<PAGE>
As filed with the Securities and Exchange Commission on August 3, 1998
Registration No. 333-37161
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 5
to
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------
AMERICAN FAMILY HOLDINGS, INC.
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
(Address of principal executive offices)
David G. Lasker, President
American Family Holdings, Inc.
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
(Name and address of agent for service)
Copy to:
David R. Decker, Esq.
Arter & Hadden LLP
700 South Flower Street, 30th Floor
Los Angeles, California 90017
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- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Title of Amount Proposed Maximum
Securities Being Being Maximum Offering Aggregate Amount of
Registered Registered Price Per Offering Price Registration
Share or Unit(1) Fee(2)
<S> <C> <C> <C> <C>
Units(3) 1,658,000(4) $ 20.00 33,160,000 9,782.20
Common Stock 4,974,000(5) $ 16.00 79,584,000 23,477.28
TOTAL 6,632,000 $112,744,000 $ 33,259.48(6)
</TABLE>
(1) $20 is an arbitrary amount chosen and is not intended to imply that the
Common Stock will trade at a price of $20 per share.
(2) The registration fee for the common stock and the units to be issued in
this offering has been calculated using the maximum number of shares and
Units that can be issued in this offering. The registration fee for the
common stock issuable upon exercise of the warrants has been calculated
pursuant to Rule 457(i) assuming that all of the warrants would be
exercised at a price equal to 80% of the offering price of the other common
stock issued in this offering.
(3) Units consist of one share of Common Stock and warrants to purchase three
shares of Common Stock at a per share price equal to 80% of the closing
price on the trading date before exercise.
(4) Includes 250,000 units to be available for contingent issuance to certain
investors.
(5) Issuable upon exercise of the warrants included in the Units.
(6) $9,220.88 paid with original S-4 filing. $23,438.60 net due.
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM OF FORM S-4 PROSPECTUS CAPTION OR LOCATION
<S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Cover
Page of Prospectus...................................... Cover of Registration Statement; Cross-Reference
Sheet; Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page of
Prospectus............................................. Prospectus Summary; Reports to Shareholders
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information...................................... Prospectus Summary; Risk Factors; Business
and Properties; Background and Reasons for
the Acquisition
4. Terms of The Transaction............................... Prospectus Summary; Background and Reasons
for the Acquisition; Comparison of Tenancy-
in-Common Interests and Shares;
Comparisons of Programs and Company;
Description of Shares; 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
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
(continued)
<CAPTION>
ITEM OF FORM S-4 PROSPECTUS CAPTION OR LOCATION
<S> <C>
14. Information with Respect to Registrants other than S-3
or S-2 Registrants...................................... Prospectus Summary; Business and
Properties; Selected Financial
Information; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3
Companies............................................... Not Applicable
16. Information with Respect to S-2 or
S-3 Companies........................................... Not Applicable
17. Information with Respect to
Companies other than S-3 or S-2
Companies............................................... Prospectus Summary; Business and
Properties; Background and Reasons
for the Acquisition; Selected
Financial Information; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Financial Statements
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations are
being Solicited ........................................ Prospectus Summary; Voting
Procedures; Interests of Certain
Persons in the Acquisition;
Principal Shareholders; Management
Following the Acquisition
19. Information if Proxies, Consents or
Authorizations are Not to be
Solicited or in an Exchange Offer ...................... Not Applicable
</TABLE>
<PAGE>
IF YOU ARE AN INVESTOR IN ANY OF THE FOLLOWING, YOUR VOTE IS VERY
IMPORTANT
<TABLE>
<S> <C>
SACRAMENTO/DELTA GREENS "TRUDY PAT" PROGRAM CYPRESS LAKES "TRUDY PAT" PROGRAM
OCEANSIDE "TRUDY PAT" PROGRAM PALMDALE/JOSHUA RANCH "TRUDY PAT" PROGRAM
YOSEMITE/AHWAHNEE I "TRUDY PAT" PROGRAM ESPERANZA PROGRAM
YOSEMITE/AHWAHNEE II "TRUDY PAT" PROGRAM STACEY ROSE PROPERTIES A PROGRAM
MORI POINT "TRUDY PAT" PROGRAM STACEY ROSE PROPERTIES B PROGRAM
</TABLE>
AMERICAN FAMILY HOLDINGS, INC.
