total liabilities and stockholders' equity.................. 1,027,422
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO BALANCE SHEET
NOTE 1. ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
American Family Holdings, Inc. (the Company) was organized and
incorporated in Delaware to become a publicly held corporation which would
acquire the assets, certain liabilities and business activities owned by
investors in the investment programs listed below in exchange for ownership
in the Company. The Company will also attempt to sell a maximum of 1,000,000
shares of common stock and warrants (the "Units") at a price of $10 per Unit.
Each warrant entitled the holder to purchase two additional shares of common
stock at 80% of the closing price of the stock on the day prior to exercise
of the warrant. The warrant has a term of two years following the completion
of the Offering. Listed below are the investment programs to be acquired and
the number of common stock shares of the Company issued to the investors in
these programs:
<TABLE>
<CAPTION>
Shares of
Investment Program Common Stock
- --------------------------- ------------
<S> <C>
Oceanside 487,572
Yosemite/Ahwahnee I and II 834,322
Mori Point 485,704
Sacramento/Delta Greens 193,650
---------
2,001,248
---------
---------
</TABLE>
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, contingent upon the
successful completion of the Acquisition, with two members of senior
management for a term of five years and one member of senior management for a
term of three years, each subject to automatic one year extensions unless
terminated. The agreements provide for annual compensation of $180,000,
$180,000 and $200,000 and contain provisions for bonus consideration based on
performance standards. In addition, except to the extent required to carry on
pre-existing duties to investors in other programs managed by National or
other pre-existing real estate investments, each agreement includes
provisions restricting the officers from competing with the Company during
the term of such employment; providing for certain salary and benefit
continuance for six months if the officer is permanently disabled; and,
providing for a severance payment in the amount of 2.99 times the officer's
average salary and bonus over the past five years (or such shorter time as
the officer was employed), payable in 36 equal monthly installments, in the
event of a change of control of the Company within two years of the change of
control event.
F-11
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO BALANCE SHEET
(CONTINUED)
NOTE 3. STOCK INCENTIVE PLAN
The Company has established a stock incentive plan (the "Stock Incentive
Plan") to enable executive officers, key employees and directors of the
Company and its subsidiaries to participate in the ownership of the Company.
The following awards may be made under the Plan:
NONQUALIFIED STOCK OPTIONS will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the
date of grant (but not less than par value), and usually will become
exercisable in installments after the grant date. Nonqualified stock options
may be granted for any reasonable term.
INCENTIVE STOCK OPTIONS, if granted, will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of fair market value
of Common Stock on the grant date and a ten year restriction on their term,
but may be subsequently modified to disqualify them from treatment as an
incentive stock option.
RESTRICTED STOCK is Common Stock of the Company which may be awarded to
key employees of the Company by the Compensation Committee, subject to such
restrictions on the exercise of full ownership as such Committee may
determine. Restrictions may relate, among other things, to duration of
employment, Company performance and individual performance.
Promptly after the Closing of the Acquisition, the Company expects to
issue to certain officers, directors and key employees of the Company and its
subsidiaries options to purchase an aggregate of 7,500 shares of Common Stock
pursuant to the Stock Incentive Plan. The term of each of such options will
be 10 years from the date of grant. Commencing one year from the Closing,
each such option will vest 25% per year over four years and is exercisable at
a price per share equal to the public offering price per Share in the
Offering. The expected allocations of the options to such persons is as
presented above in the "Directors and Executive Officers Compensation and
Incentives."
185,000 shares of Common Stock, subject to adjustment, will be reserved
for issuance under the Stock Incentive Plan. There is no limit on the number
of awards that may be granted to any one individual (other than Independent
Directors who annually receive a fixed number of options automatically).
F-12
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Oceanside "Trudy Pat"
Program ("Oceanside Program") (as defined in Note 1) as of December 31, 1997,
and the related statements of operations, changes in owners' equity and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Oceanside Program as of December 31, 1997, and the results of operations and
cash flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-13
<PAGE>
THE OCEANSIDE PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997
----------
<S> <C>
ASSETS:
Cash and cash equivalents $ 145,072
Restricted cash 1,421,670
Note receivable (Note 7) 50,000
Real estate property held for sale (Note 6) 3,322,329
Property and equipment, net (Note 3) 14,093
Other assets 46,597
Due from affiliate (Note 1) 443,647
----------
Total assets $5,443,408
----------
----------
LIABILITIES:
Accounts payable $ 274,664
Due to affiliate (Note 4) 800,000
Accrued expenses and other liabilities 197,030
----------
Total liabilities 1,271,694
----------
----------
COMMITMENTS AND CONTINGENCIES (Note 4)
OWNERS' EQUITY:
Owners' Equity 4,171,714
----------
Total liabilities and owners' equity $5,443,408
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
REVENUES FROM HOME SALES $ 4,290,850 $ 5,490,180
COST OF HOME SALES 3,828,982 4,975,160
GROSS PROFIT 461,868 515,020
EXPENSES:
Selling, general and administrative 1,014,712 842,987
Real estate inventory writedown (Note 7) 1,069,651 -
Related party management fees (Note 4) 300,000 300,000
--------- ---------
Total expenses 2,384,363 1,142,987
--------- ---------
--------- ---------
Interest income 64,645 79,292
--------- ---------
Net income (loss) $(1,857,850) $ (548,675)
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<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
------------
------------
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,857,850) $ (548,675)
Adjustments net loss to cash
provided by (used in) operating
activities:
Depreciation and amortization 12,584 3,352
----------- -----------
Real estate inventory writedown 1,069,651 -
Increase (decrease) from changes in:
Restricted cash 358,471 326,089
Note receivable (50,000)
Real estate inventory 1,161,508 1,155,537
Other assets (21,631) (24,120)
Due from affiliate (443,647) -
Accounts payable (311,104) 286,196
Accrued expenses and
other liabilities 379,306 (196,141)
Net cash provided by (used in)
operating activities 297,288 1,002,238
------------ ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (4,854) (17,600)
Additions to real estate property held
for sale (102,409) (96,462)
----------- -----------
Net cash used in investing activities (107,263) (114,062)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds 1,821,560 3,600,000
Line of credit repayments (1,825,470) (3,596,090)
Contributions (distributions) (701,250) (900,000)
----------- -----------
Net cash provided by (used in)
financing activities (705,160) (896,090)
----------- -----------
Net increase (decrease) in
cash and cash equivalents (515,135) (7,914)
Cash and cash equivalents
at beginning of period 660,207 668,121
----------- -----------
Cash and cash equivalents
at end of period $ 145,072 $ 660,207
----------- -----------
----------- -----------
Cash paid during the
period for interest $ 4,272 $ 9,526
----------- -----------
----------- -----------
</TABLE>
Interest capitalized for the year ended December 31, 1996 and 1997 were
$14,939 and $4,536.
See accompanying notes to financial statements.
F-17
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1993 National Investors Financial, Inc. ("National"), represented
by NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Oceanside Program (the "Program") to entities affiliated
with the Ved Corporation, the original borrowers, in the amount of
$30,000,000 by selling undivided tenant-in-common interests in such loan to
1,755 investors. In November of 1993, the borrower granted the property
("Oceanside Development") securing the loan to Oceanside Development, Inc., a
California corporation (the "Company"), formed by National on behalf of the
investors in the Oceanside Program. The first lien was kept intact after the
date of grant to protect the investors' interests in the underlying property
during its development. As the investors' interests are to be converted to
common stock in conjunction with a proposed acquisition of the Program, the
underlying protection of the lien is no longer needed and will be
extinguished as part of the acquisition. Oceanside Development is a single
family detached home development consisting of two tracts, Encore and
Symphony. The property is located in Oceanside, California and is currently
held by Oceanside Development, Inc. on behalf of the Oceanside Investors.
The Oceanside property was appraised at $6,484,000 as of the date of grant
from the original borrower. Therefore, the property has been written down to
its fair market value at the time of grant and the investors' interests in
the property is reflected as Owners' Equity in the financial statements.
The accompanying financial statements include the accounts of the Program,
which consist of Oceanside Development, Inc. and Oceanside Development, LLC,
and do not include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation
("American"), was formed to be a publicly-held corporation to acquire the
businesses of certain investment programs previously syndicated by National
in exchange for common stock. In addition, American Family Holdings, Inc.
will offer a maximum of 1,000,000 units, which consists of one share of
common stock and one warrant at a price of $10 per unit. Each warrant
entitled the holder to purchase two additional shares of common stock at 80%
of the closing price of the stock on the day prior to exercise of the
warrant. The warrant has a term of two years following the completion of the
Offering.
In conjunction with the contemplated transactions, the Program is
currently capitalizing the associated costs and recording these costs as due
from the American. These costs are currently shown as deferred acquisition
costs on the books of American. These costs will, however, be allocated
against a ratio of the proceeds received from the units offering and the
value of the shares given to the program investors in exchange for their
undivided tenant-in-common interests after the completion of both
transactions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS AND RESTRICTED CASH
The Oceanside Program management considers all highly liquid
investments with an original maturity of three months or less when purchased
to be cash equivalents. The Program has restricted bonded cash accounts
which may only be used for capital expenditures on the residential
properties. The restricted cash balance at December 31, 1997 was $1,421,670.
F-18
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE INVENTORIES AND REAL ESTATE PROPERTY HELD FOR SALE
Costs incurred which are included in real estate inventories and
property held for sale consist of land, land development costs, direct and
indirect costs of construction, other overhead costs, interest and property
taxes. Interest and property taxes are capitalized to real estate
inventories when development activities begin, and capitalization ends when
the qualifying assets are ready for their intended use. As of December 31,
1997, the Oceanside Development had 111 lots classified as property held for
sale.
Effective January 1, 1996, the Program adopted the provisions of Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which requires impairment losses to be recorded on long-lived assets being
developed, based on fair value, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Examples of indicators of impairment
include a significant decrease in the market value of an asset, a significant
change in the extent or manner in which an asset is used or a significant
adverse change in legal or business factors that could affect the value of an
asset. Assets held for sale are to be carried at the lower of cost or fair
value less the costs to sell.
The estimation process in determining the fair value of real estate assets is
inherently uncertain and relies to a considerable extent on current and
future economic and market conditions, the availability of suitable financing
to fund holding, development, and construction activities, and the repayment
or refinancing of existing indebtedness. Such economic and market conditions
may effect management's development and marketing plans. Accordingly, the
ultimate realizations to differ from amounts presently estimated.
SALE AND PROFIT RECOGNITION
Revenues from home sales are recognized when closings have
occurred. At the time of revenue recognition, costs of home sales are charged
with direct costs of construction and an allocation of a project's total
estimated costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are being provided principally on the straight line method over
the estimated useful lives or the related assets. Estimated useful lives
range from 3-5 years.
INCOME TAXES
The financial statements include the activity of the Program, which
income or losses are included in the investors' respective tax returns.
F-19
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles required management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Based upon certain market assumptions and information available to
management, the carrying values of financial instruments as of December 31,
1997 approximate their fair values. The carrying value of cash and cash
equivalents, accounts payable and accrued expenses are assumed to approximate
fair value as they are short term in nature and receivable or payable on
demand. The fair value of the line of credit was estimated based on similar
interest rates available for comparable financial instruments.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
1997
------------
<S> <C>
Office and computer equipment $ 5,787
Furniture and fixtures 25,145
------------
30,932
Less accumulated depreciation (16,839)
------------
$ 14,093
------------
------------
</TABLE>
NOTE 4. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages six other programs under similar
servicing agreements. As documented within the servicing agreement, National
is to receive an annual fee equal to 1% of the original loan balance.
National's requirements under the servicing agreement include managing the
assets of the Program to assure that the purpose and the activities of the
Program are continued for the investors. The Program incurred asset
management expenses of $300,000 and $300,000 for the years ended December 31,
1996 and 1997. Additionally, the Program accrued compensation expense of
$192,000 and $192,000 for the years ended December 31, 1996 and 1997 payable
to senior management of the Program, who are also the principals of National.
Total accrued and unpaid management fees and compensation as of December 31,
1997 was $800,000.
F-20
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4. COMMITMENTS (CONTINUED)
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant
effect on the financial position of the Program.
NOTE 5. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in
the Program to make additional capital contributions. Such contributions are
only recorded to the extent of cash received.
NOTE 6. CONCENTRATION OF CREDIT RISK
The Program's financial instruments that are exposed to concentrations of
credit risk consist of cash and cash equivalents and restricted cash accounts
placed with federally insured financial institutions. Such accounts may at
times exceed federally insured limits. The Program has not experienced any
losses on such accounts.
NOTE 7. REAL ESTATE INVENTORY WRITEDOWN
In October 1997, the Program sold the remaining lots on the Encore project
for $650,000, which included a note receivable of $50,000. This note bears
interest at 10% per annum and is due the earlier of (i) the close of escrow
of the last Encore lot sold by the purchaser or (ii) one year. All
capitalized construction costs incurred on the related lots in excess of the
consideration received have been written off in the current year.
F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Yosemite/Ahwahnee I and
II "Trudy Pat" Programs (the "Yosemite/Ahwahnee Programs") (as defined in
Note 1) as of December 31, 1997, and the related consolidated statements of
operations, changes in owners' equity and cash flows for each of the two
years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Yosemite/Ahwahnee Programs as of December 31, 1997, and the results of
operations and cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-22
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997
-----------
<S> <C>
ASSETS:
Real estate and improvements (Note 3) $10,137,074
Notes receivable (Note 4) 353,028
Property and equipment, net (Note 5) 371,058
Deferred membership selling expense (Note 11) 538,993
Other assets 61,935
Due from affiliate (Note 1) 242,639
-----------
Total assets $11,704,727
-----------
-----------
LIABILITIES:
Capital lease obligations (Note 6) 340,563
Accounts payable 303,400
Due to affiliate (Note 7) 841,763
Accrued property taxes (Note 7) 683,558
Accrued expenses and other liabilities 144,149
Deferred revenues (Note 11) 1,181,577
-----------
Total liabilities 3,495,010
-----------
-----------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
OWNERS' EQUITY:
Owners' Equity 8,209,717
-----------
Total liabilities and
owners' equity $11,704,727
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES
Golf course operations $ 765,167 $ 571,778
Sale of RV memberships 136,995 51,380
Sale of developed lots
- 99,961
----------- -----------
Total revenues 902,162 723,119
----------- -----------
----------- -----------
COST OF SALES
Golf course operations 252,548 165,836
Developed lots - 83,190
Total cost of sales 252,548 249,026
----------- -----------
GROSS PROFIT 649,614 474,093
----------- -----------
----------- -----------
EXPENSES:
Selling, general and administrative 2,470,201 2,333,735
Related party management fees (Note 7) 200,000 200,000
----------- -----------
Total expenses 2,670,201 2,533,735
----------- -----------
----------- -----------
Interest income(expense) (38,781) (18,962)
----------- -----------
Net loss $(2,059,368) $(2,078,604)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
Balance January 1, 1996 10,295,663
Capital contributions 1,141,111
Net loss for the year (2,078,604)
-----------
-----------
Balance December 31, 1996 9,358,170
-----------
Capital contributions 910,915
Net loss for the period (2,059,368)
-----------
-----------
Balance December 31, 1997 $8,209,717
-----------
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,059,368) $(2,078,604)
------------ ------------
Adjustments net loss to cash
provided by (used in) operating activities:
Cost of developed lots sold - 83,190
Depreciation and amortization 381,299 336,229
Increase (decrease) from changes in:
Other assets (114,023) (264,478)
Due from affiliate (242,639) -
Accounts payable 92,661 172,210
Accrued expenses and other liabilities 622,226 304,920
Net deferral of sales revenues and
selling expenses 443,673 198,910
------------ ------------
Net cash used in operating activities (876,171) (1,247,623)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (56,001) (48,899)
Additions to real estate - (23,250)
------------ ------------
Net cash provided by (used in) investing
activities (56,001) (72,149)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease repayments (80,294) (67,088)
Contributions 910,915 1,141,111
------------ ------------
Net cash provided by (used in) financing
activities 830,621 1,074,023
------------ ------------
Net increase (decrease) in cash and cash
equivalents (101,551) (245,749)
Cash and cash equivalents at beginning of
period 101,551 347,300
------------ ------------
Cash and cash equivalents at end of
period $ - $ 101,551
------------ ------------
Cash paid during the period for interest $ - $ -
------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1989 and 1992 National Investors Financial, Inc. ("National"),
represented by NASD registered securities broker-dealers, completed the
funding of two real estate loans for the Yosemite/Ahwahnee Programs (the
"Programs") by selling undivided tenant-in-common interests in such loans to
investors. The Yosemite/Ahwahnee I loan was in the amount of $6,500,000 to
426 investors and Yosemite/Ahwahnee II was in the amount of $13,500,000 to
837 investors. In September of 1995, on behalf of the Yosemite/Ahwahnee
investors, National foreclosed on the borrower and took title to the property
("Ahwahnee Golf Course and Resort") involved. The first liens were kept
intact after the foreclosure to protect the investors' interests in the
underlying property during its development. As the investors' interests are
to be converted to common stock in conjunction with a proposed acquisition of
the Programs, the underlying protection of the liens are no longer needed and
will be extinguished as part of the acquisition. Ahwahnee Golf Course and
Resort is projected to be a multi-faceted resort, which currently includes a
country club and a partially completed recreational vehicle park, with plans
to develop the remainder of the project, potentially as a timeshare facility.
The 1,650 acre property is located in Madera County, California,
approximately 15 miles south of Yosemite National Park and is currently held
in trust by National on behalf of the Yosemite/Ahwahnee Investors. The
Company obtained an appraisal as of the date of foreclosure, which assumes
that the property is developed at its highest and best use, and the result of
the appraisal, after certain accounting-related adjustments made by the
Company, was a fair market value of $10,800,000. Therefore, the property has
been written down to its fair market value at the time of the foreclosure and
the investors' interest in the property is reflected as Owners' Equity in the
financial statements. Since taking over these properties, National has
operated them on behalf of the investors through a corporation known as
Ahwahnee Golf Course and Resort, Inc.
The accompanying financial statements include the accounts of the Programs,
which consist of Ahwahnee Golf Course and Resort, Inc., National Investors
Land Holding Trust VII and National Investors Land Holding Trust IX, and do
not include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"),
was formed to be a publicly-held corporation to acquire the businesses of
certain investment programs previously syndicated by National in exchange for
common shares. In addition, American will offer a maximum of 1,000,000
units, which consist of one share of common stock and one warrant at a price
of $10 per unit. Each warrant entitled the holder to purchase two additional
shares of common stock at 80% of the closing price of the stock on the day
prior to exercise of the warrant. The warrant has a term of two years
following the completion of the Offering.
In conjunction with the contemplated transactions, the Program is
currently capitalizing the associated costs and recording these costs as due
from the American. These costs are currently shown as deferred acquisition
costs on the books of American. These costs will, however, be allocated
against a ratio of the proceeds received from the units offering and the
value of the shares given to the program investors in exchange for their
undivided tenant-in-common interests after the completion of both
transactions.
F-27
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Programs' management considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash
equivalents.
REAL ESTATE AND IMPROVEMENTS
Real estate and improvements are carried at cost. Expenditures for
additions and improvements are capitalized, and expenditures for repairs and
maintenance are charged to expense as incurred. Depreciation is provided on
a straight-line basis on land improvements and buildings and improvements
over estimated useful lives ranging from 5-30 years.
Effective January 1, 1996, the Programs adopted the provisions of Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which requires impairment losses to be recorded on long-lived assets
being developed, based on fair value, when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Examples of indicators of
impairment include a significant decrease in the market value of an asset, a
significant change in the extent or manner in which an asset is used or a
significant adverse change in legal or business factors that could affect the
value of an asset.
The estimation process in determining the fair value of real estate assets is
inherently uncertain and relies to a considerable extent on current and future
economic and market conditions, the availability of suitable financing to fund
holding, development, and construction activities, and the repayment or
refinancing of existing indebtedness. Such economic and market conditions may
effect management's development and marketing plans. Accordingly, the ultimate
realizations may differ from amounts presently estimated.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are being provided principally on the straight line method over
the estimated useful lives or the related assets. Estimated useful lives
range from 3-5 years.
REVENUE RECOGNITION
The Programs generate revenues from its golf course operations and sales
of recreational vehicle memberships. Revenues from the sale of recreational
vehicle memberships are not recognized until the Programs have received at
least 10% of the total purchase price and the statutory 3 day rescission
period has elapsed. Until a contract to purchase a recreational vehicle
membership qualifies as a sale, all payments received are accounted for as
customer deposits. The Program sells these recreational vehicle memberships
to members on a timeshare plan. The length of this plan ranges from the
length of the remaining lifetime of the primary member to the lifetimes of
the primary member, the primary member's child and the primary member's
grandchild. The membership rights include the use of the recreational
vehicle park and facilities. The only restriction to the membership is that
members may only use the recreational vehicle park for a maximum of seven
days at a time with a minimum of seven days between visits. These revenues
are recognized into income on a straight-line basis over the expected life of
the memberships sold, which approximates 10 years. In addition, costs
directly related to the sale of such memberships are deferred and recognized
as selling expenses over this same amortization period.
F-28
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF SALES AND INVENTORY OF RV MEMBERSHIPS
Cost of sales of recreational vehicle memberships is determined by
dividing the total costs incurred in the development of the recreational
vehicle facility by the number of units completed. Inventory of recreational
vehicle memberships, including all land costs and improvements, is stated at
cost, which is not greater than its net realizable value.
INCOME TAXES
The financial statements include the activity of the Programs, whose
income or losses are included in the investors' respective tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Based upon certain market assumptions and information available to
management, the carrying values of financial instruments as of December 31,
1997 approximate their fair values. The carrying value of cash and cash
equivalents, accounts payable and accrued expenses are assumed to approximate
fair value as they are short term in nature and receivable or payable on
demand. The fair values of notes receivable and capital lease obligations
were estimated based on similar interest rates available for comparable
financial instruments.
NOTE 3. REAL ESTATE AND IMPROVEMENTS
Real estate and improvements consist of the following:
<TABLE>
<CAPTION>
December 31,
1997
-----------
<S> <C>
Land $ 8,114,645
Land improvements 1,890,656
Buildings and improvements 820,783
-----------
10,826,084
Less accumulated depreciation (689,010)
-----------
$10,137,074
-----------
-----------
</TABLE>
F-29
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4. NOTES RECEIVABLE
The Programs make unsecured loans to individuals in conjunction with its
sales of recreational vehicle memberships. These loans bear interest at
rates between 0% and 17%, range in length from one to seven years and may be
prepaid at any time without penalty. Notes receivable are shown net of
discounts of $24,950 as of December 31, 1997. As of December 31, 1997, a
total of $324,502 of the notes receivable balance is expected to be collected
after one year. The total allowance for doubtful accounts as of December 31,
1997 is $41,073.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
1997
-----------
<S> <C>
Capital lease equipment $ 505,998
Furnitures and fixtures 25,349
Machinery and equipment 37,033
-----------
568,380
Less accumulated depreciation (192,322)
-----------
$ 371,058
-----------
-----------
</TABLE>
NOTE 6. CAPITAL LEASE OBLIGATIONS
Future minimum rental payments under noncancellable capital leases as of
December 31, 1997 were as follows:
<TABLE>
<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-30
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Programs are currently managed, subject to a servicing agreement, by
National. National also currently manages five other programs under similar
servicing agreements. As documented within the servicing agreement, National
is to receive an annual fee equal to 1% of the original loan balance.
National's requirements under the servicing agreement include managing the
assets of the Programs to assure that the purpose and activities of the
Programs are continued for the investors. The Programs incurred asset
management expenses of $200,000 and $200,000 for the years ended December 31,
1996 and 1997. Additionally, the Programs accrued compensation expense of
$264,000 and $264,000 for the years ended December 31, 1996 and 1997 payable
to senior management of the Company, who are also principals of National.
Total accrued and unpaid management fees and compensation as of December 31,
1997 were $841,763.
LAWSUITS
The Program is, from time to time, involved in various lawsuits
generally incidental to its business operations. In the opinion of
management, the ultimate resolution of these matters, if any, will not have a
significant effect on the financial position of the Program.
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $683,558 as of December 31,
1997. The Program is in the process of negotiating a payment plan with
appropriate taxing authorities relative to the payment of these past due
taxes.
NOTE 8. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as
Servicing Agent, a majority of the investors has the power to require all
investors in the Program to make additional capital contributions. Such
contributions are only recorded to the extent of cash received.
NOTE 9. DEBT FORECLOSURE
In September 1995, the management company, for the benefit of investors
in debt securities secured by the Property, foreclosed on the Property. Due
to the debtor's financial position as of December 31, 1994, the foreclosure
has been accounted for as if it took place prior to January 1, 1995.
NOTE 10. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the years ended December 31, 1996 and 1997, the Company entered
into capital lease obligations of $298,572 and $0.
F-31
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 11. DEFERRED REVENUE AND MEMBERSHIP SELLING EXPENSES
Deferred revenue consists of amounts deferred in conjunction with the
sales of campground memberships. Components of the changes in deferred
membership selling expenses and deferred membership sales revenue are as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Deferred Selling Expenses:
Deferred selling expenses, beginning of year $ 263,508 $ 0
---------- ----------
Expenses deferred 338,627 292,787
Expenses recognized (63,142) (29,279)
---------- ----------
Net change 275,485 263,508
---------- ----------
Deferred selling expenses, end of year $ 538,993 $263,508
Deferred Revenue:
Deferred revenue, beginning of year $ 462,419 $ 0
---------- ----------
Revenue deferred 856,153 513,799
Revenue recognized (136,995) (51,380)
---------- ----------
Net change 719,158 462,419
---------- ----------
Deferred Revenue, end of year $1,181,577 $462,419
---------- ----------
</TABLE>
F-32
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Mori Point "Trudy Pat"
Program (the "Mori Point Program") (as defined in Note 1) as of December 31,
1997, and the related statements of operations, changes in owners' equity and
cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Mori Point Program as of December 31, 1997, and the results of operations and
cash flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-33
<PAGE>
THE MORI POINT PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
ASSETS:
Land $ 4,100,000
Cash and cash equivalents 7,204
Due from affiliate (Note 1) 232,707
-----------
Total assets $ 4,339,911
-----------
-----------
LIABILITIES:
Due to affiliate (Note 3) $ 497,885
Accrued property taxes (Note 3) 298,369
Accrued expenses 86,615
-----------
Total liabilities $ 882,869
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 3,457,042
-----------
Total liabilities and
owners' equity $ 4,339,911
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
EXPENSES:
Selling, general and administrative $ 181,034 $ 90,348
Related party management fees (Note 3) 100,000 100,000
----------- -----------
Total expenses 281,034 190,348
Interest income 1,586 1,223
----------- -----------
Net loss $ (279,448) $ (189,125)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
---------
<S> <C>
Balance January 1, 1996 3,318,333
Capital contributions 202,310
Net loss for the year (189,125)
---------
Balance December 31, 1996 3,331,518
Capital contributions 404,972
Net loss for the period (279,448)
---------
Balance December 31, 1997 $3,457,042
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (279,448) $ (189,125)
Increase (decrease) from changes in:
Due from affiliate (232,707) --
Accrued expenses 75,355 25,847
---------- ----------
Net cash used in operating
activities (436,800) (163,278)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 404,972 202,310
---------- ----------
Net cash provided by
financing activities 404,972 202,310
Net increase (decrease) in cash and cash
equivalents (31,828) 39,032
Cash and cash equivalents at beginning
of period 39,032 --
---------- ----------
Cash and cash equivalents
at end of period $ 7,204 $ 39,032
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1990 National Investors Financial, Inc. ("National"), represented
by NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Mori Point "Trudy Pat" Program (the "Program") in the
amount of $10,000,000 by selling undivided tenant-in-common interests in such
loan to 486 investors. In August of 1992, on behalf of the Mori Point
Program investors, National foreclosed on and took title to the property
("Mori Point") involved in the Mori Point Program. Mori Point is currently
raw land which is zoned for a 275 room hotel/conference center, 60
residential units and an equestrian/commercial facility. The property is
located in Pacifica, California and is currently held in trust by National on
behalf of the Mori Point Investors. The Mori Point property was recently
appraised at $4,100,000 as of the date of foreclosure. Therefore, the
property has been written down to its fair market value at the time of the
foreclosure and the investors' interest in the property is reflected as
Owners' Equity in the financial statements.
The accompanying financial statements include the accounts of the Program,
which consists of the Mori Point Land Holding Trust, and do not include the
accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), was
formed to be a publicly-held corporation to acquire the businesses of certain
investment programs previously syndicated by National in exchange for common
shares. In addition, American will offer a maximum of 1,000,000 units, which
consist of one share of common stock and one warrant at a price of $10 per
unit. Each warrant entitled the holder to purchase two additional shares of
common stock at 80% of the closing price of the stock on the day prior to
exercise of the warrant. The warrant has a term of two years following the
completion of the Offering.
In conjunction with the contemplated transactions, the Program is
currently capitalizing the associated costs and recording these costs as due
from the American. These costs are currently shown as deferred acquisition
costs on the books of American. These costs will, however, be allocated
against a ratio of the proceeds received from the units offering and the
value of the shares given to the program investors in exchange for their
undivided tenant-in-common interests after the completion of both
transactions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Management of the Program considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash
equivalents.
F-38
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LAND
Land is carried at cost. Effective January 1, 1996, the Program adopted
the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS
No. 121") "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", which requires impairment losses to be
recorded on long-lived assets being developed, based on fair value, when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Examples of indicators of impairment include a significant decrease
in the market value of an asset, a significant change in the extent or manner
in which an asset is used or a significant adverse change in legal or
business factors that could affect the value of an asset.
The estimation process in determining the fair value of real estate assets is
inherently uncertain and relies to a considerable extent on current and
future economic and market conditions, the availability of suitable financing
to fund holding, development, and construction activities, and the repayment
or refinancing of existing indebtedness. Such economic and market conditions
may effect management's development and marketing plans. Accordingly, the
ultimate realizations may differ from amounts presently estimated.
INCOME TAXES
The financial statements include the activity of the Program, whose income
or losses are included in the investors' respective tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages six other programs under similar
servicing agreements. As documented within the servicing agreement, National
is to receive an annual fee equal to 1% of the original loan balance.
National's requirements under the servicing agreement include managing the
assets of the Program to assure that the purpose and activities of the
Program are continued for the investors. The Program incurred asset
management expenses of $100,000 and $100,000 for the years ended December 31,
1996 and 1997. Total accrued and unpaid management fees as of December 31,
1997 was $497,885.
F-39
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant
effect on the financial position of the Program.
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $298,369 as of December 31,
1997. The Program has entered into a five-year payment plan with appropriate
taxing authorities relative to the payment of these past due taxes.
NOTE 4. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in
the Program to make additional capital contributions. Such contributions are
only recorded to the extent of cash received.
F-40
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Sacramento/Delta Greens
"Trudy Pat" Program (the "Sacramento/Delta Greens Program") (as defined in
Note 1) as of December 31, 1997, and the related statements of operations,
changes in owners' equity and cash flows for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Sacramento/Delta Greens Program as of December 31, 1997, and the results of
operations and cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-41
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
ASSETS:
Land $ 2,000,000
Cash and cash equivalents 4,099
Due from affiliate (Note 1) 104,528
------------
Total assets $ 2,108,627
------------
------------
LIABILITIES:
Accounts payable $ 25,641
Due to affiliate (Note 3) 188,344
Accrued property taxes (Note 3) 45,502
Accrued expenses 49,750
------------
Total liabilities 309,237
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 1,799,390
------------
Total liabilities and owners' equity $ 2,108,627
------------
------------
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
EXPENSES:
Selling, general and administrative $ 115,620 $ 169,649
Land write-down (Note 5)
230,000 845,000
Related party management fees (Note 3)
50,000 50,000
-------------- --------------
Total expenses 395,620 1,064,649
Interest income 824 1,965
-------------- --------------
Net income (loss) $ (394,796) $ (1,062,684)
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
--------------
<S> <C>
Balance January 1, 1996 2,833,629
Capital contributions 262,572
Net loss for the year (1,062,684)
--------------
Balance December 31, 1996 2,033,517
Capital contributions 160,669
--------------
--------------
Net loss for the year (394,796)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Balance December 31, 1997 $ 1,799,390
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (394,796) $ (1,062,684)
Adjustment to reconcile net income
(loss) to net cash provided by (used in)
operating activities -
Real estate property write-down 230,000 845,000
Increase (decrease) from changes in:
Due from affiliate (104,528) -
Accounts payable (4,283) 29,924
------------ -------------
Accrued expenses 54,454 (19,834)
Net cash provided by (used in)
operating activities (219,153) (207,594)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 160,669 262,572
------------ -------------
Net cash provided by
financing activities 160,669 262,572
------------ -------------
Net increase (decrease) in cash and cash
equivalents (58,484) 54,978
Cash and cash equivalents at beginning
of period 62,583 7,605
------------ -------------
Cash and cash equivalents
at end of period $ 4,099 $ 62,583
------------ -------------
------------ -------------
Cash paid during the period for interest $ -- $ --
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1989 National Investors Financial, Inc. ("National"), represented
by NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Sacramento/Delta Greens Program (the "Program") in the
amount of $5,000,000 by selling undivided tenant-in-common interests in such
loan to 332 investors. In March of 1993, on behalf of the Sacramento/Delta
Greens Program investors, National foreclosed on the property and took title
to the property ("Sacramento/Delta Greens") involved in the Sacramento/Delta
Greens Program. Sacramento/Delta Greens is currently raw land which is zoned
and has an approved tentative tract map for a single-family detached housing
development of 534 homes. The property is located in Sacramento, California
and is currently held in Trust by National on behalf of the Sacramento/Delta
Greens investors. The Sacramento/Delta Greens property was recently
appraised at $3,075,000 as of the date of foreclosure. Therefore, the
property has been written down to its fair market value at the time of the
foreclosure and the investors' interest in the property is reflected as
Owners' Equity in the financial statements.
The accompanying financial statements include the accounts of the Program,
which consists of the Sacramento/Delta Greens Land Holding Trust, and do not
include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"),
was formed to be a publicly-held corporation to acquire the businesses of
certain investment programs previously syndicated by National in exchange for
common shares. In addition, American Family Holdings, Inc. will offer a
maximum of 1,000,000 units, which consist of one share of common stock and
one warrant at a price of $10 per unit. Each warrant entitled the holder to
purchase two additional shares of common stock at 80% of the closing price of
the stock on the day prior to exercise of the warrant. The warrant has a term
of two years following the completion of the Offering.
In conjunction with the contemplated transactions, the Program is
currently capitalizing the associated costs and recording these costs as due
from the American. These costs are currently shown as deferred acquisition
costs on the books of American. These costs will, however, be allocated
against a ratio of the proceeds received from the units offering and the
value of the shares given to the program investors in exchange for their
undivided tenant-in-common interests after the completion of both
transactions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Management of the Program considers all highly liquid investments with
an original maturity of three months or less when purchased to be cash
equivalents.
F-46
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LAND
Land is carried at cost. Effective January 1, 1996, the Program adopted
the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS
No. 121") "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", which requires impairment losses to be
recorded on long-lived assets being developed, based on fair value, when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Examples of indicators of impairment include a significant decrease
in the market value of an asset, a significant change in the extent or manner
in which an asset is used or a significant adverse change in legal or
business factors that could affect the value of an asset.
The estimation process in determining the fair value of real estate assets is
inherently uncertain and relies to a considerable extent on current and future
economic and market conditions, the availability of suitable financing to fund
holding, development, and construction activities, and the repayment or
refinancing of existing indebtedness. Such economic and market conditions may
effect management's development and marketing plans. Accordingly, the ultimate
realizations may differ from amounts presently estimated.
INCOME TAXES
The financial statements include the activity of the Program, whose
income or losses are included in the investors' respective tax returns..
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages six other programs under similar
servicing agreements. As documented within the servicing agreement, National is
to receive an annual fee equal to 1% of the original loan balance. National's
requirements under the servicing agreement include managing the assets of the
Program to assure that the purpose and activities of the program are continued
for the investors. The Program incurred asset management expenses of $50,000
and $50,000 for the years ended December 31, 1996 and 1997. Total accrued and
unpaid management fees as of December 31, 1997 was $188,344.
F-47
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant effect
on the financial position of the Program.
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $45,502 as of December 31, 1997.
The Program has entered into a five-year payment plan with appropriate taxing
authorities relative to the payment of these past due taxes.
NOTE 4. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in the
Program to make additional capital contributions. Such contributions are only
recorded to the extent of cash received.
NOTE 5. LAND WRITE-DOWN
In 1993, 596 lots were approved and appraised at a value of $5,159 per lot.
Based on an appraisal done in May 1997, the appraised value of the land had
decreased in 1996 by approximately 27% due to a decline in economic conditions
of the Sacramento/Delta Greens surrounding area, which resulted in the writedown
of the cost of the land of $845,000. Due to a decrease in zoning of the lots to
534 in 1997, a $230,000 writedown in the cost of the land was recorded during
the year ended December 31, 1997.
F-48
<PAGE>
APPENDICES
Appendix 1 Fairness Opinion
Appendix 2 Selected Additional Appraisal Information
Appendix 3 Prior Performance Schedules
<PAGE>
APPENDIX 1
[Form of Fairness Opinion]
_________ __, 1998
Boards of Directors of National Investors Financial, Inc., and
American Family Holdings, Inc., and each of the Investors in the following:
Sacramento/Delta Greens "Trudy Pat" Program
Oceanside "Trudy Pat" Program
Yosemite/Ahwahnee I "Trudy Pat" Program
Yosemite/Ahwahnee II "Trudy Pat" Program
Mori Point "Trudy Pat" Program
Ladies and Gentlemen:
We understand that a transaction is contemplated (the "Transaction") whereby
a newly formed company, American Family Holdings, Inc. (the "Company"), will
purchase the real estate (the "Properties"), other assets, liabilities and
business activities relating to certain trust deed participation ("Trudy
Pat") loan programs sponsored by National Investors Financial, Inc.
("National"). The Trudy Pat loans were initially funded by groups of
investors (the "Investors") who, by virtue of the borrowers' default on the
loans, have become the beneficial owners of the Properties which secured the
loans. These include Trudy Pat loans on real property in Sacramento,
California ("Delta Greens"), Pacifica, California ("Mori Point"), Oceanside,
California ("Oceanside"), and two separate parcels in Oakhurst, California
("Yosemite/Ahwahnee I" and "Yosemite/Ahwahnee II"). The Company's initial
capitalization was [529,037] shares of common stock, represented by 216,867
shares each to two partnerships controlled by the principals of National and
95,313 total shares issued to employees of National and the Company, and
consultants to certain of the programs (collectively, the "Founders'
Shares"). As consideration for the purchase of the programs, the Company
will issue shares of common stock (the "Shares") to the respective Investors
in the following amounts: [193,650] Shares to the Sacramento/Delta Greens
Investors (representing [7.76] percent of the total shares outstanding after
the issuance of the Shares), [485,704] Shares to the Mori Point Investors
(representing [19.45] percent of the total Shares outstanding after the
issuance of the Shares), [487,571] shares to the Oceanside Investors
(representing [19.53] percent of the total Shares outstanding after the
issuance of the Shares), [320,567 Shares to the Yosemite/Ahwahnee I
Investors (representing [12.84] percent of the total Shares outstanding
after the issuance of the Shares) and [513,755] Shares to the
Yosemite/Ahwahnee II Investors (representing [20.58] percent of the total
Shares outstanding after the issuance of the Shares). In connection with
the Transaction, it is anticipated that the Company's common stock will be
listed for public sale on the ____________ under the symbol ________.
The Company will also commence an offering of additional common shares to
the Investors in the aggregate amount of
A1.1
<PAGE>
up to $10,000,000, at a price of $10 per Unit, each Unit representing one new
share of common stock and one warrant to purchase two additional shares of
common stock at 80 percent of the Company's stock price immediately prior to
the exercise date.
You have requested our opinion (the "Opinion") as to the fairness of the
allocation of Shares pursuant to the Transaction, on a fully diluted basis
inclusive of the Founders' Shares, from a financial point of view, to the
Investors in each of Sacramento/Delta Greens, Mori Point, Oceanside,
Yosemite/Ahwahnee I and Yosemite/Ahwahnee II. Our Opinion is limited to the
allocation of Shares to the Investors in connection with the Transaction.
Therefore, we have not performed an analysis of, and express no opinion with
respect to, the proposed price of $10 per Unit. In addition, we have not
performed an analysis of, and express no opinion with respect to, the Company's
cost structure on a going forward basis and whether such structure will result
in a greater cost for services to the Investors than they were incurring
collectively when the programs were being managed by National.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the
circumstances. Among other things, we have:
1. Reviewed a draft copy of the Consent Solicitation Statement/Prospectus for
the Transaction (the "Prospectus") dated _______, 1998;
2. Reviewed the following real estate appraisals (the "Appraisals") with
respect to the Properties:
a) an appraisal of the Yosemite/Ahwahnee I and II Properties,
prepared by Arnold Associates, as of May 1, 1997 (the "Arnold
Appraisal"),
b) an appraisal of the Yosemite/Ahwahnee I and II Properties, prepared by
the Mentor Group, as of October 10, 1996 (the "Mentor Appraisal"),
c) an appraisal of the Mori Point Property, prepared by PKF
Consulting, as of May 19, 1997 (the "PKF Appraisal"),
d) an appraisal of the Delta Greens Property, prepared by David E, Lane,
Inc., as of May 9, 1997 (the "Lane Appraisal"), and
e) an appraisal of the Oceanside Property, prepared by Boznanski and
Company, as of March 31, 1997 (the "Boznanski Appraisal");
3. Reviewed the following feasibility studies with respect to the Properties:
a) a study of the Yosemite/Ahwahnee I and II Properties, prepared by
LEXES Enterprises, dated August 28, 1996,
A1.2
<PAGE>
b) a study of the Yosemite/Ahwahnee I and II Properties, prepared by RCI
Consulting, dated November 1996, and
c) a study of the Delta Greens Property, prepared by Barnett
Research Associates, dated December 23, 1996;
4. Reviewed the Agreement of Purchase and Sale and Joint Escrow Instructions
between Oceanside Development, Inc. and a publicly traded home builder,
dated as of June 18, 1997 (the "Purchase Agreement"), relating to a
potential sale of a portion of the Oceanside Property, the Symphony tract
(which agreement has since been canceled);
5. Reviewed audited financial statements for each of the Delta Greens
Property, the Mori Point Property, the Oceanside Property and the
Yosemite/Ahwahnee I and II Properties, as well as pro forma consolidated
financial statements for the Company, for the two years ended December 31,
1997;
6. Met with management of the Company and National regarding matters pertinent
to our analysis;
7. Conducted site visits to each of the Properties, and met with the General
Manager of the Yosemite/Ahwahnee I and II Properties;
8. Reviewed certain documents related to the Trudy Pat loans on the
Properties;
9. Reviewed certain other documents and schedules which were pertinent to our
analysis; and
10. Conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company or the Properties and
do not assume any responsibility with respect to it. Our Opinion is
necessarily based on business, economic, market and other conditions as they
exist and can be evaluated by us at the date of this letter.