- - PROPOSED ACQUISITION OF PROGRAM PROPERTIES
American Family Holdings, Inc. (the "Company") is offering units
consisting of one share of its stock plus warrants to buy three additional
shares in exchange for the assets (including cash on hand), certain
liabilities and business activities owned by investors in seven former "Trudy
Pat" programs and three other programs managed by National Investors
Financial, Inc. ("National"). For this proposed acquisition, the Company will
pay $[28,066,419] in the form of [1,403,321] units arbitrarily valued at $20
per unit. The units will be listed for trading on the ___________ under the
symbol "___." A unit consists of one share of common stock and warrants to
purchase three additional shares. 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, eliminate the
assessment process, focus on revenue-generating potential, improve efficiency
of operation in order to reduce costs and increase profit potential, and
provide the investors with 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 SEVEN "TRUDY PAT" PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION IN
ORDER FOR IT TO TAKE PLACE BUT THE OTHER THREE DO NOT. If the acquisition is
approved by the investors in all seven of the "Trudy Pat" programs, investors
holding a majority of the amount invested in each of the other three programs
may elect on a program-by-program basis whether to participate in the
acquisition.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation of votes started on _______, 1998 and expires at 5:00
p.m., pacific time, on __________, 1998 unless extended. Call 1-800-590-7772
with questions.
SPECIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - If a trading market develops, the initial trading price for the stock
will likely be substantially below the arbitrary value of $20 per unit
assigned for purposes of the acquisition. Thus, the value of the units you
receive may be less than you might receive if the property of your program
were sold for its current appraised value.
- - Principal stockholders of National and the executive officers of the
Company will hold approximately [16.42]% (4.78% if all warrants are
exercised) of the Company's stock for which they paid $0.01 per share and
will receive annual cash compensation aggregating $[560,000] as officers and
employees of the Company.
<PAGE>
National will be relieved of its asset management obligations and will no
longer earn asset management fees of approximately $950,000 annually.
However, the Company will still owe National, its principals and employees
over $[1,800,000] 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 certain of its properties or the
exercise of the warrants included in the units, 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 __.
----------------
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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
The Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Summary Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Exchange Value/Allocation of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Current Status of the Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Organization Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Alternatives to the Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Fairness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
National's Recommendation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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 . . . . . . . . . . . . . . . . . . . . 24
Conditions to Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Consequences if Acquisition Not Approved . . . . . . . . . . . . . . . . . . . . . . . . 25
Delivery of Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Supplements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Consent Solicitation/Summary of Voting Procedures. . . . . . . . . . . . . . . . . . . . 25
No Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
No Right to Program Books and Records. . . . . . . . . . . . . . . . . . . . . . . . . . 27
Summary Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Risks of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
The nature of your investment will change. . . . . . . . . . . . . . . . . . . . . 29
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 included in the units may trade at prices substantially below
the arbitrarily determined exchange value of $20 per unit. . . . . . . . . . . . 30
There may be conflicts of interest in National's structuring the acquisition . . . 30
You did not have independent advisors representing you in structuring
this transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
The transaction may not be tax-free. . . . . . . . . . . . . . . . . . . . . . . . 32
The company may incur significant additional debt. . . . . . . . . . . . . . . . . 32
The Board of directors will have the ability to change investment, financing
and other policies of the company without shareholder consent. . . . . . . . . . 33
You will have no dissenters' rights in connection with the acquisition . . . . . . 33
The company has no operating history . . . . . . . . . . . . . . . . . . . . . . . 33
Your voting rights will change . . . . . . . . . . . . . . . . . . . . . . . . . . 33
i
<PAGE>
Cash distribution policies will be changed . . . . . . . . . . . . . . . . . . . . 32