We have assumed that the financial statements provided to us correctly
reflect the financial results and condition of the Company (on a pro forma
basis) and the programs for the time periods covered in accordance with
generally accepted accounting principles consistently applied. We have
further assumed that there has been no material change in the financial
results and condition of the Company (on a pro forma basis) or the programs
since the date of the most recent financial statements made available to us.
We have not been requested to, and did not, solicit third party indications
of interest in acquiring all or any part of the Properties. Furthermore, at
your request, we have not negotiated the Transaction or advised you with
respect to alternatives to it.
A1.3
<PAGE>
Our analysis began with a determination of the enterprise value of each of
the Programs on a stand alone basis. The enterprise value of most entities
whose primary business purpose is owning real estate is determined based on
the adjusted book value (or net asset value) approach. Therefore, we deemed
this to be a reasonable methodology for determining the enterprise value of
each of the Oceanside, Mori Point, Yosemite/Ahwahnee I and II, and Delta
Greens programs on a stand alone basis. In the adjusted book value approach,
the estimated current market value of individual assets and liabilities are
substituted for their carrying value on the programs' financial statements
(or book value). The enterprise value is the resulting value of the equity
after subtracting liabilities from the market value of assets.
To determine the current net asset value of each of the programs, we relied
on the Appraisals to represent the market value of the respective Properties,
except in the case of the Yosemite/Ahwahnee I and II Properties, wherein we
relied upon management's reconciliation of the two existing appraisals. In
either case, we assumed, without independent analysis or verification, that
the property values thus derived were representative of the current fair
market values of the respective Properties. In determining net asset value,
we used the book value as of December 31, 1997 for most of the non-real
estate assets. This was considered reasonable because the majority of these
assets consist of cash, restricted cash, accounts receivable, notes
receivable or amounts due from affiliates, which are relatively liquid and
worth approximately their book value. With respect to property and equipment
(excluding real estate), no appraisals were provided to us. Management
believes the book value of property and equipment to be reasonably indicative
of its market value. Deferred membership selling expense (an asset) and
deferred revenues (a liability) which appear on the balance sheet of the
Yosemite/Ahwahnee II program as of December 31, 1997 were eliminated because
these assets have no market value. Liabilities (except for deferred
revenues) were subtracted out at book value. In our net asset value
calculation, we did not reduce the liabilities by the estimated amounts to be
forgiven by National. Using the aforementioned methodology, the resulting
net asset values as of December 31, 1997 were as follows (rounded to the
nearest $000): $3,700,000 for Oceanside (or 19.2 percent of the combined net
asset value); $3,171,000 for Yosemite/Ahwahnee I (or 16.5 percent of the
combined net asset value); $5,710,000 for Yosemite/Ahwahnee II (or 29.7
percent of the combined net asset value); $4,847,000 for Mori Point (or 25.2
percent of the combined net asset value); and $1,799,000 for Sacramento/Delta
Greens (or 9.4 percent of the combined net asset value).
However, in addition to their respective net asset values for the programs on
a stand alone basis, we also considered the potential synergy among the
programs based on the business plan of the Company after the Acquisition and
how this should effect the overall allocation. In this regard, we reviewed
the two feasibility studies for the Yosemite/Ahwahnee I and II properties, as
well as the Delta Greens feasibility study. The Yosemite/Ahwahnee studies
indicate that the development of the Property as a mixed use resort, with
primary emphasis on the sale of time share units, is feasible and could be
expected to generate significant positive cash flow over the next several
years. However, additional investment in
A1.4
<PAGE>
infrastructure will be required before the project will become cash flow
positive. The feasibility study for the Delta Greens Property indicates that
residential development on the Property is feasible based on expected home
prices and absorption rates in spite of the fact that the Property is located
near a high crime area which will impact selling prices. While no
feasibility study was prepared for the Mori Point Property, the real estate
appraisal prepared for the Property was performed on the basis of expected
returns from a hotel conference center development, which was the concluded
highest and best use. However, substantial additional funding will be
required to bring that project to fruition.
Unlike the other programs whose properties require substantial additional
capital in order to realize their development potential, the Oceanside
program has been generating positive cash flow. Its property is also the
most liquid. Therefore, we believe that the fact that Oceanside will receive
approximately a 480 basis point percent premium to what its allocation would
be purely on the basis of its relative stand alone net asset value is
justified because of the value that its liquidity contributes to the overall
business plan the Company is expected to undertake after the acquisition.
This premium is further supported by the fact that there is a possibility
that the Oceanside Property could be sold for more than its appraised value.
On the other hand, the fact the Yosemite/Ahwahnee I and II Programs will
collectively receive approximately 390 basis points less than what they would
receive purely on the basis of stand alone net asset value is justified
because these Programs are currently operating at a loss and require the
largest amount of funding.
With respect to the [495,318] Founders Shares, we were primarily concerned
with the [400,014] Shares to be issued to the family limited partnerships
under the control of David Lasker and James Orth. For analytical purposes,
we considered these shares as consideration for three separate items. The
first represents consideration for the approximately $946,000 forgiveness of
indebtedness, which equates to 94,611 Shares based upon an assumed price of
$10 per Share. The second component relates to the consideration for Messrs.
Lasker and Orth in connection with their responsibilities as officers of the
Company. We assumed this number of shares would be approximately 50,000
Shares, which represents the approximate amount of shares to be issued to Mr.
Albertson on the basis of arm's length negotiations. The remaining 205,403
Shares, or _____ percent of the total Shares to be issued in connection with
the Acquisition, represents consideration for the role of Messrs. Lasker and
Orth in structuring and completing the Acquisition, which is reasonable given
the fact that the transaction they have structured should, among other
things, enhance the Investors' liquidity more than enough to offset the
dilution resulting from the issuance of the Shares. Even though there is no
guarantee that an active market will develop for the Company's Shares, when
compared with likely discounts for lack of marketability in excess of 30
percent for their current ownership interests (based on historical studies),
the Investors' liquidity should be expected to be increased significantly.
Based on the foregoing, and in reliance thereon, it is our opinion that the
allocation of the Shares pursuant to the Transaction, on a fully diluted basis
inclusive of the Founders' Shares, is fair to
A1.5
<PAGE>
the Investors in Delta Greens, Mori Point, Oceanside, Yosemite/Ahwahnee I and
Yosemite/Ahwahnee II, from a financial point of view.
This Opinion is furnished solely for your benefit and may not be relied upon
by any other person without our express, prior written consent. We
understand, however, that this Opinion may be referred to in the Prospectus
to be filed by the Company in connection with this Transaction. This Opinion
is delivered to you subject to the conditions, scope of engagement,
limitations and understandings set forth in this Opinion and subject to the
understanding that the obligations of HVA in the Transaction are solely
corporate obligations, and no officer, director, employee, agent, shareholder
or controlling person of HVA shall be subjected to any personal liability
whatsoever to any person, nor will any such claim be asserted by or on behalf
of you or your affiliates.
HOULIHAN VALUATION ADVISORS
A1.6
<PAGE>
Appendix 2
SELECTED ADDITIONAL APPRAISAL INFORMATION
The following selected additional information about the appraisals of
the Programs' Properties is presented so that the Investors can better
understand the methods used and results of the appraisals.
<TABLE>
<CAPTION>
SACRAMENTO/DELTA GREENS PROGRAM (David E. Lane, Inc.)
<S> <C> <C>
Sales Comparison Approach(1) $2,134,000
Land Residual Approach(2) 2,403,000
Discounted Cash Flow(3) 1,815,000
Conclusion of "as is" value $2,000,000
----------
----------
</TABLE>
Heaviest reliance was placed on the Sales Comparison Approach because
the Property is undeveloped and generates no revenue.
Material Assumptions
- As of the 1993 date of value the property was approved for 596 lots,
including 144 duplexes.
- As of the 1997 date of value the property is approved for 534 lots,
all single family.
- Physical and economic conditions as of the 1993 date of value were as
reported in the appraisal. No inspection or investigation was made in 1993.
Assumptions particular to cash flow analysis
- A sell-out, or absorption, period of ten years.
- A base paper lot value of $7,500 for small groups of lots, with
step-up increases of $500 per lot per year - as many option or phased sales
are usually arranged (last year is at $12,000 per lot).
- Lots sold in groups of two phases per year in numerical order, using
the current tentative map of 534 lots.
- Commission and marketing of 5%, as limited sales agreements are
envisioned.
A2.1
<PAGE>
- Real estate taxes based on an interpolated value of $2,000,000,
times the combined 1.5% tax and levies rate, with the declining total value
of the remaining lots increased by 2% annually.
- Miscellaneous costs, such as insurance and overhead, of 1% of sales.
- A discount rate of 20%.
<TABLE>
<CAPTION>
OCEANSIDE PROGRAM (Boznanski & Company)
SYMPHONY 111 lots
<S> <C> <C>
Sales Comparison Approach(1) $2,636,000 - $3,164,000
Land Residual Approach(4) 2,850,000
Conclusion of "as is" value $2,850,000
----------
----------
</TABLE>
The Land Residual Approach was deemed to be the more realistic as it
took into account remaining development costs and was approximately the
mid-point of Sales Comparison Approach range.
<TABLE>
<CAPTION>
MORI POINT (PKF Consulting)
<S> <C> <C>
Discounted Cash Flow(3) $5,300,000
Ground Rent Capitalization Approach(5) 6,000,000
Sales Comparison Approach(1) 5,400,000
Conclusion of "as is" value $5,500,000
----------
----------
</TABLE>
Material Assumption
- The project will be open by January 1, 2001.
- Assumes a sell out of ten years
As the sales comparisons available were not similarly sized or located,
of a similar development potential, the greatest reliance was placed on the
Discounted Cash Flow Approach as good market information was available to
support the potential cash flow and development cost of the potential
project. The Ground Rent Capitalization Approach was used as a test of
reasonableness.
<TABLE>
<CAPTION>
YOSEMITE/AHWANHEE I AND II (Arnold Associates)
<S> <C> <C>
GOLF COURSE/COUNTRY CLUB
Sales Comparison Approach(1) $5,400,000
Income Approach(6) 4,810,000
Cost Approach(7) 6,270,000
Conclusion of "as is" value $4,480,000*
----------
----------
</TABLE>
A2.2
<PAGE>
* Reflects a $5,100,000 stabilized value less $620,000 of lost income
during stabilization process of the golf course.
The Sales Comparison Approach was deemed the most reliable because
sufficient market data existed, although the comparables were superior in
location, quality or condition. The Income Approach was not reliable as
there was no historical data available.
Material Assumption
- Stabilized income and rounds played.
<TABLE>
<CAPTION>
RV PARK
-------
<S> <C> <C>
Sales Comparison Approach(1) $3,886,000
Cost Approach(7) 3,986,000
Conclusion of "as is" value $3,886,000
----------
----------
</TABLE>
The Sales Comparison Approach was deemed the most reliable. The Cost
Approach was suspect because of lack of historical data. There was no
historical data to support the Income Approach.
<TABLE>
<S> <C>
COUNTRY CLUB ESTATES ("as is") $2,250,000
ESTATE "OUTLOTS" F, G AND H ("as is") $5,800,000
OTHER "OUTLOTS" C, D AND E ("as is") $4,500,000
</TABLE>
In each of the last three categories, only the Sales Comparison Approach
was used as such approach was deemed the only reliable indicator value for
the types of property in question.
Valuation qualification for the Estates: Changes in concept and
realignment of Road 621 could change density and possibly trigger additional
wildlife habitat easement acreage.
YOSEMITE/AHWAHNEE I AND II (MENTOR)
Utilizing a sales comparison approach(1) for the undeveloped land and a
cost approach(7) for the balance of the Properties, in October 1996, The Mentor
Group, Inc. appraisal valued the
<TABLE>
<S> <C> <C>
Country Club Estates ("as is") $ 530,000
Remaining Real Estate
Land 1,895,000
Buildings 1,025,000
Land Improvements 541,200
Conclusion of "as is" value $4,000,000
----------
----------
</TABLE>
A2.3
<PAGE>
At the time of the appraisal, The Mentor Group did not adopt the income
capitalization approach for the golf course portion because it was not
projected to be profitable in the near future and needed considerable
expenditures to be operational. The sales comparison approach was not used
for the golf course portion because there were no comparable sales.
- ----------------------
(1) The SALES COMPARISON APPROACH produces an estimate of value
by comparing the sales and/or listings of similar properties in the
same area as the subject property or in competing areas. This
technique is used to indicate the value established by informed
buyers and sellers in the market.
(2) In a LAND RESIDUAL ANALYSIS, a simple deduction is applied to
an estimated finished-lot price that a homebuilder could afford to
pay in the neighborhood.
(3) A DISCOUNTED CASH FLOW ANALYSIS is used to value vacant land
that has the potential for development for a use when that use
represents the likely highest and best use of the land.
(4) The OCEANSIDE RESIDUAL LAND analysis includes two separate
scenarios. The first utilizes a finished land value estimate, and
the second utilizes a finished product (land plus home plus site
improvements) as a basis from which to back out all necessary costs
to arrive at the finished values.
(5) The GROUND RENT APPROACH is particularly appropriate for
special use properties such as hotels, where there is not a
sufficient number of truly comparable land sales to accurately
estimate the value of the site using the sales comparison approach.
Ground rent is the amount paid for the right to use and occupy the
land according to the terms of a ground lease. It corresponds to the
value of the land owner's interest in the land, the lease fee
interest.
(6) The INCOME CAPITALIZATION APPROACH is based on an estimate of
the subject property's possible net operating income. The net
operating income is capitalized to arrive at an indication of value
from the standpoint of an investment. This method measures the
present worth of anticipated future benefits (net income) derived
from the property.
(7) The COST APPROACH considers the current cost of reproducing
or replacing a property, less accrued depreciation in the property.
A summation of the market value of the land assumed vacant and
reproduction cost new of the improvements provides an indication of
the total value of the property.
A2.4
<PAGE>
General Appraisal Assumptions
1. SACRAMENTO/DELTA GREENS PROGRAM
- The legal description, dimensions, and areas used herein are assumed
to be correct.
- Title to the property is assumed to be free and clear of any liens or
encumbrances, and to be merchantable title, unless otherwise specified herein.
- No responsibility is assumed for matters that are legal in nature.
- Information furnished by the appraiser by others has been reviewed and
analyzed and is believed to be reasonably accurate, but cannot be guaranteed.
- Unless otherwise specified herein, it is assumed that there are no
adverse subsurface conditions, particularly those relating to soil-bearing
capacity.
- Unless otherwise stated in this report: The existence of hazardous
material, which may or may not be present on the property, was not observed
by the appraiser. The appraiser has no knowledge of the existence of such
materials on or in the property. The appraiser, however, is not qualified to
detect such substances. He presence of substances such as asbestos, radon
urea-formaldehyde foam insulation, or other potentially hazardous materials
may affect the value of the property. The value estimate is predicated on
the assumption that there is no such material on or in the property that
would cause a loss in value. No responsibility is assumed for any such
conditions, or for any expertise or engineering knowledge required to
discover them.
2. OCEANSIDE PROGRAM
- That the vesting and legal description furnished this appraiser are
correct.
- That measurements and areas furnished by others are correct. No
survey has been made for the purpose of the appraisal.
- That the maps and exhibits found in this report are provided for
reader reference purposes only. No guarantee as to accuracy is expressed or
implied.
- That the property is appraised as if free and clear of liens and that
the title is good and marketable.
- That no guarantee is made as to the corrections of estimates or
opinions furnished by others which have been used in making this appraisal.
- That no liabilities be assumed on account of inaccuracies in such
estimates or opinions.
A2.5
<PAGE>
- That no liability is assumed on account of matters of a legal
nature affecting this property, such as title defects, liens, encroachments,
overlapping boundaries, etc.
- Unless otherwise stated in this report, the existence of hazardous
material, which may or may not be present on the property, was not observed
by the appraiser. The appraiser has no knowledge of the existence of such
materials on or in the property. The appraiser, however, is not qualified to
detect such substances such as asbestos, urea-formaldehyde foam insulation,
or other potentially hazardous materials may affect the value of the
property. The value estimate is predicated on the assumption that there is
no such material on or in the property that would cause a loss in value. No
responsibility is assumed for any such conditions, or for any expertise or
engineering knowledge required to discover them the client is urged to
retain an expert in this field, if desired.
- It is assumed that there are no hidden or unapparent conditions of
the property, subsoil, or structures that render it more or less valuable.
No responsibility is assumed for such conditions or for arranging for
engineering studies that may be required to discover them.
3. MORI POINT
- The appraiser assumes no responsibility for economic, physical or
demographic factors which may affect or alter the opinions in this report if
said economic, physical or demographic factors were not present as of the
date of the letter of transmittal accompanying this report. The appraiser is
not obligated to predict future political, economic or social trends.
- In preparing the report, the appraiser was required to rely on
information furnished by other individuals or found in previously existing
records and/or documents. Unless otherwise indicated, such information is
presumed to be reliable. However, no warranty, either express or implied, is
given by the appraiser for the accuracy of such information and the appraiser
assumes no responsibility for information relied upon later found to have
been inaccurate.
- No opinion as to the title of the subject property is rendered.
Data related to ownership and legal description was obtained from the
attached title report records and is considered reliable. Title is assumed
to be marketable and free and clear of all liens, encumbrances, easements and
restrictions except those specifically discussed in the report. The property
is appraised assuming it to be under responsible ownership and competent
management, and available for its highest and best use.
- The appraiser assumes no responsibility for hidden or unapparent
conditions of the property, subsoil, ground water or structures that render
the subject property more or less valuable. No responsibility is assumed for
arranging for engineering, geologic or environmental studies that may be
required to discover such hidden or unapparent conditions.
A2.6
<PAGE>
- The appraiser has not been provided any information regarding the
presence of any material or substance on or in any portion of the subject
property or improvements thereon, which material or substance possesses or
may possess toxic, hazardous and/or other harmful and/or dangerous
characteristics. Unless otherwise stated in the report, the appraiser did not
become aware of the presence of any such material or substance during the
appraiser's inspection of the subject property. However, the appraiser is
not qualified to investigate or test for the presence of such materials or
substances. The presence of such materials or substances may adversely
affect the value of the subject property. The value estimated in this report
is predicted on the assumption that no such material or substance is present
on or in the subject property or in such proximity thereto that it would
cause a loss in value. The appraiser assumes no responsibility for the
presence of any such substance or material on or in the subject property, nor
for any expertise or engineering knowledge required to discover the presence
of such substance or material. Unless otherwise stated, this report assumes
the subject property is in compliance with all federal, state and local
environmental laws, regulations and rules.
- Unless otherwise stated, the subject property is appraised assuming
it to be in full compliance with all applicable zoning and land use
regulations and restrictions.
- Unless otherwise stated, the property is appraised assuming that
all required licenses, permits, certificates, consents or other legislative
and/or administrative authority from any local, state or national government
or private entity or organization have been or can be obtained or renewed for
any use on which the value estimate contained in this report is based.
- No engineering survey has been made by the appraiser. Except as
specifically stated, data relative to size and area of the subject property
was taken from sources considered reliable and no encroachment of the subject
property is considered to exist.
- It is assumed that the utilization of the land and/or improvements
is within the boundaries or property described herein and that there is no
encroachment or trespass.
- It is assumed that the utilization of the land and/or improvements
is within the boundaries or property described herein and that there is no
encroachment or trespass.
4. YOSEMITE/AHWAHNEE I AND II (Arnold)
- No responsibility is assumed for the legal description or for
matters including legal or title considerations. Title to the property is
assumed to be good and marketable unless otherwise stated. The property is
assumed to be available for its highest and best use.
- The property is appraised free and clear of any or all liens or
encumbrances unless otherwise stated.
- Responsible ownership and competent property management are assumed.
A2.7
<PAGE>
- The information furnished by others is believed to be reliable.
However, no warranty is given for its accuracy.
- The appraiser assumes no responsibility for economic or physical
factors occurring after the date of value which may affect the opinions
herein stated. The projections included in this report are subject to
changes in future conditions that cannot be accurately predicted by the
appraiser and could affect the future income or value projections.
- No engineering survey has been made by the appraiser. Except as
specifically stated, data relative to size and area were taken from sources
considered reliable. The plot plans and illustrative material in this report
are included only to assist the reader in visualizing the property.
- That there are no hidden or unapparent conditions of the property,
subsoil, or structures that render it more or less valuable. No
responsibility is assumed for such conditions or for arranging for
engineering studies that may be required to discover them.
- That there is full compliance with all applicable federal, state,
and local environmental regulations and laws unless noncompliance is stated,
defined, and considered in the appraisal report.
- That unless otherwise stated in this report, the existence of
hazardous material, which may or may not be present on the property, was not
observed by the appraiser. The appraiser has no knowledge of the existence
of such materials on or in the property. The appraiser however, is not
qualified to detect such substances. The presence of any potentially
hazardous materials or substances may affect the value of the property. The
value estimate is predicated on the assumption that there are no such
materials or substances on or in or under the property that would cause a
loss in value. No responsibility is assumed for any such conditions, or for
any expertise or engineering knowledge required to discover them.
- That all applicable zoning and use regulations and restrictions have
been complied with, unless a nonconformity has been stated, defined, and
considered in the appraisal report.
- That all required licenses, certificates of occupancy, consents, or
other legislative or administrative authority from any local, state, or
national government or private entity organization have been or can be
obtained or renewed for any use on which the value estimate contained in this
report is based.
- That the utilization of the land and improvements is within the
boundaries or property lines of the property described and that there is no
encroachment or trespass unless noted in this report.
A2.8
<PAGE>
5. YOSEMITE/AHWAHNEE I AND II (Mentor)
- The title of the property is marketable.
- Unless otherwise indicated, the property is free and clear of all
liens, encumbrances, easement and restrictions.
- The property does not exist in violation of any applicable codes,
ordinances, statutes or other governmental regulations.
- The property is under responsible ownership and competent management
and is available for its highest and best use.
- Information supplied by others, which was considered in this
valuation, came from sources believed to be reliable. The appraiser assumes no
further responsibility for its accuracy. The appraiser reserves the right to
adjust the valuation herein reported by consideration of additional or more
reliable data that may become available.
- The appraiser assumes no hidden or unexpected conditions of the
property exist which would adversely affect value.
- The appraiser assumed no responsibility for economic or physical
factors occurring after the date of value which may affect the opinions
reported.
- Hazardous substances, if present in a facility, can introduce an
actual or potential liability that will adversely affect the marketability and
value of the facility. Such liability may take the form of immediate
recognition of existing hazardous conditions. Future liability could stem from
the release of currently nonhazardous contaminants, such as asbestos fibers or
toxic vapors from urea formaldehyde foam insulation, through aging or building
renovations.
In the development of the appraiser's opinion of value, no
consideration has been given to such liability or its impact on value. The
appraiser is not qualified to investigate the possible presence of toxic
materials requiring either immediate or future correction.
- The overall site does contain various easements, as well encumbering
the larger landholdings, which are assumed not to adversely affect the
utilization of the subject land.
- All governmental approvals necessary to permit development for the
proposed residential, recreational vehicle timeshare area are assumed
available as per actual discussions with the Madera County planner. However,
no preliminary site plans showing the proposed development were submitted.
A2.9
<PAGE>
APPENDIX 3
PRIOR PERFORMANCE SCHEDULES
A3.1
<PAGE>
APPENDIX 3
SCHEDULE A
Schedule A shows, as of December 31, 1997, general information about the only
"Trudy Pat" program which closed in the three most recent years. 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.
<TABLE>
<CAPTION>
Arciero-Diamond Ridge
---------------------
<S> <C>
Dollar amount offered $ 14,000,000
Dollar amount raised 5,538,800
Less offering expenses:
Organizational expenses(1) 0
Sales commissions(1) 0
Discounts retained by affiliates(1) 0
Loan Amount $ 5,538,800
Date offering began July 21, 1993
Length of offering in months 12.75
Months to investment all available
for investment one
</TABLE>
- --------------
(1) The borrower repaid the loan proceeds on August 17, 1994 before the
entire amount offered was raised. No offering expenses were paid by the
investors.
A3.1
<PAGE>
APPENDIX 3
SCHEDULE B
Schedule B shows, as of December 31, 1997, aggregate compensation paid over
the last three years to National and its affiliates by the eleven public
"Trudy Pat" programs which have not been terminated. None of the programs
have investment objectives similar to those of the Company. Prospective
investors should be aware that the results of these programs are not
necessarily indicative of the potential results of the Company.
<TABLE>
<CAPTION>
Arciero-
Sacramento/ Yosemite/ Yosemite/ Diamond
Delta Greens Oceanside Ahwahnee I Ahwahnee II Mori Point Joshua Ranch Cypress Lakes Ridge
------------ --------- ---------- ----------- ---------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Date offering commenced 11/1/88 11/15/91 5/2/89 9/10/90 11/20/89 3/26/90 2/19/91 7/21/93
Dollar amount raised $5,000,000 $30,000,000 $6,500,000 $13,500,000 $10,000,000 $15,000,000 $14,000,000 $5,538,000
Servicing fees
Jan. 1995 to Dec. 1997:
Accrued 0 0 0 0 0 0 0 0
Paid 0 900,000 48,750 101,250 0 0 0 0
Property management
fees Jan. 1995 to Dec.
1997:
Accrued 141,733 0 0 0 272,667 0 0 0
Paid 8,267 0 146,250 303,750 27,333 450,000 420,000 0
Amount paid to National
from proceeds of offerings
closed in the most recent
three years N/A N/A N/A N/A N/A N/A N/A $ 69,670
</TABLE>
A3.2
<PAGE>
APPENDIX 3
SCHEDULE B (continued)
<TABLE>
<CAPTION>
Stacey Rose Stacey Rose
Esperanza "A" "B"
--------- ----------- -----------
<S> <C> <C> <C>
Date offering commenced 11/18/87 5/5/88 5/5/88
Dollar amount raised $ 500,000 $ 85,000 $ 315,300
Servicing fees
Jan. 1995 to Dec. 1997:
Accrued 0 0 0
Paid 0 0 0
Property management
fees Jan. 1995 to Dec.
1997:
Accrued 15,000 2,550 9,459
Paid 0 0 0
Amount paid to National
from proceeds of offerings
closed in the most recent
three years N/A N/A N/A
</TABLE>
A3.3
<PAGE>
APPENDIX 3
SCHEDULE C
Schedule C shows, as of December 31, 1997, the annual operating results of
the eight public "Trudy Pat" programs the offerings of which closed in the
most recent five years. No tax information is included as tenancy-in-common
arrangements are not required to file information tax returns. Each investor
determines the tax treatment of distributions. None of the programs have
investment objectives similar to those of the Company. Prospective investors
should be aware that the results of these programs are not necessarily
indicative of the potential results of the Company.
<TABLE>
<CAPTION>
Sacramento/Delta Greens Oceanside
------------------------------------------------ -------------------------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrower loan
repayments:
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $375,000 $900,000 $900,000 $675,000
Interest 0 0 0 0 0 3,145,869 393,750 0 0 0
Cash from sale N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Distributions to
investors:(1)
Principal 0 0 0 0 0 0 375,000 900,000 900,000 675,000
Interest 0 0 0 0 0 3,145,869 393,750 0 0 0
Distributions per
$1,000 invested:
Principal N/A N/A N/A N/A N/A 0 12.50 30 30 22.50
Interest N/A N/A N/A N/A N/A 104.86 13.13 0 0 0
</TABLE>
- --------------
(1) Net of servicing fees and property management fees and expenses.
A3.4
<PAGE>
APPENDIX 3
SCHEDULE C(CONTINUED)
<TABLE>
<CAPTION>
Yosemite/Ahwahnee I Yosemite/Ahwahnee I
------------------------------------------------ -------------------------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrower loan
repayments:
Principal $103,085 $ 0 $ 0 $ 0 $ 0 $ 68,264 $ 0 $ 0 $ 0 $ 0
Interest 920,794 4,756 0 0 0 688,303 10,273 0 0 0
Cash from sale N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Distributions to
investors:(1)
Principal 103,085 0 0 0 0 68,264 0 0 0 0
Interest 920,794 4,756 0 0 0 688,303 10,273 0 0 0
Distributions per
$1,000 invested:
Principal 15.86 0 0 0 0 5.06 0 0 0 0
Interest 141.66 .73 0 0 0 50.99 .76 0 0 0
</TABLE>
- --------------
(1) Net of servicing fees and property management fees and expenses.
A3.5
<PAGE>
APPENDIX 3
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.
A3.6
<PAGE>
APPENDIX 3
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 0 113,531 997,027 N/A N/A N/A
Distributions per
$1,000 invested:
Principal 0 0 0 0 0 $ 0 1,000 N/A N/A N/A
Interest 95.57 4.48 0 0 0 20.50 53.64 N/A N/A N/A
</TABLE>
- ---------------
(1) Net of servicing fees and property management fees and expenses.
A3.7
<PAGE>
APPENDIX 3
SCHEDULE D
Schedule D shows, as of December 31, 1997, the results of one "Trudy Pat"
program in which the loan has been completely repaid within the last five
years. No tax information is available as tenancy-in-common arrangements are
not required to file information income tax returns. 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.
<TABLE>
<CAPTION>
Arciero-Diamond Ridge
---------------------
<S> <C>
Dollar amount raised $ 5,538,800
Loan secured by one property
Date loan fully funded July 25, 1994
Date loan paid off August 17, 1994(1)
Repayment/Distributions:
Principal $ 5,538,800
Interest $ 297,077(2)
------------
Distributions per $1,000 invested:
Principal $ 1,000
Interest $ 53.64(2)
------------
</TABLE>
- ---------------
(1) This loan was funded over the course of 12.75 months, commencing on July
21, 1993. Funds were first advanced to the borrower on September 16,
1993.
(2) Net of compensation to National. In 1993, interest in the amount of
$113,551 ($53.64 per $1,000 of investment), net of compensation to
National, was distributed to investors.
A3.8
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
SACRAMENTO/DELTA GREENS "TRUDY PAT" PROGRAM
CAPITALIZED TERMS USED IN THIS SUPPLEMENT AND NOT DEFINED HEREIN
HAVE THE MEANING GIVEN TO THEM IN THE PROSPECTUS.
SEE "GLOSSARY" AT PAGE __ OF THE PROSPECTUS.
This Supplement has been prepared to help the Investors in the
Sacramento/Delta Greens Program to understand how the Acquisition described
in the accompanying Prospectus will affect them. If completed, the effects
of the Acquisition may be different for Investors in the other Programs. A
separate supplement has been prepared for each of the other Programs, copies
of which may be obtained, without charge, by writing to National Investors
Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport Beach, California
92660, Attention: Vivian Kennedy, or calling 1-800-590-7772.
As described in the accompanying Prospectus, American Family Holdings,
Inc. (the "Company") is offering shares of its Common Stock in exchange for
the assets (including cash reserves), certain liabilities and business
activities owned by Investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[20,012,475] of shares
of common stock arbitrarily valued at $10 per Share. The stock will be
listed for trading on the ___________ under the symbol "___." The purpose of
the transaction is to consolidate the operations of the programs, improve the
ability to sell or obtain financing for development of the programs'
properties, and provide the investors with liquidity for their investments.
Of the [2,001,248] shares to be issued by the Company in the Acquisition,
Investors in the Sacramento/Delta Greens Program will receive a total of
[193,650] shares or [320] shares per $10,000 of Adjusted Outstanding
Investment. After costs of sale, and the payment of Program liabilities,
National does not believe any alternative would yield to Investors in the
Sacramento/Delta Greens program an amount that is higher than the value of
the Company shares to be received in the Acquisition.
In each of the Programs, the Investors will vote on whether to approve the
Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF
THE FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - You will have an investment in a business which also operates a golf
course and a recreational vehicle park, and which plans to pursue the
development of timeshare facilities and a hotel/conference center.
- - If a trading market develops, the initial trading price for the stock
will likely be substantially below the arbitrary value of $10 per share
assigned to the Company's shares for purposes of the acquisition. Thus, the
value of the shares you receive may be less than you might receive if the
property of your program were sold.
- - Principal stockholders of National and executive officers of the Company
will hold approximately [18.23]% of the Company's stock for which they paid
$0.01 per share and will receive annual cash compensation aggregating
$660,000 as officers and employees. National will be relieved of its
servicing and asset management obligations and will no longer earn servicing
and asset management fees of approximately $650,000 annually. However, the
Company will still owe National over $1,300,000 of accrued but unpaid fees
and expenses.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event.
If so, National believes a tax loss is the probable result for most of you.
- - The Company must have additional cash to fund its proposed operations.
If it cannot obtain such funding from the sale of its securities or certain
of its properties, it will be no more successful than the programs have been
individually in completing the development of some or all of the properties.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found
on pages [30] through [42] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. If the acquisition is
completed, there will be a change in the nature of the investment of each
investor from holding a tenancy-in-common interest in real estate to holding
shares in an on-going company, the assets of which may be changed from time
to time without approval of investors. If the acquisition is completed,
investors will be able to liquidate their investments only by selling their
shares on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through
property sales. If the acquisition is completed, investors will have an
investment in an entity that is larger than each of the programs and will
thus lose relative voting power. Investors will have an investment in a
business which also operates a golf course and a recreational vehicle park,
and which plans to pursue the development of timeshare facilities and a
hotel/conference center.
DIFFERENCES BETWEEN EXCHANGE VALUES AND SALES PRICE. Investors are
subject to the risk that the exchange value of a program does not reflect the
price a program's assets might bring in a sale. If the property of a program
were to be sold, the net proceeds of the sale and the amount finally
distributed to an investor in that program may be more or less than the
exchange value. There is no assurance that the future value of the shares
will continue to be greater than the most recent appraised value of the
property.
UNCERTAINTY REGARDING TRADING PRICE FOR THE SHARES. Initially, shares
may trade at prices substantially below the arbitrarily determined exchange
value of $10 per share or historical book value of the company's assets.
There is no guaranty that a liquid trading market will develop for the
shares, or be sustained. If a trading market develops for the shares, the
price of shares after the acquisition will likely decrease below the exchange
value per share of $10 due to a potentially large number of shares that
investors may sell immediately after the acquisition.
CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The founders of
the company, and specifically the principal shareholders of National, as well
as National itself, will be subject to conflicts of interest. The principal
shareholders and employees of National and the company will hold
approximately [18.23]% of the company's outstanding stock for which they paid
$0.01 per share. Other founders of the company will hold approximately [1.6]%
of the company's outstanding stock for which they also aid $0.01 per share.
Thus, the investors' total ownership interests in the programs' properties
will be diluted by the equity interest in the company held by the founders of
the company. The principal stockholders of National and other executive
officers of the company will receive annual cash compensation aggregating
$660,000 as officers and employees of the company. National
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will be relieved of its servicing and asset management obligations and will
no longer earn asset management or servicing related fees. However, the
company will still owe National over $1,300,000 of accrued but unpaid fees
and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote , and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
Messrs. Lasker and Orth will be required to devote some of their time
to other projects for which National acts as servicing agent and asset
manager.
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS. No independent party
was retained by National to negotiate on behalf of the investors. Therefore,
terms of the acquisition may be less favorable to investors and more
favorable to founders of the company which included the principal
shareholders of National than if the acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of
each program, the terms of the acquisition may have been more favorable to
certain or all of the programs and fewer shares and less favorable employment
contracts may have been received by the founders of the company.
TAX UNCERTAINTIES. The acquisition may not be a tax-free transaction to
investors. Due to uncertainties in the facts of this transaction, tax
counsel is unable to opine conclusively on the taxability of the acquisition
to investors. If the acquisition is a taxable transaction, an investor would
recognize gain or loss in 1998 equal to the difference between the investor's
tax basis in his interest in a program property, and the number of shares of
the company received valued at $10 per share. If the acquisition is treated
as taxable, National believes most investors would recognize a tax loss.
POTENTIAL CHANGE IN THE AMOUNT OF LEVERAGE. 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.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN
INVESTMENT, FINANCING AND CERTAIN OTHER POLICIES. 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.
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NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS. If you vote
against the acquisition, and it is approved, you will not be able to object
to the acquisition and receive the appraised value of your tenancy-in-common
interest in your program's assets. You will have no choice other than to
accept shares for your interests.
COMPANY HAS NO OPERATING HISTORY. The company was formed within the past
year to take part in the acquisition of your property. It does not have the
benefit of operating for a long time. This means that shares in the company
are much riskier than ownership of shares of established companies. If the
company had been operating as if it owned the properties which it desires to
acquire, it would have experienced losses to date.
FUNDAMENTAL CHANGES IN THE BUSINESS PLAN. Rather than being focused on
a single property, the company will be an infinite life entity focused on the
management of at least five properties. The effect of this on investors is
two-fold. First, poor performance of a particular property may affect the
company's operations as a whole regardless of the performance of the other
properties. Second, there will be no particular time when an investor can
expect that a sale of any of the properties will result in cash distributions
to him or her.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes
or sales of a particular property. Those decisions will be made by the board
of directors or management. In addition, you will have an investment in an
entity that is larger than each of the programs and, thus, you will lose
relative voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, because of the borrowers' defaults there have
been no distributions from any of the programs, other than the Oceanside
program, in the past three years. Future cash distributions will be based on
the company's earnings and the decision of the board of directors to pay
dividends. Therefore, even if a property in which you formerly held an
interest were to perform well, there is no assurance that there would be cash
distributions to you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National is
presently compensated for its services at the rate of one percent of the
principal amount originally invested in each program. In addition,
additional compensation has been accrued for property management services
provided to the Oceanside and Yosemite/Ahwahnee properties by officers and
employees of National in their capacities as officers of Oceanside
Development, Inc. and Ahwahnee Golf Course & Resort, Inc. In the future,
compensation will be paid to officers of the company in the form of salaries,
stock options and other benefits. These salaries and other forms of
compensation will be payable to management of the company even if one or more
of the properties acquired in the acquisition is subsequently sold.
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HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL USED ITS OWN JUDGMENT TO RESOLVE THE CONFLICTING
YOSEMITE/AHWAHNEE APPRAISALS. Faced with two conflicting appraisals for the
Yosemite/Ahwahnee properties, to determine the appraised values for these
properties for purposes of determining their exchange values, National's
management used the most conservative information presented in the appraisals
unless a change in circumstances or market conditions for a particular parcel
suggested one appraisal was more pertinent than the other. If the values
arrived at by National were too low for either program, the program's
exchange value would be too low and would result in too few shares being
allocated to that program in the acquisition. Conversely, if the values
arrived at by National were too high, the program would receive too large an
allocation of shares in the acquisition to the detriment of the investors in
the other programs.
GENERAL REAL ESTATE RISKS
THERE ARE SIGNIFICANT DELINQUENT PROPERTY TAXES. If delinquent property
taxes are not timely paid, the company could lose one or more of the
properties to tax sales. Each of the programs' properties is subject to the
following delinquent property taxes as of December 31, 1997:
Sacramento/Delta Greens - approximately $45,000; Oceanside - approximately
$55,000; Yosemite/Ahwahnee (combined) - approximately $684,000; and Mori
Point - approximately $298,000. Annual payments required for all the
properties for current taxes (including amounts currently due on five-year
payment plans) total approximately $248,000. In the case of Sacramento/Delta
Greens and Mori Point, National has entered into statutorily authorized
5-year payment plans with the applicable taxing authorities. It plans to do
the same with Yosemite/Ahwahnee shortly.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $[11,400,000] from sale of the units or from sale of
certain assets of the programs become available, the company will not be able
to proceed with its entire business plan. Additionally, if a minimum of
approximately $250,000 is not raised to pay current property tax liabilities,
then certain properties might be lost to tax sales before sales to third
parties can be arranged. The company will also need financing from other
sources to complete its plan. Financing sources are not predictable and
interest rates or other costs of financing may be prohibitive. Other than a
construction loan source for the Oceanside project, neither the programs nor
the company have received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay
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assessments for streets, schools and parks which increase the cost of
development. Increased costs can have a negative affect on the company's
sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. See "Business and Properties - Investments in Real Estate or Interests in
Real Estate" at page __. Real estate development involves more risks than in
the ownership and operation of established projects. Financing may not be
available on favorable terms for development projects; construction may not
be completed on schedule or budget; long-term financing may not be available
on completion of construction; and sites may not be sold on profitable terms.
THE CALIFORNIA ECONOMY HAS FLUCTUATED BROADLY IN THE PAST FEW YEARS. We
presently conduct all of our business in California. Our markets have been
affected by substantial fluctuations in local economic conditions, interest
rates, inflation, employment levels and regulations. California has also
experienced draught conditions, resulting in water conservation measures and
rationing. In the past, these conditions have caused local governments to
restrict residential development. California's climate and geology present
risks of natural disaster such as earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE
OWED [$1,381,881] BY THE COMPANY. This represents accrued fees and expenses
from the programs which National has not cancelled. This amount is due and
payable and the company intends to start paying it after the Acquisition, but
only from operating revenues or proceeds from the sale of assets, but not
from working capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED. Construction of
the Sacramento/Delta Greens property will require the filing of a final map
and obtaining building permits from the city's real estate planning
authorities. The existing tentative map approval does not entitle the
property owner to build on the property. The tentative tract map for the
Sacramento/Delta Greens property requires that studies must be conducted to
identify any endangered species' habitat which may exist on the property. If
any are identified, changes to the tentative development plans will have to
be made and approved that will reduce or eliminate any damage to the habitat.
The longer this process takes, the longer it will be until the company can
make money from the property.
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HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays
in construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged
approximately $30,000 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully
compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 8.4% of the assets of the company, respectively. Although
there can be no assurances and net revenues from Sacramento/Delta Greens may
equal or exceed $3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) finance engineering and endangered species studies
(estimated by management to cost approximately $124,800), (ii) finance
planning for final approvals (estimated by management to cost approximately
$51,700), and (iii) finance utilities and roads and the construction of homes
(estimated by management to cost approximately $3,000,000 on a phased basis).
Another risk is whether the lots to be developed will appeal to project
builders and whether home financing will be available. Finally, there is a
risk that the development and sale of lots or homes will be profitable.
REAL ESTATE RISKS OF OCEANSIDE PROPERTY
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE PROPERTY MAY
CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE
SOLD. Changing market conditions may increase the difficulty of selling the
lots. If the company chooses to build homes on the lots, delays in
construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged $10,000
per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and
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pricing are all factors affecting success. Competitors may have better
financial, managerial and other resources, affecting our ability to
successfully compete.
Oceanside is a proposed residential development and represent over
21.75% of the assets of the company. Although there can be no assurances,
net revenues from Oceanside are expected to be in excess of $5,000,000 over
the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that enough investment money
may not be available to obtain a construction loan and begin construction of
the next tract of homes (estimated by management to be approximately $700,000
of equity). There is also a risk that finished lots or completed homes will
not be marketable at a profit or that home financing will not be available at
affordable rates. There is also strong nearby competition.
REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE TIMESHARE ASPECT OF THE RESORT HAVE NOT YET BEEN
OBTAINED. The Yosemite/Ahwahnee property has a final map on 45 remaining
single family estate lots and a use permit for a 600 space recreational
vehicle park. Additional planned usage such as timeshare will require
extensive county and state approvals through the Departments of Real Estate
and Housing and Commercial Development.
RISKS AFFECTING OPERATION OF A GOLF COURSE. Increased competition,
seasonality, weather and course conditions will affect the operations of the
company. While no new golf courses have opened near the Ahwahnee Golf
Course, new courses could increase the competition and reduce the rounds
played. Seasonal variations may require the company to supplement revenue at
the golf course to meet operating expenses. Weather can negatively affect
the turf grass and reduce the number of rounds played. Inflationary costs
may not be offset by increased dues. Also, golf's success depends on
discretionary spending by consumers, which may be vulnerable to regional and
economic conditions, as well as to pleasure or destination travel
preferences by visitors and tourists. All of these factors could reduce the
amount of money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity which may
attract potential timeshare purchasers in the future. At this time, the
project does not rely on the golf course for its revenue. National estimates
that the value of the golf course will be less than 5% of the assets of the
company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits. For
example, Spring through Fall at the Yosemite/Ahwahnee property are the
periods of highest occupancy. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues.
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The recreational vehicle park at Yosemite/Ahwahnee may generate as much
as ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers who borrow to buy a home. If a buyer
defaults, we would incur costs in remarketing the timeshare.
We do not have an exchange network to enhance marketing appeal. If we
cannot offer such a network in the future, we may be at a competitive
disadvantage.
The timeshare industry is extremely competitive and we may not be able
to secure development financing on acceptable terms.
Timeshare development is planned for Yosemite/Ahwahnee. Since the
project is not yet permitted for timeshare, there has been no allocation of
assets. Should timeshare be approved, the company anticipates that a
significant portion of the revenue of the company will be derived from sales
of timeshare units, possibly in excess of 25%.
RISKS RELATING TO RECREATIONAL VEHICLE PARK OPERATIONS. Risks relating
to recreational vehicle parks are substantially the same as those described
above for timeshare projects.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) make up for the current cash drain from operations of the
golf course (estimated by management at approximately $150,000) annually,
(ii) construct an additional planned 100 recreational vehicle sites
(estimated by management to cost approximately $700,000), and (iii) obtain
approvals for and construction of the first group of timeshare units
(estimated by management to cost approximately $3,000,000). There are also a
risk that the operation of recreational vehicle sites, timeshares and golf
course activities will not be profitable.
REAL ESTATE RISKS OF MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY HAVE NOT YET BEEN OBTAINED. If needed
permits for development are not obtained or reissued, the business plan for
the company will have to be revised or abandoned. Additionally, the presence
of two endangered species on the Mori Point property increases the risks
that necessary approvals may not be received if an acceptable habitat
mitigation plan cannot be developed. The permitting process with the
California Coastal Commission and applicable county or city real estate
planning agencies is expensive and time consuming. Mori Point had a specific
plan and tentative map to build a hotel/conference center which expired in
1991. These approvals must be reinstated
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prior to construction on the property. Such reinstatement will be
complicated by the existence of two endangered species living on the
property.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits.
Seasonality can be expected to cause quarterly fluctuations in the company's
revenues. In the resort and hotel/conference center property at Mori Point,
we may be competing against well-known chains and extended-stay inns.
Mori Point represents over 20% of the assets of the company and,
assuming it is operated as a hotel/conference center, its revenues may exceed
20% of the total revenues of the company upon completion of the project.
ADDITIONAL SPECIFIC RISKS. There is a risk that the city government
will not approve the property for its intended use. Capital to conduct
engineering and environmental studies in order to apply for and obtain
approvals for its use from the City is estimated to be approximately
$500,000. Capital will also be necessary for roads, utilities and other
infrastructure costs prior to construction. Finally, there is a risk that
the proposed hotel/conference center may not be profitable.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the charter documents may restrict changes in
control of the Company's management. These provisions may make it more
difficult or expensive for another party to acquire and exercise control of
the Company or to change its management, even if that change would be
beneficial to you. These provisions include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate of
incorporation, subject to the receipt of fair value, the Board of Directors
may issue shares in other classes or series and fix the rights, powers and
limitations associated with such shares. Although the Board of Directors has
no present intention of doing so, it could issue a class or series that
could, depending on its terms, impede a merger, tender offer or other
transaction that you might believe is in your best interest or in which you
might receive a premium for your shares over the then current market price.
The issuance of such shares could also dilute your voting power.
STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability
to change control of the company, even if you believe such a change is in
your best interests.
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RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% o the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of
incorporation which cover anti-takeover provisions require the approval of
two-thirds of the company's voting stock. This restriction also may deter
potential purchasers who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well
as the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements.
POSITIVE AND NEGATIVE FEATURES OF THE ACQUISITION
National and the Company considered the following in deciding to propose
the Acquisition:
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE FOR
YOUR INVESTMENT IN THE PROGRAM, AS ADJUSTED PER THE TERMS OF THE TENANCY-IN-
COMMON AGREEMENTS. You will receive [320] shares per $10,000 of Adjusted
Outstanding Investment in the Program.
- POTENTIAL LIQUID TRADING MARKET FOR YOUR SHARES. After the
acquisition, shares will be listed on the ______________. While there can be no
assurance that a trading market will develop or be sustained, if a trading
market develops, you will have the opportunity to liquidate all or some of those
shares at your discretion. However, initially the shares are likely to trade at
prices substantially below the arbitrary $10 value assigned to them.
- CONTROL OF THE TIMING OF LIQUIDATION OF YOUR INVESTMENT. You will be
able to control when you with to sell your shares. However, if no trading
market exists at the time, you may not be able to sell your shares. Under the
current programs, you have been subject to a majority vote to sell or retain the
property, regardless of whether or not the timing and decision were favorable to
you.
- BENEFITS OF LISTED SHARES TO THE COMPANY. Listing of the shares on
the ____ may provide benefits to the company which could enhance investor value.
The company may have access to public capital markets that the individual
programs do not have if the company is able to show potential for growth.
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- DIVERSITY MAY REDUCE RISK. Your investment will be spread over an
initial asset base of four different real estate projects (the two
Yosemite/Ahwahnee programs will be one project after the acquisition). However,
the poor performance of a particular property could negatively affect the
performance of the company even if the other properties are performing up to
expectations. Historically, all of the properties have operated at a loss. In
order for the company to be successful, it must obtain external financing or
sell certain of its assets to raise cash for operations.
- PROPERTY MANAGEMENT. We have hired real estate management
professionals who are experienced in real estate development, operation and
construction. While members of management have gained experience in the
operation of golf courses and recreational vehicle parks through the operation
of the Yosemite/Ahwahnee properties, they do not have extensive experience in
timeshare or resort development, marketing or operations.
- MODEST INCREASE IN MANAGEMENT COMPENSATION. National considered that
the total of salaries to be payable to the Company's officers and other
employees exceeds the total payable to National and its affiliates for servicing
and property management services ($1,181,000 as opposed to $969,000, both of
which include the payroll for Ahwahnee Country Club). The increase was not
viewed as significant since the original servicing fees were based on loan
servicing which is less labor-intensive than property development and
management.
- NO FURTHER LIABILITY FOR MANDATORY ASSESSMENTS. Your tenancy-in-
common agreement and servicing agreement will be cancelled by the acquisition,
meaning your exposure to mandatory assessments will cease. However, the company
will be required to obtain additional money from outside sources or the sale of
certain of its properties to be successful.
- LIABILITY IS LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As beneficial
owners of the assets and businesses of the programs, you are not currently
effectively insulated from personal liability based on the operation of those
assets. As shareholders of a corporation, you will be.
- NO CONTROL OVER TIMING OF SALE OF A PARTICULAR PROPERTY. No
particular group of investors will have the ability to control the timing of the
sale of a particular property as they do under the current program structure.
Instead, all Investors will be required to rely on the decisions of management
regarding the sale of a property.
- PROCEEDS FROM SALE OF PROPERTIES. If a property is sold, the proceeds
will be used by the company to further the business plan of the company.
Presently, if a program property is sold in its entirety, the proceeds would go
to applicable investors directly as a return of their investment. If it is
refinanced, by majority vote the program investors presently have the power to
direct the use of refinancing proceeds.
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- ACQUISITION COULD TRIGGER TAXATION OF INVESTORS. Participation in the
acquisition may be a taxable event for investors. However, National intends to
treat the transaction as a tax-free transaction. To the extent that the
acquisition is determined to be taxable, National believes most investors would
be required to report tax losses. On the other hand, there generally would be
no taxable event to investors as the programs are currently structured until the
program property was sold. At such time, the amount returned to you would
result in either a tax loss or gain depending upon how much of your original
investment was returned to you.
- CASH DISTRIBUTIONS. Currently, if a property was sold, you would be
entitled to a distribution of the proceeds of such sale net of costs of sale and
accrued liabilities. After the acquisition, your distributions will be
dependent upon the earnings of the company and a decision of the board of
directors to make distributions in the form of dividends. You will not
automatically receive distributions upon the sale of any particular property.
- MANAGEMENT AND COMPANY FOUNDERS WILL OWN APPROXIMATELY 18.23% OF THE
COMPANY (ALMOST 14% IF ALL UNITS ARE SOLD IN THE CONCURRENT OFFERING). These
individuals paid $.01 per share for their company shares. In addition, over the
past several years, National and its affiliates have forgiven, and as a result
of the acquisition will forgive, an aggregate of over $3,000,000 of fees and
expenses due from the programs.
- NATIONAL'S PRINCIPAL STOCKHOLDERS WILL OWN FOUNDERS' STOCK IN THE
COMPANY AND WILL RECEIVE SALARIES AS OFFICERS OF THE COMPANY. David Lasker and
James Orth will be President and Chief Executive officer, respectively, of the
company and entities they control will each own 8.01% of the company's
outstanding shares (5.72% if all units are sold in the concurrent offering).
These shares are included in the shares described above as being owned by
management and company founders. Mr. Lasker and Mr. Orth also will receive
annual salaries of $180,000 plus other benefits. See "Management Following the
Acquisition -- Directors and Executive Officers Compensation and Incentives" at
page __.
- AS A CONSEQUENCE OF THE ACQUISITION, THE INVESTORS WILL TERMINATE
NATIONAL AS SERVICING AGENT FOR THE PROGRAMS. This will relieve National of its
ongoing servicing obligations which National could unilaterally terminate if it
elected to do so.
- THE COMPANY WILL OWE NATIONAL $1,381,881 OF ACCRUED BUT UNPAID FEES
AND EXPENSES DUE FROM THE PROGRAMS AFTER THE ACQUISITION. If the company is
successful, National will have the opportunity to receive the portion of its
accrued but unpaid fees and expenses which it has not forgiven.
The Acquisition will have no material effect on this Program's stand-alone
financial condition or results of operations. Overall, the Company expects to
experience losses in the initial year of operations.
For further information about how the Acquisition will affect you and the
Program, see the following portions of the Prospectus:
13
<PAGE>
- "Background and Reasons for the Acquisition" commencing at page
__.
- "Comparison of Tenancy-in-Common Interests and Shares" commencing
at page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing at page __.
- "Management Following the Acquisition" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
FAIRNESS TO INVESTORS IN THE SACRAMENTO/DELTA GREENS PROGRAM
From a financial point of view, the company and National believe the terms
of the acquisition are fair as a whole and to the investors in each of the
programs. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that develops
will be sustained;
- while the number of shares to be issued to reflect the exchange value
of a program is arbitrary, the trading price of such shares initially is likely
to be substantially below the $10 value arbitrarily assigned to such shares. In
our opinion, the exchange values offered to investors for their assets allow for
an equitable allocation of the 2,001,248 shares among the programs. The
disparity between exchange values and appraised values results from adding the
value of program cash reserves and other assets, if any, to appraised values and
deducting program liabilities (principally accrued property taxes and other fees
net of fees to be forgiven by National);
- on completion of the acquisition the investors will hold over 80% of
the outstanding stock of the company while principals, employees, and
consultants of National will hold less than 20%. That 20% was purchased for
$.01 per share. National and its principals have forgiven, or will forgive at
the completion of the acquisition, over $3,000,000 of expenses and accrued fees
of which a total of approximately $1,400,000 was earned under the servicing
agreements or for property management services and expenses after the loans
defaulted. National believes that the amount paid for the property management
services is no greater than the amount that a third party would charge;
- the valuation of the real estate assets of each of the programs by the
independent appraisers;
14
<PAGE>
- the probability that the transaction will either be tax-free to
investors or most likely yield a tax loss. Either way, National believes there
will likely be no out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have independent
representation in the structuring of the acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the programs were originally formed to have a two to four year
finite life and the investors expected to receive a return of their investment
from the original borrower, the company is an infinite life entity which will
not return the program investors' original investment based on a sale or
refinancing of the properties underlying the original programs. However, after
the borrowers defaulted on the "Trudy Pat" loans, the investors became
beneficial owners of the underlying properties with the need to complete
development, manage or otherwise ready the properties for sale. Those endeavors
had no fixed timetable and, thus, the finite life aspect of their original
investments was significantly changed. Therefore, the infinite life aspect of
the company is not viewed by National to be a material change from the
investors' CURRENT situation;
- the acquisition will cause fundamental changes in the individual
business plans of the programs. Rather than being focused on a single property,
the company will be focused on the management of at least five properties.
Thus, the poor performance of a particular property may affect the company's
operations as a whole regardless of the performance of the other properties.
Further, there will be no particular time when an Investor can expect its
interest to be automatically liquidated;
- investors will not be able to vote on changes to or dispositions of a
particular property or borrowing secured by a particular property. Those
decisions will be made by the Board of Directors or management. Further, as
investors in a larger entity, relative voting power will be diluted;
- future cash distributions will be based on the company's earnings
during the decision of the Board of Directors to pay dividends rather than the
performance or sale of a particular property;
- investors voting against the acquisition will have no alternative but
to accept shares in the company if the acquisition is approved by holders of a
majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a change
in management which is not favored by the Board of Directors of the company; and
15
<PAGE>
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the shares in
the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __.
National reviewed the arbitrary value you will receive in connection with
the acquisition and compared it with what you might receive if (i) the programs'
properties were operated "as is," (ii) the programs' properties were sold in a
quick sale in three months or less, or (iii) the programs' properties were sold
at the appraised values used to determine the exchange values. Based on that
review, and even acknowledging that, initially, the company's shares issued in
the acquisition would likely trade substantially below their arbitrary $10
issuance value, National believes that there is a higher probability of
realizing value from the programs' assets through the acquisition than through
the other alternatives. This belief is based on the expectation that some
financing opportunities will become available based on the form of the entity
and the time pressure associated with forced sales or liquidation will be
relieved. See "Background and Reasons for the Acquisition -- Comparison to
Alternatives" and "Recommendation of National and Fairness Determination" at
pages __ and __. Based on this comparison, National concluded that the
acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Program (as well as each of the other four
Programs) is essentially the consideration at which the Company is offering
in exchange for the real estate assets, certain liabilities and business of
the Program. The value is reflected as a number of shares of the Company
common stock (in the case of the Program, 193,650 shares) multiplied by an
arbitrary $10 per share value.
The Exchange Value for the Program was calculated as follows: appraised
value of the Program's Property at May 1997, plus book value of other
Sacramento/Delta Greens Program assets at December 31, 1997, less Program
liabilities at [December 31], 1997, and plus liabilities to National to be
forgiven by National as part of the Acquisition.
The following table summarizes the calculation of the Exchange Value of
the Sacramento/Delta Greens Program and the value assigned on $10,000 of
Adjusted Outstanding Investment:
16
<PAGE>
<TABLE>
<CAPTION> Value Assigned
Appraised Net Other to Program per
Value of + Assets and = Exchange $10,000 of Adjusted
Real Estate(1) Liabilities(2) Value Outstanding Investment
-------------- -------------- ----- ----------------------
<S> <C> <C> <C>
$ 2,000,000 $[ (63,499)] $[1,936,501] $ [3,195](3)
</TABLE>
- -----------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values
made in determining a Property's Exchange Value as of [DECEMBER 31, 1997].
<TABLE>
<CAPTION>
Book Assets Book Liabilities To Be Forgiven Net Other Assets
(12/31/97)* - (12/31/97)* + Amounts = and Liabilities
----------- ------------ ------- ---------------
<S> <C> <C> <C>
$ 108,627 $(309.237) $ 137,111 $ (63,499)
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no mortgage debt on the Property.
(3) Equals [320] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,012,248] shares of Company common stock being offered to
Investors in the Acquisition represent 80.16% of the Company's shares which
will be outstanding upon completion of the Acquisition. The remaining shares
will be held by management and other founders of the Company. Such shares
will be allocated among the five Programs pro rata in accordance with
Exchange Values. The Sacramento/Delta Greens Program will be allocated
[193,650] shares.
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in
the applicable Program (taking into account assessments paid and unpaid, as
well as interest accrued to each Investor through the date beneficial
ownership of the Program's Property was taken for the Investors) as adjusted
for voluntary advances. An Investor in the Sacramento/Delta Greens Program
with an adjusted investment amount of $10,000 will receive [320] shares of
Company stock arbitrarily valued at $10 per share.
Neither National nor the Company's founders have any economic interest
in the Sacramento/Delta Greens Program except for National's contractual
right to servicing fees and the $3,118 of tenancy-in-common interests
purchased by National at the inception of the Program for which interests
National will receive Company shares in the Acquisition pro rata with the
other Sacramento/Delta Greens Investors.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Program (including accrued but unpaid interest) plus
the amount of assessments and advances paid by Investors at [DECEMBER 31],
1997, appraised real estate value, Exchange Value of the Program, the number
and percentage of shares allocated to the Program, and the
17
<PAGE>
number of shares and comparative value of the Company to be held by founders
after the Acquisition.
<TABLE>
<CAPTION>
% of Total
Shares to be
Amount Real Estate Outstanding
Owed plus Appraised Exchange No. of Shares After the
Name of Program Assessments Value Value(1) Allocated(1)(2) Acquisition
--------------- ----------- ----- -------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 6,038,016 $ 2,000,000 $ [1,936,501] [193,650] [7.76]%
</TABLE>
- --------------------
(1) The founders of the Company which include members of Company
management, as well as certain employees of National and consultants to
the Company and the Programs, will hold a total of [495,318] Company
shares after the Acquisition (19.84% of the outstanding shares
post-Acquisition) which, if valued at $10 per share, would have an
aggregate value of $[4,953,180]. The Company was formed, and shares were
purchased by the founders for $.01 per share, prior to making the
Acquisition proposal. While a factor considered in the analysis, the
shares to be retained by the Company's founders were not determined
based only on fees cancelled or to be cancelled by National and its
principals. Overall, National believed that the Company's founders
should hold slightly less than 20% of the shares after the Acquisition.
See "Dilution" at page __ of the Prospectus. If the Acquisition is
completed, the following table sets forth the fees which National and
its principals have cancelled, or will cancel:
<TABLE>
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------- ---------- ---------
<S> <C> <C> <C>
Sacramento/Delta $ 137,111 $ 500,000 $ 637,111
Greens
Oceanside 704,000 -0- 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee I 70,000 1,157,867 1,227,867
Mori Point -0- 461,589 461,589
----------- ---------- ----------
TOTAL $ 946,111 $2,191,614 $3,137,725
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [20.30]% of the total shares to be
owned by the Company's founders after the Acquisition ([100,550] shares) would
have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1997,
1996 and 1995.
18
<PAGE>
<TABLE>
<CAPTION> Actually Actually Actually
Incurred Paid for Incurred Paid for Incurred Paid for
for Year Year for Year Year for Year Year
Ended Ended Ended Ended Ended Ended
Name of Program 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96 12/31/97(1) 12/31/97
--------------- ----------- -------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $50,000(2) $-0- $50,000(2) $-0- $50,000 (2) $8,267
</TABLE>
- --------------------
(1) These amounts represent accrued servicing fees.
(2) Approximately $115,238 per year if the Acquisition had been completed
during the above periods including $63,822 of estimated salaries to be paid
by the Company to its officers and other employees were allocated to the
Program based on Exchange Values. No cash would have been available to pay
officers' bonuses or dividends to shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/
EFFECT OF THE ACQUISITION
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995, 1996 and
1997:
<TABLE>
<CAPTION>
Prior to
Name of Program 1992 1992 1993 1994 1995 1996 1997 Total
--------------- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $1,654,013 $ 343,750 $ 0 $ 0 $ 0 $ 0 $ 0 $1,997,763
</TABLE>
There have been no recent distributions to Investors. The Acquisition is
not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
19
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
OCEANSIDE "TRUDY PAT" PROGRAM
CAPITALIZED TERMS USED IN THIS SUPPLEMENT AND NOT DEFINED HEREIN
HAVE THE MEANING GIVEN TO THEM IN THE PROSPECTUS.
SEE "GLOSSARY" AT PAGE __ OF THE PROSPECTUS.
This Supplement has been prepared to help the Investors in the Oceanside
Program to understand how the Acquisition described in the accompanying
Prospectus will affect them. If completed, the effects of the Acquisition
may be different for Investors in the other Programs. A separate supplement
has been prepared for each of the other Programs, copies of which may be
obtained, without charge, by writing to National Investors Financial, Inc.,
4220 Von Karman Avenue, Suite 110, Newport Beach, California 92660,
Attention: Vivian Kennedy, or calling 1-800-590-7772.
As described in the accompanying Prospectus, American Family Holdings,
Inc. (the "Company") is offering shares of its Common Stock in exchange for
the assets (including cash reserves), certain liabilities and business
activities owned by Investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[20,012,475] of shares
of common stock arbitrarily valued at $10 per Share. The stock will be
listed for trading on the ___________ under the symbol "___." The purpose of
the transaction is to consolidate the operations of the programs, improve the
ability to sell or obtain financing for development of the programs'
properties, and provide the investors with liquidity for their investments.
Of the [2,001,248] shares to be issued by the Company in the Acquisition,
Investors in the Oceanside Program will receive a total of [487,571] shares
or [162] shares per $10,000 of Adjusted Outstanding Investment. After costs
of sale, and the payment of Program liabilities, National does not believe
any alternative would yield to Investors in the Oceanside program an amount
that is higher than the value of the Company shares to be received in the
Acquisition.
In each of the Programs, the Investors will vote on whether to approve the
Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF
THE FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - You will have an investment in a business which also operates a golf
course and a recreational vehicle park, and which plans to pursue the
development of timeshare facilities and a hotel/conference center.
- - If the Oceanside property was sold for appraised value and if the
Company's stock traded below $__ per share, you would receive more value on
sale of the property than in the Acquisition.
- - If a trading market develops, the initial trading price for the stock
will likely be substantially below the arbitrary value of $10 per share
assigned to the Company's shares for purposes of the acquisition. Thus, the
value of the shares you receive may be less than you might receive if the
property of your program were sold.
- - Principal stockholders of National and executive officers of the Company
will hold approximately [18.23]% of the Company's stock for which they paid
$0.01 per share and will receive annual cash compensation aggregating
$660,000 as officers and employees. National will be relieved of its
servicing and asset management obligations and will no longer earn servicing
and asset management fees of approximately $650,000 annually. However, the
Company will still owe National over $1,300,000 of accrued but unpaid fees
and expenses.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event.
If so, National believes a tax loss is the probable result for most of you.
- - The Company must have additional cash to fund its proposed operations.
If it cannot obtain such funding from the sale of its securities or certain
of its properties, it will be no more successful than the programs have been
individually in completing the development of some or all of the properties.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found
on pages [30] through [42] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. If the acquisition is
completed, there will be a change in the nature of the investment of each
investor from holding a tenancy-in-common interest in real estate to holding
shares in an on-going company, the assets of which may be changed from time
to time without approval of investors. If the acquisition is completed,
investors will be able to liquidate their investments only by selling their
shares on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through
property sales. If the acquisition is completed, investors will have an
investment in an entity that is larger than each of the programs and will
thus lose relative voting power. Investors will have an investment in a
business which also operates a golf course and a recreational vehicle park,
and which plans to pursue the development of timeshare facilities and a
hotel/conference center.
DIFFERENCES BETWEEN EXCHANGE VALUES AND SALES PRICE. Investors are
subject to the risk that the exchange value of a program does not reflect the
price a program's assets might bring in a sale. If the property of a program
were to be sold, the net proceeds of the sale and the amount finally
distributed to an investor in that program may be more or less than the
exchange value. There is no assurance that the future value of the shares
will continue to be greater than the most recent appraised value of the
property.
UNCERTAINTY REGARDING TRADING PRICE FOR THE SHARES. Initially, shares
may trade at prices substantially below the arbitrarily determined exchange
value of $10 per share or historical book value of the company's assets.
There is no guaranty that a liquid trading market will develop for the
shares, or be sustained. If a trading market develops for the shares, the
price of shares after the acquisition will likely decrease below the exchange
value per share of $10 due to a potentially large number of shares that
investors may sell immediately after the acquisition.
CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The founders of
the company, and specifically the principal shareholders of National, as well
as National itself, will be subject to conflicts of interest. The principal
shareholders and employees of National and the company will hold
approximately [18.23]% of the company's outstanding stock for which they paid
$0.01 per share. Other founders of the company will hold approximately [1.6]%
of the company's outstanding stock for which they also aid $0.01 per share.
Thus, the investors' total ownership interests in the programs' properties
will be diluted by the equity interest in the company held by the founders of
the company. The principal stockholders of National and other executive
officers of the company will receive annual cash compensation aggregating
$660,000 as officers and employees of the company. National will be relieved
of its servicing and asset management obligations and will no longer earn
2
<PAGE>
asset management or servicing related fees. However, the company will still
owe National over $1,300,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote , and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
Messrs. Lasker and Orth will be required to devote some of their time to
other projects for which National acts as servicing agent and asset manager.
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS. No independent party
was retained by National to negotiate on behalf of the investors. Therefore,
terms of the acquisition may be less favorable to investors and more
favorable to founders of the company which included the principal
shareholders of National than if the acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of
each program, the terms of the acquisition may have been more favorable to
certain or all of the programs and fewer shares and less favorable employment
contracts may have been received by the founders of the company.
TAX UNCERTAINTIES. The acquisition may not be a tax-free transaction to
investors. Due to uncertainties in the facts of this transaction, tax
counsel is unable to opine conclusively on the taxability of the acquisition
to investors. If the acquisition is a taxable transaction, an investor would
recognize gain or loss in 1998 equal to the difference between the investor's
tax basis in his interest in a program property, and the number of shares of
the company received valued at $10 per share. If the acquisition is treated
as taxable, National believes most investors would recognize a tax loss.
POTENTIAL CHANGE IN THE AMOUNT OF LEVERAGE. 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.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN
INVESTMENT, FINANCING AND CERTAIN OTHER POLICIES. 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.
3
<PAGE>
NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS. If you vote
against the acquisition, and it is approved, you will not be able to object
to the acquisition and receive the appraised value of your tenancy-in-common
interest in your program's assets. You will have no choice other than to
accept shares for your interests.
COMPANY HAS NO OPERATING HISTORY. The company was formed within the past
year to take part in the acquisition of your property. It does not have the
benefit of operating for a long time. This means that shares in the company
are much riskier than ownership of shares of established companies. If the
company had been operating as if it owned the properties which it desires to
acquire, it would have experienced losses to date.
FUNDAMENTAL CHANGES IN THE BUSINESS PLAN. Rather than being focused on
a single property, the company will be an infinite life entity focused on the
management of at least five properties. The effect of this on investors is
two-fold. First, poor performance of a particular property may affect the
company's operations as a whole regardless of the performance of the other
properties. Second, there will be no particular time when an investor can
expect that a sale of any of the properties will result in cash distributions
to him or her.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes
or sales of a particular property. Those decisions will be made by the board
of directors or management. In addition, you will have an investment in an
entity that is larger than each of the programs and, thus, you will lose
relative voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, because of the borrowers' defaults there have
been no distributions from any of the programs, other than the Oceanside
program, in the past three years. Future cash distributions will be based on
the company's earnings and the decision of the board of directors to pay
dividends. Therefore, even if a property in which you formerly held an
interest were to perform well, there is no assurance that there would be cash
distributions to you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National is
presently compensated for its services at the rate of one percent of the
principal amount originally invested in each program. In addition,
additional compensation has been accrued for property management services
provided to the Oceanside and Yosemite/Ahwahnee properties by officers and
employees of National in their capacities as officers of Oceanside
Development, Inc. and Ahwahnee Golf Course & Resort, Inc. In the future,
compensation will be paid to officers of the company in the form of salaries,
stock options and other benefits. These salaries and other forms of
compensation will be payable to management of the company even if one or more
of the properties acquired in the acquisition is subsequently sold.
4
<PAGE>
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL USED ITS OWN JUDGMENT TO RESOLVE THE CONFLICTING
YOSEMITE/AHWAHNEE APPRAISALS. Faced with two conflicting appraisals for the
Yosemite/Ahwahnee properties, to determine the appraised values for these
properties for purposes of determining their exchange values, National's
management used the most conservative information presented in the appraisals
unless a change in circumstances or market conditions for a particular parcel
suggested one appraisal was more pertinent than the other. If the values
arrived at by National were too low for either program, the program's
exchange value would be too low and would result in too few shares being
allocated to that program in the acquisition. Conversely, if the values
arrived at by National were too high, the program would receive too large an
allocation of shares in the acquisition to the detriment of the investors in
the other programs.
GENERAL REAL ESTATE RISKS
THERE ARE SIGNIFICANT DELINQUENT PROPERTY TAXES. If delinquent property
taxes are not timely paid, the company could lose one or more of the
properties to tax sales. Each of the programs' properties is subject to the
following delinquent property taxes as of December 31, 1997:
Sacramento/Delta Greens -approximately $45,000; Oceanside - approximately
$55,000; Yosemite/Ahwahnee (combined) - approximately $684,000; and Mori
Point - approximately $298,000. Annual payments required for all the
properties for current taxes (including amounts currently due on five-year
payment plans) total approximately $248,000. In the case of Sacramento/Delta
Greens and Mori Point, National has entered into statutorily authorized
5-year payment plans with the applicable taxing authorities. It plans to do
the same with Yosemite/Ahwahnee shortly.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $[11,400,000] from sale of the units or from sale of
certain assets of the programs become available, the company will not be able
to proceed with its entire business plan. Additionally, if a minimum of
approximately $250,000 is not raised to pay current property tax liabilities,
then certain properties might be lost to tax sales before sales to third
parties can be arranged. The company will also need financing from other
sources to complete its plan. Financing sources are not predictable and
interest rates or other costs of financing may be prohibitive. Other than a
construction loan source for the Oceanside project, neither the programs nor
the company have received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay
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assessments for streets, schools and parks which increase the cost of
development. Increased costs can have a negative affect on the company's
sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. See "Business and Properties - Investments in Real Estate or Interests in
Real Estate" at page __. Real estate development involves more risks than in
the ownership and operation of established projects. Financing may not be
available on favorable terms for development projects; construction may not
be completed on schedule or budget; long-term financing may not be available
on completion of construction; and sites may not be sold on profitable terms.
THE CALIFORNIA ECONOMY HAS FLUCTUATED BROADLY IN THE PAST FEW YEARS. We
presently conduct all of our business in California. Our markets have been
affected by substantial fluctuations in local economic conditions, interest
rates, inflation, employment levels and regulations. California has also
experienced draught conditions, resulting in water conservation measures and
rationing. In the past, these conditions have caused local governments to
restrict residential development. California's climate and geology present
risks of natural disaster such as earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE
OWED $1,381,881 BY THE COMPANY. This represents accrued fees and expenses
from the programs which National has not cancelled. This amount is due and
payable and the company intends to start paying it after the Acquisition, but
only from operating revenues or proceeds from the sale of assets, but not
from working capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED. Construction of
the Sacramento/Delta Greens property will require the filing of a final map
and obtaining building permits from the city's real estate planning
authorities. The existing tentative map approval does not entitle the
property owner to build on the property. The tentative tract map for the
Sacramento/Delta Greens property requires that studies must be conducted to
identify any endangered species' habitat which may exist on the property. If
any are identified, changes to the tentative development plans will have to
be made and approved that will reduce or eliminate any damage to the habitat.
The longer this process takes, the longer it will be until the company can
make money from the property.
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HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays
in construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged
approximately $30,000 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully
compete. Sacramento/Delta Greens is a proposed residential developments and
represent over 8.4% of the assets of the company, respectively. Although
there can be no assurances and net revenues from Sacramento/Delta Greens may
equal or exceed $3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) finance engineering and endangered species studies
(estimated by management to cost approximately $124,800), (ii) finance
planning for final approvals (estimated by management to cost approximately
$51,700), and (iii) finance utilities and roads and the construction of homes
(estimated by management to cost approximately $3,000,000 on a phased basis).
Another risk is whether the lots to be developed will appeal to project
builders and whether home financing will be available. Finally, there is a
risk that the development and sale of lots or homes will be profitable.
REAL ESTATE RISKS OF OCEANSIDE PROPERTY
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE PROPERTY MAY
CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE
SOLD. Changing market conditions may increase the difficulty of selling the
lots. If the company chooses to build homes on the lots, delays in
construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged $10,000
per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and
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pricing are all factors affecting success. Competitors may have better
financial, managerial and other resources, affecting our ability to
successfully compete.
Oceanside is a proposed residential development and represent over
21.75% of the assets of the company. Although there can be no assurances,
net revenues from Oceanside are expected to be in excess of $5,000,000 over
the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that enough investment money
may not be available to obtain a construction loan and begin construction of
the next tract of homes (estimated by management to be approximately $700,000
of equity). There is also a risk that finished lots or completed homes will
not be marketable at a profit or that home financing will not be available at
affordable rates. There is also strong nearby competition.
REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE TIMESHARE ASPECT OF THE RESORT HAVE NOT YET BEEN
OBTAINED. The Yosemite/Ahwahnee property has a final map on 45 remaining
single family estate lots and a use permit for a 600 space recreational
vehicle park. Additional planned usage such as timeshare will require
extensive county and state approvals through the Departments of Real Estate
and Housing and Commercial Development
RISKS AFFECTING OPERATION OF A GOLF COURSE. Increased competition,
seasonality, weather and course conditions will affect the operations of the
company. While no new golf courses have opened near the Ahwahnee Golf
Course, new courses could increase the competition and reduce the rounds
played. Seasonal variations may require the company to supplement revenue at
the golf course to meet operating expenses. Weather can negatively affect
the turf grass and reduce the number of rounds played. Inflationary costs
may not be offset by increased dues. Also, golf's success depends on
discretionary spending by consumers, which may be vulnerable to regional and
economic conditions, as well as to pleasure or destination travel
preferences by visitors and tourists. All of these factors could reduce the
amount of money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity which may
attract potential timeshare purchasers in the future. At this time, the
project does not rely on the golf course for its revenue. National estimates
that the value of the golf course will be less than 5% of the assets of the
company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits. For
example, Spring through Fall at the Yosemite/Ahwahnee property are the
periods of highest occupancy. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues.
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The recreational vehicle park at Yosemite/Ahwahnee may generate as much
as ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers who borrow to buy a home. If a buyer
defaults, we would incur costs in remarketing the timeshare.
We do not have an exchange network to enhance marketing appeal. If we
cannot offer such a network in the future, we may be at a competitive
disadvantage.
The timeshare industry is extremely competitive and we may not be able
to secure development financing on acceptable terms.
Timeshare development is planned for Yosemite/Ahwahnee. Since the
project is not yet permitted for timeshare, there has been no allocation of
assets. Should timeshare be approved, the company anticipates that a
significant portion of the revenue of the company will be derived from sales
of timeshare units, possibly in excess of 25%.
RISKS RELATING TO RECREATIONAL VEHICLE PARK OPERATIONS. Risks relating
to recreational vehicle parks are substantially the same as those described
above for timeshare projects.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) make up for the current cash drain from operations of the
golf course (estimated by management at approximately $150,000) annually,
(ii) construct an additional planned 100 recreational vehicle sites
(estimated by management to cost approximately $700,000), and (iii) obtain
approvals for and construction of the first group of timeshare units
(estimated by management to cost approximately $3,000,000). There are also a
risk that the operation of recreational vehicle sites, timeshares and golf
course activities will not be profitable.
REAL ESTATE RISKS OF MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY HAVE NOT YET BEEN OBTAINED. If needed
permits for development are not obtained or reissued, the business plan for
the company will have to be revised or abandoned. Additionally, the presence
of two endangered species on the Mori Point property increases the risks that
necessary approvals may not be received if an acceptable habitat mitigation
plan cannot be developed. The permitting process with the California Coastal
Commission and applicable county or city real estate planning agencies is
expensive and time consuming. Mori Point had a specific plan and tentative
map to build a hotel/conference center which expired in 1991. These
approvals must be reinstated
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prior to construction on the property. Such reinstatement will be
complicated by the existence of two endangered species living on the property.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits.
Seasonality can be expected to cause quarterly fluctuations in the company's
revenues. In the resort and hotel/conference center property at Mori Point,
we may be competing against well-known chains and extended-stay inns.
Mori Point represents over 20% of the assets of the company and,
assuming it is operated as a hotel/conference center, its revenues may exceed
20% of the total revenues of the company upon completion of the project.
ADDITIONAL SPECIFIC RISKS. There is a risk that the city government
will not approve the property for its intended use. Capital to conduct
engineering and environmental studies in order to apply for and obtain
approvals for its use from the City is estimated to be approximately
$500,000. Capital will also be necessary for roads, utilities and other
infrastructure costs prior to construction. Finally, there is a risk that
the proposed hotel/conference center may not be profitable.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the charter documents may restrict changes in
control of the Company's management. These provisions may make it more
difficult or expensive for another party to acquire and exercise control of
the Company or to change its management, even if that change would be
beneficial to you. These provisions include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate of
incorporation, subject to the receipt of fair value, the Board of Directors
may issue shares in other classes or series and fix the rights, powers and
limitations associated with such shares. Although the Board of Directors has
no present intention of doing so, it could issue a class or series that
could, depending on its terms, impede a merger, tender offer or other
transaction that you might believe is in your best interest or in which you
might receive a premium for your shares over the then current market price.
The issuance of such shares could also dilute your voting power.
STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability
to change control of the company, even if you believe such a change is in
your best interests.
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RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% o the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of
incorporation which cover anti-takeover provisions require the approval of
two-thirds of the company's voting stock. This restriction also may deter
potential purchasers who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well
as the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements.
POSITIVE AND NEGATIVE FEATURES OF THE ACQUISITION
National and the Company considered the following in deciding to propose
the Acquisition:
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE FOR
YOUR INVESTMENT IN THE PROGRAM AS ADJUSTED PER THE TERMS OF THE TENANCY-IN-
COMMON AGREEMENTS. You will receive [162] shares per $10,000 of Adjusted
Outstanding Investment in the Program.
- POTENTIAL LIQUID TRADING MARKET FOR YOUR SHARES. After the
acquisition, shares will be listed on the ______________. While there can be no
assurance that a trading market will develop or be sustained, if a trading
market develops, you will have the opportunity to liquidate all or some of those
shares at your discretion. However, initially the shares are likely to trade at
prices substantially below the arbitrary $10 value assigned to them.
- CONTROL OF THE TIMING OF LIQUIDATION OF YOUR INVESTMENT. You will be
able to control when you with to sell your shares. However, if no trading
market exists at the time, you may not be able to sell your shares. Under the
current programs, you have been subject to a majority vote to sell or retain the
property, regardless of whether or not the timing and decision were favorable to
you.
- BENEFITS OF LISTED SHARES TO THE COMPANY. Listing of the shares on
the ____ may provide benefits to the company which could enhance investor value.
The company may have access to public capital markets that the individual
programs do not have if the company is able to show potential for growth.
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- DIVERSITY MAY REDUCE RISK. Your investment will be spread over
an initial asset base of four different real estate projects (the two
Yosemite/Ahwahnee programs will be one project after the acquisition).
However, the poor performance of a particular property could negatively
affect the performance of the company even if the other properties are
performing up to expectations. Historically, all of the properties have
operated at a loss. In order for the company to be successful, it must
obtain external financing or sell certain of its assets to raise cash for
operations.
- PROPERTY MANAGEMENT. We have hired real estate management
professionals who are experienced in real estate development, operation and
construction. While members of management have gained experience in the
operation of golf courses and recreational vehicle parks through the operation
of the Yosemite/Ahwahnee properties, they do not have extensive experience in
timeshare or resort development, marketing or operations.
- MODEST INCREASE IN MANAGEMENT COMPENSATION. National considered that
the total of salaries to be payable to the Company's officers and other
employees exceeds the total payable to National and its affiliates for servicing
and property management services ($1,181,000 as opposed to $969,000, both of
which include the payroll for Ahwahnee Country Club). The increase was not
viewed as significant since the original servicing fees were based on loan
servicing which is less labor-intensive than property development and
management.
- NO FURTHER LIABILITY FOR MANDATORY ASSESSMENTS. Your tenancy-in-
common agreement and servicing agreement will be cancelled by the acquisition,
meaning your exposure to mandatory assessments will cease. However, the company
will be required to obtain additional money from outside sources or the sale of
certain of its properties to be successful.
- LIABILITY IS LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As beneficial
owners of the assets and businesses of the programs, you are not currently
effectively insulated from personal liability based on the operation of those
assets. As shareholders of a corporation, you will be.
- NO CONTROL OVER TIMING OF SALE OF A PARTICULAR PROPERTY. No
particular group of investors will have the ability to control the timing of the
sale of a particular property as they do under the current program structure.
Instead, all Investors will be required to rely on the decisions of management
regarding the sale of a property.
- PROCEEDS FROM SALE OF PROPERTIES. If a property is sold, the proceeds
will be used by the company to further the business plan of the company.
Presently, if a program property is sold in its entirety, the proceeds would go
to applicable investors directly as a return of their investment. If it is
refinanced, by majority vote the program investors presently have the power to
direct the use of refinancing proceeds.
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- ACQUISITION COULD TRIGGER TAXATION OF INVESTORS. Participation in the
acquisition may be a taxable event for investors. However, National intends to
treat the transaction as a tax-free transaction. To the extent that the
acquisition is determined to be taxable, National believes most investors would
be required to report tax losses. On the other hand, there generally would be
no taxable event to investors as the programs are currently structured until the
program property was sold. At such time, the amount returned to you would
result in either a tax loss or gain depending upon how much of your original
investment was returned to you.