The method of management compensation will be changed. . . . . . . . . . . . . . . 32
Holders of a majority of tenancy-in-common interest bind a program . . . . . . . . 32
National's judgment regarding the conflicting Yosemite/Ahwahnee appraisals
may be incorrect which means the exchange values for these properties
may be too low or too high . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Real Estate Risks Associated with All Properties . . . . . . . . . . . . . . . . . . . . 32
There are significant delinquent property taxes. . . . . . . . . . . . . . . . . . 32
Certain assets may have to be sold to raise working capital. . . . . . . . . . . . 33
Federal, state and local environmental and other laws may require
expensive hazardous substance clean-up or removal as well as expensive
public improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
If there is an uninsured loss, the company could lose its investment,
profits or cash flow from a property . . . . . . . . . . . . . . . . . . . . . . 33
The development of additional projects may occur . . . . . . . . . . . . . . . . . 33
The California economy has fluctuated broadly in the past few years. . . . . . . . 33
When the acquisition is completed, National and its principals will be
owed $1,818,684 by the company . . . . . . . . . . . . . . . . . . . . . . . . . 33
Real Estate Risks of Specific Properties . . . . . . . . . . . . . . . . . . . . . . . . 34
Sacramento/Delta Greens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Permits to develop the properties need to be obtained. . . . . . . . . . . . . 34
Holding an inventory of residential lots may cause the company to incur
substantial carrying costs until the lots can be sold . . . . . . . . . . . 34
Risks of residential development . . . . . . . . . . . . . . . . . . . . . . . 34
Additional specific risks. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Yosemite/Ahwahnee Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Permits to develop the condominium-type timeshare aspect of the resort
have not yet been obtained. . . . . . . . . . . . . . . . . . . . . . . . . 35
Risks affecting operation of a golf course . . . . . . . . . . . . . . . . . . 35
Resort development is unpredictable for a variety of reasons and could
result in losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Risks relating to timeshare operations . . . . . . . . . . . . . . . . . . . . 35
Risks relating to recreational vehicle park operations . . . . . . . . . . . . 36
Additional specific risks. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Mori Point Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Permits to develop the property have not yet been obtained . . . . . . . . . . 36
Hotel/conference center development is unpredictable for a variety of
reasons and could result in losses. . . . . . . . . . . . . . . . . . . . . 36
Additional specific risks. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Cypress Lakes Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
The vested tentative map needs modification and build out of the
property will be expensive. . . . . . . . . . . . . . . . . . . . . . . . . 37
Risks affecting operation of a golf course . . . . . . . . . . . . . . . . . . 37
Risks of residential development . . . . . . . . . . . . . . . . . . . . . . . 37
Palmdale/Joshua Ranch Property . . . . . . . . . . . . . . . . . . . . . . . . . . 37
The vested tentative map is subject to approval. . . . . . . . . . . . . . . . 37
ii
<PAGE>
Permits to develop the property need to be obtained. . . . . . . . . . . . . . 38
Holding an inventory of residential lots 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
Esperanza Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Risks of commercial development. . . . . . . . . . . . . . . . . . . . . . . . 38
Additional specific risks. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Stacey Rose Properties A and B Property. . . . . . . . . . . . . . . . . . . . . . 39
Risks of residential development . . . . . . . . . . . . . . . . . . . . . . . 39
Additional specific risks. . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Anti-Takeover Provisions and Limitation of Director Liability. . . . . . . . . . . . . . 39
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. . . . . . . 39
The Board is divided into three classes serving staggered three year terms . . . . 39
There are restrictions on certain business combinations with interested
parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
The Delaware law, as well as the charter documents, limit the liability of
directors and officers to shareholders . . . . . . . . . . . . . . . . . . . . . 40
BACKGROUND AND REASONS FOR THE ACQUISITION . . . . . . . . . . . . . . . . . . . . . . . . . 41
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Management of the Programs since Foreclosure . . . . . . . . . . . . . . . . . . . . . . 47
Efforts to Dispose of the Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Alternatives to Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Comparison of Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Terms of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Calculation of Exchange Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Allocation of Units among the Programs . . . . . . . . . . . . . . . . . . . . . . . . . 64
Allocation of Units among Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Company Shares Held by Affiliates or Employees of National . . . . . . . . . . . . . . . 68
Historical Compensation for Servicing, Asset and Property Management/Effect
of Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Historical Cash Distributions to Investors . . . . . . . . . . . . . . . . . . . . . . . 71
Features of the Acquisition Considered by National . . . . . . . . . . . . . . . . . . . 72
Conditions to the Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Fairness in View of Conflicts of Interest. . . . . . . . . . . . . . . . . . . . . . . . 78
Consequences if the Acquisition is Not Approved. . . . . . . . . . . . . . . . . . . . . 78
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Appraisals and Fairness Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Experience of Independent Valuator . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
iii
<PAGE>
COMPARISON OF TENANCY-IN-COMMON INTERESTS AND SHARES . . . . . . . . . . . . . . . . . . . . 85
COMPARISONS OF PROGRAMS AND COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
VOTING PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Time of Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Record Date and Outstanding Votes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Approval Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Investor Ballot and Vote Required. . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Investor Representations on Ballot . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Revocability of Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Solicitation of Votes; Solicitation Expenses . . . . . . . . . . . . . . . . . . . . . .100
No Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100
No Right to Program Books and Records. . . . . . . . . . . . . . . . . . . . . . . . . .100
Issuance of Certificates for Acquisition Shares. . . . . . . . . . . . . . . . . . . . .100
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION
AND CONFLICTS OF INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
Benefits to National . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
Company Shares Owned by National's Principals and Other Company Management . . . . . . .101
Other Benefits to Shareholders of National . . . . . . . . . . . . . . . . . . . . . . .102
Lack of Independent Representation of Investors. . . . . . . . . . . . . . . . . . . . .102
Features Discouraging Potential Takeovers. . . . . . . . . . . . . . . . . . . . . . . .103
Allocation of Services and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . .103
Non-Arm's-Length Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . .104
Fiduciary Responsibility of National . . . . . . . . . . . . . . . . . . . . . . . . . .104
Indemnification of Officers and Directors of the Company . . . . . . . . . . . . . . . .104
Officers and Directors Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
BUSINESS AND PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106
Business of the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107
Consolidation of the Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110
The Residential Development Industry . . . . . . . . . . . . . . . . . . . . . . . . . .111
The Lodging and Recreation Industry. . . . . . . . . . . . . . . . . . . . . . . . . . .111
The Business Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .114
The Consolidated Business Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115
Priority of Projects and Estimated Timetable . . . . . . . . . . . . . . . . . . . . . .123
Types of Borrowing Required. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .125
Impact of Interest Rates on the Company. . . . . . . . . . . . . . . . . . . . . . . . .125
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126
iv
<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . . . .126
Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .127
Financing Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .128
Miscellaneous Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .128
Working Capital Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .128
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .130
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133
Results of Operations - The Sacramento/Delta Greens Program. . . . . . . . . . . . . . .133
Results of Operations - The Oceanside Program. . . . . . . . . . . . . . . . . . . . . .134
Results of Operations - The Yosemite/Ahwahnee Programs . . . . . . . . . . . . . . . . .135
Results of Operations - The Mori Point Program . . . . . . . . . . . . . . . . . . . . .136
Results of Operations - The Cypress Lakes Program. . . . . . . . . . . . . . . . . . . .136
Results of Operations - The Palmdale/Joshua Ranch Program. . . . . . . . . . . . . . . .137
Results of Operations - The Esperanza Program. . . . . . . . . . . . . . . . . . . . . .137
Results of Operations - The Stacey Rose Properties A and B Programs. . . . . . . . . . .138
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . .138
Historical Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140
New Accounting Pronouncements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141