- CASH DISTRIBUTIONS. Currently, if a property was sold, you would be
entitled to a distribution of the proceeds of such sale net of costs of sale and
accrued liabilities. After the acquisition, your distributions will be
dependent upon the earnings of the company and a decision of the board of
directors to make distributions in the form of dividends. You will not
automatically receive distributions upon the sale of any particular property.
- MANAGEMENT AND COMPANY FOUNDERS WILL OWN APPROXIMATELY 18.23% OF THE
COMPANY (ALMOST 14% IF ALL UNITS ARE SOLD IN THE CONCURRENT OFFERING). These
individuals paid $.01 per share for their company shares. In addition, over the
past several years, National and its affiliates have forgiven, and as a result
of the acquisition will forgive, an aggregate of over $3,000,000 of fees and
expenses due from the programs.
- NATIONAL'S PRINCIPAL STOCKHOLDERS WILL OWN FOUNDERS' STOCK IN THE
COMPANY AND WILL RECEIVE SALARIES AS OFFICERS OF THE COMPANY. David Lasker and
James Orth will be President and Chief Executive officer, respectively, of the
company and entities they control will each own 8.01% of the company's
outstanding shares (5.72% if all units are sold in the concurrent offering).
These shares are included in the shares described above as being owned by
management and company founders. Mr. Lasker and Mr. Orth also will receive
annual salaries of $180,000 plus other benefits. See "Management Following the
Acquisition -- Directors and Executive Officers Compensation and Incentives" at
page __.
- AS A CONSEQUENCE OF THE ACQUISITION, THE INVESTORS WILL TERMINATE
NATIONAL AS SERVICING AGENT FOR THE PROGRAMS. This will relieve National of its
ongoing servicing obligations which National could unilaterally terminate if it
elected to do so.
- THE COMPANY WILL OWE NATIONAL $1,381,881 OF ACCRUED BUT UNPAID FEES
AND EXPENSES DUE FROM THE PROGRAMS AFTER THE ACQUISITION. If the company is
successful, National will have the opportunity to receive the portion of its
accrued but unpaid fees and expenses which it has not forgiven.
The Acquisition will have no material effect on this Program's stand-alone
financial condition or results of operations. Overall, the Company expects to
experience losses in the initial year of operations.
For further information about how the Acquisition will affect you and the
Program, see the following portions of the Prospectus:
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- "Background and Reasons for the Acquisition" commencing at page
__.
- "Comparison of Tenancy-in-Common Interests and Shares" commencing
at page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing at page __.
- "Management Following the Acquisition" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
FAIRNESS TO INVESTORS IN THE OCEANSIDE PROGRAM
From a financial point of view, the company and National believe the terms
of the acquisition are fair as a whole and to the investors in each of the
programs. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that develops
will be sustained;
- while the number of shares to be issued to reflect the exchange value
of a program is arbitrary, the trading price of such shares initially is likely
to be substantially below the $10 value arbitrarily assigned to such shares. In
our opinion, the exchange values offered to investors for their assets allow for
an equitable allocation of the 2,001,248 shares among the programs. The
disparity between exchange values and appraised values results from adding the
value of program cash reserves and other assets, if any, to appraised values and
deducting program liabilities (principally accrued property taxes and other fees
net of fees to be forgiven by National);
- on completion of the acquisition the investors will hold over 80% of
the outstanding stock of the company while principals, employees, and
consultants of National will hold less than 20%. That 20% was purchased for
$.01 per share. National and its principals have forgiven, or will forgive at
the completion of the acquisition, over $3,000,000 of expenses and accrued fees
of which a total of approximately $1,400,000 was earned under the servicing
agreements or for property management services and expenses after the loans
defaulted. National believes that the amount paid for the property management
services is no greater than the amount that a third party would charge;
- the valuation of the real estate assets of each of the programs by the
independent appraisers;
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- the probability that the transaction will either be tax-free to
investors or most likely yield a tax loss. Either way, National believes there
will likely be no out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have independent
representation in the structuring of the acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the programs were originally formed to have a two to four year
finite life and the investors expected to receive a return of their investment
from the original borrower, the company is an infinite life entity which will
not return the program investors' original investment based on a sale or
refinancing of the properties underlying the original programs. However, after
the borrowers defaulted on the "Trudy Pat" loans, the investors became
beneficial owners of the underlying properties with the need to complete
development, manage or otherwise ready the properties for sale. Those endeavors
had no fixed timetable and, thus, the finite life aspect of their original
investments was significantly changed. Therefore, the infinite life aspect of
the company is not viewed by National to be a material change from the
investors' CURRENT situation;
- the acquisition will cause fundamental changes in the individual
business plans of the programs. Rather than being focused on a single property,
the company will be focused on the management of at least five properties.
Thus, the poor performance of a particular property may affect the company's
operations as a whole regardless of the performance of the other properties.
Further, there will be no particular time when an Investor can expect its
interest to be automatically liquidated;
- investors will not be able to vote on changes to or dispositions of a
particular property or borrowing secured by a particular property. Those
decisions will be made by the Board of Directors or management. Further, as
investors in a larger entity, relative voting power will be diluted;
- future cash distributions will be based on the company's earnings
during the decision of the Board of Directors to pay dividends rather than the
performance or sale of a particular property;
- investors voting against the acquisition will have no alternative but
to accept shares in the company if the acquisition is approved by holders of a
majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a change
in management which is not favored by the Board of Directors of the company; and
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- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the shares in
the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __.
National reviewed the arbitrary value you will receive in connection with
the acquisition and compared it with what you might receive if (i) the programs'
properties were operated "as is," (ii) the programs' properties were sold in a
quick sale in three months or less, or (iii) the programs' properties were sold
at the appraised values used to determine the exchange values. Based on that
review, and even acknowledging that, initially, the company's shares issued in
the acquisition would likely trade substantially below their arbitrary $10
issuance value, National believes that there is a higher probability of
realizing value from the programs' assets through the acquisition than through
the other alternatives. This belief is based on the expectation that some
financing opportunities will become available based on the form of the entity
and the time pressure associated with forced sales or liquidation will be
relieved. See "Background and Reasons for the Acquisition -- Comparison to
Alternatives" and "Recommendation of National and Fairness Determination" at
pages __ and __. Based on this comparison, National concluded that the
acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Program (as well as each of the other four
Programs) is essentially the consideration which the Company is offering in
exchange for the real estate assets, certain liabilities and business of the
Program. The value is reflected as a number of shares of the Company's common
stock (in the case of the Program, [487,571 shares) multiplied by an arbitrary
$10 per share value.
The Exchange Value for the Program was calculated as follows: appraised
value of the Program's Property at May 1997, plus book value of other Oceanside
Program assets at [DECEMBER 31], 1997, less Program liabilities at [DECEMBER
31], 1997, and plus liabilities to National to be forgiven by National as part
of the Acquisition.
The following table summarizes the calculation of the Exchange Value of the
Oceanside Program and the value assigned per $10,000 of Adjusted Outstanding
Investment:
<TABLE>
<CAPTION>
Value Assigned
Appraised Value Net Other to Program per
of + Assets and = Exchange $10,000 of Adjusted
Real Estate(1) Liabilities(2) Value Outstanding Investment
-------------- -------------- ----- ----------------------
<S> <C> <C> <C>
$ 2,850,000 $[2,025,714] $[4,875,714] $ [1,624](3)
</TABLE>
16
<PAGE>
- -------------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values made in
determining a Property's Exchange Value as of [December 31, 1997].
<TABLE>
<CAPTION>
Book Assets Book Liabilities To Be Forgiven Amounts Net Other Assets and
(12/31/97)* - (12/31/97)* + = Liabilities
<S> <C> <C> <C>
$ 2,593,408 $ (1,271,694) $ 704,000 $ 2,025,714
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no mortgage debt on the Property.
(3) Equals [162] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,012,248] shares of Company common stock being offered to Investors
in the Acquisition represent 80.16% of the Company's shares which will be
outstanding upon completion of the Acquisition. The remaining shares will be
held by management and other founders of the Company. Such shares will be
allocated among the five Programs pro rata in accordance with Exchange Values.
The Oceanside Program will be allocated [487,571] shares.
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in the
applicable Program (taking into account assessments paid and unpaid, as well as
interest accrued to each Investor through the date beneficial ownership of the
Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Oceanside Program with an adjusted investment
amount of $10,000 will receive [162] shares of Company stock arbitrarily valued
at $10 per share.
Neither National nor the Company's founders have any economic interest
in the Oceanside Program except for National's contractual right to servicing
fees and the $[2,082] of tenancy-in-common interests purchased by National at
the inception of the Program for which interests National will receive Company
shares in the Acquisition pro rata with the other Mori Point Investors.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Program (including accrued but unpaid interest) plus
the amount of assessments and advances paid by Investors at December 31, 1997,
appraised real estate value, Exchange Value of the Program, the number and
percentage of shares allocated to the Program, and the number of shares and
comparative value of the Company to be held by founders after the Acquisition.
17
<PAGE>
<TABLE>
<CAPTION>
% of Total Shares
Amount Real Estate to be Outstanding
Owed plus Appraised Exchange No. of Shares After the
Name of Program Assessments Value Value(1) Allocated(1)(2) Acquisition
--------------- ----------- ----- -------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Oceanside $ 27,100,000 $ 2,850,000 $ 4,875,714 [487,571] [19.53]%
</TABLE>
- -------------------
(1) The founders of the Company which include members of Company management,
as well as certain employees of National and consultants to the Company
and the Programs, will hold a total of [495,318] Company shares after
the Acquisition (19.84% of the outstanding shares post-Acquisition)
which, if valued at $10 per share, would have an aggregate value of
$[4,953,180]. The Company was formed, and shares were purchased by the
founders for $.01 per share, prior to making the Acquisition proposal.
While a factor considered in the analysis, the shares to be retained by
the Company's founders were not determined based only on fees cancelled
or to be cancelled by National and its principals. Overall, National
believed that the Company's founders should hold slightly less than 20%
of the shares after the Acquisition. See "Dilution" at page __ of the
Prospectus. If the Acquisition is completed, the following table sets
forth the fees which National and its principals have cancelled, or will
cancel:
<TABLE>
<CAPTION>
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
---------- --------- ---------
<S> <C> <C> <C>
Sacramento/Delta Greens $ 137,111 $ 500,000 $ 637,111
Oceanside 704,000 -0- 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point -0- 461,589 461,589
----------- ------------- ------------
TOTAL $ 946,111 $ 2,191,614 $ 3,137,725
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [22.44] % of the total shares
to be owned by the Company's founders after the Acquisition ([111,149]
shares) would have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1997,
1996 and 1995.
18
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
YOSEMITE/AHWAHNEE I "TRUDY PAT" PROGRAM
CAPITALIZED TERMS USED IN THIS SUPPLEMENT AND NOT DEFINED HEREIN HAVE THE
MEANING GIVEN TO THEM IN THE PROSPECTUS.
SEE "GLOSSARY" AT PAGE __ OF THE PROSPECTUS.
---------------------------
This Supplement has been prepared to help the Investors in the
Yosemite/Ahwahnee I Program to understand how the Acquisition described in
the accompanying Prospectus will affect them. If completed, the effects of
the Acquisition may be different for Investors in the other Programs. A
separate supplement has been prepared for each of the other Programs, copies
of which may be obtained, without charge, by writing to National Investors
Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport Beach, California
92660, Attention: Vivian Kennedy, or calling 1-800-590-7772.
As described in the accompanying Prospectus, American Family Holdings, Inc.
(the "Company") is offering shares of its Common Stock in exchange for the
assets (including cash reserves), certain liabilities and business activities
owned by Investors in five former "Trudy Pat" programs managed by National
Investors Financial, Inc. ("National"). For this proposed Acquisition, the
Company will issue an aggregate of $[20,012,475] of shares of common stock
arbitrarily valued at $10 per Share. The stock will be listed for trading on
the ___________ under the symbol "___." The purpose of the transaction is to
consolidate the operations of the programs, improve the ability to sell or
obtain financing for development of the programs' properties, and provide the
investors with liquidity for their investments.
Of the [2,001,248] shares to be issued by the Company in the Acquisition,
Investors in the Yosemite/Ahwahnee I Program will receive a total of [320,567]
shares or [354] shares per $10,000 of Adjusted Outstanding Investment. After
costs of sale, and the payment of Program liabilities, National does not believe
any alternative would yield to Investors in the Yosemite/Ahwahnee I program an
amount that is higher than the value of the Company shares to be received in the
Acquisition.
In each of the Programs, the Investors will vote on whether to approve the
Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF THE
FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a tenancy-in-common
interest in your program's property. Instead, you will hold shares in a
publicly-traded real estate company and will not receive liquidation proceeds
when, or if, your program's property is sold. As an investor in a publicly-
traded company with many stockholders, you will have relatively less voting
power.
- - You will have an investment in a business which also plans to construct and
sell residential properties, and which plans to pursue the development of a
hotel/conference center.
- - If a trading market develops, the initial trading price for the stock will
likely be substantially below the arbitrary value of $10 per share assigned to
the Company's shares for purposes of the acquisition. Thus, the value of the
shares you receive may be less than you might receive if the property of your
program were sold.
- - Principal stockholders National and executive officers of the Company will
hold approximately [18.23]% of the Company's stock for which they paid $0.01 per
share and will receive annual cash compensation aggregating $660,000 as officers
and employees. National will be relieved of its servicing and asset management
obligations and will no longer earn servicing and asset management fees of
approximately $650,000 annually. However, the Company will still owe National
over $1,300,000 of accrued but unpaid fees and expenses.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event. If
so, National believes a tax loss is the probable result for most of you.
- - The Company must have additional cash to fund its proposed operations. If
it cannot obtain such funding from the sale of its securities or certain of its
properties, it will be no more successful than the programs have been
individually in completing the development of some or all of the properties.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found on
pages [30] through [42] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. If the acquisition is
completed, there will be a change in the nature of the investment of each
investor from holding a tenancy-in-common interest in real estate to holding
shares in an on-going company, the assets of which may be changed from time to
time without approval of investors. If the acquisition is completed, investors
will be able to liquidate their investments only by selling their shares on the
_____ or in private transactions, and they will not receive a return of their
investment in the form of liquidation proceeds through property sales. If the
acquisition is completed, investors will have an investment in an entity that is
larger than each of the programs and will thus lose relative voting power.
Investors will have an investment in a business which also plans to construct
and sell residential properties, and which plans to pursue the development of a
hotel/conference center.
DIFFERENCES BETWEEN EXCHANGE VALUES AND SALES PRICE. Investors are subject
to the risk that the exchange value of a program does not reflect the price a
program's assets might bring in a sale. If the property of a program were to be
sold, the net proceeds of the sale and the amount finally distributed to an
investor in that program may be more or less than the exchange value. There is
no assurance that the future value of the shares will continue to be greater
than the most recent appraised value of the property.
UNCERTAINTY REGARDING TRADING PRICE FOR THE SHARES. Initially, shares may
trade at prices substantially below the arbitrarily determined exchange value of
$10 per share or historical book value of the company's assets. There is no
guaranty that a liquid trading market will develop for the shares, or be
sustained. If a trading market develops for the shares, the price of shares
after the acquisition will likely decrease below the exchange value per share of
$10 due to a potentially large number of shares that investors may sell
immediately after the acquisition.
CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The founders of the
company, and specifically the principal shareholders of National, as well as
National itself, will be subject to conflicts of interest. The principal
shareholders and employees of National and the company will hold approximately
[18.23]% of the company's outstanding stock for which they paid $0.01 per share.
Other founders of the company will hold approximately [1.6]% of the company's
outstanding stock for which they also paid $0.01 per share. Thus, the
investors' total ownership interests in the programs' properties will be diluted
by the equity interest in the company held by the founders of the company. The
principal stockholders of National and other executive officers of the Company
will receive annual cash compensation aggregating $660,000 as officers and
employees of the company. National will be relieved of its servicing and asset
management obligations and will no longer earn
2
<PAGE>
asset management or servicing related fees. However, the company will still
owe National over $1,300,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not favored
by the board of directors. These provisions include a board of directors with
three classes serving staggered three year terms, the inability to remove a
particular director before the expiration of his or her term without a two-
thirds supermajority vote , and the inability to amend the anti-takeover
provisions of the charter documents without a similar vote. Thus, if investors
are unhappy with management's performance, it will be more difficult to remove
directors not favored by the investors.
Messrs. Lasker and Orth will be required to devote some of their time to
other projects for which National acts as servicing agent and asset manager.
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS. No independent party was
retained by National to negotiate on behalf of the investors. Therefore, terms
of the acquisition may be less favorable to investors and more favorable to
founders of the company which included the principal shareholders of National
than if the acquisition had been subject to arm's-length negotiation. Had an
independent party negotiated on behalf of each program, the terms of the
acquisition may have been more favorable to certain or all of the programs and
fewer shares and less favorable employment contracts may have been received by
the founders of the company.
TAX UNCERTAINTIES. The acquisition may not be a tax-free transaction to
investors. Due to uncertainties in the facts of this transaction, tax counsel
is unable to opine conclusively on the taxability of the acquisition to
investors. If the acquisition is a taxable transaction, an investor would
recognize gain or loss in 1998 equal to the difference between the investor's
tax basis in his interest in a program property, and the number of shares of the
company received valued at $10 per share. If the acquisition is treated as
taxable, National believes most investors would recognize a tax loss.
POTENTIAL CHANGE IN THE AMOUNT OF LEVERAGE. 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.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN INVESTMENT,
FINANCING AND CERTAIN OTHER POLICIES. 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.
3
<PAGE>
NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS. If you vote
against the acquisition, and it is approved, you will not be able to object to
the acquisition and receive the appraised value of your tenancy-in-common
interest in your program's assets. You will have no choice other than to accept
shares for your interests.
COMPANY HAS NO OPERATING HISTORY. The company was formed within the past
year to take part in the acquisition of your property. It does not have the
benefit of operating for a long time. This means that shares in the company are
much riskier than ownership of shares of established companies. If the company
had been operating as if it owned the properties which it desires to acquire, it
would have experienced losses to date.
FUNDAMENTAL CHANGES IN THE BUSINESS PLAN. Rather than being focused on a
single property, the company will be an infinite life entity focused on the
management of at least five properties. The effect of this on investors is two-
fold. First, poor performance of a particular property may affect the company's
operations as a whole regardless of the performance of the other properties.
Second, there will be no particular time when an investor can expect that a sale
of any of the properties will result in cash distributions to him or her.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes or
sales of a particular property. Those decisions will be made by the board of
directors or management. In addition, you will have an investment in an entity
that is larger than each of the programs and, thus, you will lose relative
voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, because of the borrowers' defaults there have been
no distributions from any of the programs, other than the Oceanside program, in
the past three years. Future cash distributions will be based on the company's
earnings and the decision of the board of directors to pay dividends.
Therefore, even if a property in which you formerly held an interest were to
perform well, there is no assurance that there would be cash distributions to
you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National is
presently compensated for its services at the rate of one percent of the
principal amount originally invested in each program. In addition, additional
compensation has been accrued for property management services provided to the
Oceanside and Yosemite/Ahwahnee properties by officers and employees of National
in their capacities as officers of Oceanside Development, Inc. and Ahwahnee Golf
Course & Resort, Inc. In the future, compensation will be paid to officers of
the company in the form of salaries, stock options and other benefits. These
salaries and other forms of compensation will be payable to management of the
company even if one or more of the properties acquired in the acquisition is
subsequently sold.
4
<PAGE>
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL USED ITS OWN JUDGMENT TO RESOLVE THE CONFLICTING YOSEMITE/AHWAHNEE
APPRAISALS. Faced with two conflicting appraisals for the Yosemite/Ahwahnee
properties, to determine the appraised values for these properties for purposes
of determining their exchange values, National's management used the most
conservative information presented in the appraisals unless a change in
circumstances or market conditions for a particular parcel suggested one
appraisal was more pertinent than the other. If the values arrived at by
National were too low for either program, the program's exchange value would be
too low and would result in too few shares being allocated to that program in
the acquisition. Conversely, if the values arrived at by National were too
high, the program would receive too large an allocation of shares in the
acquisition to the detriment of the investors in the other programs.
GENERAL REAL ESTATE RISKS
THERE ARE SIGNIFICANT DELINQUENT PROPERTY TAXES. If delinquent property
taxes are not timely paid, the company could lose one or more of the properties
to tax sales. Each of the programs' properties is subject to the following
delinquent property taxes as of December 31, 1997: Sacramento/Delta Greens -
approximately $45,000; Oceanside - approximately $55,000; Yosemite/Ahwahnee
(combined) - approximately $684,000; and Mori Point - approximately $298,000.
Annual payments required for all the properties for current taxes (including
amounts currently due on five-year payment plans) total approximately $248,000.
In the case of Sacramento/Delta Greens and Mori Point, National has entered into
statutorily authorized 5-year payment plans with the applicable taxing
authorities. It plans to do the same with Yosemite/Ahwahnee shortly.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $[11,400,000] from sale of the units or from sale of
certain assets of the programs become available, the company will not be able to
proceed with its entire business plan. Additionally, if a minimum of
approximately $250,000 is not raised to pay current property tax liabilities,
then certain properties might be lost to tax sales before sales to third parties
can be arranged. The company will also need financing from other sources to
complete its plan. Financing sources are not predictable and interest rates or
other costs of financing may be prohibitive. Other than a construction loan
source for the Oceanside project, neither the programs nor the company have
received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay
5
<PAGE>
assessments for streets, schools and parks which increase the cost of
development. Increased costs can have a negative affect on the company's
sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. See "Business and Properties - Investments in Real Estate or Interests in
Real Estate" at page __. Real estate development involves more risks than in
the ownership and operation of established projects. Financing may not be
available on favorable terms for development projects; construction may not
be completed on schedule or budget; long-term financing may not be available
on completion of construction; and sites may not be sold on profitable terms.
THE CALIFORNIA ECONOMY HAS FLUCTUATED BROADLY IN THE PAST FEW YEARS. We
presently conduct all of our business in California. Our markets have been
affected by substantial fluctuations in local economic conditions, interest
rates, inflation, employment levels and regulations. California has also
experienced draught conditions, resulting in water conservation measures and
rationing. In the past, these conditions have caused local governments to
restrict residential development. California's climate and geology present
risks of natural disaster such as earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE OWED
[$1,381,881] BY THE COMPANY. This represents accrued fees and expenses from the
programs which National has not cancelled. This amount is due and payable and
the company intends to start paying it after the Acquisition, but only from
operating revenues or proceeds from the sale of assets, but not from working
capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED. Construction of the
Sacramento/Delta Greens property will require the filing of a final map and
obtaining building permits from the city's real estate planning authorities.
The existing tentative map approval does not entitle the property owner to build
on the property. The tentative tract map for the Sacramento/Delta Greens
property requires that studies must be conducted to identify any endangered
species' habitat which may exist on the property. If any are identified,
changes to the tentative development plans will have to be made and approved
that will reduce or eliminate any damage to the habitat. The longer this
process takes, the longer it will be until the company can make money from the
property.
6
<PAGE>
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays in
construction, the lack of reasonably priced construction or mortgage financing,
and the general California economy could lengthen the holding period for the
lots. This would mean a delay in realizing cash from the business operations.
The average carrying costs, including property taxes, management and servicing
related fees, for this property has averaged approximately $30,000 per month
over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real estate
is cyclical and the residential lot development industry is highly competitive.
If the demand for new lots does not keep pace with competitive supply, our
properties may be sold at a loss. The location of the company's lots, the
presence of other competition, customer acceptance and pricing are all factors
affecting success. Competitors may have better financial, managerial and other
resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 8.4% of the assets of the company, respectively. Although there
can be no assurances and net revenues from Sacramento/Delta Greens may equal or
exceed $3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to (i) finance engineering and endangered species studies (estimated
by management to cost approximately $124,800), (ii) finance planning for final
approvals (estimated by management to cost approximately $51,700), and (iii)
finance utilities and roads and the construction of homes (estimated by
management to cost approximately $3,000,000 on a phased basis). Another risk is
whether the lots to be developed will appeal to project builders and whether
home financing will be available. Finally, there is a risk that the development
and sale of lots or homes will be profitable.
REAL ESTATE RISKS OF OCEANSIDE PROPERTY
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE PROPERTY MAY
CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE
SOLD. Changing market conditions may increase the difficulty of selling the
lots. If the company chooses to build homes on the lots, delays in
construction, the lack of reasonably priced construction or mortgage financing,
and the general California economy could lengthen the holding period for the
lots. This would mean a delay in realizing cash from the business operations.
The average carrying costs, including property taxes, management and servicing
related fees, for this property has averaged $10,000 per month over the past
three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real estate
is cyclical and the residential lot development industry is highly competitive.
If the demand for new lots does not keep pace with competitive supply, our
properties may be sold at a loss. The location of the company's lots, the
presence of other competition, customer acceptance and
7
<PAGE>
pricing are all factors affecting success. Competitors may have better
financial, managerial and other resources, affecting our ability to
successfully compete.
Oceanside is a proposed residential development and represent over 21.75%
of the assets of the company. Although there can be no assurances, net revenues
from Oceanside are expected to be in excess of $5,000,000 over the following 36
months.
ADDITIONAL SPECIFIC RISKS. There is a risk that enough investment money
may not be available to obtain a construction loan and begin construction of the
next tract of homes (estimated by management to be approximately $700,000 of
equity). There is also a risk that finished lots or completed homes will not be
marketable at a profit or that home financing will not be available at
affordable rates. There is also strong nearby competition.
REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE TIMESHARE ASPECT OF THE RESORT HAVE NOT YET BEEN
OBTAINED. The Yosemite/Ahwahnee property has a final map on 45 remaining single
family estate lots and a use permit for a 600 space recreational vehicle park.
Additional planned usage such as timeshare will require extensive county and
state approvals through the Departments of Real Estate and Housing and
Commercial development.
RISKS AFFECTING OPERATION OF A GOLF COURSE. Increased competition,
seasonality, weather and course conditions will affect the operations of the
company. While no new golf courses have opened near the Ahwahnee Golf Course,
new courses could increase the competition and reduce the rounds played.
Seasonal variations may require the company to supplement revenue at the golf
course to meet operating expenses. Weather can negatively affect the turf grass
and reduce the number of rounds played. Inflationary costs may not be offset by
increased dues. Also, golf's success depends on discretionary spending by
consumers, which may be vulnerable to regional and economic conditions, as well
as to pleasure or destination travel preferences by visitors and tourists. All
of these factors could reduce the amount of money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity which may
attract potential timeshare purchasers in the future. At this time, the project
does not rely on the golf course for its revenue. National estimates that the
value of the golf course will be less than 5% of the assets of the company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard to
obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not be
able to develop its resort projects as part of its growth strategy. Economic
conditions, changes in travel patterns, extreme weather conditions, labor and
other variable costs can all affect revenues and profits. For example, Spring
through Fall at the Yosemite/Ahwahnee property are the periods of highest
occupancy. Seasonality can be expected to cause quarterly fluctuations in the
company's revenues.
8
<PAGE>
The recreational vehicle park at Yosemite/Ahwahnee may generate as much as
ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or eliminate
profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers who borrow to buy a home. If a buyer defaults,
we would incur costs in remarketing the timeshare.
We do not have an exchange network to enhance marketing appeal. If we
cannot offer such a network in the future, we may be at a competitive
disadvantage.
The timeshare industry is extremely competitive and we may not be able to
secure development financing on acceptable terms.
Timeshare development is planned for Yosemite/Ahwahnee. Since the project
is not yet permitted for timeshare, there has been no allocation of assets.
Should timeshare be approved, the company anticipates that a significant portion
of the revenue of the company will be derived from sales of timeshare units,
possibly in excess of 25%.
RISKS RELATING TO RECREATIONAL VEHICLE PARK OPERATIONS. Risks relating to
recreational vehicle parks are substantially the same as those described above
for timeshare projects.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to (i) make up for the current cash drain from operations of the golf
course (estimated by management at approximately $150,000) annually, (ii)
construct an additional planned 100 recreational vehicle sites (estimated by
management to cost approximately $700,000), and (iii) obtain approvals for and
construction of the first group of timeshare units (estimated by management to
cost approximately $3,000,000). There are also a risk that the operation of
recreational vehicle sites, timeshares and golf course activities will not be
profitable.
REAL ESTATE RISKS OF MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY HAVE NOT YET BEEN OBTAINED. If needed
permits for development are not obtained or reissued, the business plan for
the company will have to be revised or abandoned. Additionally, the presence
of two endangered species on the Mori Point property increases the risks that
necessary approvals may not be received if an acceptable habitat mitigation
plan cannot be developed. The permitting process with the California Coastal
Commission and applicable county or city real estate planning agencies is
expensive and time consuming. Mori Point had a specific plan and tentative
map to build a hotel/conference center which expired in 1991. These
approvals must be reinstated
9
<PAGE>
prior to construction on the property. Such reinstatement will be
complicated by the existence of two endangered species living on the property.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard to
obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not be
able to develop its resort projects as part of its growth strategy. Economic
conditions, changes in travel patterns, extreme weather conditions, labor and
other variable costs can all affect revenues and profits. Seasonality can be
expected to cause quarterly fluctuations in the company's revenues. In the
resort and hotel/conference center property at Mori Point, we may be competing
against well-known chains and extended-stay inns.
Mori Point represents over 20% of the assets of the company and, assuming
it is operated as a hotel/conference center, its revenues may exceed 20% of the
total revenues of the company upon completion of the project.
ADDITIONAL SPECIFIC RISKS. There is a risk that the city government will
not approve the property for its intended use. Capital to conduct engineering
and environmental studies in order to apply for and obtain approvals for its use
from the City is estimated to be approximately $500,000. Capital will also be
necessary for roads, utilities and other infrastructure costs prior to
construction. Finally, there is a risk that the proposed hotel/conference
center may not be profitable.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the charter documents may restrict changes in control
of the Company's management. These provisions may make it more difficult or
expensive for another party to acquire and exercise control of the Company or to
change its management, even if that change would be beneficial to you. These
provisions include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate of
incorporation, subject to the receipt of fair value, the Board of Directors may
issue shares in other classes or series and fix the rights, powers and
limitations associated with such shares. Although the Board of Directors has no
present intention of doing so, it could issue a class or series that could,
depending on its terms, impede a merger, tender offer or other transaction that
you might believe is in your best interest or in which you might receive a
premium for your shares over the then current market price. The issuance of
such shares could also dilute your voting power.
STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability to
change control of the company, even if you believe such a change is in your best
interests.
10
<PAGE>
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's certificate
of incorporation, as well as Delaware law, prohibits certain business
combinations with owners of more than 15% o the outstanding voting stock of the
company ("interested stockholders") within the three year period immediately
prior to the date on which the interested stockholder became an interested
stockholder. These restrictions on certain business combinations may deter
potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of incorporation
which cover anti-takeover provisions require the approval of two-thirds of the
company's voting stock. This restriction also may deter potential purchasers
who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well as
the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections National
enjoys under the programs' servicing agreements.
POSITIVE AND NEGATIVE FEATURES OF THE ACQUISITION
National and the Company considered the following in deciding to propose
the Acquisition:
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE FOR
YOUR INVESTMENT IN THE PROGRAM AS ADJUSTED PER THE TERMS OF THE TENANCY-IN-
COMMON AGREEMENTS. You will received [354] shares per $10,000 of Adjusted
Outstanding Investment in the Program.
- POTENTIAL LIQUID TRADING MARKET FOR YOUR SHARES. After the
acquisition, shares will be listed on the ______________. While there can be no
assurance that a trading market will develop or be sustained, if a trading
market develops, you will have the opportunity to liquidate all or some of those
shares at your discretion. However, initially the shares are likely to trade at
prices substantially below the arbitrary $10 value assigned to them.
- CONTROL OF THE TIMING OF LIQUIDATION OF YOUR INVESTMENT. You will be
able to control when you with to sell your shares. However, if no trading
market exists at the time, you may not be able to sell your shares. Under the
current programs, you have been subject to a majority vote to sell or retain the
property, regardless of whether or not the timing and decision were favorable to
you.
- BENEFITS OF LISTED SHARES TO THE COMPANY. Listing of the shares on
the ____ may provide benefits to the company which could enhance investor value.
The company may have access to public capital markets that the individual
programs do not have if the company is able to show potential for growth.
11
<PAGE>
- DIVERSITY MAY REDUCE RISK. Your investment will be spread over an
initial asset base of four different real estate projects (the two
Yosemite/Ahwahnee programs will be one project after the acquisition). However,
the poor performance of a particular property could negatively affect the
performance of the company even if the other properties are performing up to
expectations. Historically, all of the properties have operated at a loss. In
order for the company to be successful, it must obtain external financing or
sell certain of its assets to raise cash for operations.
- PROPERTY MANAGEMENT. We have hired real estate management
professionals who are experienced in real estate development, operation and
construction. While members of management have gained experience in the
operation of golf courses and recreational vehicle parks through the operation
of the Yosemite/Ahwahnee properties, they do not have extensive experience in
timeshare or resort development, marketing or operations.
- MODEST INCREASE IN MANAGEMENT COMPENSATION. National considered that
the total of salaries to be payable to the Company's officers and other
employees exceeds the total payable to National and its affiliates for servicing
and property management services ($1,181,000 as opposed to $969,000, both of
which include the payroll for Ahwahnee Country Club). The increase was not
viewed as significant since the original servicing fees were based on loan
servicing which is less labor-intensive than property development and
management.
- NO FURTHER LIABILITY FOR MANDATORY ASSESSMENTS. Your tenancy-in-
common agreement and servicing agreement will be cancelled by the acquisition,
meaning your exposure to mandatory assessments will cease. However, the company
will be required to obtain additional money from outside sources or the sale of
certain of its properties to be successful.
- LIABILITY IS LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As beneficial
owners of the assets and businesses of the programs, you are not currently
effectively insulated from personal liability based on the operation of those
assets. As shareholders of a corporation, you will be.
- NO CONTROL OVER TIMING OF SALE OF A PARTICULAR PROPERTY. No
particular group of investors will have the ability to control the timing of the
sale of a particular property as they do under the current program structure.
Instead, all Investors will be required to rely on the decisions of management
regarding the sale of a property.
- PROCEEDS FROM SALE OF PROPERTIES. If a property is sold, the proceeds
will be used by the company to further the business plan of the company.
Presently, if a program property is sold in its entirety, the proceeds would go
to applicable investors directly as a return of their investment. If it is
refinanced, by majority vote the program investors presently have the power to
direct the use of refinancing proceeds.
12
<PAGE>
- ACQUISITION COULD TRIGGER TAXATION OF INVESTORS. Participation in the
acquisition may be a taxable event for investors. However, National intends to
treat the transaction as a tax-free transaction. To the extent that the
acquisition is determined to be taxable, National believes most investors would
be required to report tax losses. On the other hand, there generally would be
no taxable event to investors as the programs are currently structured until the
program property was sold. At such time, the amount returned to you would
result in either a tax loss or gain depending upon how much of your original
investment was returned to you.
- CASH DISTRIBUTIONS. Currently, if a property was sold, you would be
entitled to a distribution of the proceeds of such sale net of costs of sale and
accrued liabilities. After the acquisition, your distributions will be
dependent upon the earnings of the company and a decision of the board of
directors to make distributions in the form of dividends. You will not
automatically receive distributions upon the sale of any particular property.
- MANAGEMENT AND COMPANY FOUNDERS WILL OWN APPROXIMATELY 18.23% OF THE
COMPANY (ALMOST 14% IF ALL UNITS ARE SOLD IN THE CONCURRENT OFFERING). These
individuals paid $.01 per share for their company shares. In addition, over the
past several years, National and its affiliates have forgiven, and as a result
of the acquisition will forgive, an aggregate of over $3,000,000 of fees and
expenses due from the programs.
- NATIONAL'S PRINCIPAL STOCKHOLDERS WILL OWN FOUNDERS' STOCK IN THE
COMPANY AND WILL RECEIVE SALARIES AS OFFICERS OF THE COMPANY. David Lasker and
James Orth will be President and Chief Executive officer, respectively, of the
company and entities they control will each own 8.01% of the company's
outstanding shares (5.72% if all units are sold in the concurrent offering).
These shares are included in the shares described above as being owned by
management and company founders. Mr. Lasker and Mr. Orth also will receive
annual salaries of $180,000 plus other benefits. See "Management Following the
Acquisition -- Directors and Executive Officers Compensation and Incentives" at
page __.
- AS A CONSEQUENCE OF THE ACQUISITION, THE INVESTORS WILL TERMINATE
NATIONAL AS SERVICING AGENT FOR THE PROGRAMS. This will relieve National of its
ongoing servicing obligations which National could unilaterally terminate if it
elected to do so.
- THE COMPANY WILL OWE NATIONAL $1,381,881 OF ACCRUED BUT UNPAID FEES
AND EXPENSES DUE FROM THE PROGRAMS AFTER THE ACQUISITION. If the company is
successful, National will have the opportunity to receive the portion of its
accrued but unpaid fees and expenses which it has not forgiven.
The Acquisition will have no material effect on this Program's stand-alone
financial condition or results of operations. Overall, the Company expects to
experience losses in the initial year of operations.
For further information about how the Acquisition will affect you and the
Program, see the following portions of the Prospectus:
13
<PAGE>
- "Background and Reasons for the Acquisition" commencing at page
__.
- "Comparison of Tenancy-in-Common Interests and Shares" commencing
at page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing at page __.
- "Management Following the Acquisition" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
FAIRNESS TO INVESTORS IN THE YOSEMITE/AHWAHNEE I PROGRAM
From a financial point of view, the company and National believe the terms
of the acquisition are fair as a whole and to the investors in each of the
programs. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that develops
will be sustained;
- while the number of shares to be issued to reflect the exchange value
of a program is arbitrary, the trading price of such shares initially is likely
to be substantially below the $10 value arbitrarily assigned to such shares. In
our opinion, the exchange values offered to investors for their assets allow for
an equitable allocation of the 2,001,248 shares among the programs. The
disparity between exchange values and appraised values results from adding the
value of program cash reserves and other assets, if any, to appraised values and
deducting program liabilities (principally accrued property taxes and other fees
net of fees to be forgiven by National);
- on completion of the acquisition the investors will hold over 80% of
the outstanding stock of the company while principals, employees, and
consultants of National will hold less than 20%. That 20% was purchased for
$.01 per share. National and its principals have forgiven, or will forgive at
the completion of the acquisition, over $3,000,000 of expenses and accrued fees
of which a total of approximately $1,400,000 was earned under the servicing
agreements or for property management services and expenses after the loans
defaulted. National believes that the amount paid for the property management
services is no greater than the amount that a third party would charge;
- the valuation of the real estate assets of each of the programs by the
independent appraisers;
14
<PAGE>
- the probability that the transaction will either be tax-free to
investors or most likely yield a tax loss. Either way, National believes there
will likely be no out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have independent
representation in the structuring of the acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the programs were originally formed to have a two to four year
finite life and the investors expected to receive a return of their investment
from the original borrower, the company is an infinite life entity which will
not return the program investors' original investment based on a sale or
refinancing of the properties underlying the original programs. However, after
the borrowers defaulted on the "Trudy Pat" loans, the investors became
beneficial owners of the underlying properties with the need to complete
development, manage or otherwise ready the properties for sale. Those endeavors
had no fixed timetable and, thus, the finite life aspect of their original
investments was significantly changed. Therefore, the infinite life aspect of
the company is not viewed by National to be a material change from the
investors' CURRENT situation;
- the acquisition will cause fundamental changes in the individual
business plans of the programs. Rather than being focused on a single property,
the company will be focused on the management of at least five properties.
Thus, the poor performance of a particular property may affect the company's
operations as a whole regardless of the performance of the other properties.
Further, there will be no particular time when an Investor can expect its
interest to be automatically liquidated;
- investors will not be able to vote on changes to or dispositions of a
particular property or borrowing secured by a particular property. Those
decisions will be made by the Board of Directors or management. Further, as
investors in a larger entity, relative voting power will be diluted;
- future cash distributions will be based on the company's earnings
during the decision of the Board of Directors to pay dividends rather than the
performance or sale of a particular property;
- investors voting against the acquisition will have no alternative but
to accept shares in the company if the acquisition is approved by holders of a
majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a change
in management which is not favored by the Board of Directors of the company; and
15
<PAGE>
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the shares in
the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __.
National reviewed the arbitrary value you will receive in connection with
the acquisition and compared it with what you might receive if (i) the programs'
properties were operated "as is," (ii) the programs' properties were sold in a
quick sale in three months or less, or (iii) the programs' properties were sold
at the appraised values used to determine the exchange values. Based on that
review, and even acknowledging that, initially, the company's shares issued in
the acquisition would likely trade substantially below their arbitrary $10
issuance value, National believes that there is a higher probability of
realizing value from the programs' assets through the acquisition than through
the other alternatives. This belief is based on the expectation that some
financing opportunities will become available based on the form of the entity
and the time pressure associated with forced sales or liquidation will be
relieved. See "Background and Reasons for the Acquisition -- Comparison to
Alternatives" and "Recommendation of National and Fairness Determination" at
pages __ and __. Based on this comparison, National concluded that the
acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Program (as well as each of the other four
Programs) is essentially the consideration which the Company is offering in
exchange for the real estate assets, certain liabilities and business of the
Program. The value is reflected as a number of shares of the Company's common
stock (in the case of the Program, [320,567] shares) multiplied by an arbitrary
$10 per share value.
In calculating the Exchange Value for this Program, National had to
reconcile the differences between the May 1997 appraisal by Arnold Associates
and the October 1996 appraisal by The Mentor Group. See "Appraisals and
Fairness Opinion -- Reconciliation of Yosemite/Ahwahnee Properties' Appraisals"
at page [__] of the Prospectus. After determining the reconciled appraised
value of the Program, the Exchange Value was calculate by adding to the
reconciled appraised value the book value of the Program's other assets at
[DECEMBER 31], 1997, deducting the Program's liabilities as [DECEMBER 31], 1997,
and adding back liabilities to National to be forgiven by National as part of
the Acquisition.
The following table summarizes the calculation of the Exchange Value of the
Yosemite/Ahwahnee I Program and the value assigned on $10,000 of Adjusted
Outstanding Investment:
16
<PAGE>
<TABLE>
<CAPTION>
Value Assigned
Appraised Net Other to Program per
Value of + Assets and = Exchange $10,000 of Adjusted
Real Estate(1) Liabilities(2) Value Outstanding Investment
-------------- -------------- ---------- -----------------------
<S> <C> <C> <C>
$ 3,912,454 $[ (706,787)] $ [3,205,666] $ [3,542](3)
</TABLE>
- ----------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values
made in determining a Property's Exchange Value as of
[DECEMBER 31, 1997].
<TABLE>
<CAPTION>
Book Assets Book
(12/31/97)* - Liabilities To Be Forgiven Net Other Assets
(12/31/97)* + Amounts = and Liabilities
------------ ------------ --------------- ----------------
<S> <C> <C> <C>
$ 602,891 $(1,344,678) $ 35,000 $ (706,787)
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no mortgage debt on the Property.