MANAGEMENT FOLLOWING THE ACQUISITION . . . . . . . . . . . . . . . . . . . . . . . . . . . .142
Executive Officers and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . .143
Directors and Executive Officers Compensation and Incentives . . . . . . . . . . . . . .146
Stock Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147
401(k) Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .148
Employment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149
Limitation of Liability and Indemnification. . . . . . . . . . . . . . . . . . . . . . .149
PRIOR PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150
PRIOR PERFORMANCE SCHEDULES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .152
SECONDARY MARKET FOR TENANCY-IN-COMMON INTERESTS . . . . . . . . . . . . . . . . . . . . . .161
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .161
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .161
Director and Officer Stock Ownership . . . . . . . . . . . . . . . . . . . . . . . . . .162
DESCRIPTION OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163
v
<PAGE>
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163
Certain Shareholder Voting Requirements. . . . . . . . . . . . . . . . . . . . . . . . .164
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .164
THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .164
Offering of Acquisition Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .164
APPRAISALS AND FAIRNESS OPINION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .165
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .165
Experience of Independent Appraisers . . . . . . . . . . . . . . . . . . . . . . . . . .167
May 1997 Appraisals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .167
The Mentor Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .169
ConflictingYosemite/Ahwahnee Properties' Appraisals. . . . . . . . . . . . . . . . . . .170
On-Going Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170
Updates/Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .171
FEDERAL INCOME TAX CONSEQUENCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .171
Qualification of the Acquisition as a Qualifying Section 351 Transaction . . . . . . . .172
Federal Income Tax Consequences of the Acquisition . . . . . . . . . . . . . . . . . . .174
Federal Income Tax Consequences to Investors After the Effective Date. . . . . . . . . .175
REPORTS TO SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .176
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .177
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .177
FURTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .177
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .178
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
</TABLE>
<TABLE>
<S>
APPENDICES <C>
- ----------
Appendix 1 Fairness Opinion . . . . . . . . . . . . . . . . . . . . A-1
Appendix 2 Selected Additional Appraisal Information. . . . . . . . A-2
</TABLE>
ACCOMPANYING THE PROSPECTUS
- - PROGRAM SUPPLEMENT
- - OFFICIAL INVESTOR BALLOT
- - Instructions to Investors on How to Complete the Official Investor Ballot
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<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 which were sold pursuant to permits issued by the
California Department of Corporations. Pursuant to servicing agreements with
each investor in each program, National has collected and distributed
principal and interest payments, if any, on the loans, acted to take title on
behalf of the investors where loans have gone into default, and managed the
properties after the defaults. While they are trust deed loan participation
programs, the Esperanza and Stacey Rose A and B programs were not sold as
"Trudy Pat" programs. Thus, they are not referred to as "Trudy Pat" programs
in this prospectus.
Since taking title to the properties for the benefit of investors,
National's objective has been to position the underlying properties so that
the maximum amount of investor capital can be recovered in the shortest
period of time. To the extent any offers to purchase any of the properties
have been received since the investors have taken ownership, these offers
have been substantially less than the invested amount and have not been
approved by applicable investors. Additionally, the current appraised value
for each of the properties is less than the original investment amount.
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 seven "Trudy Pat" programs and the
other three non-"Trudy Pat" programs named on the cover page of this
prospectus for an aggregate exchange value of $[28,066,419] in the form of
[1,403,321] units arbitrarily valued at $20 per unit. The units consist of
one share of company common stock plus warrants to buy three additional
shares. Each warrant permits the holder to buy one share of the company's
common stock at a price equal to 80% of closing price of the company's common
stock on the trading date immediately preceding the exercise date. The first
warrant is exercisable commencing 12 months from the date of issuance; the
second commencing 18 months from the date of issuance; and the third
commencing 24 months from the date of issuance. A share may be purchased by
exercising a warrant for only 30 days after the warrant becomes exercisable.
The warrants will be allowed to be separated from the units [60] days after
issuance.
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 after
a current sale for distribution to that program's investors after taking into
account other program assets, as well as all outstanding obligations of the
program.
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<PAGE>
The Sacramento/Delta Greens property is vacant land to be developed for
residential lots. The Oceanside property consists of the Ahwahnee Golf
Course and some surrounding land that is available for future development.
The Yosemite/Ahwahnee properties consist of 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. The Cypress Lakes property is vacant land
to be developed into a golf course and residential lots. The Palmdale/Joshua
Ranch property is vacant land to be developed into large residential lots and
an equestrian community. The Esperanza property is vacant land to be
developed into a commercial project. The Stacey Rose A and Stacey Rose B
properties are contiguous vacant parcels of land that are to be developed
into residential lots, along with a third parcel acquired by National for the
benefit of the Stacey Rose investors.
By voting for the acquisition of your property in exchange for the
company's units, you will also be approving the transfer to the company of
cash reserves, if any, in your program derived from sale of properties or
assessments paid, as well as the use of the cash reserves by the company to
further its overall business plan and not for distributions or for any
particular property.
SUMMARY RISK FACTORS
The following is a summary of the potential disadvantages, adverse
consequences and risks of the acquisition. This summary is qualified in its
entirety by the more detailed discussion in the section entitled "Risk
Factors" contained in this prospectus beginning on page __.
THERE WILL BE A FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If
the acquisition is completed, there will be a change in the nature of the
investment of each investor from holding a tenancy-in-common interest in real
estate to holding shares (and the right to buy additional 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 [UNITS]
[SHARES] on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through
property sales. If the acquisition is completed, investors will have an
investment in an entity that is larger than each of the programs and will
thus lose relative voting power.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL
SALES PRICE. Investors are subject to the risk that the exchange value of a
program does not reflect the price a program's assets might bring in a sale.
If the property of a program were to be sold, the net proceeds of the sale
and the amount finally distributed to an investor in that program may be more
or less than the exchange value. There is no assurance that the future value
of the shares and warrants received in the acquisition will be greater than
the most recent appraised value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may
trade at prices substantially below the arbitrarily determined exchange value
of $20 per unit or the 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 $20
2
<PAGE>
due to a potentially large number of shares that investors may sell
immediately after the acquisition.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of
interest. The principal shareholders and employees of National and the
company will hold approximately [16.42]% (4.78% if all warrants are
exercised) of the company's outstanding stock for which they paid $0.01 per
share. Other founding shareholders will hold approximately [2.3]% of the
company's outstanding stock (0.68% if all warrants are exercised) for which
they also paid $0.01 per share. Thus, the investors' total ownership
interests in the programs' properties will be diluted by the equity interest
in the company held by the founders of the company. The principal
stockholders of National, and other executive officers of the company, will
receive annual cash compensation aggregating $[560,000] as officers and
employees of the company. National will be relieved of its asset management
obligations and will no longer earn asset management fees. However, the
company will still owe National and its principals and employees over
$[1,800,000] of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote , and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE THE
ACQUISITION ON BEHALF OF THE INVESTORS. Therefore, terms of the acquisition
may be less favorable to investors and more favorable to founders of the
company which included the principal shareholders of National than if the
acquisition had been subject to arm's-length negotiation. Had an independent
party negotiated on behalf of each program, the terms of the acquisition may
have been more favorable to certain or all of the programs and fewer shares
and less favorable employment contracts may have been received by the
founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to
opine conclusively on the tax consequences of the acquisition to investors.