(3) Equals [354] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,001,248] shares of Company common stock being offered to Investors
in the Acquisition represent 80.16% of the Company's shares which will be
outstanding upon completion of the Acquisition. The remaining shares will be
held by management and other founders of the Company. Such shares will be
allocated among the five Programs pro rata in accordance with Exchange Values.
The Yosemite/Ahwahnee I Program will be allocated [320,567] shares.
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in the
applicable Program (taking into account assessments paid and unpaid, as well as
interest accrued to each Investor through the date beneficial ownership of the
Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Yosemite/Ahwahnee I Program with an adjusted
investment amount of $10,000 will receive [354] shares of Company stock
arbitrarily valued at $10 per share.
Neither National nor the Company's founders have any interest in the
Yosemite/ Ahwahnee I Program except for National's contractual right to
servicing fees and the $[2,373] of tenancy-in-common interests purchased by
National for which interests National will receive Company shares in the
Acquisition pro rata with the other Yosemite/Ahwahnee I Investors.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Program (including accrued but unpaid interest) plus
the amount of assessments and advances paid by Investors at [DECEMBER 31], 1997,
appraised real estate value, Exchange Value of the Program, the number and
percentage of shares allocated to the Program, and the
17
<PAGE>
number of shares and comparative value of the Company to be held by founders
after the Acquisition.
<TABLE>
<CAPTION>
% of Total
Shares to be
Amount Real Estate Outstanding
Owed plus Appraised Exchange No. of Shares After the
Name of Program Assessments Value Value(1) Allocated(1)(2) Acquisition
---------------- ------------- --------------- -------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee I $ 8,987,163 $ 3,912,4545 $ 3,205,666 320,567 [12.84]%
</TABLE>
- ----------------
(1) The founders of the Company which include members of Company management, as
well as certain employees of National and consultants to the Company and
the Programs, will hold a total of [495,318] Company shares after the
Acquisition (19.84% of the outstanding shares post-Acquisition) which, if
valued at $10 per share, would have an aggregate value of $[4,953,180].
The Company was formed, and shares were purchased by the founders for $.01
per share, prior to making the Acquisition proposal. While a factor
considered in the analysis, the shares to be retained by the Company's
founders were not determined based only on fees cancelled or to be
cancelled by National and its principals. Overall, National believed that
the Company's founders should hold slightly less than 20% of the shares
after the Acquisition. See "Dilution" at page __ of the Prospectus. If
the Acquisition is completed, the following table sets forth the fees which
National and its principals have cancelled, or will cancel:
<TABLE>
<CAPTION>
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------------- --------- --------- -----------
<S> <C> <C> <C>
Sacramento/Delta Greens $ 137,111 $ 500,000 $ 637,111
Oceanside 704,000 -0- 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point -0- 461,589 461,589
--------- ---------- ----------
TOTAL $ 946,111 $2,191,614 $3,137,725
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [3.42]% of the total shares to
be owned by the Company's founders after the Acquisition ([16,940] shares)
would have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1997,
1996 and 1995.
18
<PAGE>
<TABLE>
<CAPTION>
Actually Actually Actually
Incurred for Paid for Incurred for Paid for Incurred for Paid for
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
Name of Program 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2)
--------------- ----------- ---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee I $84,051(3) $-0- $150,800(3) $101,626 $148,439 (3) $60,700
</TABLE>
- ----------------
(1) These amounts represent servicing fees and salaries for officers and
employees of Ahwahnee Golf Course and Resort, Inc.
(2) These amounts represent servicing fees only.
(3) Approximately $187,189 per year if the Acquisition had been completed
during the above periods including $22,572 of estimated salaries to be paid
by the Company to its officers and other employees were allocated to the
Program based on Exchange Values. No cash would have been available to pay
officers' bonuses or dividends to shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/
EFFECT OF THE ACQUISITION
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995, 1996 and
1997:
<TABLE>
<CAPTION>
Prior to
Name of Program 1992 1992 1993 1994 1995 1996 1997 Total
--------------- ----------- --------- -------- -------- ------ ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee I
Principal $ 45,000 $135,000 $103,085 $ 0 $ 0 $ 0 $ 0 $ 283,085
Interest $ 1,903,306 $920,794 $335,557 $ 4,756 $ 0 $ 0 $ 0 $3,164,413
</TABLE>
There have been no recent distributions to Investors. The Acquisition is
not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
19
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/ PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
YOSEMITE/AHWAHNEE II "TRUDY PAT" PROGRAM
CAPITALIZED TERMS USED IN THIS SUPPLEMENT AND NOT DEFINED
HEREIN HAVE THE MEANING GIVEN TO THEM IN THE PROSPECTUS.
SEE "GLOSSARY" AT PAGE OF THE PROSPECTUS.
This Supplement has been prepared to help the Investors in the
Yosemite/Ahwahnee II Program to understand how the Acquisition described in
the accompanying Prospectus will affect them. If completed, the effects of
the Acquisition may be different for Investors in the other Programs. A
separate supplement has been prepared for each of the other Programs, copies
of which may be obtained, without charge, by writing to National Investors
Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport Beach, California
92660, Attention: Vivian Kennedy, or calling 1-800-590-7772.
As described in the accompanying Prospectus, American Family Holdings,
Inc. (the "Company") is offering shares of its Common Stock in exchange for
the assets (including cash reserves), certain liabilities and business
activities owned by Investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[20,012,475] of shares
of common stock arbitrarily valued at $10 per Share. The stock will be
listed for trading on the under the symbol " ." The purpose of
the transaction is to consolidate the operations of the programs, improve the
ability to sell or obtain financing for development of the programs'
properties, and provide the investors with liquidity for their investments.
Of the [2,001,248] shares to be issued by the Company in the Acquisition,
Investors in the Yosemite/Ahwahnee II Program will receive a total of
[513,755]shares or [265] shares per $10,000 of Adjusted Outstanding
Investment. After costs of sale, and the payment of Program liabilities,
National does not believe any alternative would yield to Investors in the
Yosemite/Ahwahnee II program an amount that is higher than the value of the
Company shares to be received in the Acquisition.
In each of the Programs, the Investors will vote on whether to approve the
Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF
THE FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on , 1998 and expires at 5:00 p.m.,
Pacific Time, on , 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - You will have an investment in a business which also plans to construct
and sell residential properties, and which plans to pursue the development of
a hotel/conference center.
- - If a trading market develops, the initial trading price for the stock
will likely be substantially below the arbitrary value of $10 per share
assigned to the Company's shares for purposes of the acquisition. Thus, the
value of the shares you receive may be less than you might receive if the
property of your program were sold.
- - Principal stockholders of National and executive officers of the Company
will hold approximately [18.23]% of the Company's stock for which they paid
$0.01 per share and will receive annual cash compensation aggregating
$660,000 as officers and employees. National will be relieved of its
servicing and asset management obligations and will no longer earn servicing
and asset management fees of approximately $650,000 annually. However, the
Company will still owe National over $1,300,000 of accrued but unpaid fees
and expenses.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event.
If so, National believes a tax loss is the probable result for most of you.
- - The Company must have additional cash to fund its proposed operations.
If it cannot obtain such funding from the sale of its securities or certain
of its properties, it will be no more successful than the programs have been
individually in completing the development of some or all of the properties.
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MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found
on pages [30] through [42] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. If the acquisition is
completed, there will be a change in the nature of the investment of each
investor from holding a tenancy-in-common interest in real estate to holding
shares in an on-going company, the assets of which may be changed from time
to time without approval of investors. If the acquisition is completed,
investors will be able to liquidate their investments only by selling their
shares on the or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through
property sales. If the acquisition is completed, investors will have an
investment in an entity that is larger than each of the programs and will
thus lose relative voting power. Investors will have an investment in a
business which also plans to construct and sell residential properties, and
which plans to pursue the development of a hotel/conference center.
DIFFERENCES BETWEEN EXCHANGE VALUES AND SALES PRICE. Investors are
subject to the risk that the exchange value of a program does not reflect the
price a program's assets might bring in a sale. If the property of a program
were to be sold, the net proceeds of the sale and the amount finally
distributed to an investor in that program may be more or less than the
exchange value. There is no assurance that the future value of the shares
will continue to be greater than the most recent appraised value of the
property.
UNCERTAINTY REGARDING TRADING PRICE FOR THE SHARES. Initially, shares
may trade at prices substantially below the arbitrarily determined exchange
value of $10 per share or historical book value of the company's assets.
There is no guaranty that a liquid trading market will develop for the
shares, or be sustained. If a trading market develops for the shares, the
price of shares after the acquisition will likely decrease below the exchange
value per share of $10 due to a potentially large number of shares that
investors may sell immediately after the acquisition.
CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The founders of
the company, and specifically the principal shareholders of National, as well
as National itself, will be subject to conflicts of interest. The principal
shareholders and employees of National and the company, will hold
approximately [18.23]% of the company's outstanding stock for which they paid
$0.01 per share. Other founders of the company will hold approximately [1.6]%
of the company's outstanding stock for which they also paid $0.01 per share.
Thus, the investors' total ownership interests in the programs' properties
will be diluted by the equity interest in the company held by the founders of
the company. The principal stockholders of National and other executive
officers of the company will receive annual cash compensation aggregating
$660,000 as officers and employees of the company. National will be relieved
of its servicing and asset management obligations and will no longer earn
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asset management or servicing related fees. However, the company will still
owe National over $1,300,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote , and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
Messrs. Lasker and Orth will be required to devote some of their time to
other projects for which National acts as servicing agent and asset manager.
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS. No independent party
was retained by National to negotiate on behalf of the investors. Therefore,
terms of the acquisition may be less favorable to investors and more
favorable to founders of the company which included the principal
shareholders of National than if the acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of
each program, the terms of the acquisition may have been more favorable to
certain or all of the programs and fewer shares and less favorable employment
contracts may have been received by the founders of the company.
TAX UNCERTAINTIES. The acquisition may not be a tax-free transaction to
investors. Due to uncertainties in the facts of this transaction, tax
counsel is unable to opine conclusively on the taxability of the acquisition
to investors. If the acquisition is a taxable transaction, an investor would
recognize gain or loss in 1998 equal to the difference between the investor's
tax basis in his interest in a program property, and the number of shares of
the company received valued at $10 per share. If the acquisition is treated
as taxable, National believes most investors would recognize a tax loss.
POTENTIAL CHANGE IN THE AMOUNT OF LEVERAGE. 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.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN
INVESTMENT, FINANCING AND CERTAIN OTHER POLICIES. 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.
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NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS. If you vote
against the acquisition, and it is approved, you will not be able to object
to the acquisition and receive the appraised value of your tenancy-in-common
interest in your program's assets. You will have no choice other than to
accept shares for your interests.
COMPANY HAS NO OPERATING HISTORY. The company was formed within the past
year to take part in the acquisition of your property. It does not have the
benefit of operating for a long time. This means that shares in the company
are much riskier than ownership of shares of established companies. If the
company had been operating as if it owned the properties which it desires to
acquire, it would have experienced losses to date.
FUNDAMENTAL CHANGES IN THE BUSINESS PLAN. Rather than being focused on
a single property, the company will be an infinite life entity focused on the
management of at least five properties. The effect of this on investors is
two-fold. First, poor performance of a particular property may affect the
company's operations as a whole regardless of the performance of the other
properties. Second, there will be no particular time when an investor can
expect that a sale of any of the properties will result in cash distributions
to him or her.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes
or sales of a particular property. Those decisions will be made by the board
of directors or management. In addition, you will have an investment in an
entity that is larger than each of the programs and, thus, you will lose
relative voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, because of the borrowers' defaults there have
been no distributions from any of the programs, other than the Oceanside
program, in the past three years. Future cash distributions will be based on
the company's earnings and the decision of the board of directors to pay
dividends. Therefore, even if a property in which you formerly held an
interest were to perform well, there is no assurance that there would be cash
distributions to you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National is
presently compensated for its services at the rate of one percent of the
principal amount originally invested in each program. In addition,
additional compensation has been accrued for property management services
provided to the Oceanside and Yosemite/Ahwahnee properties by officers and
employees of National in their capacities as officers of Oceanside
Development, Inc. and Ahwahnee Golf Course & Resort, Inc. In the future,
compensation will be paid to officers of the company in the form of salaries,
stock options and other benefits. These salaries and other forms of
compensation will be payable to management of the company even if one or more
of the properties acquired in the acquisition is subsequently sold.
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HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL USED ITS OWN JUDGMENT TO RESOLVE THE CONFLICTING
YOSEMITE/AHWAHNEE APPRAISALS. Faced with two conflicting appraisals for the
Yosemite/Ahwahnee properties, to determine the appraised values for these
properties for purposes of determining their exchange values, National's
management used the most conservative information presented in the appraisals
unless a change in circumstances or market conditions for a particular parcel
suggested one appraisal was more pertinent than the other. If the values
arrived at by National were too low for either program, the program's
exchange value would be too low and would result in too few shares being
allocated to that program in the acquisition. Conversely, if the values
arrived at by National were too high, the program would receive too large an
allocation of shares in the acquisition to the detriment of the investors in
the other programs.
GENERAL REAL ESTATE RISKS
THERE ARE SIGNIFICANT DELINQUENT PROPERTY TAXES. If delinquent property
taxes are not timely paid, the company could lose one or more of the
properties to tax sales. Each of the programs' properties is subject to the
following delinquent property taxes as of December 31, 1997:
Sacramento/Delta Greens - approximately $45,000; Oceanside - approximately
$55,000; Yosemite/Ahwahnee (combined) - approximately $684,000; and Mori
Point - approximately $298,000. Annual payments required for all the
properties for current taxes (including amounts currently due on five-year
payment plans) total approximately $248,000. In the case of Sacramento/Delta
Greens and Mori Point, National has entered into statutorily authorized
5-year payment plans with the applicable taxing authorities. It plans to do
the same with Yosemite/Ahwahnee shortly.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $[11,400,000] from sale of the units or from sale of
certain assets of the programs become available, the company will not be able
to proceed with its entire business plan. Additionally, if a minimum of
approximately $250,000 is not raised to pay current property tax liabilities,
then certain properties might be lost to tax sales before sales to third
parties can be arranged. The company will also need financing from other
sources to complete its plan. Financing sources are not predictable and
interest rates or other costs of financing may be prohibitive. Other than a
construction loan source for the Oceanside project, neither the programs nor
the company have received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay
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assessments for streets, schools and parks which increase the cost of
development. Increased costs can have a negative affect on the company's
sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. See "Business and Properties - Investments in Real Estate or Interests in
Real Estate" at page . Real estate development involves more risks than in
the ownership and operation of established projects. Financing may not be
available on favorable terms for development projects; construction may not
be completed on schedule or budget; long-term financing may not be available
on completion of construction; and sites may not be sold on profitable terms.
THE CALIFORNIA ECONOMY HAS FLUCTUATED BROADLY IN THE PAST FEW YEARS. We
presently conduct all of our business in California. Our markets have been
affected by substantial fluctuations in local economic conditions, interest
rates, inflation, employment levels and regulations. California has also
experienced draught conditions, resulting in water conservation measures and
rationing. In the past, these conditions have caused local governments to
restrict residential development. California's climate and geology present
risks of natural disaster such as earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE
OWED $1,381,881 BY THE COMPANY. This represents accrued fees and expenses
from the programs which National has not cancelled. This amount is due and
payable and the company intends to start paying it after the Acquisition, but
only from operating revenues or proceeds from the sale of assets, but not
from working capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED. Construction of
the Sacramento/Delta Greens property will require the filing of a final map
and obtaining building permits from the city's real estate planning
authorities. The existing tentative map approval does not entitle the
property owner to build on the property. The tentative tract map for the
Sacramento/Delta Greens property requires that studies must be conducted to
identify any endangered species' habitat which may exist on the property. If
any are identified, changes to the tentative development plans will have to
be made and approved that will reduce or eliminate any damage to the habitat.
The longer this process takes, the longer it will be until the company can
make money from the property.
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HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays
in construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged
approximately $30,000 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully
compete.
Sacramento/Delta Greens is a proposed residential developments
and represent over 8.4% of the assets of the company, respectively. Although
there can be no assurances and net revenues from Sacramento/Delta Greens may
equal or exceed $3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) finance engineering and endangered species studies
(estimated by management to cost approximately $124,800), (ii) finance
planning for final approvals (estimated by management to cost approximately
$51,700), and (iii) finance utilities and roads and the construction of homes
(estimated by management to cost approximately $3,000,000 on a phased basis).
Another risk is whether the lots to be developed will appeal to project
builders and whether home financing will be available. Finally, there is a
risk that the development and sale of lots or homes will be profitable.
REAL ESTATE RISKS OF OCEANSIDE PROPERTY
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE PROPERTY MAY
CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE
SOLD. Changing market conditions may increase the difficulty of selling the
lots. If the company chooses to build homes on the lots, delays in
construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged $10,000
per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and
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pricing are all factors affecting success. Competitors may have better
financial, managerial and other resources, affecting our ability to
successfully compete.
Oceanside is a proposed residential development and represent
over 21.75% of the assets of the company. Although there can be no
assurances, net revenues from Oceanside are expected to be in excess of
$5,000,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that enough investment money
may not be available to obtain a construction loan and begin construction of
the next tract of homes (estimated by management to be approximately $700,000
of equity). There is also a risk that finished lots or completed homes will
not be marketable at a profit or that home financing will not be available at
affordable rates. There is also strong nearby competition.
REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE TIMESHARE ASPECT OF THE RESORT HAVE NOT YET BEEN
OBTAINED. The Yosemite/Ahwahnee property has a final map on 45 remaining
single family estate lots and a use permit for a 600 space recreational
vehicle park. Additional planned usage such as timeshare will require
extensive county and state approvals through the Departments of Real Estate
and Housing and Commercial Development.
RISKS AFFECTING OPERATION OF A GOLF COURSE. Increased competition,
seasonality, weather and course conditions will affect the operations of the
company. While no new golf courses have opened near the Ahwahnee Golf
Course, new courses could increase the competition and reduce the rounds
played. Seasonal variations may require the company to supplement revenue at
the golf course to meet operating expenses. Weather can negatively affect
the turf grass and reduce the number of rounds played. Inflationary costs
may not be offset by increased dues. Also, golf's success depends on
discretionary spending by consumers, which may be vulnerable to regional and
economic conditions, as well as to pleasure or destination travel preferences
by visitors and tourists. All of these factors could reduce the amount of
money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity which may
attract potential timeshare purchasers in the future. At this time, the
project does not rely on the golf course for its revenue. National estimates
that the value of the golf course will be less than 5% of the assets of the
company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits. For
example, Spring through Fall at the Yosemite/Ahwahnee property are the
periods of highest occupancy. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues.
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The recreational vehicle park at Yosemite/Ahwahnee may generate as much
as ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers who borrow to buy a home. If a buyer
defaults, we would incur costs in remarketing the timeshare.
We do not have an exchange network to enhance marketing appeal. If we
cannot offer such a network in the future, we may be at a competitive
disadvantage.
The timeshare industry is extremely competitive and we may
not be able to secure development financing on acceptable terms.
Timeshare development is planned for Yosemite/Ahwahnee. Since the
project is not yet permitted for timeshare, there has been no allocation of
assets. Should timeshare be approved, the company anticipates that a
significant portion of the revenue of the company will be derived from sales
of timeshare units, possibly in excess of 25%.
RISKS RELATING TO RECREATIONAL VEHICLE PARK OPERATIONS. Risks relating
to recreational vehicle parks are substantially the same as those described
above for timeshare projects.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) make up for the current cash drain from operations of the
golf course (estimated by management at approximately $150,000) annually,
(ii) construct an additional planned 100 recreational vehicle sites
(estimated by management to cost approximately $700,000), and (iii) obtain
approvals for and construction of the first group of timeshare units
(estimated by management to cost approximately $3,000,000). There are also a
risk that the operation of recreational vehicle sites, timeshares and golf
course activities will not be profitable.
REAL ESTATE RISKS OF MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY HAVE NOT YET BEEN OBTAINED. If needed
permits for development are not obtained or reissued, the business plan for
the company will have to be revised or abandoned. Additionally, the presence
of two endangered species on the Mori Point property increases the risks that
necessary approvals may not be received if an acceptable habitat mitigation
plan cannot be developed. The permitting process with the California Coastal
Commission and applicable county or city real estate planning agencies is
expensive and time consuming. Mori Point had a specific plan and tentative
map to build a hotel/conference center which expired in 1991. These
approvals must be reinstated
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prior to construction on the property. Such reinstatement will be
complicated by the existence of two endangered species living on the property.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits.
Seasonality can be expected to cause quarterly fluctuations in the company's
revenues. In the resort and hotel/conference center property at Mori Point,
we may be competing against well-known chains and extended-stay inns.
Mori Point represents over 20% of the assets of the company and,
assuming it is operated as a hotel/conference center, its revenues may exceed
20% of the total revenues of the company upon completion of the project.
ADDITIONAL SPECIFIC RISKS. There is a risk that the city government
will not approve the property for its intended use. Capital to conduct
engineering and environmental studies in order to apply for and obtain
approvals for its use from the City is estimated to be approximately
$500,000. Capital will also be necessary for roads, utilities and other
infrastructure costs prior to construction. Finally, there is a risk that
the proposed hotel/conference center may not be profitable.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the charter documents may restrict changes in
control of the Company's management. These provisions may make it more
difficult or expensive for another party to acquire and exercise control of
the Company or to change its management, even if that change would be
beneficial to you. These provisions include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate of
incorporation, subject to the receipt of fair value, the Board of Directors
may issue shares in other classes or series and fix the rights, powers and
limitations associated with such shares. Although the Board of Directors has
no present intention of doing so, it could issue a class or series that
could, depending on its terms, impede a merger, tender offer or other
transaction that you might believe is in your best interest or in which you
might receive a premium for your shares over the then current market price.
The issuance of such shares could also dilute your voting power.
STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability
to change control of the company, even if you believe such a change is in
your best interests.
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RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% o the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of
incorporation which cover anti-takeover provisions require the approval of
two-thirds of the company's voting stock. This restriction also may deter
potential purchasers who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well
as the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements.
POSITIVE AND NEGATIVE FEATURES OF THE ACQUISITION
National and the Company considered the following in deciding to propose
the Acquisition:
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE
FOR YOUR INVESTMENT IN THE PROGRAM, AS ADJUSTED PER THE TERMS OF THE
TENANCY-IN-COMMON AGREEMENTS. You will receive [265] shares per $10,000 of
Adjusted Outstanding Investment in the Program.
- POTENTIAL LIQUID TRADING MARKET FOR YOUR SHARES. After the
acquisition, shares will be listed on the . While there can be
no assurance that a trading market will develop or be sustained, if a trading
market develops, you will have the opportunity to liquidate all or some of
those shares at your discretion. However, initially the shares are likely to
trade at prices substantially below the arbitrary $10 value assigned to them.
- CONTROL OF THE TIMING OF LIQUIDATION OF YOUR INVESTMENT. You will
be able to control when you with to sell your shares. However, if no trading
market exists at the time, you may not be able to sell your shares. Under
the current programs, you have been subject to a majority vote to sell or
retain the property, regardless of whether or not the timing and decision
were favorable to you.
- BENEFITS OF LISTED SHARES TO THE COMPANY. Listing of the shares on
the may provide benefits to the company which could enhance investor
value. The company may have access to public capital markets that the
individual programs do not have if the company is able to show potential for
growth.
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- DIVERSITY MAY REDUCE RISK. Your investment will be spread over an
initial asset base of four different real estate projects (the two
Yosemite/Ahwahnee programs will be one project after the acquisition).
However, the poor performance of a particular property could negatively
affect the performance of the company even if the other properties are
performing up to expectations. Historically, all of the properties have
operated at a loss. In order for the company to be successful, it must
obtain external financing or sell certain of its assets to raise cash for
operations.
- PROPERTY MANAGEMENT. We have hired real estate management
professionals who are experienced in real estate development, operation and
construction. While members of management have gained experience in the
operation of golf courses and recreational vehicle parks through the
operation of the Yosemite/Ahwahnee properties, they do not have extensive
experience in timeshare or resort development, marketing or operations.
- - MODEST INCREASE IN MANAGEMENT COMPENSATION. National considered that
the total of salaries to be payable to the Company's officers and other
employees exceeds the total payable to National and its affiliates for
servicing and property management services ($1,181,000 as opposed to
$969,000, both of which include the payroll for Ahwahnee Country Club). The
increase was not viewed as significant since the original servicing fees were
based on loan servicing which is less labor-intensive than property
development and management.
- NO FURTHER LIABILITY FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
acquisition, meaning your exposure to mandatory assessments will cease.
However, the company will be required to obtain additional money from outside
sources or the sale of certain of its properties to be successful.
- LIABILITY IS LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the programs, you are not
currently effectively insulated from personal liability based on the
operation of those assets. As shareholders of a corporation, you will be.
- NO CONTROL OVER TIMING OF SALE OF A PARTICULAR PROPERTY. No
particular group of investors will have the ability to control the timing of
the sale of a particular property as they do under the current program
structure. Instead, all Investors will be required to rely on the decisions
of management regarding the sale of a property.
- PROCEEDS FROM SALE OF PROPERTIES. If a property is sold, the
proceeds will be used by the company to further the business plan of the
company. Presently, if a program property is sold in its entirety, the
proceeds would go to applicable investors directly as a return of their
investment. If it is refinanced, by majority vote the program investors
presently have the power to direct the use of refinancing proceeds.
12
<PAGE>
- ACQUISITION COULD TRIGGER TAXATION OF INVESTORS. Participation in
the acquisition may be a taxable event for investors. However, National
intends to treat the transaction as a tax-free transaction. To the extent
that the acquisition is determined to be taxable, National believes most
investors would be required to report tax losses. On the other hand, there
generally would be no taxable event to investors as the programs are
currently structured until the program property was sold. At such time, the
amount returned to you would result in either a tax loss or gain depending
upon how much of your original investment was returned to you.
- CASH DISTRIBUTIONS. Currently, if a property was sold, you would
be entitled to a distribution of the proceeds of such sale net of costs of
sale and accrued liabilities. After the acquisition, your distributions will
be dependent upon the earnings of the company and a decision of the board of
directors to make distributions in the form of dividends. You will not
automatically receive distributions upon the sale of any particular property.
- MANAGEMENT AND COMPANY FOUNDERS WILL OWN APPROXIMATELY 18.23% OF
THE COMPANY (ALMOST 14% IF ALL UNITS ARE SOLD IN THE CONCURRENT OFFERING).
These individuals paid $.01 per share for their company shares. In addition,
over the past several years, National and its affiliates have forgiven, and
as a result of the acquisition will forgive, an aggregate of over $3,000,000
of fees and expenses due from the programs.
- NATIONAL'S PRINCIPAL STOCKHOLDERS WILL OWN FOUNDERS' STOCK IN THE
COMPANY AND WILL RECEIVE SALARIES AS OFFICERS OF THE COMPANY. David Lasker
and James Orth will be President and Chief Executive officer, respectively,
of the company and entities they control will each own 8.01% of the company's
outstanding shares (5.72% if all units are sold in the concurrent offering).
These shares are included in the shares described above as being owned by
management and company founders. Mr. Lasker and Mr. Orth also will receive
annual salaries of $180,000 plus other benefits. See "Management Following
the Acquisition -- Directors and Executive Officers Compensation and
Incentives" at page .
- AS A CONSEQUENCE OF THE ACQUISITION, THE INVESTORS WILL TERMINATE
NATIONAL AS SERVICING AGENT FOR THE PROGRAMS. This will relieve National of
its ongoing servicing obligations which National could unilaterally terminate
if it elected to do so.
- THE COMPANY WILL OWE NATIONAL $1,381,881 OF ACCRUED BUT UNPAID FEES
AND EXPENSES DUE FROM THE PROGRAMS AFTER THE ACQUISITION. If the company is
successful, National will have the opportunity to receive the portion of its
accrued but unpaid fees and expenses which it has not forgiven.
The Acquisition will have no material effect on this Program's
stand-alone financial condition or results of operations. Overall, the
Company expects to experience losses in the initial year of operations.
For further information about how the Acquisition will affect you and
the Program, see the following portions of the Prospectus:
13
<PAGE>
- "Background and Reasons for the Acquisition" commencing at
page .
- "Comparison of Tenancy-in-Common Interests and Shares"
commencing at page .
- "Comparison of Programs and Company" commencing at page .
- "Business and Properties" commencing at page .
- "Management's Discussion and Analysis of Financial Condition
and Results of Operations" commencing at page .
- "Management Following the Acquisition" commencing at page .
- "Federal Income Tax Consequences" commencing at page .
FAIRNESS TO INVESTORS IN THE YOSEMITE/AHWAHNEE II PROGRAM
From a financial point of view, the company and National believe the
terms of the acquisition are fair as a whole and to the investors in each of
the programs. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that
develops will be sustained;
- while the number of shares to be issued to reflect the exchange
value of a program is arbitrary, the trading price of such shares initially
is likely to be substantially below the $10 value arbitrarily assigned to
such shares. In our opinion, the exchange values offered to investors for
their assets allow for an equitable allocation of the 2,001,248 shares among
the programs. The disparity between exchange values and appraised values
results from adding the value of program cash reserves and other assets, if
any, to appraised values and deducting program liabilities (principally
accrued property taxes and other fees net of fees to be forgiven by National);
- on completion of the acquisition the investors will hold over 80%
of the outstanding stock of the company while principals, employees, and
consultants of National will hold less than 20%. That 20% was purchased for
$.01 per share. National and its principals have forgiven, or will forgive
at the completion of the acquisition, over $3,000,000 of expenses and accrued
fees of which a total of approximately $1,400,000 was earned under the
servicing agreements or for property management services and expenses after
the loans defaulted. National believes that the amount paid for the property
management services is no greater than the amount that a third party would
charge;
- the valuation of the real estate assets of each of the programs by
the independent appraisers;
14
<PAGE>
- the probability that the transaction will either be tax-free to
investors or most likely yield a tax loss. Either way, National believes
there will likely be no out-of-pocket tax cost to all, or the vast majority,
of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have
independent representation in the structuring of the acquisition, we believe
they have been counterbalanced by your opportunity to vote on the transaction
and the Fairness Opinion;
- while the programs were originally formed to have a two to four
year finite life and the investors expected to receive a return of their
investment from the original borrower, the company is an infinite life entity
which will not return the program investors' original investment based on a
sale or refinancing of the properties underlying the original programs.
However, after the borrowers defaulted on the "Trudy Pat" loans, the
investors became beneficial owners of the underlying properties with the need
to complete development, manage or otherwise ready the properties for sale.
Those endeavors had no fixed timetable and, thus, the finite life aspect of
their original investments was significantly changed. Therefore, the
infinite life aspect of the company is not viewed by National to be a
material change from the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the individual
business plans of the programs. Rather than being focused on a single
property, the company will be focused on the management of at least five
properties. Thus, the poor performance of a particular property may affect
the company's operations as a whole regardless of the performance of the
other properties. Further, there will be no particular time when an Investor
can expect its interest to be automatically liquidated;
- investors will not be able to vote on changes to or dispositions of
a particular property or borrowing secured by a particular property. Those
decisions will be made by the Board of Directors or management. Further, as
investors in a larger entity, relative voting power will be diluted;
- future cash distributions will be based on the company's earnings
during the decision of the Board of Directors to pay dividends rather than
the performance or sale of a particular property;
- investors voting against the acquisition will have no alternative
but to accept shares in the company if the acquisition is approved by holders
of a majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a
change in management which is not favored by the Board of Directors of the
company; and
15
<PAGE>
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the shares
in the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page .
National reviewed the arbitrary value you will receive in connection
with the acquisition and compared it with what you might receive if (i) the
programs' properties were operated "as is," (ii) the programs' properties
were sold in a quick sale in three months or less, or (iii) the programs'
properties were sold at the appraised values used to determine the exchange
values. Based on that review, and even acknowledging that, initially, the
company's shares issued in the acquisition would likely trade substantially
below their arbitrary $10 issuance value, National believes that there is a
higher probability of realizing value from the programs' assets through the
acquisition than through the other alternatives. This belief is based on the
expectation that some financing opportunities will become available based on
the form of the entity and the time pressure associated with forced sales or
liquidation will be relieved. See "Background and Reasons for the
Acquisition -- Comparison to Alternatives" and "Recommendation of National
and Fairness Determination" at pages and . Based on this comparison,
National concluded that the acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Program (as well as each of the other four
Programs) is essentially the consideration which the Company is offering in
exchange for the real estate assets, certain liabilities and business of the
Program. The value is reflected as a number of shares of the Company's
common stock (in the case of the Program, [513,755] shares) multiplied by an
arbitrary $10 per share value.
In calculating the Exchange Value for this Program, National had to
reconcile the differences between the May 1997 appraisal by Arnold Associates
and the October 1996 appraisal by The Mentor Group. See "Appraisals and
Fairness Opinion -- Reconciliation of Yosemite/Ahwahnee Properties'
Appraisals" at page [ ] of the Prospectus. After determining the reconciled
appraised value of the Program, the Exchange Value was calculate by adding to
the reconciled appraised value the book value of the Program's other assets
at December 31, 1997, deducting the Program's liabilities as December 31,
1997, and adding back liabilities to National to be forgiven by National as
part of the Acquisition.
The following table summarizes the calculation of the Exchange Value of
the Yosemite/Ahwahnee II Program and the value assigned on $10,000 of
Adjusted Outstanding Investment:
16
<PAGE>
<TABLE>
<CAPTION>
Value Assigned
Appraised Net Other to Program per
Value of + Assets and = Exchange $10,000 of Adjusted
Real Estate(1) Liabilities(2) Value Outstanding Investment
-------------- -------------- ----------- ----------------------
<S> <C> <C> <C>
$ 6,253,121 $(1,115,570) $ 5,137,552 $ [2,646](3)
</TABLE>
- -------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values made in
determining a Property's Exchange Value as of December 31, 1997.
<TABLE>
<CAPTION>
Book Book To Be Net Other
Assets - Liabilities + Forgiven = Assets
(12/31/97)* (12/31/97)* Amounts and Liabilities
----------- ------------- --------- ---------------
<S> <C> <C> <C>
$ 963,576 $ (2,149,146) $ 70,000 $ [(1,115,570)]
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no mortgage debt on the Property.
(3) Equals [265] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,001,248] shares of Company common stock being offered to
Investors in the Acquisition represent 80.16% of the Company's shares which
will be outstanding upon completion of the Acquisition. The remaining shares
will be held by management and other founders of the Company. Such shares
will be allocated among the five Programs pro rata in accordance with
Exchange Values. The Yosemite/Ahwahnee II Program will be allocated [513,755]
shares.
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in
the applicable Program (taking into account assessments paid and unpaid, as
well as interest accrued to each Investor through the date beneficial
ownership of the Program's Property was taken for the Investors) as adjusted
for voluntary advances. An Investor in the Yosemite/Ahwahnee II Program with
an adjusted investment amount of $10,000 will receive [265] shares of Company
stock arbitrarily valued at $10 per share.
Neither National nor the Company's founders have any economic
interest in the Yosemite/ Ahwahnee II Program except for National's
contractual right to servicing fees and the $[46,454] of tenancy-in-common
interests purchased by National at the inception of the Program for which
interests National will receive Company shares in the Acquisition pro rata
with the other Yosemite/Ahwahnee II Investors.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Program (including accrued but unpaid interest) plus
the amount of assessments and advances paid by Investors at December 31,
1997, appraised real estate value, Exchange Value of the Program, the number
and percentage of shares allocated to the Program, and the
17
<PAGE>
number of shares and comparative value of the Company to be held by founders
after the Acquisition.
<TABLE>
<CAPTION>
% of Total Shares
Amount Real Estate to be Outstanding
Owed plus Appraised Exchange No. of Shares After the
Name of Program Assessments Value Value(1) Allocated(1)(2) Acquisition
- ---------------- ------------ ------------ -------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II $ 19,344,964 $ 6,253,121 $ [5,137,552] [513,755] [20.58]%
</TABLE>
- -------------
(1) The founders of the Company which include members of Company management, as
well as certain employees of National and consultants to the Company and
the Programs, will hold a total of [495,318] Company shares after the
Acquisition (19.84% of the outstanding shares post-Acquisition) which, if
valued at $10 per share, would have an aggregate value of $[4,953,180].
The Company was formed, and shares were purchased by the founders for $.01
per share, prior to making the Acquisition proposal. While a factor
considered in the analysis, the shares to be retained by the Company's
founders were not determined based only on fees cancelled or to be
cancelled by National and its principals. Overall, National believed that
the Company's founders should hold slightly less than 20% of the shares
after the Acquisition. See "Dilution" at page of the Prospectus. If
the Acquisition is completed, the following table sets forth the fees which
National and its principals have cancelled, or will cancel:
<TABLE>
<CAPTION>
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
---------- ------------ -----------
<S> <C> <C> <C>
Sacramento/Delta Greens $ 137,111 $ 500,000 $ 637,111
Oceanside 704,000 -0- 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point -0- 461,589 461,589
---------- ------------ -----------
TOTAL $ 946,111 $ 2,191,614 $ 3,137,725
---------- ------------ -----------
---------- ------------ -----------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [39.13]% of the total shares to
be owned by the Company's founders after the Acquisition ([193,818] shares)
would have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1997,
1996 and 1995.
18
<PAGE>
<TABLE>
<CAPTION>
Incurred for Actually Paid Incurred for Actually Paid Incurred for Actually Paid
Year Ended for Year Ended Year Ended for Year Ended Year Ended for Year Ended
Name of Program 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2)
- --------------- ------------ -------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II $174,569(3) $-0- $313,200(3) $211,069 $248,157 (3) $123,998
</TABLE>
- -------------
(1) These amounts represent servicing fees and salaries for officers and
employees of Ahwahnee Golf Course and Resort, Inc.
(2) These amounts represent servicing fees.
(3) Approximately $312,375 per year if the Acquisition had been completed
during the above periods including $258,258 of estimated salaries to be
paid by the Company to its officers and other employees were allocated to
the Program based on Exchange Values. No cash would have been available to
pay officers' bonuses or dividends to shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/
EFFECT OF THE ACQUISITION
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995, 1996 and
1997:
<TABLE>
<CAPTION>
Prior to
Name of Program 1992 1992 1993 1994 1995 1996 1997 Total
--------------- --------- ----------- --------- -------- ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II
Principal $ 20,000 $ 60,000 $ 68,264 $ 0 $ 0 $ 0 $ 0 $ 148,254
Interest $ 592,498 $ 1,153,352 $ 688,303 $ 10,273 $ 0 $ 0 $ 0 $ 2,444,426
</TABLE>
There have been no recent distributions to Investors. The Acquisition
is not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page .
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page .
- "Financial Statements" at page F-1.
19
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/ PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
MORI POINT "TRUDY PAT" PROGRAM
CAPITALIZED TERMS USED IN THIS SUPPLEMENT AND NOT DEFINED HEREIN HAVE THE
MEANING GIVEN TO THEM IN THE PROSPECTUS. SEE "GLOSSARY" AT PAGE __ OF
THE PROSPECTUS.
-------------------------------
This Supplement has been prepared to help the Investors in the Mori Point
Program to understand how the Acquisition described in the accompanying
Prospectus will affect them. If completed, the effects of the Acquisition
may be different for Investors in the other Programs. A separate supplement
has been prepared for each of the other Programs, copies of which may be
obtained, without charge, by writing to National Investors Financial, Inc.,
4220 Von Karman Avenue, Suite 110, Newport Beach, California 92660,
Attention: Vivian Kennedy, or calling 1-800-590-7772.
As described in the accompanying Prospectus, American Family Holdings,
Inc. (the "Company") is offering shares of its Common Stock in exchange for
the assets (including cash reserves), certain liabilities and business
activities owned by Investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[20,012,475] of shares
of common stock arbitrarily valued at $10 per Share. The stock will be
listed for trading on the ___________ under the symbol "___." The purpose of
the transaction is to consolidate the operations of the programs, improve the
ability to sell or obtain financing for development of the programs'
properties, and provide the investors with liquidity for their investments.
Of the [2,001,248] shares to be issued by the Company in the Acquisition,
Investors in the Mori Point Program will receive a total of [485,704] shares
or [399] shares per $10,000 of Adjusted Outstanding Investment. After costs
of sale, and the payment of Program liabilities, National does not believe
any alternative would yield to Investors in the Mori Point program an amount
that is higher than the value of the Company shares to be received in the
Acquisition.
In each of the Programs, the Investors will vote on whether to approve the
Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF
THE FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - You will have an investment in a business which also operates a golf
course and a recreational vehicle park, and which plans to pursue the
development of timeshare facilities and a hotel/conference center.
- - If a trading market develops, the initial trading price for the stock
will likely be substantially below the arbitrary value of $10 per share
assigned to the Company's shares for purposes of the acquisition. Thus, the
value of the shares you receive may be less than you might receive if the
property of your program were sold.
- - Principal stockholders of National and executive officers of the Company
will hold approximately [18.23]% of the Company's stock for which they paid
$0.01 per share and will receive annual cash compensation aggregating
$660,000 as officers and employees. National will be relieved of its
servicing and asset management obligations and will no longer earn servicing
and asset management fees of approximately $650,000 annually. However, the
Company will still owe National over $1,300,000 of accrued but unpaid fees
and expenses.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event.
If so, National believes a tax loss is the probable result for most of you.
- - The Company must have additional cash to fund its proposed operations.
If it cannot obtain such funding from the sale of its securities or certain
of its properties, it will be no more successful than the programs have been
individually in completing the development of some or all of the properties.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found on
pages [30] through [42] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. If the acquisition is
completed, there will be a change in the nature of the investment of each
investor from holding a tenancy-in-common interest in real estate to holding
shares in an on-going company, the assets of which may be changed from time
to time without approval of investors. If the acquisition is completed,
investors will be able to liquidate their investments only by selling their
shares on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through
property sales. If the acquisition is completed, investors will have an
investment in an entity that is larger than each of the programs and will
thus lose relative voting power. Investors will have an investment in a
business which also operates a golf course and a recreational vehicle park,
and which plans to pursue the development of timeshare facilities and a
hotel/conference center.
DIFFERENCES BETWEEN EXCHANGE VALUES AND SALES PRICE. Investors are
subject to the risk that the exchange value of a program does not reflect the
price a program's assets might bring in a sale. If the property of a program
were to be sold, the net proceeds of the sale and the amount finally
distributed to an investor in that program may be more or less than the
exchange value. There is no assurance that the future value of the shares
will continue to be greater than the most recent appraised value of the
property.
UNCERTAINTY REGARDING TRADING PRICE FOR THE SHARES. Initially, shares
may trade at prices substantially below the arbitrarily determined exchange
value of $10 per share or historical book value of the company's assets.
There is no guaranty that a liquid trading market will develop for the
shares, or be sustained. If a trading market develops for the shares, the
price of shares after the acquisition will likely decrease below the exchange
value per share of $10 due to a potentially large number of shares that
investors may sell immediately after the acquisition.
CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The founders of
the company, and specifically the principal shareholders of National, as well
as National itself, will be subject to conflicts of interest. The principal
shareholders and employees of National and the company, will hold
approximately [18.23]% of the company's outstanding stock for which they paid
$0.01 per share. Other founders of the company will hold approximately [1.6]%
of the company's outstanding stock for which they also paid $0.01 per share.
Thus, the investors' total ownership interests in the programs' properties
will be diluted by the equity interest in the company held by the founders of
the company. The principal stockholders of National and other executive
officers of the company will receive annual cash compensation aggregating
$660,000 as officers and employees of the company. National will be relieved
of its servicing and asset management obligations and will no longer earn
2
<PAGE>
asset management or servicing related fees. However, the company will still
owe National over $1,300,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote , and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
Messrs. Lasker and Orth will be required to devote some of their time to
other projects for which National acts as servicing agent and asset manager.
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS. No independent party was
retained by National to negotiate on behalf of the investors. Therefore, terms
of the acquisition may be less favorable to investors and more favorable to
founders of the company which included the principal shareholders of National
than if the acquisition had been subject to arm's-length negotiation. Had an
independent party negotiated on behalf of each program, the terms of the
acquisition may have been more favorable to certain or all of the programs and
fewer shares and less favorable employment contracts may have been received by
the founders of the company.
TAX UNCERTAINTIES. The acquisition may not be a tax-free transaction to
investors. Due to uncertainties in the facts of this transaction, tax
counsel is unable to opine conclusively on the taxability of the acquisition
to investors. If the acquisition is a taxable transaction, an investor would
recognize gain or loss in 1998 equal to the difference between the investor's
tax basis in his interest in a program property, and the number of shares of
the company received valued at $10 per share. If the acquisition is treated
as taxable, National believes most investors would recognize a tax loss.
POTENTIAL CHANGE IN THE AMOUNT OF LEVERAGE. 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.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN
INVESTMENT, FINANCING AND CERTAIN OTHER POLICIES. 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.
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NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS. If you vote
against the acquisition, and it is approved, you will not be able to object
to the acquisition and receive the appraised value of your tenancy-in-common
interest in your program's assets. You will have no choice other than to
accept shares for your interests.
COMPANY HAS NO OPERATING HISTORY. The company was formed within the past
year to take part in the acquisition of your property. It does not have the
benefit of operating for a long time. This means that shares in the company
are much riskier than ownership of shares of established companies. If the
company had been operating as if it owned the properties which it desires to
acquire, it would have experienced losses to date.
FUNDAMENTAL CHANGES IN THE BUSINESS PLAN. Rather than being focused on
a single property, the company will be an infinite life entity focused on the
management of at least five properties. The effect of this on investors is
two-fold. First, poor performance of a particular property may affect the
company's operations as a whole regardless of the performance of the other
properties. Second, there will be no particular time when an investor can
expect that a sale of any of the properties will result in cash distributions
to him or her.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes
or sales of a particular property. Those decisions will be made by the board
of directors or management. In addition, you will have an investment in an
entity that is larger than each of the programs and, thus, you will lose
relative voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, because of the borrowers' defaults there have
been no distributions from any of the programs, other than the Oceanside
program, in the past three years. Future cash distributions will be based on
the company's earnings and the decision of the board of directors to pay
dividends. Therefore, even if a property in which you formerly held an
interest were to perform well, there is no assurance that there would be cash
distributions to you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National is
presently compensated for its services at the rate of one percent of the
principal amount originally invested in each program. In addition,
additional compensation has been accrued for property management services
provided to the Oceanside and Yosemite/Ahwahnee properties by officers and
employees of National in their capacities as officers of Oceanside
Development, Inc. and Ahwahnee golf Course & Resort, Inc. In the future,
compensation will be paid to officers of the company in the form of salaries,
stock options and other benefits. These salaries and other forms of
compensation will be payable to management of the company even if one or more
of the properties acquired in the acquisition is subsequently sold.
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HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL USED ITS OWN JUDGMENT TO DETERMINE THE YOSEMITE/AHWAHNEE
APPRAISALS. Faced with two conflicting appraisals for the Yosemite/Ahwahnee
properties, to determine the appraised values for these properties for
purposes of determining their exchange values, National's management used the
most conservative information presented in the appraisals unless a change in
circumstances or market conditions for a particular parcel suggested one
appraisal was more pertinent than the other. If the values arrived at by
National were too low for either program, the program's exchange value would
be too low and would result in too few shares being allocated to that program
in the acquisition. Conversely, if the values arrived at by National were
too high, the program would receive too large an allocation of shares in the
acquisition to the detriment of the investors in the other programs.
GENERAL REAL ESTATE RISKS
THERE ARE SIGNIFICANT DELINQUENT PROPERTY TAXES. If delinquent property
taxes are not timely paid, the company could lose one or more of the
properties to tax sales. Each of the programs' properties is subject to the
following delinquent property taxes as of December 31, 1997:
Sacramento/Delta Greens -approximately $45,000; Oceanside - approximately
$55,000; Yosemite/Ahwahnee (combined) - approximately $684,000; and Mori
Point - approximately $298,000. Annual payments required for all the
properties for current taxes (including amounts currently due on five-year
payment plans) total approximately $248,000. In the case of Sacramento/Delta
Greens and Mori Point, National has entered into statutorily authorized
5-year payment plans with the applicable taxing authorities. It plans to do
the same with Yosemite/Ahwahnee shortly.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $[11,400,000] from sale of the units or from sale of
certain assets of the programs become available, the company will not be able
to proceed with its entire business plan. Additionally, if a minimum of
approximately $250,000 is not raised to pay current property tax liabilities,
then certain properties might be lost to tax sales before sales to third
parties can be arranged. The company will also need financing from other
sources to complete its plan. Financing sources are not predictable and
interest rates or other costs of financing may be prohibitive. Other than a
construction loan source for the Oceanside project, neither the programs nor
the company have received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay
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assessments for streets, schools and parks which increase the cost of
development. Increased costs can have a negative affect on the company's
sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. See "Business and Properties - Investments in Real Estate or Interests in
Real Estate" at page __. Real estate development involves more risks than in
the ownership and operation of established projects. Financing may not be
available on favorable terms for development projects; construction may not
be completed on schedule or budget; long-term financing may not be available
on completion of construction; and sites may not be sold on profitable terms.
THE CALIFORNIA ECONOMY HAS FLUCTUATED BROADLY IN THE PAST FEW YEARS. We
presently conduct all of our business in California. Our markets have been
affected by substantial fluctuations in local economic conditions, interest
rates, inflation, employment levels and regulations. California has also
experienced draught conditions, resulting in water conservation measures and
rationing. In the past, these conditions have caused local governments to
restrict residential development. California's climate and geology present
risks of natural disaster such as earthquakes and floods.
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE
OWED [$1,381,881] BY THE COMPANY. This represents accrued fees and expenses
from the programs which National has not cancelled. This amount is due and
payable and the company intends to start paying it after the Acquisition, but
only from operating revenues or proceeds from the sale of assets, but not
from working capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED. Construction of
the Sacramento/Delta Greens property will require the filing of a final map
and obtaining building permits from the city's real estate planning
authorities. The existing tentative map approval does not entitle the
property owner to build on the property. The tentative tract map for the
Sacramento/Delta Greens property requires that studies must be conducted to
identify any endangered species' habitat which may exist on the property. If
any are identified, changes to the tentative development plans will have to
be made and approved that will reduce or eliminate any damage to the habitat.
The longer this process takes, the longer it will be until the company can
make money from the property.
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HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays
in construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged
approximately $30,000 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 8.4% of the assets of the company, respectively. Although
there can be no assurances and net revenues from Sacramento/Delta Greens may
equal or exceed $3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) finance engineering and endangered species studies
(estimated by management to cost approximately $124,800), (ii) finance
planning for final approvals (estimated by management to cost approximately
$51,700), and (iii) finance utilities and roads and the construction of homes
(estimated by management to cost approximately $3,000,000 on a phased basis).
Another risk is whether the lots to be developed will appeal to project
builders and whether home financing will be available. Finally, there is a
risk that the development and sale of lots or homes will be profitable.
REAL ESTATE RISKS OF OCEANSIDE PROPERTY
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE PROPERTY MAY
CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE
SOLD. Changing market conditions may increase the difficulty of selling the
lots. If the company chooses to build homes on the lots, delays in
construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged $10,000
per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and
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pricing are all factors affecting success. Competitors may have better
financial, managerial and other resources, affecting our ability to
successfully compete.
Oceanside is a proposed residential development and represent over
21.75% of the assets of the company. Although there can be no assurances,
net revenues from Oceanside are expected to be in excess of $5,000,000 over
the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that enough investment money
may not be available to obtain a construction loan and begin construction of
the next tract of homes (estimated by management to be approximately $700,000
of equity). There is also a risk that finished lots or completed homes will
not be marketable at a profit or that home financing will not be available at
affordable rates. There is also strong nearby competition.
REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE TIMESHARE ASPECT OF THE RESORT HAVE NOT YET BEEN
OBTAINED. The Yosemite/Ahwahnee property has a final map on 45 remaining
single family estate lots and a use permit for a 600 space recreational
vehicle park. Additional planned usage such as timeshare will require
extensive county and state approvals through the Departments of Real Estate
and Housing and Commercial Development.
RISKS AFFECTING OPERATION OF A GOLF COURSE. Increased competition,
seasonality, weather and course conditions will affect the operations of the
company. While no new golf courses have opened near the Ahwahnee Golf
Course, new courses could increase the competition and reduce the rounds
played. Seasonal variations may require the company to supplement revenue at
the golf course to meet operating expenses. Weather can negatively affect
the turf grass and reduce the number of rounds played. Inflationary costs
may not be offset by increased dues. Also, golf's success depends on
discretionary spending by consumers, which may be vulnerable to regional and
economic conditions, as well as to pleasure or destination travel preferences
by visitors and tourists. All of these factors could reduce the amount of
money earned by the company.
The Yosemite/Ahwahnee golf course can be an important amenity which may
attract potential timeshare purchasers in the future. At this time, the
project does not rely on the golf course for its revenue. National estimates
that the value of the golf course will be less than 5% of the assets of the
company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits. For
example, Spring through Fall at the Yosemite/Ahwahnee property are the
periods of highest occupancy. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues.
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The recreational vehicle park at Yosemite/Ahwahnee may generate as much
as ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers who borrow to buy a home. If a buyer
defaults, we would incur costs in remarketing the timeshare.
We do not have an exchange network to enhance marketing appeal. If we
cannot offer such a network in the future, we may be at a competitive
disadvantage.
The timeshare industry is extremely competitive and we may not be able
to secure development financing on acceptable terms.
Timeshare development is planned for Yosemite/Ahwahnee. Since the
project is not yet permitted for timeshare, there has been no allocation of
assets. Should timeshare be approved, the company anticipates that a
significant portion of the revenue of the company will be derived from sales
of timeshare units, possibly in excess of 25%.
RISKS RELATING TO RECREATIONAL VEHICLE PARK OPERATIONS. Risks relating
to recreational vehicle parks are substantially the same as those described
above for timeshare projects.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) make up for the current cash drain from operations of the
golf course (estimated by management at approximately $150,000) annually,
(ii) construct an additional planned 100 recreational vehicle sites
(estimated by management to cost approximately $700,000), and (iii) obtain
approvals for and construction of the first group of timeshare units
(estimated by management to cost approximately $3,000,000). There are also a
risk that the operation of recreational vehicle sites, timeshares and golf
course activities will not be profitable.
REAL ESTATE RISKS OF MORI POINT PROPERTY
PERMITS TO DEVELOP THE PROPERTY HAVE NOT YET BEEN OBTAINED. If needed
permits for development are not obtained or reissued, the business plan for
the company will have to be revised or abandoned. Additionally, the presence
of two endangered species on the Mori Point property increases the risks that
necessary approvals may not be received if an acceptable habitat mitigation
plan cannot be developed. The permitting process with the California Coastal
Commission and applicable county or city real estate planning agencies is
expensive and time consuming. Mori Point had a specific plan and tentative
map to build a hotel/conference center which expired in 1991. These
approvals must be reinstated
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prior to construction on the property. Such reinstatement will be
complicated by the existence of two endangered species living on the property.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits.
Seasonality can be expected to cause quarterly fluctuations in the company's
revenues. In the resort and hotel/conference center property at Mori Point,
we may be competing against well-known chains and extended-stay inns.
Mori Point represents over 20% of the assets of the company and,
assuming it is operated as a hotel/conference center, its revenues may exceed
20% of the total revenues of the company upon completion of the project.
ADDITIONAL SPECIFIC RISKS. There is a risk that the city government
will not approve the property for its intended use. Capital to conduct
engineering and environmental studies in order to apply for and obtain
approvals for its use from the City is estimated to be approximately
$500,000. Capital will also be necessary for roads, utilities and other
infrastructure costs prior to construction. Finally, there is a risk that
the proposed hotel/conference center may not be profitable.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the charter documents may restrict changes in
control of the Company's management. These provisions may make it more
difficult or expensive for another party to acquire and exercise control of
the Company or to change its management, even if that change would be
beneficial to you. These provisions include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate of
incorporation, subject to the receipt of fair value, the Board of Directors
may issue shares in other classes or series and fix the rights, powers and
limitations associated with such shares. Although the Board of Directors has
no present intention of doing so, it could issue a class or series that
could, depending on its terms, impede a merger, tender offer or other
transaction that you might believe is in your best interest or in which you
might receive a premium for your shares over the then current market price.
The issuance of such shares could also dilute your voting power.
STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability
to change control of the company, even if you believe such a change is in
your best interests.
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RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% o the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of
incorporation which cover anti-takeover provisions require the approval of
two-thirds of the company's voting stock. This restriction also may deter
potential purchasers who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well
as the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements.
POSITIVE AND NEGATIVE FEATURES OF THE ACQUISITION
National and the Company considered the following in deciding to propose
the Acquisition:
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE
FOR YOUR INVESTMENT IN THE PROGRAM, AS ADJUSTED PER THE TERMS OF THE
TENANCY-IN-COMMON AGREEMENTS. You will receive [399] shares per $10,000 of
Adjusted Outstanding Investment in the Program.
- POTENTIAL LIQUID TRADING MARKET FOR YOUR SHARES. After the
acquisition, shares will be listed on the ______________. While there can be
no assurance that a trading market will develop or be sustained, if a trading
market develops, you will have the opportunity to liquidate all or some of
those shares at your discretion. However, initially the shares are likely to
trade at prices substantially below the arbitrary $10 value assigned to them.
- CONTROL OF THE TIMING OF LIQUIDATION OF YOUR INVESTMENT. You will
be able to control when you with to sell your shares. However, if no trading
market exists at the time, you may not be able to sell your shares. Under
the current programs, you have been subject to a majority vote to sell or
retain the property, regardless of whether or not the timing and decision
were favorable to you.
- BENEFITS OF LISTED SHARES TO THE COMPANY. Listing of the shares on
the ____ may provide benefits to the company which could enhance investor
value. The company may have access to public capital markets that the
individual programs do not have if the company is able to show potential for
growth.
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- DIVERSITY MAY REDUCE RISK. Your investment will be spread over an
initial asset base of four different real estate projects (the two
Yosemite/Ahwahnee programs will be one project after the acquisition).
However, the poor performance of a particular property could negatively
affect the performance of the company even if the other properties are
performing up to expectations. Historically, all of the properties have
operated at a loss. In order for the company to be successful, it must
obtain external financing or sell certain of its assets to raise cash for
operations.
- PROPERTY MANAGEMENT. We have hired real estate management
professionals who are experienced in real estate development, operation and
construction. While members of management have gained experience in the
operation of golf courses and recreational vehicle parks through the
operation of the Yosemite/Ahwahnee properties, they do not have extensive
experience in timeshare or resort development, marketing or operations.
- MODEST INCREASE IN MANAGEMENT COMPENSATION. National considered
that the total of salaries to be payable to the Company's officers and other
employees exceeds the total payable to National and its affiliates for
servicing and property management services ($1,181,000 as opposed to
$969,000, both of which include the payroll for Ahwahnee Country Club). The
increase was not viewed as significant since the original servicing fees were
based on loan servicing which is less labor-intensive than property
development and management.
- NO FURTHER LIABILITY FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
acquisition, meaning your exposure to mandatory assessments will cease.
However, the company will be required to obtain additional money from outside
sources or the sale of certain of its properties to be successful.
- LIABILITY IS LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the programs, you are not
currently effectively insulated from personal liability based on the
operation of those assets. As shareholders of a corporation, you will be.
- NO CONTROL OVER TIMING OF SALE OF A PARTICULAR PROPERTY. No
particular group of investors will have the ability to control the timing of
the sale of a particular property as they do under the current program
structure. Instead, all Investors will be required to rely on the decisions
of management regarding the sale of a property.
- PROCEEDS FROM SALE OF PROPERTIES. If a property is sold, the
proceeds will be used by the company to further the business plan of the
company. Presently, if a program property is sold in its entirety, the
proceeds would go to applicable investors directly as a return of their
investment. If it is refinanced, by majority vote the program investors
presently have the power to direct the use of refinancing proceeds.
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- ACQUISITION COULD TRIGGER TAXATION OF INVESTORS. Participation in
the acquisition may be a taxable event for investors. However, National
intends to treat the transaction as a tax-free transaction. To the extent
that the acquisition is determined to be taxable, National believes most
investors would be required to report tax losses. On the other hand, there
generally would be no taxable event to investors as the programs are
currently structured until the program property was sold. At such time, the
amount returned to you would result in either a tax loss or gain depending
upon how much of your original investment was returned to you.
- CASH DISTRIBUTIONS. Currently, if a property was sold, you would
be entitled to a distribution of the proceeds of such sale net of costs of
sale and accrued liabilities. After the acquisition, your distributions will
be dependent upon the earnings of the company and a decision of the board of
directors to make distributions in the form of dividends. You will not
automatically receive distributions upon the sale of any particular property.
- MANAGEMENT AND COMPANY FOUNDERS WILL OWN APPROXIMATELY 18.23% OF
THE COMPANY (ALMOST 14% IF ALL UNITS ARE SOLD IN THE CONCURRENT OFFERING).
These individuals paid $.01 per share for their company shares. In addition,
over the past several years, National and its affiliates have forgiven, and
as a result of the acquisition will forgive, an aggregate of over $3,000,000
of fees and expenses due from the programs.
- NATIONAL'S PRINCIPAL STOCKHOLDERS WILL OWN FOUNDERS' STOCK IN THE
COMPANY AND WILL RECEIVE SALARIES AS OFFICERS OF THE COMPANY. David Lasker
and James Orth will be President and Chief Executive officer, respectively,
of the company and entities they control will each own 8.01% of the company's
outstanding shares (5.72% if all units are sold in the concurrent offering).
These shares are included in the shares described above as being owned by
management and company founders. Mr. Lasker and Mr. Orth also will receive
annual salaries of $180,000 plus other benefits. See "Management Following
the Acquisition -- Directors and Executive Officers Compensation and
Incentives" at page __.
- AS A CONSEQUENCE OF THE ACQUISITION, THE INVESTORS WILL TERMINATE
NATIONAL AS SERVICING AGENT FOR THE PROGRAMS. This will relieve National of
its ongoing servicing obligations which National could unilaterally terminate
if it elected to do so.
- THE COMPANY WILL OWE NATIONAL $1,381,881 OF ACCRUED BUT UNPAID FEES
AND EXPENSES DUE FROM THE PROGRAMS AFTER THE ACQUISITION. If the company is
successful, National will have the opportunity to receive the portion of its
accrued but unpaid fees and expenses which it has not forgiven.
The Acquisition will have no material effect on this Program's
stand-alone financial condition or results of operations. Overall, the
Company expects to experience losses in the initial year of operations.
For further information about how the Acquisition will affect you and
the Program, see the following portions of the Prospectus:
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- "Background and Reasons for the Acquisition" commencing at
page __.
- "Comparison of Tenancy-in-Common Interests and Shares"
commencing at page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition
and Results of Operations" commencing at page __.
- "Management Following the Acquisition" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
FAIRNESS TO INVESTORS IN THE MORI POINT PROGRAM
From a financial point of view, the company and National believe the
terms of the acquisition are fair as a whole and to the investors in each of
the programs. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that
develops will be sustained;
- while the number of shares to be issued to reflect the exchange
value of a program is arbitrary, the trading price of such shares initially
is likely to be substantially below the $10 value arbitrarily assigned to
such shares. In our opinion, the exchange values offered to investors for
their assets allow for an equitable allocation of the 2,001,248 shares among
the programs. The disparity between exchange values and appraised values
results from adding the value of program cash reserves and other assets, if
any, to appraised values and deducting program liabilities (principally
accrued property taxes and other fees net of fees to be forgiven by National);
- on completion of the acquisition the investors will hold over 80%
of the outstanding stock of the company while principals, employees, and
consultants of National will hold less than 20%. That 20% was purchased for
$.01 per share. National and its principals have forgiven, or will forgive
at the completion of the acquisition, over $3,000,000 of expenses and accrued
fees of which a total of approximately $1,400,000 was earned under the
servicing agreements or for property management services and expenses after
the loans defaulted. National believes that the amount paid for the property
management services is no greater than the amount that a third party would
charge;
- the valuation of the real estate assets of each of the programs by
the independent appraisers;
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- the probability that the transaction will either be tax-free to
investors or most likely yield a tax loss. Either way, National believes
there will likely be no out-of-pocket tax cost to all, or the vast majority,
of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have
independent representation in the structuring of the acquisition, we believe
they have been counterbalanced by your opportunity to vote on the transaction
and the Fairness Opinion;
- while the programs were originally formed to have a two to four
year finite life and the investors expected to receive a return of their
investment from the original borrower, the company is an infinite life entity
which will not return the program investors' original investment based on a
sale or refinancing of the properties underlying the original programs.
However, after the borrowers defaulted on the "Trudy Pat" loans, the
investors became beneficial owners of the underlying properties with the need
to complete development, manage or otherwise ready the properties for sale.
Those endeavors had no fixed timetable and, thus, the finite life aspect of
their original investments was significantly changed. Therefore, the
infinite life aspect of the company is not viewed by National to be a
material change from the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the individual
business plans of the programs. Rather than being focused on a single
property, the company will be focused on the management of at least five
properties. Thus, the poor performance of a particular property may affect
the company's operations as a whole regardless of the performance of the
other properties. Further, there will be no particular time when an Investor
can expect its interest to be automatically liquidated;
- investors will not be able to vote on changes to or dispositions of
a particular property or borrowing secured by a particular property. Those
decisions will be made by the Board of Directors or management. Further, as
investors in a larger entity, relative voting power will be diluted;
- future cash distributions will be based on the company's earnings
during the decision of the Board of Directors to pay dividends rather than
the performance or sale of a particular property;
- investors voting against the acquisition will have no alternative
but to accept shares in the company if the acquisition is approved by holders
of a majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a
change in management which is not favored by the Board of Directors of the
company; and
15
<PAGE>
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the shares
in the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __.
National reviewed the arbitrary value you will receive in connection
with the acquisition and compared it with what you might receive if (i) the
programs' properties were operated "as is," (ii) the programs' properties
were sold in a quick sale in three months or less, or (iii) the programs'
properties were sold at the appraised values used to determine the exchange
values. Based on that review, and even acknowledging that, initially, the
company's shares issued in the acquisition would likely trade substantially
below their arbitrary $10 issuance value, National believes that there is a
higher probability of realizing value from the programs' assets through the
acquisition than through the other alternatives. This belief is based on the
expectation that some financing opportunities will become available based on
the form of the entity and the time pressure associated with forced sales or
liquidation will be relieved. See "Background and Reasons for the
Acquisition -- Comparison to Alternatives" and "Recommendation of National
and Fairness Determination" at pages __ and __. Based on this comparison,
National concluded that the acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Program (as well as each of the other four
Programs) is essentially the consideration at which the Company is offering
in exchange for the real estate assets, certain liabilities and business of
the Program. The value is reflected as a number of shares of the Company
common stock (in the case of the Program, [485,704] shares) multiplied by an
arbitrary $10 per share value.
The Exchange Value for the Program was calculated as follows: appraised
value of the Program's Property at May 1997, plus book value of other Mori
Point Program assets at December 31, 1997, less Program liabilities at
December 31, 1997, and plus liabilities to National to be forgiven by
National as part of the Acquisition.
The following table summarizes the calculation of the Exchange Value of
the Mori Point Program and the value assigned on $10,000 of Adjusted
Outstanding Investment:
<TABLE>
<CAPTION>
Value Assigned
Appraised Net Other to Program per
Value of + Assets and = Exchange $10,000 of Adjusted
Real Estate(1) Liabilities(2) Value Outstanding Investment
-------------- -------------- ----- ----------------------
<S> <C> <C> <C>
$ 5,500,000 $[ (642,958)] $ [4,857,042] $ [3,988](3)
</TABLE>
16
<PAGE>
- ----------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values made in
determining a Property's Exchange Value as of [DECEMBER 31, 1997].
<TABLE>
<CAPTION>
Book Assets Book Liabilities To Be Forgiven Net Other Assets
(12/31/97)* - (12/31/97)* + Amounts = and Liabilities
----------- ----------- ------- ---------------
<S> <C> <C> <C>
$ 239,911 $ (882,869) $ 0 $[(642,958)]
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no mortgage debt on the Property.
(3) Equals [399] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The 2,001,248 shares of Company common stock being offered to Investors
in the Acquisition represent 80.16% of the Company's shares which will be
outstanding upon completion of the Acquisition. The remaining shares will be
held by management and other founders of the Company. Such shares will be
allocated among the five Programs pro rata in accordance with Exchange
Values. The Mori Point Program will be allocated [485,704] shares
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in
the applicable Program (taking into account assessments paid and unpaid, as
well as interest accrued to each Investor through the date beneficial
ownership of the Program's Property was taken for the Investors) as adjusted
for voluntary advances. An Investor in the Mori Point Program with an
adjusted investment amount of $10,000 will receive [399] shares of Company
stock arbitrarily valued at $10 per share.
Neither National nor the Company's founders have any economic
interest in the Mori Point Program except for National's contractual right to
servicing fees and the $[5,279] of tenancy-in-common interests purchased by
National for which interests National will receive Company shares in the
Acquisition pro rata with the other Mori Point Investors.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Program (including accrued but unpaid interest) plus
the amount of assessments and advances paid by Investors at
[DECEMBER 31, 1997], appraised real estate value, Exchange Value of the
Program, the number and percentage of shares allocated to the Program, and
the number of shares and comparative value of the Company to be held by
founders after the Acquisition.
<TABLE>
<CAPTION>
% of Total
Shares to be
Amount Real Estate Outstanding
Owed plus Appraised Exchange No. of Shares After the
Name of Program Assessments Value Value(1) Allocated(1)(2) Acquisition
--------------- ----------- ----- -------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Mori Point $ 12,420,000 $ 5,500,000 $[4,857,042] [485,704] [19.45]%
</TABLE>
17
<PAGE>
- ----------------
(1) The founders of the Company which include members of Company
management, as well as certain employees of National and consultants to
the Company and the Programs, will hold a total of [495,318] Company
shares after the Acquisition (19.84% of the outstanding shares
post-Acquisition) which, if valued at $10 per share, would have an
aggregate value of $[4,953,180]. The Company was formed, and shares were
purchased by the founders for $.01 per share, prior to making the
Acquisition proposal. While a factor considered in the analysis, the
shares to be retained by the Company's founders were not determined
based only on fees cancelled or to be cancelled by National and its
principals. Overall, National believed that the Company's founders
should hold slightly less than 20% of the shares after the Acquisition.
See "Dilution" at page __ of the Prospectus. If the Acquisition is
completed, the following table sets forth the fees which National and
its principals have cancelled, or will cancel:
<TABLE>
<CAPTION>
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------------- --------- ----------- ----------
<S> <C> <C> <C>
Sacramento/Delta Greens $137,111 $ 500,000 $ 637,111
Oceanside 704,000 -0- 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point -0- 461,589 461,589
-------- ---------- ----------
TOTAL $946,111 $2,191,614 $3,137,725
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [14.71]% of the total shares to
be owned by the Company's founders after the Acquisition ([72,861] shares)
would have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
Incurred Actually Incurred Actually Incurred Actually
for Year Paid for for Year Paid for for Year Paid for
Ended Year Ended Ended Year Ended Ended Year Ended
Name of Program 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96 12/31/97(1) 12/31/97
- --------------- ----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mori Point $100,000(2) $-0- $100,000(2) $-0- $100,000(2) $27,333
----------
----------
</TABLE>
- ---------------
(1) These amounts represent accrued servicing fees.
(2) Approximately $283,676 per year if the Acquisition had been completed
during the above periods including $93,522 of estimated salaries to be paid
by the Company to its officers and other employees were allocated to the
Program based on Exchange Values. No cash would have been available to pay
officers' bonuses or dividends to shareholders.
18
<PAGE>
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/
EFFECT OF THE ACQUISITION
No cash distributions made to Investors in any of the years ended
December 31, 1992, 1993, 1994, 1995, 1996 or 1997. Prior to 1992, $1,354,708
in interest was distributed to Investors. The Acquisition is not expected to
alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
19
<PAGE>
OFFICIAL INVESTOR BALLOT
[attach mailing label here The Primary Investor named on this label is
for each distinct investor] listed as a participant in one or more of the
Programs involved in the Acquisition and is
eligible to vote and subscribe.
THE SOLICITATION OF VOTES EXPIRES AT 11:59 PM,
PACIFIC TIME, ON ___________, 1998, UNLESS EXTENDED (THE "EXPIRATION TIME").
Pursuant to the Prospectus dated _________, 1998 (the "Prospectus"), which
accompanied the original mailing of this Official Investor Ballot, American
Family Holdings, Inc. (the "Company") is proposing to acquire the assets,
(including, without limitation, real estate and cash reserves), certain
liabilities and business activities of the Programs (the "Acquisition") in
exchange for shares of the Company's common stock (the "Shares"). The
Acquisition requires the approval of Investors holding a majority beneficial
economic interest in each of the Programs. If a majority of Investors in any
one of the Programs does not approve the Acquisition prior to the Expiration
Time, then the Acquisition will not occur. If the Acquisition is approved,
all Investors in each of the Programs are bound by the vote of the majority
that granted approval. Capitalized terms in this Official Investor Ballot
shall have the same meaning as in the accompanying Prospectus.
NATIONAL RECOMMENDS A "YES" VOTE.
VOTING BALLOT (PLEASE INDICATE ONE CHOICE ONLY)
____ YES! I vote to approve the Acquisition described in the
Prospectus, and, as part of that Acquisition, to receive
Acquisition Shares in the Company in exchange for my Adjusted
Outstanding Investment in the Program. I authorize and instruct
National to reconvey and extinguish on my behalf all encumbrances
against the Program's real estate in which I have an interest.
____ NO. I vote against the Acquisition. I have read and understand
the portions of the Prospectus which describe the consequences to
my investment in the Program if the Acquisition does not occur.
____ ABSTAIN. I abstain from voting. I understand that my abstention will
be counted as a vote AGAINST the Acquisition.
I represent and warrant that I (1) have received and reviewed the Prospectus
and the applicable Supplement, (2) understand that if the Acquisition is
completed, I will become a shareholder in the Company, (3) have full power
and authority to vote as an Investor pursuant to the Program's
tenancy-in-common agreement, (4) understand that if a voting selection is not
indicated, but this ballot is signed and delivered, I will be deemed to have
voted in favor of the Acquisition, and (5) that to the best of my knowledge,
when and if my interests in the property sold are transferred to the Company
in exchange for Shares, the Company will acquire good, marketable and
unencumbered title to them, free and clear of all liens, restrictions and
encumbrances, and that the interests in the property sold will not be subject
to any adverse claim other than property taxes. By voting in favor of the
Acquisition, I confirm that I am concurrently voting to terminate the
tenancy-in-common agreement and the servicing agreement which govern the
Program and I understand that the provisions of such agreement states that
such termination, if it occurs, will result in National being relieved from
any and all liabilities or responsibilities connected with the Program, and
that all amounts owing to National under the servicing agreement (less
amounts forgiven by National) shall remain owing to National and be assumed
by the Company. This vote, and all authority conferred herein, shall survive
my death or incapacity, and any of my obligations in connection with this
vote and subscription shall be binding upon my heirs, successors and assigns.
________________________________________ ____________________________
Signature of Primary Investor Date
________________________________________
Print Name
Daytime Telephone_______________________ Tax I.D. No.________________
<PAGE>
INSTRUCTIONS TO INVESTORS ON HOW TO COMPLETE THE OFFICIAL INVESTOR BALLOT
STEPS TO COMPLETE THE INVESTOR BALLOT
1. Indicate your voting selection in the space provided on the ballot.
Select one choice only.
2. Sign the ballot, indicate the date, and print your name and the
taxpayer identification number associated with your investment. Also,
make sure to include your daytime phone number in case someone needs
to contact you.
SIGNATURES
The signature on the ballot must correspond with the name shown on the
label attached to the ballot and must match the signature on file with the
Program. Pursuant to the tenancy-in-common agreements governing the
Programs, if two or more persons jointly hold title to a beneficial interest
in a Program, then only the Primary Investor is entitled to sign the ballot
and cast votes for that interest. If the Investor signing the ballot is the
Primary Investor in more than one of the Programs involved in the
Acquisition, his/her vote will be recorded for all of the interests which
they are entitled to cast votes, unless the Investor acts in a fiduciary or
representative capacity for the separate interests, in which case separate
ballots bearing different labels will be required and provided to the
Investor.
If the ballot is being signed by a trustee, an executor, an
administrator, a guardian, an attorney-in-fact, an officer of a corporation,
an agent or another person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and must submit proper evidence
of their authority to so act, unless such evidence is already on file with
the Program.
Official Forms may be signed by a legal representative of a deceased or
legally disabled Investor, provided the legal representative has obtained the
necessary court authorizations and has furnished National with appropriate
copies of such authorizations, either prior to executing the Official Forms
or by enclosing them with the Forms.
SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
If the Shares are to be issued in a name other than that shown on the
label affixed to the ballot, or if the Shares are to be sent to someone or
someplace other than what is shown on the label affixed to the ballot,
contact the Investor Services department at National Investors Financial,
Inc. at 1-800-548-0050 for a special issuance letter. All special issuance
and delivery requests are subject to acceptance.
DELIVERY OF THE INVESTOR BALLOT
In order for a vote to be counted towards approval of the Acquisition, a
properly completed and duly executed ballot, along with any other documents
required pursuant to the ballot, these instructions, or the agreements
governing the Programs, must be received by National prior to the Expiration
Time. The method of delivering the ballot and related documents to
National's offices is at the Investor's election and risk, but delivery will
only be deemed to have been made when actually received by National. If an
Investor decides to use delivery by U.S. mail or by another common carrier,
it is recommended that the materials be sent a sufficient amount of time
prior to the Expiration Time to ensure timely delivery.
<PAGE>
REVOCATION OF A VOTE
If you have cast a vote and want to change it at any time prior to the
Expiration Time, you may revoke your previous vote by delivering a substitute
ballot to National along with a letter stating that the prior vote is revoked
and that the substitute ballot supersedes it. After the Expiration Time,
votes will no longer be revocable unless the Acquisition does not occur, in
which case all votes will be revoked automatically. Any notice of
revocation, to be effective, must indicate the beneficial interests to which
it relates and must be executed in the same manner as the ballot that
contained the vote which is subject to revocation.
TRANSFER OF INTERESTS
If you transfer your beneficial interests in a Program after the date
the solicitation begins but before the Expiration Time, then if time permits,
the Prospectus will be sent to the successor holder(s) of the interests.
Such a transfer will terminate your right to vote on the Acquisition or to
participate in the Offering, and any votes concerning the transferred
interests must be cast by the successor holder(s).
WHERE TO SEND YOUR INVESTOR BALLOT
Send your completed and duly executed ballot, along with any related
documents, to National Investors Financial, Inc., 4220 Von Karman Avenue,
Suite 110, Newport Beach, CA 92660. After determining that subscriptions are
valid, checks will be forwarded immediately to the Escrow Agent.
QUESTIONS OR ADDITIONAL MATERIALS:
Contact National at the above address or by calling 1-800-590-7772.
<PAGE>
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
Item 20 Indemnification of Directors and Officers
Pursuant to the Registrant's Certificate of Incorporation and By-Laws
and pursuant to Section 145 of the Delaware General Corporation Law,
directors, officers and agents of the Registrant are entitled to
indemnification for their actions in respect of the Registrant to the fullest
extent permitted by Delaware law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to officers, directors and controlling persons of the
Registrant pursuant to such provisions, or otherwise, the Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
Item 21 Exhibits and Financial Statement Schedules
<TABLE>
<S> <C>
2.1 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Mori Point Property*
2.2 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Oceanside Property*
2.3 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Yosemite/Ahwahnee I and II Property*
2.4 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Delta Greens Property*
3.1 Certificate of Incorporation of American Family Holdings, Inc.*
3.2 Certificate of Amendment of Certificate of Incorporation before
the Issuance of Stock*
3.3 By-Laws of American Family Holdings, Inc.*
4.1 Pages 1 through 4 of the Certificate of Incorporation of the
Company Filed as Exhibit 3.1 above defining the rights of
security holders are incorporated herein by this reference*
5.1 Opinion of Arter & Hadden LLP regarding legality of Shares*
8.1 Form of Arter & Hadden LLP tax opinion
10.1 Signed Employment Agreement of David Lasker
10.2 Signed Employment Agreement of James Orth
10.3 Signed Employment Agreement of L.C. "Bob" Albertson, Jr.
10.4 1997 Stock Option and Incentive Plan for Officers, Independent
Directors and Employees of American Family Holdings, Inc. and
Affiliates*
10.5 Form of Employment Agreement of Mark Kawanami
21.1 Subsidiaries of the Registrant*
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
23.1 Consent of Arter & Hadden LLP as counsel contained in
Exhibit 5.1*
23.2 Consent of BDO Seidman, LLP as independent accountants*
23.3 Consent of Houlihan Valuation Advisers*
23.4 Consent of David E. Lane, Inc. (re Delta Greens appraisal)*
23.5 Consent of Boznanski and Company (re Oceanside appraisal)*
23.6 Consent of Arnold Associates (re Yosemite/Ahwahnee appraisals)*
23.7 Consent of PKF Consulting (re Mori Point appraisal)*
23.8 Consent of The Mentor Group, Inc. (re Yosemite/Ahwahnee
appraisal)*
23.9 Consent of BDO Seidman, LLP as independent accountants (re
Amendment No. 1)*
23.10 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 2)*
23.11 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 3)
23.12 Consent of Houlihan Valuation Advisers (re Amendment No. 3)
24.1 Power of Attorney (see signature page)*
27 Financial Data Schedule*
99.1 Appraisal Report "Delta Greens" Residential Subdivision,
Sacramento, California, value dated as of May 9, 1997*
99.2 Appraisal of Ahwahnee Golf Course and Resort, Madera County,
California, value dated as of May 1, 1997*
99.3 Complete, Self-Contained Appraisal 23 Finished Residential Lots
Being a Part of "Encore," Oceanside, California, value dated as
of March 31, 1997*
99.4 Complete, Self-Contained Appraisal Partially Finished
Residential Land 111 Residential Lots, "Symphony," Oceanside,
California, value dated as of May 15, 1997*
99.5 Appraisal of Fee Simple Estate in a 104.98 Acre Parcel
Designated for Hotel Development, Located at Mori Point in
Pacific, California, value dated as of May 1, 1997*
99.6 Appraisal of Ahwahnee Resort and Country Club, value dated
October 10, 1996*
99.7 Schedule E to Prior Performance Table
</TABLE>
* Previously filed
** To be filed by amendment
Item 22 Undertakings
(a) Item 512 Undertakings.
(i) The undersigned Registrant hereby undertakes:
(A) to file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
II-2
<PAGE>
(1) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(2) to reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement; and
(3) to include any material information with respect to
the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement.
(B) that, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the official BONA FIDE offer thereof.
(C) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(ii) Insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
competent jurisdiction the against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) Other Part II, Form S-4, Undertakings.
(i) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
Prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated
documents by first-class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the date of the
request.
II-3
<PAGE>
(ii) The undersigned Registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the Program being acquired involved therein, that was not the subject to
and included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-4 and has duly caused this
Amendment to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newport Beach, State
of California, on March 30, 1998.
AMERICAN FAMILY HOLDINGS, INC.
By /s/ David G. Lasker
--------------------------------------
David G. Lasker,
Co-Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Co-Chairman of the Board,
President, Chief Financial
/s/ David G. Lasker Officer and Chief Accounting March 30, 1998
- --------------------------- Officer
David G. Lasker
Co-Chairman of the Board,
/s/ James N. Orth Chief Executive Officer and
- --------------------------- Secretary March 30, 1998
James N. Orth
L.C. "Bob" Albertson, Jr.* Executive Vice President and
- -------------------------- Director March 30, 1998
L.C. "Bob" Albertson, Jr.