The acquisition may be taxable, if at all, only with respect to the
investors' receipt of warrants. Alternatively, if the acquisition is a fully
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 units of the company received valued at
$20 per unit. If the acquisition is treated as fully taxable, National
believes most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, none of the properties will be subject to any liens other than
for property taxes. The board of directors could authorize borrowing by the
company. The debt service for the loans may adversely affect the company's
ability to make distributions to shareholders. The company may incur full
3
<PAGE>
recourse debt which exposes all of the assets of the company to repayment
instead of limited recourse debt which generally exposes specific properties
for the repayment of debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING
INVESTORS. If you vote against the acquisition, and it is approved, you will
not be able to object to the acquisition and receive the appraised value of
your tenancy-in-common interest in your program's assets. You will have no
choice other than to accept units for your interests.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed a little
over a year ago to take part in the acquisition of your property. It does
not have the benefit of operating for a long time. This means that shares in
the company are much riskier than ownership of shares of established
companies. If the company had been operating as if it owned the properties
which it desires to acquire, it would have experienced losses to date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE
ACQUISITION TAKES PLACE. Rather than being focused on a single property, the
company will be an infinite life entity focused on the management of at least
the seven properties of the former "Trudy Pat" programs. 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. Prior to the
dates that title to the properties securing the original program loans was
taken, National was entitled to an annual loan servicing fee equal to one
percent of the original loan amounts. When title to the properties was taken
on behalf of the programs, even though the loans no longer existed, National
continued to charge the same rate as the servicing fee for the asset
management services it provided to investors. The investors in each of the
programs had become the beneficial tenant-in-common owners of real estate,
most of which was
4
<PAGE>
undeveloped. While it had no obligation to do so, in order to assist the
beneficial owners in protecting their real estate assets and readying them
for sale or development, National assumed the duties of an asset manager
after title was taken to the properties. In this capacity, National obtained
information from investors about their preferences in regard to development
or sale of the properties, acted as assessing agent to raise funds necessary
to pay property taxes, insurance and other costs of property ownership.
The annual fees payable to National are currently $50,000 for
Sacramento/Delta Greens; $300,000 for Oceanside; $65,000 for
Yosemite/Ahwahnee I; $135,000 for Yosemite/Ahwahnee II; $100,000 for Mori
Point; $140,000 for Cypress Lakes; $150,000 for Palmdale/Joshua Ranch; $5,000
for Esperanza; $3,153 for Stacey Rose A; and $850 for Stacey Rose B.
In addition to the one percent fee, compensation has been earned for
property management services provided to the Oceanside program ($896,000
accrued since the date of ownership (November 1993) through June 30, 1998;
$876,000 actually paid) and Yosemite/Ahwahnee properties ($594,535 accrued
since the date of ownership (September 1995); $-0- actually paid) by officers
and employees of National in their capacities as officers and employees of
Oceanside Development, Inc. and Ahwahnee Golf Course & Resort, Inc. Those
property management services included, without limitation, solicitation,
engagement, coordination and supervision of: entitlement and permit
processing, environmental, engineering, planning, architectural,
construction, marketing, appraisal, legal, accounting and other experts as
needed for each project; due diligence on potential service providers;
assistance in presentations and applications for approvals to governmental
agencies; packaging and documenting the status of a project for potential
financing, sale or joint venture; supervising and managing the operational
activities for construction projects on the Oceanside and Yosemite/Ahwahnee
projects; and contract negotiations and documentation. To the extent similar
property specific services were provided to the other programs, they were
provided without extra charge because the necessary activities were less
regular and less operationally intense.
In the future, compensation will be paid to officers of the company in
the form of salaries (aggregating $[560,000] annually plus contractual bonus
opportunities and salary increases), stock options and other benefits. See
"Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for details of stock options and other benefits.
These salaries and other forms of compensation will be payable to management
of the company even if one or more of the properties acquired in the
acquisition is subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE DIFFERENCES IN YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THE EXCHANGE VALUES FOR THESE
PROPERTIES MAY BE TOO LOW OR TOO HIGH. National reviewed the updated March
1998 appraisal of the Yosemite/Ahwahnee properties which reflected an
aggregate "as is" appraised value of
5
<PAGE>
$20,246,000 and the October 1996 appraisal which reflected an "as is"
aggregate appraised value of $4,000,000. The results of those appraisals
clearly differed from each other, and, in management's judgment, the
difference could not be accounted for by improving market conditions. Some
of the parcels, including the golf course, were subsequently sold, on June 5,
1998, to the Oceanside Program investors to obtain working capital for the
Yosemite/Ahwahnee Programs. Based on its review of all appraisals, National
concluded that the properties currently owned by the Yosemite/Ahwahnee I and
II Programs have values of $5,486,000 ($1,782,950 and $3,703,050,
respectively), and the parcels currently owned by the Oceanside Program have
a value of $5,080,000. National believes its approach is reasonable.