Charles F. Hanson*
- -------------------------- Director March 30, 1998
Charles F. Hanson
Dudley Muth*
- -------------------------- Director March 30, 1998
Dudley Muth
John G. LeSieur, III*
- -------------------------- Director March 30, 1998
John G. LeSieur, III
*By /s/ David G. Lasker
------------------------------------
David G. Lasker, Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
<TABLE>
<S> <C>
2.1 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Mori Point Property*
2.2 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Oceanside Property*
2.3 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Yosemite/Ahwahnee I and II Property*
2.4 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Delta Greens Property*
3.1 Certificate of Incorporation of American Family Holdings, Inc.*
3.2 Certificate of Amendment of Certificate of Incorporation before
the Issuance of Stock*
3.3 By-Laws of American Family Holdings, Inc.*
4.1 Pages 1 through 4 of the Certificate of Incorporation of the
Company Filed as Exhibit 3.1 above defining the rights of
security holders are incorporated herein by this reference*
5.1 Opinion of Arter & Hadden LLP regarding legality of Shares*
8.1 Form of Arter & Hadden LLP tax opinion
10.1 Signed Employment Agreement of David Lasker
10.2 Signed Employment Agreement of James Orth
10.3 Signed Employment Agreement of L.C. "Bob" Albertson, Jr.
10.4 1997 Stock Option and Incentive Plan for Officers, Independent
Directors and Employees of American Family Holdings, Inc. and
Affiliates*
10.5 Form of Employment Agreement of Mark Kawanami
21.1 Subsidiaries of the Registrant*
23.1 Consent of Arter & Hadden as counsel contained in Exhibit 5.1*
23.2 Consent of BDO Seidman, LLP as independent accountants*
23.3 Consent of Houlihan Valuation Advisers*
23.4 Consent of David E. Lane, Inc. (re Delta Greens appraisal)*
23.5 Consent of Boznanski and Company (re Oceanside appraisal)*
23.6 Consent of Arnold Associates (re Yosemite/Ahwahnee appraisals)*
23.7 Consent of PKF Consulting (re Mori Point appraisal)*
23.8 Consent of The Mentor Group, Inc. (re Yosemite/Ahwahnee
appraisal)*
23.9 Consent of BDO Seidman, LLP as independent accountants (re
Amendment No. 1)*
23.10 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 2)*
23.11 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 3)
23.12 Consent of Houlihan Valuation Advisers (re Amendment No. 3)
24.1 Power of Attorney (see signature page)*
27 Financial Data Schedule*
</TABLE>
<PAGE>
<TABLE>
<S> <C>
99.1 Appraisal Report "Delta Greens" Residential Subdivision,
Sacramento, California, value dated as of May 9, 1997*
99.2 Appraisal of Ahwahnee Golf Course and Resort, Madera County,
California, value dated as of May 1, 1997*
99.3 Complete, Self-Contained Appraisal 23 Finished Residential Lots
Being a Part of "Encore," Oceanside, California, value dated as
of March 31, 1997*
99.4 Complete, Self-Contained Appraisal Partially Finished Residential
Land 111 Residential Lots, "Symphony," Oceanside, California,
value dated as of May 15, 1997*
99.5 Appraisal of Fee Simple Estate in a 104.98 Acre Parcel Designated
for Hotel Development, Located at Mori Point in Pacific,
California, value dated as of May 1, 1997*
99.6 Appraisal of Ahwahnee Resort and Country Club, value dated
October 10, 1996*
99.7 Schedule E to Prior Performance Table
</TABLE>
* Previously filed
** To be filed by amendment
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF ARTER & HADDEN LLP]
January __, 1998
66944/66608
American Family Holdings, Inc.
4220 Von Karman Avenue,
Suite 110
Newport Beach, California 92660
Re: ISSUANCE OF SHARES IN ACQUISITION
Gentlemen:
You have requested our opinion as to certain Federal income tax
consequences with respect to the Acquisition described in that certain
Prospectus contained in Registration Statements (File Nos. 333-37161 and
333-_____) to which this opinion letter is attached as Exhibit 8.1. In
formulating our opinion, we have examined and have relied upon (i) the
Prospectus and the correctness of all statements, representations and
information set forth therein, and (ii) the correctness of other documents,
statements, representations and information that the Company and its
representatives have furnished to us. Capitalized words in this opinion have
the meanings set forth in the Prospectus.
For the reasons set forth in the portion of the Prospectus entitled
"Federal Income Tax Consequences," we are unable to opine that the
Acquisition will qualify under Section 351 of the Internal Revenue Code of
1986, as amended. However, if Investors who acquire 80% or more of the Shares
are not subject to the step transaction doctrine discussed therein, we are of
the opinion that the Acquisition will qualify under Section 351, with the
resulting Federal income tax consequences as summarized therein. Conversely,
if Investors who are not subject to the step transaction doctrine acquire
less than 80% of the Shares, we are of the opinion that the Acquisition will
not qualify under Section 351, with the resulting Federal income tax
consequences as summarized therein.
<PAGE>
American Family Holdings, Inc.
January ___, 1998
Page 2
We are also of the opinion that the discussion in "Federal Income Tax
Consequences" fully and fairly addresses all material Federal income tax issues
relating to the Acquisition which involve the reasonable possibility of a
challenge by the Service.
Our opinion (i) is subject to the qualifications and assumptions set
forth herein and in the "Federal Income Tax Consequences" discussion, (ii) is
rendered solely for your information and assistance in connection with the
Acquisition, and may not be relied upon by any other person or for any other
purpose, or quoted in whole or in part, or otherwise referred to, in any
document (other than the Prospectus) without our prior written consent, and
(iii) are dated as set forth above, and we undertake no, and hereby disclaim
any, obligation to advise you of any changes in the current laws and regulations
or any new developments which might affect matters set forth in "Federal Income
Tax Consequences" subsequent to the date hereof. We consent to the use of this
opinion as an exhibit to the Registration Statement. We bring to your attention
the fact that our legal opinion is our expression of professional judgment and
is not a guarantee of a result.
We consent to the use of this opinion as an exhibit to the Registration
Statements and to the use of our name under the headings "Federal Income Tax
Consequences" and "Legal Matters" in the Preliminary Prospectus forming a part
of the Registration Statements.
Very truly yours,
2
<PAGE>
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement"), dated as of August 29, 1997
is made by and between American Family Holdings, Inc., a Delaware
corporation, having its principal offices at 4220 Von Karman, Suite 110,
Newport Beach, California 92660 (the "Company"), and David G. Lasker (the
"Employee").
In consideration of the mutual promises and agreements set forth herein,
the parties agree as follows:
1. EMPLOYMENT. The Company will employ Employee, and Employee will
serve, as President and Chief Financial Officer (CFO) of the Company pursuant
to this Agreement. Employee will report to the Board of Directors of the
Company, and will, subject to his election or appointment as such, serve as a
member of the Board of Directors and any committee of the Board of Directors.
In addition, the Company will cause Employee to be elected Vice President
and Director of American Family Communities, Inc., a to-be-formed
wholly-owned subsidiary of the Company ("AFC") and Vice President as well as
a Director of the following to-be-formed companies which will be wholly-owned
subsidiaries of AFC: Delta Greens Homes, Inc., Yosemite Woods Family Resort,
Inc., Oceanside Homes, Inc., and Mori Point Destinations, Inc. Subject to
availability, the Company will cause such subsidiaries to transfer to the
Company such funds as may be necessary for the Company to honor its
obligations under this Agreement.
2. TERM OF EMPLOYMENT. The term of employment under this Agreement
will commence on the Effective Date of the Acquisition described in the
Company's registration statement to be filed on Form S-4 or SB-2 with the
Securities and Exchange Commission in the foreseeable future, and continue
through December 31, 2002 (the "Initial Term"), provided that the Agreement
shall automatically be extended for one year at the end of 2002 and each year
thereafter (the AExtended Term") unless the Agreement is earlier terminated
pursuant to its terms or the Company provides Employee with a written notice
not less than 90 days before the end of any given calendar year of its
election not to have the automatic extension provisions of this Agreement
apply as specified in said notice.
3. COMPENSATION AND OTHER BENEFITS.
3.1 BASE SALARY. As compensation for his employment under this
Agreement, commencing as of the Effective Date of the Acquisition, the
Company will pay to Employee a signing bonus of $25,000 and a base salary of
$180,000 per year (AInitial Base Salary") which, commencing January 1, 1999,
shall increase by the greater of either i) $18,000 per year during the
Initial Term, or ii) by the percentage change increase in the Consumer Price
Index (ACPI") applicable to Orange County that occurred in the year last
past. If the CPI is discontinued or revised, the government index replacing
the CPI shall be used for such calculations. Subject to normal withholding,
any base salary will be payable twice monthly in as equal installments as
1
<PAGE>
possible. It is understood that the Company may, at the discretion of its
Board of Directors, increase such base salary in amount that may be in excess
of either i) or ii) above.
3.2 BONUS COMPENSATION. Employee shall be eligible for
performance bonus compensation equal to two percent (ATwo Percent Performance
Bonus") of the ACompany's Performance Base Income," as defined herein. The
ACompany's Performance Base Income," as that term is used herein, shall be
equal to the Company's annual federal corporate taxable income as determined
under the Internal Revenue Code of 1986, as amended, as expressly modified
herein and as expressly adjusted in this Section for items not otherwise
required to be included in the Company's consolidated income for federal
corporate income tax purposes. The computation of the Company's federal
corporate taxable income shall not include a deduction for state corporate
income or franchise taxes, net operating loss carryovers (forward or back)
and depreciation in excess of income on real properties held for rental. In
addition, the computation of the Company's federal corporate taxable income
for purposes of the Two Percent Performance Bonus shall substitute the tax
basis of any real property contributed to the Company at the Effective Date
of Acquisition to reflect its then existing fair market value, which shall be
defined as the appraised value of each property utilized as the basis to
calculate its Exchange Value as determined in the registration statement of
the Company to be filed with the Securities and Exchange Commission. The
Company's federal corporate taxable income will be computed on a consolidated
basis. The Company's Performance Base Income, to the extent not required to
be consolidated for federal corporate income tax purposes or not otherwise
includable in the Company's federal corporate taxable income shall
nevertheless include the income of any subsidiary, partnership or entity to
the extent of the Company's percentage ownership in such entity, regardless
of the number of tiers of entities that may be involved and regardless of
whether currently distributable or distributed. Such bonus will be paid on or
before the 90th day after the end of the Company's applicable tax year (ATwo
Percent Performance Bonus Pay Date"). This bonus will be paid only when the
Company has sufficient reserves to fully and timely pay all of its
foreseeable operating debts as they become due. If the Company does not have
such sufficient reserves, the Company may delay payment of the Two Percent
Performance Bonus for two one-year periods; however, such amounts shall bear
interest at ten percent per annum from April 1 of the year in which the
payment was due until paid. Notwithstanding the foregoing to the contrary,
the Two Percent Performance Bonus will become absolutely payable no later
than two years after the Two Percent Performance Bonus Pay Date regardless of
any other condition including, but not limited to, the sufficiency of the
Company's working capital reserves. At the Board's discretion, the Company
may grant Employee a separate bonus of up to 50% of Employee's then existing
base salary (ABase Salary Performance Bonus"). Said bonus shall be paid on
or before the 90th day after the end of the Company's applicable tax year.
3.3 OTHER BENEFITS.
3.3.1 During the term of Employee's employment hereunder,
Employee (and his dependents where applicable) will be entitled to
participate and will be included in any employee benefit plans including but
not limited to any group health and life insurance, pension,
2
<PAGE>
profit sharing, retirement, stock incentive or similar plans of the Company
now existing or established hereafter. Employee will also be covered by the
Company's directors and officers errors and omissions insurance.
3.3.2 During the term of Employee's employment hereunder,
Employee will be authorized to incur and will be reimbursed by Company for
all reasonable business-related expenses, travel expenses (as if the Company
was headquartered in Orange County) and entertainment expenses incurred by
Employee to promote the business of the Company. Club dues and expenses will
be covered as agreed upon between Employee and the Company. In addition, the
Company will pay for, or reimburse Employee for, all mandatory continuing
education required to maintain professional licenses necessary to the
Company's business, and the costs of membership in all professional
associations reasonably applicable to the Company's business. The Company
will also pay for the equivalent or current insurance policies from the Paul
Revere, Kemper and North American Companies unless premiums are paid for by
another affiliate of Employee. Employee shall be the owner of said policies.
3.3.3 During the term of Employees employment hereunder,
Employee will be entitled to 20 business days of vacation and ten business
days for illness during each full contract year of employment, determined on
a pro-rata basis for and partial contract year of employment during which
time Employee is not partially or fully disabled, provided that such vacation
will be arranged so that the Company may function at reasonable operating
levels during such vacation periods. Any vacation and/or sick days taken in
excess of that stated above in any given calendar year shall require Board
approval. Any vacation and/or sick days not taken shall accrue and carry
over to the next contract year provided that, at the end of any calendar year
in which this Agreement is in effect, Employee may not have accrued any
unused vacation days aggregating in excess of 30 days. Any unused sick days
by accrue without limitation. Any vacation or sick days not used upon
termination shall be paid at the rate of Employee's then existing base salary
under Section 3.1 hereunder.
3.3.4 If at any time during which Employee is a director,
executive officer or employee of the Company or any of its subsidiaries, the
Company proposes to file a registration statement under the Securities Act of
1933, as amended, relating to an underwritten or "best efforts" public
offering of Common Stock of the company, other than an offering by the
Company in which no selling stockholders participate, at least 30 days before
filing that registration statement, the Company will notify Employee of the
Company's intention to file the registration statement and the Company will
include in the registration statement any shares of the Company's Common
Stock then owned by Employee or an entity with which Employee is affiliated
which Employee requests be included in the registration statement on the same
terms and conditions as the other shares being sold, up to such number of
Employee's shares as the managing underwriter or selling agent, if any, of
the proposed public offering states in writing to Employee to be the maximum
number of Employees' shares which the managing underwriter or selling agent,
if any, has determined can be included in the public offering without
adversely affecting the sale of the other shares to which the registration
statement relates.
3
<PAGE>
3.4 SALARY AND BENEFIT CONTINUATION. The Company will continue to
pay to Employee compensation as provided in Section 3.1 hereunder at the full
rate for a period of six months after Employee is declared permanently and
totally disabled and unable to perform the duties of President or Chief
Financial Officer of the Company. Thereafter, the Company will pay to
Employee 25% of Employee's annual salary as provided in Section 3.1 hereunder
for an additional 12 consecutive months or until the regular expiration
(without regard to any automatic extension) of this Agreement, whichever is
earlier. Furthermore, in the event of such permanent and total disability,
the benefits described in Section 3.3.1 will continue as if Employee had
continued to render services pursuant to this Agreement throughout its term,
and the benefits described in Section 3.3.4 will continue in accordance with
the terms of this Agreement. For purposes of this Section, the determination
of whether or not Employee is declared permanently and totally disabled shall
be made by Employee's physician, by written notice to the Board of Directors.
In the event the Board of Directors disagrees with the determination by
Employees' physician, the Board of Directors will appoint, at the Company's
expense, another physician to make such determination. If the physician so
appointed by the Board of Directors disagrees with the determination made by
Employee's physician, then the two physicians shall appoint a mutually
acceptable third physician, at the Company's expense, to make the final
determination of whether Employee is permanently and totally disabled, which
determination will be binding upon all parties hereto.
3.5 CHANGE OF CONTROL COMPENSATION. If, pursuant to Section 5.2
hereof, Employee terminates this Agreement within six months of a Change of
Control (as defined in Section 6.1 hereof), as severance pay and in lieu of
any further salary for periods subsequent to the date of termination,
Employee shall receive 2.99 times the sum of all amounts (collectively,
AChange of Control Compensation") paid to Employee pursuant only to Sections
3.1 and 3.2 hereof during the five complete calendar years preceding the
calendar year during which the Change of Control occurs (or such lesser
number of calendar years in the event Employee has been employed by the
Company for fewer than five such calendar years) divided by five (or such
lesser number in the event Employee has been employed by the Company for
fewer than five such calendar years). The following provisions shall apply
for purposes of this Section 3.5:
(a) The Change of Control Compensation paid to Employee
during any partial calendar years of employment shall be annualized, and such
annualized year shall be treated as a full calendar year.
(b) Amounts payable to Employee pursuant to this Section 3.5
shall be paid without interest in 18 equal monthly installments (less
applicable withholding) commencing on the first day of the first month after
Employee's termination occurring after a Change of Control.
(c) The amounts payable pursuant to this Section 3.5 shall
not be reduced, offset or subject to recovery by the Company by reason of any
amounts earned by Employee as the result of employment by another employer
after the date of termination, or otherwise.
4
<PAGE>
(d) Any Change of Control Compensation due to Employee from
the Company shall also include any stock options not yet granted pursuant to
Section 3.8 hereunder.
3.6 LIMITATION ON CHANGE OF CONTROL COMPENSATION. Notwithstanding
Section 3.5 hereof, if any portion of the Change of Control Compensation
provided for in this Agreement would constitute a "parachute payment" (as
defined in Section 280G(b)(2) of the Internal Revenue Code), the payments and
benefits due to the Employee shall be reduced, in such order of priority and
amount as the Employee shall elect, to the largest amount as will result in
no portion of such payments being subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code. Notwithstanding anything in the
foregoing to the contrary, any dispute or controversy regarding whether any
payments under this Agreement must be reduced pursuant to this Section 3.6
shall be settled by an independent accounting firm acceptable to each of the
parties hereto, or, if no such firm is acceptable to each party, each of the
Employee and the Company shall select an accounting firm acceptable to it,
and such accounting firms shall together designate an independent accounting
firm to settle such dispute or controversy, and such settlement shall be
binding upon both parties. The Company may withhold from any benefits
payable under this Agreement all federal, state, city or other taxes as shall
be required pursuant to any law or governmental regulation or ruling.
3.7 AUTO AND CELL PHONE EXPENSES. The Company shall be
responsible for any automobile expenses for Employee and shall reimburse
Employee for the costs of service, maintenance, insurance, licensing and
fueling such automobile(s). In addition, the Company shall provide cellular
telephones and reimburse Employee for any charges for such usage.
3.8 STOCK OPTIONS. As of the Effective Date of the Acquisition,
and on the first and second anniversaries thereof, in addition to any options
granted to Employee pursuant to the Company's 1997 Stock Option and Incentive
Plan, the Employee shall be granted the following options to purchase the
Company's common stock:
<TABLE>
Date of Grant Number of shares Exercise Price/Share
------------- ---------------- --------------------
<S> <C> <C>
Acquisition Effective Date 10,000 $10.000
First Anniversary of 10,000 Fair Market Value
Acquisition Effective Date
Second Anniversary of 10,000 Fair Market Value
Acquisition Effective Date
</TABLE>
"Fair Market Value" shall be the closing price of the Company's
common stock on the national exchange on which it is traded on the trading
day before the options are granted. If the Company's common stock is not
traded on a national exchange, Fair Market Value shall be determined in good
faith by the Board of Directors.
5
<PAGE>
Each group of options will be exercisable as follows: 3,333 shares
immediately, 3,333 shares on the first anniversary of grant; and 3,334 shares
on the second anniversary of grant. To the extent not exercised, options
granted pursuant to this Section 3.8 shall expire ten years from the date of
grant.
The options granted hereby shall not be transferable without the
consent of a majority of the Board of Directors of the Company; provided that
such options may be transferred by will or to a revocable living trust for
estate planning purposes. If any options are so transferred, they will not
be transferred by the transferee without the written consent of the Board of
Directors.
4. NON-COMPETITION/UNFAIR COMPETITION.
4.1 NON-COMPETITION. During the term of Employee's employment
under this Agreement, Employee will not knowingly, directly or indirectly,
engage or participate in any business that is in competition with the
business of the Company. The foregoing obligation of Employee not to compete
with the Company shall not prohibit (i) Employee from owning or purchasing
any corporate securities of any corporation or other entity that are
regularly traded on a recognized stock exchange or over-the-counter market so
long as Employee does not own, in the aggregate, five percent or more of the
voting equity securities of any such corporation or other entity, or (ii)
Employee from continuing to own interests in existing real estate oriented
projects in which he has investments, or (iii) Employee from assisting in the
financing for, investing in or managing any real estate oriented projects
which are not in direct competition with those of the Company.
4.2 UNFAIR COMPETITION. The Company treats certain information as
confidential information (the "Confidential Information"). Employee
acknowledges and agrees that the sale or unauthorized use or disclosure of
any Confidential Information obtained by Employee during his employment with
the Company constitute unfair competition. Employee promises and agrees not
to engage in unfair competition with the Company during the term of this
Agreement and thereafter.
5. TERMINATION PROVISIONS.
5.1 TERMINATION BY COMPANY. This Agreement may be terminated by
the Company only as provided in this Section and for no other cause or reason:
(a) The Company may terminate Employee's employment under
this Agreement upon 90 days' advance written notice by a vote of the Board of
Directors (excluding Employee but including a majority of the non-employee
directors). If such termination is other than for "Cause" (as defined
herein), the Company will pay to Employee (or his estate) the then applicable
base salary Employee would have been entitled to receive under Section 3.1
hereunder for the remaining term of this Agreement, regardless of
re-employment, if any, as if Employee's employment had continued in full
through the termination date then in effect (without giving effect to any
future automatic annual extensions) and Employee had rendered services
through
6
<PAGE>
that date, payable in equal monthly installments over a one-year period
beginning on the date of termination, but in any event no less than one
year's salary as of the date of termination. If such termination is for
"Cause" (as defined herein), to the extent permitted by law, Employee's
compensation and benefits shall terminate as of the date the termination
becomes effective. For purposes of this Agreement, "Cause" shall mean and be
limited to an act of fraud, embezzlement or similar conduct by Employee
involving the Company.
(b) Except to the extent necessary to give effect to Sections
5.1(a) and 5.2, this Agreement will terminate upon the death of Employee.
(c) Except as otherwise provided in Section 3.4, this
Agreement will terminate as of the date Employee is declared permanently and
totally disabled and unable to perform the duties assigned to him.
(d) If the Company terminates this Agreement, Employee's
employment relationship with any of the Company's subsidiaries shall be
deemed terminated as of the same time.
5.2 TERMINATION BY EMPLOYEE. This Agreement may be terminated by
Employee upon 30 days' prior written notice as set forth below:
(a) If Employee's termination is voluntary and not for any of
the reasons set forth in Sections 5.2(b) or (c), the Company shall have no
further liability to Employee upon such termination except those liabilities
that might arise with respect to the Company's stock under Section 3.9 hereof.
(b) If Employee's termination occurs within one year from the
Company's breach of this Agreement or occurs within one year of a Change of
Location (as defined in Section 6.2), Employee's compensation shall be
determined under Section 5.1(a) as if such termination was without "Cause."
(c) If Employee's termination occurs within six months from a
Change of Control (as defined in Section 6.1), Employee's compensation will
be governed by Section 3.5 hereof. If negotiations that result in a Change
of Control are occurring with less than 6 months remaining until the end of
the Initial Term or any Extended Term of this Agreement, then the provisions
governing Employee's Change of Control Compensation under this Section 5.2
and Section 3.5 hereof shall survive this Agreement.
6. DEFINITIONS.
6.1 CHANGE OF CONTROL. For purposes of this Agreement, a Change
of Control of the Company shall mean any of the following events:
7
<PAGE>
(a) The acquisition by any person or entity, including any
current shareholder of the Company, of securities of the Company resulting in
such person's owning of record or beneficially 40% or more of the voting
securities of the Company;
(b) A merger, consolidation or other combination, or sale of
substantially all of the assets of the Company, the result of which is either
(i) the ownership by shareholders of the Company of less than 51% of the
voting securities of the resulting or acquiring entity having the power to
elect a majority of the Board of such entity and the power to preserve such
power to elect, or (ii) the Company having no substantial operating business;
or
(c) A change in the membership in the Board which, taken in
conjunction with any other prior or concurrent changes, results in 50% or
more of the Board's membership being persons not nominated by management in
the Company's then most recent form of nomination, excluding changes
resulting from substitutions for retirement or death or for removal or
resignation due to demonstrated disability.
Notwithstanding anything in the foregoing to the contrary, no
Change of Control shall be deemed to have occurred for purposes of this
Agreement by virtue of any transaction which results in the Employee, or a
group of persons or entity which includes the Employee, acquiring, directly
or indirectly, 40% or more of any class of voting securities of the Company.
For purposes of Section 6.1, the terms "person" and "beneficial
owner" have the meanings set forth in Regulation 13D under the Securities
Exchange Act of 1934, as such Regulation exists on the date hereof, and the
term "voting security" includes any security that has, or may have upon an
event of default or in respect to any transaction, a right to vote on any
matter upon which the holder of any class of common stock of the Company
would have a right to vote.
For purposes of subsection (a) through ( c) above, such Change of
Control shall include any such applicable lesser standard prescribed by
Section 280(G) of the Internal Revenue Code or regulations issued or proposed
thereto.
6.2 CHANGE IN LOCATION. For purposes of this Agreement, the term
"Change of Location" means any change of the headquarters operations of the
Company to a place outside of Orange County, California, or the requirement
that Employee spend more than 50% of his business time for the Company at
locations outside of Orange County, California.
7. INDEMNIFICATION. As an officer, and if so elected, a director, of
the Company and any of its subsidiaries or affiliates, Employee shall be
indemnified by the Company and any of its subsidiaries or affiliates to the
fullest extent permitted by applicable law. To the extent necessary and
permissible, such indemnification will protect Employee from prior operations
of properties acquired by the Company or any of its subsidiaries or affiliates
8
<PAGE>
8. OTHER PROVISIONS.
8.1 NOTICES. All notices, requests, demands and other
communications required or permitted to be given hereunder will be in writing
and will be deemed to have been duly given if personally delivered or sent by
telecopier or sent by prepaid telegram or first class mail, postage prepaid,
registered or certified, as follows:
If to Employee: David G. Lasker
27282 Delemos
Mission Viejo, Ca. 92692
If to Company: 4220 Von Karman Avenue
Suite 110
Newport Beach, California 92660
Attention: CEO
Either party may change the address to which such
communications are to be delivered by giving written notice to the other
party. Any notice personally given will be deemed received upon delivery to
the address designated, any notice by mail as provided in this paragraph will
be deemed given on the third business day following such mailing, and any
notice given by telecopier or telegram as provided herein will be deemed
delivered on the business day following the transmission by telecopier or the
delivery of such notice to the telegraph company for transmission.
8.2 ATTORNEYS' FEES. In the event of a dispute between any or all
of the parties hereto, or in the event either party seeks to enforce this
Agreement, the prevailing or successful party in a court or arbitration
determination shall be entitled to have its reasonable attorney=s fees and
costs reimbursed by the other party.
8.3 GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of California and
performable in Orange County, California.
8.4 ENTIRE AGREEMENT. This Agreement contains all of the terms
and conditions agreed upon by the parties hereto with reference to the
subject matter hereof and supersedes any and all prior written or verbal
agreements. This Agreement may not be modified except by a written instrument
executed by both parties or their permitted successors in interest, if any.
9
<PAGE>
Each and every term of this Agreement will be valid and enforced to
the fullest extent permitted by law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first above written.
/s/ DAVID G. LASKER
----------------------------------------
David G. Lasker (the "Employee")
AMERICAN FAMILY HOLDINGS, INC.
(the "Company")
By /s/ JAMES N. ORTH
----------------------------------------
James N. Orth, Chief Executive Officer
10
<PAGE>
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement"), dated as of September 30,
1997 is made by and between American Family Holdings, Inc., a Delaware
corporation, having its principal offices at 4220 Von Karman, Suite 110,
Newport Beach, California 92660 (the "Company"), and James N. Orth (the
"Employee").
In consideration of the mutual promises and agreements set forth herein,
the parties agree as follows:
1. EMPLOYMENT. The Company will employ Employee, and Employee will
serve, as Chief Executive Officer (CEO) and Secretary pursuant to this
Agreement. Employee will report to the Board of Directors of the Company,
and will, subject to his election or appointment as such, serve as a member
of the Board of Directors and any committee of the Board of Directors. In
addition, the Company will cause Employee to be elected a director of
American Family Communities, Inc., a to-be-formed wholly-owned subsidiary of
the Company ("AFC") and Vice President as well as a director of the following
to-be-formed companies which will be wholly-owned subsidiaries of AFC: Delta
Greens Homes, Inc., Yosemite Woods Family Resort, Inc., Oceanside Homes,
Inc., and Mori Point Destinations, Inc. Subject to availability, the Company
will cause such subsidiaries to transfer to the Company such funds as may be
necessary for the Company to honor its obligations under this Agreement.
2. TERM OF EMPLOYMENT. The term of employment under this Agreement
will commence on the Effective Date of the Acquisition described in the
Company's registration statement on Form S-4, filed with the Securities and
Exchange Commission (File No. 333-37161) on October 3, 1997, and continue
through December 31, 2002 (the "Initial Term"), provided that the Agreement
shall automatically be extended for one year at the end of 2002 and each year
thereafter (the "Extended Term") unless the Agreement is earlier terminated
pursuant to its terms or the Company provides Employee with a written notice
not less than 90 days before the end of any given calendar year of its
election not to have the automatic extension provisions of this Agreement
apply as specified in said notice.
3. COMPENSATION AND OTHER BENEFITS.
3.1 BASE SALARY. As compensation for his employment under this
Agreement, commencing as of the Effective Date of the Acquisition, the
Company will pay to Employee a signing bonus of $25,000 and a base salary of
$180,000 per year which, commencing January 1, 1999, shall increase by the
greater of either (i) $18,000 per year during the Initial Term, or (ii) by
the percentage change increase in the Consumer Price Index ("CPI") applicable
to Orange County that occurred in the year last past. If the CPI is
discontinued or revised, the government index replacing the CPI shall be used
for such calculations. Subject to normal withholding, any base salary will
be payable twice monthly in as equal installments as possible. It is
understood that the Company may, at the discretion of its Board of Directors,
increase such base salary in amount that may be in excess of either i) or ii)
above.
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3.2 BONUS COMPENSATION. Employee shall be eligible for
performance bonus compensation equal to two percent of the Company's annual
pre-tax stated taxable income as determined under the Internal Revenue Code
of 1986, as amended, except as expressly modified herein (excluding from the
calculation of such pre-tax income net operating loss carryovers (forward or
back) and depreciation in excess of income on real properties held for
rental)("Two Percent Performance Bonus"). The Company's pre-tax income will
be computed on a consolidated basis and shall include the income of any
subsidiary, partnership or entity to the extent of the Company's percentage
ownership in such entity, regardless of the number of tiers of entities that
may be involved and regardless of whether currently distributable or
distributed. Such bonus will be paid on or before the 90th day after the end
of the Company's applicable tax year ("Two Percent Performance Bonus Pay
Date:). This bonus will be paid only when the Company has sufficient working
capital to fully and timely pay all of its foreseeable operating debts as
they become due. If the Company does not have such sufficient reserves, the
Company may delay payment of the Two Percent Performance Bonus for two
one-year periods; however, such amounts shall bear interest at ten percent
per annum from April 1 of the year in which the payment was due until paid.
Notwithstanding the foregoing to the contrary, the Two Percent Performance
Bonus will become absolutely payable no later than two years after the Two
Percent Performance Bonus Pay Date regardless of any other condition
including, but not limited to, the sufficiency of the Company's working
capital reserves. At the Board's discretion, the Company shall grant Employee
a separate bonus of 10-50% of Employee's then existing base salary ("Base
Salary Performance Bonus"). Said bonus shall be paid on or before the 90th
day after the end of the Company's applicable tax year.
3.3 OTHER BENEFITS.
3.3.1 During the term of Employee's employment hereunder,
Employee (and his dependents where applicable) will be entitled to
participate and will be included in any employee benefit plans including but
not limited to any group health and life insurance, pension, profit sharing,
retirement, stock incentive or similar plans of the Company now existing or
established hereafter. Employee will also be covered by the Company's
directors and officers errors and omissions insurance.
3.3.2 During the term of Employee's employment hereunder,
Employee will be authorized to incur and will be reimbursed by Company for
all reasonable business-related expenses, travel expenses (as if the Company
was headquartered in Orange County) and entertainment expenses incurred by
Employee to promote the business of the Company. Club dues and expenses will
be covered as agreed upon between Employee and the Company. In addition, the
Company will pay for, or reimburse Employee for, all mandatory continuing
education required to maintain professional licenses necessary to the
Company's business, and the costs of membership in all professional
associations reasonably applicable to the Company's business. The Company
will also pay for the equivalent or current insurance policies from Paul
Revere, Kemper and North American unless premiums are paid for by another
affiliate of Employee. Employee shall be the owner of said policies.
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<PAGE>
3.3.3 During the term of Employee's employment hereunder,
Employee will be entitled to 20 business days of vacation and ten business
days for illness during each contract year of employment, determined on a
pro-rata basis for and partial contract year of employment, during which time
Employee is not partially or fully disabled, provided that such vacation will
be arranged so that the Company may function at reasonable operating levels
during such vacation periods. Any vacation and/or sick days taken in excess
of that stated above in any given calendar year shall require Board approval.
Any vacation and/or sick days not taken shall accrue, carry over to the next
contract year; provided that, at the end of any calendar year in which this
Agreement is in effect, Employee may not have accrued any unused vacation or
sick days aggregating in excess of 30 days. Any such days if not used, upon
termination shall be paid at the rate of Employee's then existing base salary
under Section 3.1 hereunder.
3.3.4 If at any time during which Employee is a director,
executive officer or employee of the Company or any of its subsidiaries, the
Company proposes to file a registration statement under the Securities Act of
1933, as amended, relating to an underwritten or "best efforts" public
offering of Common Stock of the company, other than an offering by the
Company in which no selling stockholders participate, at least 30 days before
filing that registration statement, the Company will notify Employee of the
Company's intention to file the registration statement and the Company will
include in the registration statement any shares of the Company's Common
Stock then owned by Employee or an entity with which Employee is affiliated
which Employee requests be included in the registration statement on the same
terms and conditions as the other shares being sold, up to such number of
Employee's shares as the managing underwriter or selling agent, if any, of
the proposed public offering states in writing to Employee to be the maximum
number of Employees' shares which the managing underwriter or selling agent,
if any, has determined can be included in the public offering without
adversely affecting the sale of the other shares to which the registration
statement relates..
3.4 SALARY AND BENEFIT CONTINUATION. The Company will continue to
pay to Employee compensation as provided in Section 3.1 hereunder at the full
rate for a period of six months after Employee is declared permanently and
totally disabled and unable to perform the duties of Chief Executive Officer or
Secretary of the Company. Thereafter, the Company will pay to Employee 25% of
Employee's annual salary as provided in Section 3.1 hereunder for an additional
12 consecutive months or until the regular expiration (without regard to any
automatic extension) of this Agreement, whichever is earlier. Furthermore, in
the event of such permanent and total disability, the benefits described in
Section 3.3.1 will continue as if Employee had continued to render services
pursuant to this Agreement throughout its term, and the benefits described in
Section 3.3.4 will continue in accordance with the terms of this Agreement.
For purposes of this Section, the determination of whether or
not Employee is declared permanently and totally disabled shall be made by
Employee's physician, by written notice to the Board of Directors. In the
event the Board of Directors disagrees with the determination by Employees'
physician, the Board of Directors will appoint, at the Company's expense,
another physician to make such determination. If the physician so appointed
by the Board of Directors disagrees with the determination made by Employee's
physician, then the two physicians shall appoint a mutually acceptable third
physician, at the
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Company's expense, to make the final determination of whether Employee is
permanently and totally disabled, which determination will be binding upon
all parties hereto.
3.5 CHANGE OF CONTROL COMPENSATION. If, pursuant to Section 5.2
hereof, Employee terminates this Agreement within six months of a Change of
Control (as defined in Section 6.1 hereof), as severance pay and in lieu of
any further salary for periods subsequent to the date of termination,
Employee shall receive 2.99 times the sum of all amounts (collectively,
"Change of Control Compensation") paid to Employee pursuant only to Sections
3.1 and 3.2 hereof during the five complete calendar years preceding the
calendar year during which the Change of Control occurs (or such lesser
number of calendar years in the event Employee has been employed by the
Company for fewer than five such calendar years) divided by five (or such
lesser number in the event Employee has been employed by the Company for
fewer than five such calendar years). The following provisions shall apply
for purposes of this Section 3.5:
(a) The Change of Control Compensation paid to Employee
during any partial calendar years of employment shall be annualized, and such
annualized year shall be treated as a full calendar year.
(b) Amounts payable to Employee pursuant to this Section 3.5
shall be paid without interest in 18 equal monthly installments (less
applicable withholding) commencing on the first day of the first month after
Employee's termination occurring after a Change of Control.
(c) The amounts payable pursuant to this Section 3.5 shall
not be reduced, offset or subject to recovery by the Company by reason of any
amounts earned by Employee as the result of employment by another employer
after the date of termination, or otherwise.
(d) Any Change of Control Compensation due to Employee from
the Company shall also include any stock options not yet granted pursuant to
Section 3.8 hereunder.
3.6 LIMITATION ON CHANGE OF CONTROL COMPENSATION. Notwithstanding
Section 3.5 hereof, if any portion of the Change of Control Compensation
provided for in this Agreement would constitute a "parachute payment" (as
defined in Section 280G(b)(2) of the Internal Revenue Code), the payments and
benefits due to the Employee shall be reduced, in such order of priority and
amount as the Employee shall elect, to the largest amount as will result in
no portion of such payments being subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code. Notwithstanding anything in the
foregoing to the contrary, any dispute or controversy regarding whether any
payments under this Agreement must be reduced pursuant to this Section 3.6
shall be settled by an independent accounting firm acceptable to each of the
parties hereto, or, if no such firm is acceptable to each party, each of the
Employee and the Company shall select an accounting firm acceptable to it,
and such accounting firms shall together designate an independent accounting
firm to settle such dispute or controversy, and such settlement shall be
binding upon both parties. The Company may withhold from any benefits
payable under this Agreement all federal, state, city or other taxes as shall
be required pursuant to any law or governmental regulation or ruling.
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<PAGE>
3.7 AUTO AND CELL PHONE EXPENSES. The Company shall be
responsible for any automobile expenses for Employee and shall reimburse
Employee for the costs of service, maintenance, insurance, licensing and
fueling such automobile. In addition, the Company shall provide cellular
telephones and reimburse Employee for any charges for such usage.
3.8 STOCK OPTIONS. As of the Effective Date of the Acquisition,
and on the first and second anniversaries thereof, in addition to any options
granted to Employee pursuant to the Company's 1997 Stock Option and Incentive
Plan, the Employee shall be granted the following options to purchase the
Company's common stock:
<TABLE>
Date of Grant Number of shares Exercise Price/Share
------------- ---------------- --------------------
<S> <C> <C>
Acquisition Effective Date 10,000 $10.00
First Anniversary of 10,000 Fair Market Value
Acquisition Effective Date
Second Anniversary of 10,000 Fair Market Value
Acquisition Effective Date
</TABLE>
"Fair Market Value" shall be the closing price of the
Company's common stock on the national exchange on which it is traded on the
trading day before the options are granted. If the Company's common stock is
not traded on a national exchange, Fair Market Value shall be determined in
good faith by the Board of Directors.
Each group of options will be exercisable as follows: 3,333
shares immediately, 3,333 shares on the first anniversary of grant; and 3,334
shares on the second anniversary of grant. To the extent not exercised,
options granted pursuant to this Section 3.8 shall expire ten years from the
date of grant.
The options granted hereby shall not be transferable without
the consent of a majority of the Board of Directors of the Company; provided
that such options may be transferred by will or to a revocable living trust
for estate planning purposes. If any options are so transferred, they will
not be transferred by the transferee without the written consent of the Board
of Directors.
4. NON-COMPETITION/UNFAIR COMPETITION.
4.1 NON-COMPETITION. During the term of Employee's employment
under this Agreement, Employee will not knowingly, directly or indirectly,
engage or participate in any business that is in competition with the
business of the Company. The foregoing obligation of Employee not to compete
with the Company shall not prohibit (i) Employee from owning or purchasing
any corporate securities of any corporation or other entity that are
regularly traded on a recognized stock exchange or over-the-counter market so
long as Employee does not own, in the aggregate, five percent or more of the
voting equity securities of any such corporation or other entity, or (ii)
Employee from continuing to own interests in existing real estate projects in
which he has investments, or (iii) Employee from assisting in the financing
for, investing in or managing any real estate projects which are not in
direct competition with those of the Company.
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4.2 UNFAIR COMPETITION. The Company treats certain information as
confidential information (the "Confidential Information"). Employee
acknowledges and agrees that the sale or unauthorized use or disclosure of
any Confidential Information obtained by Employee during his employment with
the Company constitute unfair competition. Employee promises and agrees not
to engage in unfair competition with the Company during the term of this
Agreement and thereafter.
5. TERMINATION PROVISIONS.
5.1 TERMINATION BY COMPANY. This Agreement may be terminated by
the Company only as provided in this Section and for no other cause or reason:
(a) The Company may terminate Employee's employment under
this Agreement upon 90 days' advance written notice by a vote of the Board of
Directors (excluding Employee but including a majority of the non-employee
directors). If such termination is other than for "Cause" (as defined
herein), the Company will pay to Employee (or his estate) the then applicable
base salary Employee would have been entitled to receive under Section 3.1
hereunder for the remaining term of this Agreement, regardless of
re-employment, if any, as if Employee's employment had continued in full
through the termination date then in effect (without giving effect to any
future automatic annual extensions) and Employee had rendered services
through that date, payable in equal monthly installments over a one-year
period beginning on the date of termination, but in any event no less than
one year's salary as of the date of termination. If such termination is for
"Cause" (as defined herein), to the extent permitted by law, Employee's
compensation and benefits shall terminate as of the date the termination
becomes effective. For purposes of this Agreement, "Cause" shall mean and be
limited to the following events: (i) an act of fraud, embezzlement or
similar conduct by Employee involving the Company; (ii) any action by
Employee involving the arrest of Employee for violation of any criminal
statute constituting a felony or misdemeanor involving moral turpitude if the
Board reasonably determines that the continuation of Employee's employment
after such event would have an adverse impact on the operations of the
Company or its reputation in the financial community; (iii) gross misconduct
or habitual negligence in the performance of Employee's duties; (iv) an act
constituting employment discrimination, sexual harassment or a breach of
Employee's fiduciary duty to the Company under the Delaware General
Corporation Law; (v) a continuing, repeated willful failure or refusal by
Employee to perform his duties; provided, however, that termination shall not
be deemed to be for Cause under this subclause (v) unless Employee shall have
first received written notice from the Board advising Employee of the
specific acts or omissions alleged to constitute a failure or refusal to
perform and such failure or refusal to perform continues after Employee shall
have had a reasonable opportunity to correct the acts or omissions cited in
such notice; or (vi) competition by Employee with the Company or its
subsidiaries in violation of Section 4 thereof.
(b) Except to the extent necessary to give effect to Sections
5.1(a) and 5.2, this Agreement will terminate upon the death of Employee.
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(c) Except as otherwise provided in Section 3.4, this
Agreement will terminate as of the date Employee is declared permanently and
totally disabled and unable to perform the duties assigned to him.
(d) If the Company terminates this Agreement, Employee's
employment relationship with any of the Company's subsidiaries shall be
deemed terminated as of the same time.
5.2 TERMINATION BY EMPLOYEE. This Agreement may be terminated by
Employee upon 30 days' prior written notice as set forth below:
(a) If Employee's termination is voluntary and not for any of
the reasons set forth in Sections 5.2(b) or (c), the Company shall have no
further liability to Employee upon such termination except those liabilities
that might arise with respect to the Company's stock under Section 3.9 hereof.
(b) If Employee's termination occurs within one year from the
Company's breach of this Agreement or occurs within one year of a Change of
Location (as defined in Section 6.2), Employee's compensation shall be
determined under Section 5.1(a) as if such termination was without "Cause."
(c) If Employee's termination arises from a Change of Control
(as defined in Section 6.1), Employee's compensation will be governed by
Section 3.5 hereof.
6. DEFINITIONS.
6.1 CHANGE OF CONTROL. For purposes of this Agreement, a Change
of Control of the Company shall mean any of the following events:
(a) The acquisition by any person or entity, including any
current shareholder of the Company, of securities of the Company resulting in
such person's owning of record or beneficially 40% or more of the voting
securities of the Company;
(b) A merger, consolidation or other combination, or sale of
substantially all of the assets of the Company, the result of which is either
(i) the ownership by shareholders of the Company of less than 51% of the
voting securities of the resulting or acquiring entity having the power to
elect a majority of the Board of such entity and the power to preserve such
power to elect, or (ii) the Company having no substantial operating business;
or
(c) A change in the membership in the Board which, taken in
conjunction with any other prior or concurrent changes, results in 50% or
more of the Board's membership being persons not nominated by management in
the Company's then most recent form of nomination, excluding changes
resulting from substitutions for retirement or death or for removal or
resignation due to demonstrated disability.
Notwithstanding anything in the foregoing to the contrary, no
Change of Control shall be deemed to have occurred for purposes of this
Agreement by virtue of any transaction which results in the Employee, or a
group of persons or entity which includes the
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Employee, acquiring, directly or indirectly, 40% or more of any class of
voting securities of the Company.
For purposes of Section 6.1, the terms "person" and
"beneficial owner" have the meanings set forth in Regulation 13D under the
Securities Exchange Act of 1934, as such Regulation exists on the date
hereof, and the term "voting security" includes any security that has, or may
have upon an event of default or in respect to any transaction, a right to
vote on any matter upon which the holder of any class of common stock of the
Company would have a right to vote.
For purposes of subsection (a) through ( c) above, such Change
of Control shall include any such applicable lesser standard prescribed by
Section 280(G) of the Internal Revenue Cod or regulations issued or proposed
thereto.
6.2 CHANGE IN LOCATION. For purposes of this Agreement, the term
"Change of Location" means any change of the headquarters operations of the
Company to a place outside of Orange County, California, or the requirement
that Employee spend more than 50% of his business time for the Company at
locations outside of Orange County, California.
7. MISCELLANEOUS PROVISIONS.
7.1 INDEMNIFICATION. As an officer, and if so elected, a
director, of the Company and any of its subsidiaries, Employee shall be
entitled to indemnification to the fullest extent permitted by applicable
law. To the extent necessary and permissible, such indemnification will
protect Employee from prior operations of properties acquired by the Company
or any of its subsidiaries.
7.2 NOTICES. All notices, requests, demands and other
communications required or permitted to be given hereunder will be in writing
and will be deemed to have been duly given if personally delivered or sent by
telecopier or sent by prepaid telegram or first class mail, postage prepaid,
registered or certified, as follows:
If to Employee: James N. Orth
30 Drakes Bay
Corona Del Mar, California 92625
If to Company: 4220 Von Karman Avenue
Suite 110
Newport Beach, California 92660
Attention: President
Either party may change the address to which such communications
are to be delivered by giving written notice to the other party. Any notice
personally given will be deemed received upon delivery to the address
designated, any notice by mail as provided in this paragraph will be deemed
given on the third business day following such mailing, and any notice given
by telecopier or telegram as provided herein will be deemed delivered on the
business day
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<PAGE>
following the transmission by telecopier or the delivery of such notice to
the telegraph company for transmission.
7.3 ATTORNEYS' FEES. In the event of a dispute between any or
all of the parties hereto, or in the event either party seeks to enforce this
Agreement, the prevailing or successful party in a court or arbitration
determination shall be entitled to have its reasonable attorneys' fees and
costs reimbursed by the other party.
7.4 GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of California and
performable in Orange County, California.
7.5 ENTIRE AGREEMENT. This Agreement contains all of the terms
and conditions agreed upon by the parties hereto with reference to the
subject matter hereof and supersedes any and all prior written or verbal
agreements. This Agreement may not be modified except by a written instrument
executed by both parties or their permitted successors in interest, if any.
Each and every term of this Agreement will be valid and enforced to
the fullest extent permitted by law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first above written.
/s/ JAMES N. ORTH
-------------------------------------
James N. Orth. (the "Employee")
AMERICAN FAMILY HOLDINGS, INC.
(the "Company")
By /s/ DAVID G. LASKER
-------------------------------------
David G. Lasker
President & Co-Chairman
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<PAGE>
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement"), dated as of August 29, 1997
made by and between American Family Holdings, Inc., a Delaware corporation,
having its principal offices at 4220 Von Karman, Suite 110, Newport Beach,
California 92660 (the "Company"), and L.C. "Bob" Albertson, Jr. (the
"Employee").
In consideration of the mutual promises and agreements set forth herein,
the parties agree as follows:
1. EMPLOYMENT. The Company will employ Employee, and Employee will
serve, as Executive Vice President of the Company pursuant to this Agreement.
Employee will report to the President and Chief Executive Officer of the
Company, and will, subject to his election or appointment as such, serve as a
member of the Board of Directors and any committee of the Board of Directors.
In addition, the Company will cause Employee to be elected President and Chief
Executive Officer, as well as a director, of American Family Communities, Inc.,
a to-be-formed, wholly-owned subsidiary of the Company ("AFC") and the following
to-be-formed companies which will be wholly-owned subsidiaries of AFC: Delta
Greens Homes, Inc., Yosemite Woods Family Resort, Inc., Oceanside Homes, Inc.,
and Mori Point Destinations, Inc. Subject to availability, the Company will
cause such subsidiaries to transfer to the Company such funds as may be
necessary for the Company to honor its obligations under this Agreement.
2. TERM OF EMPLOYMENT. The term of employment under this Agreement will
commence on the Effective Date of the Acquisition described in the Company's
registration statement to be filed on Form S-4 or SB-2 with the Securities and
Exchange Commission in the foreseeable future, and continue through December 31,
2000 (the "Initial Term"), provided that the Agreement shall automatically be
extended for one year at the end of 2000 and each year thereafter (the "Extended
Term") unless the Agreement is earlier terminated pursuant to its terms or the
Company provides Employee with a written notice not less than 90 days before the
end of a calendar year of its election not to have the automatic extension
provisions of this Agreement apply as specified in said notice.
3. COMPENSATION AND OTHER BENEFITS.
3.1 BASE SALARY. As compensation for his employment under this
Agreement, commencing as of the Effective Date of the Acquisition, the Company
will pay to Employee a signing bonus of $25,000 and a base salary of $200,000
per year ("Initial Base Salary") which, commencing January 1, 1999, shall
increase by $25,000 per year during the Initial Term ("Increased Base Salary").
Subject to normal withholding, any base salary will be payable twice monthly in
as equal installments as possible. It is understood that the Company may, at
the discretion of its Board of Directors, increase any such base salary. Any
Increased Base Salary payable during any year of an Extended Term shall be
increased, but not decreased, to reflect the percentage change increase in the
Consumer Price Index ("C.P.I.") applicable to Orange County
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that occurred in the year last past unless the Board's increase for the next
year, in its discretion, is in excess of the applicable C.P.I. increase for
such upcoming year. If the C.P.I. is discontinued or revised, the government
index replacing the C.P.I. shall be used for such calculations.
3.2 BONUS COMPENSATION. Employee shall be eligible for performance
bonus compensation equal to two percent ("Two Percent Performance Bonus") of the
"Company's Performance Base Income," as defined herein. The "Company's
Performance Base Income," as that term is used herein, shall be equal to the
Company's annual federal corporate taxable income as determined under the
Internal Revenue Code of 1986, as amended, as expressly modified herein and as
expressly adjusted in this Section for items not otherwise required to be
included in the Company's consolidated income for federal corporate income tax
purposes. The computation of the Company's federal corporate taxable income
shall not include a deduction for state corporate income or franchise taxes, net
operating loss carryovers (forward or back) and depreciation in excess of income
on real properties held for rental. In addition, the computation of the
Company's federal corporate taxable income for purposes of the Two Percent
Performance Bonus shall substitute the tax basis of any real property
contributed to the Company at the Effective Date of Acquisition to reflect its
then existing fair market value, which shall be defined as the appraised value
of each property utilized as the basis to calculate its Exchange Value as
determined in the registration statement of the Company to be filed with the
Securities and Exchange Commission. The Company's federal corporate taxable
income will be computed on a consolidated basis. The Company's Performance Base
Income, to the extent not required to be consolidated for federal corporate
income tax purposes or not otherwise includable in the Company's federal
corporate taxable income shall nevertheless include the income of any
subsidiary, partnership or entity to the extent of the Company's percentage
ownership in such entity, regardless of the number of tiers of entities that may
be involved and regardless of whether currently distributable or distributed.
Such bonus will be paid on or before the 90th day after the end of the Company's
applicable tax year ("Two Percent Performance Bonus Pay Date"). This bonus will
be paid only when the Company has sufficient reserves to fully and timely pay
all of its foreseeable operating debts as they become due. If the Company does
not have such sufficient reserves, the Company may delay payment of the Two
Percent Performance Bonus for two one-year periods; however, such amounts shall
bear interest at ten percent per annum from April 1 of the year in which the
payment was due until paid. Notwithstanding the foregoing to the contrary, the
Two Percent Performance Bonus will become absolutely payable no later than two
years after the Two Percent Performance Bonus Pay Date regardless of any other
condition including, but not limited to, the sufficiency of the Company's
working capital reserves. At the Board's discretion, should the Company achieve
the Board-Approved Business Plan Objectives, as herein defined, the Company may
grant Employee a separate but not additional bonus of up to 50% of Employee's
then existing base salary ("Base Salary Performance Bonus") if amounts have
either not been earned or are not to be paid as part of the Two Percent
Performance for the then applicable year. Said bonus shall be paid on or before
the 90th day after the end of the Company's applicable tax year.
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3.3 OTHER BENEFITS.
3.3.1 During the term of Employee's employment hereunder,
Employee (and his dependents where applicable) will be entitled to
participate and will be included in any employee benefit plans including but
not limited to any group health and life insurance, pension, profit sharing,
retirement, stock incentive or similar plans of the Company now existing or
established hereafter. Employee will also be covered by the Company's
directors and officers errors and omissions insurance. Employee's
participation in any of such plans shall be on terms not less advantageous
than those enjoyed by either of David G. Lasker or James N. Orth or if
neither of them are no longer employed by the Company, the Company's highest
ranking officer.
3.3.2 During the term of Employee's employment hereunder,
Employee will be authorized to incur and will be reimbursed by Company for all
reasonable business-related expenses, travel expenses (as if the Company was
headquartered in Orange County) and entertainment expenses incurred by Employee
to promote the business of the Company. Club dues and expenses will be covered
as agreed upon between Employee and the Company. In addition, the Company will
pay for, or reimburse Employee for, all mandatory continuing education required
to maintain professional licenses necessary to the Company's business, and the
costs of membership in all professional associations reasonably applicable to
the Company's business.
3.3.3 During the term of Employee's employment hereunder,
Employee will be entitled to 20 business days of vacation and ten business
days for illness during each full contract year of employment, determined on
a pro-rata basis for any partial contract year of employment during which
time Employee is not partially or fully disabled, provided that such vacation
will be arranged so that the Company may function at reasonable operating
levels during such vacation periods. Any vacation and/or sick days taken in
excess of that stated above in any calendar year shall require Board
approval. Any vacation and/or sick days not taken shall accrue and carry
over to the next contract year provided that, at the end of any calendar year
in which this Agreement is in effect, Employee may not have accrued any
unused vacation days aggregating in excess of 30 days. Any unused sick days
may accrue without limitation. Any such days not used upon termination shall
be paid at the rate of Employee's base salary under Section 3.1 hereunder.
3.3.4 If at any time during which Employee is a director,
executive officer or employee of the Company or any of its subsidiaries, the
Company proposes to file a registration statement under the Securities Act of
1933, as amended, relating to an underwritten or "best efforts" public offering
of Common Stock of the company, other than an offering by the Company in which
no selling stockholders participate, at least 30 days before filing that
registration statement, the Company will notify Employee of the Company's
intention to file the registration statement and the Company will include in
the registration statement any shares of the Company's Common Stock then owned
by Employee or an entity with which Employee is affiliated which Employee
requests be included in the registration statement on the same terms and
conditions as the other shares being sold, up to such number of Employee's
shares as the managing underwriter or selling agent, if any, of the proposed
public offering states in writing to
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Employee to be the maximum number of Employees' shares which the managing
underwriter or selling agent, if any, has determined can be included in the
public offering without adversely affecting the sale of the other shares to
which the registration statement relates. If Employee, as well as affiliates
of David G. Lasker and/or James N. Orth, desire to include shares in a
registration statement, and if the managing underwriter or selling agent
determines that the number of shares to be offered by selling shareholders
must be reduced, any such reduction that affects Employee, Mr. Lasker and/or
Mr. Orth shall be made pro-rata among them in accordance with the number of
shares each beneficially holds in the Company at the time of the pro-ration.
3.4 SALARY AND BENEFIT CONTINUATION. The Company will continue to
pay to Employee compensation as provided in Section 3.1 hereunder at the full
rate for a period of six months after Employee is declared permanently and
totally disabled and unable to perform the duties of Executive Vice President of
the Company. Thereafter, the Company will pay to Employee 25% of Employee's
annual salary as provided in Section 3.1 hereunder for an additional 12
consecutive months or until the regular expiration (without regard to any
automatic extension) of this Agreement, whichever is earlier. Furthermore, in
the event of such permanent and total disability, the benefits described in
Section 3.3.1 will continue as if Employee had continued to render services
pursuant to this Agreement throughout its term, and the benefits described in
Section 3.3.4 will continue in accordance with the terms of this Agreement.
For purposes of this Section, the determination of whether or not
Employee is declared permanently and totally disabled shall be made by
Employee's physician, by written notice to the Board of Directors. In the event
the Board of Directors disagrees with the determination by Employees' physician,
the Board of Directors will appoint, at the Company's expense, another physician
to make such determination. If the physician so appointed by the Board of
Directors disagrees with the determination made by Employee's physician, then
the two physicians shall appoint a mutually acceptable third physician, at the
Company's expense, to make the final determination of whether Employee is
permanently and totally disabled, which determination will be binding upon all
parties hereto.
3.5 CHANGE OF CONTROL COMPENSATION. If, pursuant to Section 5.2
hereof, Employee terminates this Agreement within six months of a Change of
Control (as defined in Section 6.1 hereof), as severance pay and in lieu of any
further salary for periods subsequent to the date of termination, Employee shall
receive 2.99 times the sum of all amounts (collectively, "Change of Control
Compensation") paid to Employee pursuant only to Sections 3.1 and 3.2 hereof
during the five complete calendar years preceding the calendar year during
which the Change of Control occurs (or such lesser number of calendar years in
the event Employee has been employed by the Company for fewer than five such
calendar years) divided by five (or such lesser number in the event Employee has
been employed by the Company for fewer than five such calendar years). The
following provisions shall apply for purposes of this Section 3.5:
(a) The Change of Control Compensation paid to Employee during
any partial calendar years of employment shall be annualized, and such
annualized year shall be treated as a full calendar year.
4
<PAGE>
(b) Amounts payable to Employee pursuant to this Section 3.5
shall be paid without interest in 18 equal monthly installments (less applicable
withholding) commencing on the first day of the first month after Employee's
termination occurring after a Change of Control.
(c) The amounts payable pursuant to this Section 3.5 shall not
be reduced, offset or subject to recovery by the Company by reason of any
amounts earned by Employee as the result of employment by another employer after
the date of termination, or otherwise.
(d) Any Change of Control Compensation due to Employee from the
Company shall also include any stock options not yet granted pursuant to Section
3.9 hereunder.
3.6 LIMITATION ON CHANGE OF CONTROL COMPENSATION. Notwithstanding
Section 3.5 hereof, if any portion of the Change of Control Compensation
provided for in this Agreement, would constitute a "parachute payment" (as
defined in Section 280G(b)(2) of the Internal Revenue Code), the payments and
benefits due to the Employee shall be reduced, in such order of priority and
amount as the Employee shall elect, to the largest amount as will result in no
portion of such payments being subject to the excise tax imposed by Section 4999
of the Internal Revenue Code. Notwithstanding anything in the foregoing to the
contrary, any dispute or controversy regarding whether any payments under this
Agreement must be reduced pursuant to this Section 3.6 shall be settled by an
independent accounting firm acceptable to each of the parties hereto, or, if no
such firm is acceptable to each party, each of the Employee and the Company
shall select an accounting firm acceptable to it, and such accounting firms
shall together designate an independent accounting firm to settle such dispute
or controversy, and such settlement shall be binding upon both parties. The
Company may withhold from any benefits payable under this Agreement all federal,
state, city or other taxes as shall be required pursuant to any law or
governmental regulation or ruling.
3.7 AUTO AND CELL PHONE EXPENSES. The Company shall pay to Employee
$500 per month as an automobile allowance, and shall reimburse Employee for
service, maintenance and business use gasoline charges. In addition, the
Company shall reimburse Employee for the monthly service charges for one
cellular telephone and the charges for reasonable business use of the cellular
telephone.
3.8 REPURCHASE OF STOCK BY THE COMPANY. The Company shall be
required to repurchase, at Employee's election, all or a portion of the
Company's shares owned by Employee at the commencement of this Agreement at
their fair market value as specified in Section 3.8.1. Further, the Company
shall have the option to repurchase, at the Company's election, all or a portion
of the Company's shares owned by Employee at the commencement of this Agreement
at the price Employee paid for such shares as specified in Section 3.8.2
5
<PAGE>
3.8.1 AT FAIR MARKET VALUE
(a) If (i) Employee is terminated without "Cause" (as
defined in Section 5.1(a)) during the Term, (ii) Employee terminates his
employment within six months of a Change of Control (as defined in Section 6.1),
(iii) Employee terminates his employment within one year of a Change in
Location (as defined in Section 6.2), or (iv) Employee terminates his employment
as a result of the Company's breach of this Agreement within 3 months of said
breach, then Employee may require the Company (to the extent that it is legally
able to do so) to repurchase all or a portion of the Company's shares owned by
Employee at the commencement of this Agreement at a per share price equal to
Fair Market Value (as defined in Section 3.9). This right may be exercised only
once and, if not exercised, will lapse 90 days after Employee's termination for
the reasons specified in this section above.
(b) Employee may exercise his right under Section 3.8.1 by
giving the Company written notice of his intent to require the Company to
purchase a specified number of shares, stating in such notice a date (not less
than 10 nor more than 30 days from the date of the notice) when Employee or his
agent will deliver the appropriate stock certificate(s) to the Company or its
transfer agent, duly endorsed for transfer, against payment by certified or
cashier's check.
(c) Notwithstanding the provisions of Sections 3.8.1 and
3.8.2, the Company will be required to immediately and fully pay for the
purchased shares from Employee only if the Company has sufficient reserves to
fully and timely pay all of its debts as they become due. The Company may delay
payment for the shares for up to two one-year periods; however, such delayed
payments shall bear interest at ten percent per annum from the date deferred
payment is elected by the Company until paid.
3.8.2 AT PRICE EMPLOYEE PAID. If the Employee is terminated
for "Cause" (as defined in Section 5.1(a)) during the Term of this Agreement, or
if Employee voluntarily terminates his employment as set forth in Section 5.2(a)
hereof, the Company shall have the right, but not the obligation, to purchase
the Company's shares owned by Employee at the commencement of this Agreement as
follows:
Amount of Employee's
Common Stock If Terminated Before
------------ --------------------
Up to 75% January 1, 1999
Up to 50% January 1, 2000
Up to 25% End of Initial Term
The purchase price per share shall be the price per share that
Employee paid for the stock. This right will lapse if not exercised within 30
days of Employee's termination.
6
<PAGE>
3.9. STOCK OPTIONS. As of the Effective Date of the Acquisition, and
on the first and second anniversaries thereof, in addition to any options
granted to Employee pursuant to the Company's 1997 Stock Option and Incentive
Plan, the Employee shall be granted the following options to purchase the
Company's common stock:
Date of Grant Number of shares Exercise Price/Share
------------- ---------------- --------------------
Acquisition Effective Date 10,000 $10.00
First Anniversary of 10,000 Fair Market Value
Acquisition Effective Date
Second Anniversary of 10,000 Fair Market Value
Acquisition Effective Date
"Fair Market Value" shall be the closing price of the Company's common
stock on the national exchange on which it is traded on the trading day before
the options are granted. If the Company's common stock is not traded on a
national exchange, Fair Market Value shall be determined in good faith by the
Board of Directors.
Each group of options will be exercisable as follows: 3,333 shares
immediately, 3,333 shares on the first anniversary of grant; and 3,334 shares on
the second anniversary of grant. If the Company does not renew this Agreement
after the end of the Initial Term, unvested options granted herein shall vest on
the expiration of the Initial Term. To the extent not exercised, options
granted pursuant to this Section 3.9 shall expire ten years from the date of
grant.
The options granted hereby shall not be transferrable without the
consent of a majority of the Board of Directors of the Company; provided that
such options may be transferred by will or to a revocable living trust for
estate planning purposes. If any options are so transferred, they will not be
transferred by the transferee without the written consent of the Board of
Directors.
4. NON-COMPETITION/UNFAIR COMPETITION.
4.1 NON-COMPETITION. During the term of Employee's employment under
this Agreement, Employee will not knowingly, directly or indirectly, engage or
participate in any business that is in competition with the business of the
Company. The foregoing obligation of Employee not to compete with the Company
shall not prohibit (i) Employee from owning or purchasing any corporate
securities of any corporation or other entity that are regularly traded on a
recognized stock exchange or over-the-counter market so long as Employee does
not own, in the aggregate, five percent or more of the voting equity securities
of any such corporation or other entity, or (ii) Employee from continuing to own
interests in existing real estate projects in which he has investments.
7
<PAGE>
4.2 UNFAIR COMPETITION. The Company treats certain information as
confidential information (the "Confidential Information"). Employee
acknowledges and agrees that the sale or unauthorized use or disclosure of any
Confidential Information obtained by Employee during his employment with the
Company constitute unfair competition. Employee promises and agrees not to
engage in unfair competition with the Company during the term of this Agreement
and thereafter.
5. TERMINATION PROVISIONS.
5.1 TERMINATION BY COMPANY. This Agreement may be terminated by the
Company only as provided in this Section and for no other cause or reason:
(a) The Company may terminate Employee's employment under this
Agreement upon 90 days' advance written notice by a vote of the Board of
Directors (excluding Employee but including a majority of the non-employee
directors). If such termination is other than for "Cause" (as defined herein),
the Company will pay to Employee (or his estate) the then applicable base salary
Employee would have been entitled to receive under Section 3.1 hereunder for the
remaining term of this Agreement, regardless of re-employment, if any, as if
Employee's employment had continued in full through the termination date then in
effect (without giving effect to any future automatic annual extensions) and
Employee had rendered services through that date, payable as and when such
salary would have been due but no less than one year's salary as of the date of
termination. If such termination is for "Cause" (as defined herein), to the
extent permitted by law, Employee's compensation and benefits shall terminate as
of the date the termination becomes effective. For purposes of this Agreement,
"Cause" shall mean and be limited to the following events: (i) an act of fraud,
embezzlement or similar conduct by Employee involving the Company; (ii) any
action by Employee involving the arrest of Employee for violation of any
criminal statute constituting a felony or misdemeanor involving moral turpitude
if the Board reasonably determines that the continuation of Employee's
employment after such event would have an adverse impact on the operations of
the Company or its reputation in the financial community; (iii) gross misconduct
or habitual negligence in the performance of Employee's duties; (iv) an act
constituting employment discrimination, sexual harassment or a breach of
Employee's fiduciary duty to the Company under the Delaware General Corporation
Law; (v) a continuing, repeated willful failure or refusal by Employee to
perform his duties; provided, however, that termination shall not be deemed to
be for Cause under this subclause (v) unless Employee shall have first received
written notice from the Board advising Employee of the specific acts or
omissions alleged to constitute a failure or refusal to perform and such failure
or refusal to perform continues after Employee shall have had a reasonable
opportunity to correct the acts or omissions cited in such notice; or (vi)
competition by Employee with the Company or its subsidiaries in violation of
Section 4 thereof.
(b) Except to the extent necessary to give effect to
Sections 5.1(a) and 5.2, this Agreement will terminate upon the death of
Employee.
8
<PAGE>
(c) Except as otherwise provided in Section 3.4, this Agreement
will terminate as of the date Employee is declared permanently and totally
disabled and unable to perform the duties assigned to him.
(d) If the Company terminates this Agreement, Employee's
employment relationship with any of the Company's subsidiaries shall be deemed
terminated as of the same time.
5.2 TERMINATION BY EMPLOYEE. This Agreement may be terminated by
Employee upon 30 days' prior written notice as set forth below:
(a) If Employee's termination is voluntary and not for any of
the reasons set forth in Sections 5.2(b) or (c), the Company shall have no
further liability to Employee upon such termination except those liabilities
that might arise with respect to the Company's stock under Section 3.9 hereof.
(b) If Employee's termination occurs within one year from the
Company's breach of the Agreement, or occurs within one year of a Change of
Location (as defined in Section 6.2), Employee's compensation shall be
determined under Section 5.1(a) as if such termination was without "Cause."
(c) If Employee's termination occurs within six months from a
Change of Control (as defined in Section 6.1), Employee's compensation will be
governed by Section 3.5 hereof. If negotiations that result in a Change of
Control are occurring with less than 6 months remaining until the end of the
Initial Term or any Extended Term of this Agreement, then the provisions
governing Employee's Change of Control Compensation under this Section 5.2 and
Section 3.5 hereof shall survive this Agreement.
6. DEFINITIONS.
6.1 CHANGE OF CONTROL. For purposes of this Agreement, a Change of
Control of the Company shall mean any of the following events:
(a) A sale of 50% or more of the Company's common stock
beneficially owned by David G. Lasker or James N. Orth, and their respective
affiliates, to a single person or entity in which sale Employee is not offered
an opportunity to sell his common stock in the Company to such person or entity
on the same basis as Mr. Lasker or Mr. Orth, or their respective affiliates;
(b) The acquisition by any person or entity, including any
current shareholder of the Company, working in concert with David G. Lasker or
James N. Orth, of securities of the Company resulting in such person's owning of
record or beneficially 40% or more of the voting securities of the Company in
which transaction Employee does not participate;
9
<PAGE>
(c) A merger, consolidation or other combination, or sale of
substantially all of the assets of the Company, the result of which is either
(A) the ownership by shareholders of the Company of less than 51% of the voting
securities of the resulting or acquiring entity having the power to elect a
majority of the Board of such entity and the power to preserve such power to
elect, or (B) the Company having no substantial operating business; or
(d) A change in the membership in the Board which, taken in
conjunction with any other prior or concurrent changes, results in 50% or more
of the Board's membership being persons not nominated by management in the
Company's then most recent form of nomination, excluding changes resulting from
substitutions for retirement or death or for removal or resignation due to
demonstrated disability.
Notwithstanding anything in the foregoing to the contrary, no Change
of Control shall be deemed to have occurred for purposes of this Agreement by
virtue of any transaction which results in the Employee, or a group of persons
or entity which includes the Employee, acquiring, directly or indirectly, 40% or
more of any class of voting securities of the Company.
For purposes of Section 6.1, the terms "person" and "beneficial owner"
have the meanings set forth in Regulation 13D under the Securities Exchange Act
of 1934, as such Regulation exists on the date hereof, and the term "voting
security" includes any security that has, or may have upon an event of default
or in respect to any transaction, a right to vote on any matter upon which the
holder of any class of common stock of the Company would have a right to vote.
For purposes of subsection (a) through (d) above, such Change of
Control shall include any such applicable lesser standard prescribed by Section
280(G) of the Internal Revenue Code or regulations issued or proposed thereto.
6.2 CHANGE IN LOCATION. For purposes of this Agreement, the term
"Change of Location" means any change of the headquarters operations of the
Company to a place outside of Orange County, California, or the requirement that
Employee spend more than 50% of his business time for the Company at locations
outside of Orange County, California.
7. AMERICAN FAMILY COMMUNITIES, INC. ("AFC")
7.1 Real estate operations shall be conducted by AFC or such entities
as the Company's Board determines to be appropriate.
7.2 Subject to the direction of Affects Board of Directors,
Employee's responsibilities shall include but not be limited to having authority
over staff selections, compensation and terminations provided (i) consultation
has been conducted with and consideration given to any input from David Lasker
and James Orth, and (ii) the total annual dollar amounts for such staff
compensation are reasonably within the short- and long-term business plans
developed under the direction of Employee and approved by the AFC Board and
(iii) members of the staff are reasonably qualified to fill the positions for
which they are hired.
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<PAGE>
7.3 Employee shall consult with and appropriately integrate any input
from David Lasker and James Orth in order to be accountable for the development
of short-term and long-term business plans and budgets relating to AFC and its
subsidiaries. Employee shall be responsible for presenting such plans and
budgets to AFC's Board, which may direct Employee to develop alternate business
or development plans, make adjustments to previously approved plans or direct
Employee to hire outside consultants to do the same under Employee's direction.
All such planning ("Approved Business Plan Objectives") shall be under the
direction of the Employee subject to on-going consultation with David Lasker and
James Orth and the approval of AFC's Board.
8. INDEMNIFICATION. As an officer, and if so elected, a director, of the
Company and any of its subsidiaries or affiliates, Employee shall be
indemnified by the Company and any of its subsidiaries or affiliates to the
fullest extent permitted by applicable law. To the extent necessary and
permissible, such indemnification will protect Employee from prior operations of
properties acquired by the Company or any of its subsidiaries or affiliates.
9. OTHER PROVISIONS.
9.1 NOTICES. All notices, requests, demands and other communications
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given if personally delivered or sent by telecopier or
sent by prepaid telegram or first class mail, postage prepaid, registered or
certified, as follows:
If to Employee: L.C. "Bob" Albertson, Jr.
1811 2 West Bay Ave.
Newport Beach, Ca. 92663
If to Company: 4220 Von Karman Avenue
Suite 110
Newport Beach, California 92660
Attention: President
Either party may change the address to which such communications are
to be delivered by giving written notice to the other party. Any notice
personally given will be deemed received upon delivery to the address
designated, any notice by mail as provided in this paragraph will be deemed
given on the third business day following such mailing, and any notice given by
telecopier or telegram as provided herein will be deemed delivered on the
business day following the transmission by telecopier or the delivery of such
notice to the telegraph company for transmission.
9.2 ATTORNEYS' FEES. In the event of a dispute between any or all of
the parties hereto, or in the event either party seeks to enforce this
Agreement, the prevailing or successful party in a court or arbitration
determination shall be entitled to have its reasonable attorneys' fees and costs
reimbursed by the other party.
11
<PAGE>
9.3 GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed by, the laws of the State of California and performable in
Orange County, California.
9.4 ENTIRE AGREEMENT. This Agreement contains all of the terms and
conditions agreed upon by the parties hereto with reference to the subject
matter hereof and supersedes any and all prior written or verbal agreements.
This Agreement may not be modified except by a written instrument executed by
both parties or their permitted successors in interest, if any.
Each and every term of this Agreement will be valid and enforced to
the fullest extent permitted by law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first above written.
/s/ L.C. "BOB" ALBERTSON, JR.
-----------------------------------------
L.C. "Bob" Albertson, Jr.
(the "Employee")
AMERICAN FAMILY HOLDINGS, INC.
(the "Company")
By /s/ DAVID G. LASKER
-------------------------------------
David G. Lasker
President & Co-Chairman
12
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made as of the Effective Date
of the Acquisition described in the registration statement on Form S-4 of
American Family Holdings, Inc., filed with the Securities and Exchange
Commission (File No. 333-37161) on October 3, 1997, by and between American
Family Holdings, Inc. (hereinafter referred to as "AFH" or the "Company") at
4220 Von Karman Avenue, Suite 110, Newport Beach, California 92660, and Mark
Kawanami, at 17 Carlina, Irvine, California 92620 (the "Employee").
The parties agree as follows:
1. EMPLOYMENT/TERM. AFH will employ Employee as Vice President of
Finance. AFH will also cause Employee to be employed as Vice President of
Finance for American Family Communities, Inc. ("AFC") when it is formed.
Employee will be based in Newport Beach, California, at AFH's offices and
will report directly to Bob Albertson, Executive Vice President of American
Family Holdings, Inc. As Vice President, Employee will be responsible for
all finance, accounting and reporting issues and internal controls. It is
understood and accepted that job functions and responsibilities may be
modified by the Board of Directors as the business objectives of AFH and AFC
evolve over the next year. The term of this Agreement is from the Effective
Date of the Acquisition through December 31, 1998 and renewable yearly
thereafter.
2. BASE COMPENSATION. The annual base salary for the year will be
$100,000. This salary is payable bi-monthly in accordance with AFH's
standard payroll procedures. Within 60 days, prior to the expiration of this
contract, the Company and Employee agree to discuss contract renewal.
3. INCENTIVE BONUS COMPENSATION. Employee will be eligible to receive
incentive bonus compensation in an amount up to 20% of base salary which will
be based upon specific performance criteria. Ten percent of this bonus shall
be discretionary by the Company, ten percent of this bonus shall be
non-discretionary. This will be due and payable within 90 calendar days of
the term of this agreement and after the completion of the Company=s audited
financial statements for the prior year. The performance criteria are set
forth on Schedule A attached hereto.
4. FOUNDERS STOCK. Employee shall purchase 1,000 shares of stock at
$0.01 per share.
5. STOCK OPTIONS. Employee is hereby granted options to purchase
5,000 shares of Company common stock which will be exercisable for a period
of ten years for $10 per share. The options shall vest at the rate of 25%
every three months commencing on the first day of the first full month after
the Effective Date of the Acquisition. Any unexercised options shall lapse
should Employee resign or be terminated for "Cause" (as hereinafter defined).
<PAGE>
6. BUSINESS EXPENSES. All corporate travel, hotels, meals and
entertainment and other business expenses including reasonable cellular
telephone charges will be paid for by the Company. Itemization and business
expense forms with original receipts will be turned in monthly for
reimbursement. AFH will cover any reasonable costs for any professional
seminars and conferences attended, as well as professional organizational
memberships and dues.
7. BENEFITS. As an employee of the Company, Employee will receive, at
the Company's cost, medical benefits that the Company offers to its employees.
8. VACATION. Employee will receive two weeks of paid vacation for the
term of this Agreement. He will also be eligible to receive paid sick leave
and all legal holidays in accordance with AFH's policies and procedures.
9. EXCLUSIVE EMPLOYMENT/INDEMNIFICATION. Employee will devote all
working time to the Company and will not have interests which conflict with
duties or a full-time employment commitment to the Company. He will be
covered under AFH's Directors and Officers liability insurance policy and
will be indemnified to the maximum extent permitted by applicable law.
10. CONFIDENTIALITY. Employee agrees not to reveal the Company's trade
secrets or confidential information, or any part thereof, to any person or
firm before, during or after the term of employment. The Company will be
entitled to an injunction restraining Employee from disclosing same, or from
rendering any service to any entity to whom said information has been or
threatened to be disclosed. The right to secure an injunction is not
exclusive, and the Company may pursue any other remedies it has against
Employee for a breach or threatened breach of this condition, including
recovery of damages.
11. TERMINATION. In the event the Company terminates Employee for any
reason other than for "Cause" (as defined below) or his inability to perform
his functions and duties outlined herein for a period of 90 consecutive days
during the term hereof (exclusive of vacation time), Employee will receive a
severance payment equal to six months salary and any amounts owing under
incentive bonus, and the stock option arrangement then in effect, providing
Company has the working capital for such payment. In the event the Company
does not have sufficient working capital to make such payment, then the
Company and the Employee shall work out a monthly payment plan whereby the
severance amount will be paid in its entirety within a six-month period of
termination. This severance payment will represent a complete satisfaction of
all amounts due from the Company upon termination other than for "Cause" or
inability to perform his duties.
The Company may terminate Employee's services at any time for "Cause."
In such event, except for accrued but unpaid amounts of compensation due to
Employee, the obligation of the Company to pay Employee the compensation due
under this Agreement will terminate upon the date of his termination of
services. "Cause" shall mean and be limited to the following events: (i) an
act of fraud, embezzlement or similar conduct by Employee involving the
Company; (ii) any action by Employee involving the arrest of Employee for
violation of any criminal statute
<PAGE>
constituting a felony or misdemeanor involving moral turpitude if the Board
reasonably determines that the continuation of Employee's employment after
such event would have an adverse impact on the operations of the Company or
its reputation in the financial community; (iii) gross misconduct or habitual
negligence in the performance of Employee's duties; (iv) an act constituting
employment discrimination, sexual harassment or a breach of Employee's
fiduciary duty to the Company under the Delaware General Corporation Law; (v)
a continuing, repeated willful failure or refusal by Employee to perform his
duties; provided, however, that termination shall not be deemed to be for
Cause under this subclause (v) unless Employee shall have first received
written notice from the Board advising Employee of the specific acts or
omissions alleged to constitute a failure or refusal to perform and such
failure or refusal to perform continues after Employee shall have had a
reasonable opportunity to correct the acts or omissions cited in such notice;
or (vi) competition by Employee with the Company or its subsidiaries in
violation of Section 4 thereof.
The Company may terminate Employee's services if Employee has been unable
to perform his duties for a period of 90 consecutive days (exclusive of vacation
time). In such event, Employee will be entitled to one month's severance plus
three months of medical benefits, after which the Company will have no further
obligation to Employee.
12. MISCELLANEOUS.
(a) The failure to enforce any provision of this Agreement will not
be construed as a waiver for any such provisions nor prevent a party thereafter
from enforcing the provision or any other provisions of this Agreement. The
rights granted the parties are cumulative, and the election of one will not
constitute a waiver of such party=s right to assert all other legal and
equitable remedies available under the circumstances.
(b) All notices, requests, demands and other communications hereunder
will be in writing, and will be deemed to have been duly given if delivered or
mailed, certified mail, first class, postage prepaid, as follows:
To the Company: Messrs. Bob Albertson, David Lasker & Jim Orth
American Family Holdings, Inc.
4220 Von Karman Avenue
Suite 110
Newport Beach, California 92660
To Employee: Mr. Mark Kawanami
17 Carlina
Irvine, California 92620
(c) This Agreement will not be assignable by either party.
<PAGE>
(d) The provisions of this Agreement are severable. If any
provisions of this Agreement will be held to be invalid or otherwise
unenforceable, in whole or in part, the remainder of the provisions or
enforceable parts thereof will not be affected thereby and will be enforced in
the fullest extent permitted by law.
(e) This Agreement supersedes all prior agreements and understandings
between the parties, oral or written. No modification, termination or attempted
waiver will be valid unless in writing and signed by the party against whom such
modification, termination or waiver is sought to be enforced.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original but all of which together
will constitute one and the same instrument.
(g) All parties hereto each covenant to cooperate and use their best
efforts to effect the provisions and intent of this Agreement, and each party,
in whatever capacity is appropriate, hereby agrees to promptly execute, deliver
or receive, as the case may be, all documents, amendments, and other
instruments, and to take all actions required by such other party, as are
necessary or desirable to carry out the provisions or intent of this Agreement.
(h) This Agreement and all questions as to its interpretation,
performance and enforcement and the rights and remedies of the parties hereunder
will be determined in accordance with the laws of the State of California.
Should any provision contained in this Agreement violate the laws of any state
in which this Agreement is to be performed, that provision will be deemed void
to the extent such law is so violated without invalidating any other provision
contained herein. The parties hereto mutually and knowingly agree that any suit
arising out of or relating to this Agreement will be filed and adjudicated
exclusively by a court in Orange County, State of California. In the event of
any dispute or controversy or legal action of any kind concerning the terms of
this Agreement, the prevailing party will be entitled to all reasonable
attorneys' fees and costs relating thereto.
The foregoing is understood, agreed to and accepted:
AMERICAN FAMILY HOLDINGS, INC.
By
---------------------------------------
Bob Albertson, Executive Vice President
-------------------------------------------
Mark Kawanami, Employee
<PAGE>
SCHEDULE A
INCENTIVE BONUS PERFORMANCE CRITERIA
[to come]
<PAGE>
EXHIBIT 23.11
CONSENT OF INDEPENDENT AUDITORS
To the Stockholders and Directors of
American Family Holdings, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-4 of our report dated February 24, 1998,
relating to the financial statement of American Family Holdings, Inc., as of
December 31, 1997; and our reports dated February 24, 1998 relating to the
financial statements of the Oceanside Program, the Yosemite/Ahwahnee Programs,
the Mori Point Program and the Sacramento/Delta Greens Program for each of the
two years in the period ended December 31, 1997, which are contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus
BDO Seidman, LLP
/s/ BDO Seidman, LLP
Los Angeles, California
March 27, 1998
<PAGE>
EXHIBIT 23.12
CONSENT
The undersigned hereby consents to the filing of its amended Fairness
Opinion as an exhibit to the registration statement on Form S-4 filed by
American Family Holdings, Inc. with the Securities and Exchange Commission (the
"Registration Statement") and to the reference to us under the caption
"Appraisals and Fairness Opinion" in the prospectus which is a part of the
Registration Statement.
Dated: March 27, 1998
HOULIHAN VALUATION ADVISORS
By /s/ Bret Tack
Print Name Bret Tack
Title Principal
<PAGE>
EXHIBIT 99.1
SCHEDULE E
Schedule E shows, as of December 31, 1997, properties acquired by "Trudy Pat"
programs in the three most recent years through foreclosure of defaulted loans
or acceptance of a deed in lieu of foreclosure of defaulted loans. None of the
programs have investment objectives similar to those of the Company.
Prospective investors should be aware that the results of these programs are not
necessarily indicative of the potential results of the Company.
<TABLE>
<CAPTION>
Yosemite/Ahwahnee I Yosemite/Ahwahnee II
<S> <C> <C>
1. Name, location and type of property 660 acres located in Madera 990 acres located in Madera
County, California. County, California.
Improvement consisted of 47 Improvements consisted of
finished lots with roads an 18-hole golf course with
and utilities.(1) clubhouse, pro shop,
recreational vehicle area
with roads and utilities.(1)
2. Date of foreclosure September 19, 1995 September 19, 1995
3. Balance of loan due including
interest accrued through foreclosure
date $ 7,954,629 $ 17,383,470
4. Acquisition price(2) $ 7,954,629 $ 17,383,470
5. Foreclosure costs expensed $ 19,113.49 $ 38,226.99
6. Foreclosure costs capitalized None None
7. Total acquisition costs(3) $ 19,113.49 $ 38,226.99
</TABLE>
(1) These parcels are adjacent to each other.
(2) Same as balance of loan due plus accrued interest through foreclosure date.
(3) Total of lines 5 and 6.
<PAGE>
EXHIBIT 99.1
SCHEDULE E (continued)
<TABLE>
<CAPTION>
Cypress Lakes
<S> <C>
1. Name, location and type of property 1,330 acres located in Contra Costa County,
California. Planned for a golf course and
1,330 residential units
2. Date of foreclosure July 14, 1995
3. Balance of loan due including interest
accrued through foreclosure date $ 18,183,404
4. Acquisition price(2) $ 18,183,404
5. Foreclosure costs expensed $ 31,783.18
6. Foreclosure costs capitalized None
7. Total acquisition costs(3) $ 31,783.18
</TABLE>