THERE WILL BE SIGNIFICANT REAL ESTATE RISKS ASSOCIATED WITH THE
COMPLETION OF THE COMPANY'S PROPOSED BUSINESS PLAN. These include
(i) the need to raise additional cash funds to pay delinquent property
taxes on each of the properties, as well as keeping those property taxes
current in the future (without needed cash, one or more properties may be
lost at a tax sale in the future at below market prices);
(ii) the need to pay for the costs associated with obtaining permits and
government approvals to develop the properties (without such permits and
approvals, management believes the properties might be less marketable,
requiring months or even years to sell, because there are fewer buyers at the
early stage of development);
(iii) the cost of holding an inventory of residential lots at
Sacramento/Delta Greens (presently approximately $10,000 per month) or
Cypress Lakes (presently approximately $15,000 per month) or Palmdale/Joshua
Ranch (presently approximately $25,000 per month) or Esperanza and Stacey
Rose A and B properties (presently approximately $5,000 per month together)
properties;
(iv) the cost of operation and maintenance on the various aspects of the
Yosemite/Ahwahnee project could exceed funds available; and
(v) the payment of over $[1,800,000] accrued fees and expenses to
National and its principals. Additionally, there are specific risks related
to each of the programs' properties more specifically described in "Risk
Factors -- Real Estate Risks" commencing at page __.
IT WILL BE DIFFICULT TO CHANGE MANAGEMENT DUE TO CERTAIN ANTI-TAKEOVER
PROVISIONS IN THE COMPANY'S CHARTER DOCUMENTS AND IN THE DELAWARE LAW. These
risks of management entrenchment include:
(i) the ability of the board of directors to cause the company to issue
additional shares or classes of shares which could dilute your voting power;
(ii) the fact that only one-third of the board of directors is elected
each year making it difficult for shareholders to quickly cause changes in
management;
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<PAGE>
(iii) restrictions on business combinations with holders of more than
15% of the outstanding voting stock of the company imposed by Delaware law;
and
(iv) changes to the company's certificate of incorporation relating
to anti-takeover provisions requires a two-third approval vote.
For more details, see "Risk Factors -- Anti-Takeover Provisions and
Limitation of Director Liability" commencing at page __.
EXCHANGE VALUE/ALLOCATION OF SHARES
The programs' properties have been appraised by the independent
appraisers identified on page __. Those appraisals were either dated or
updated to reflect values as of March 31, 1998. The exchange value for a
program property is its appraised value adjusted by increasing the appraised
value by the program's cash reserves and other assets, and reducing it by
program liabilities. Due to the existence of an offer to purchase the
Cypress Lakes property for an amount substantially greater than the March
1998 appraised value (which offer has been submitted to, but has not been
approved by Cypress Lakes investors), the company will pay to the Cypress
Lakes investors an additional number of units (valued at [$20] per unit
regardless of the then market value of the shares included in the units)
equal to the difference in the net sale proceeds (exclusive of interest on
deferred purchase price payments) actually received by the company from that
offer ONLY on or before December 31, 1999 (the time by which the promissory
note called for in the offer is schedule to be paid in full) and the exchange
value. 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. When the exchange value for a property is less than its
appraised value, it is due primarily to accrued liabilities of the programs'
investors. 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 units 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 units to be
paid by the company. Units will be distributed to you in accordance with
your pro rata investment in a program (including interest accrued to you
through the date you took beneficial ownership of the property and any
assessments paid subsequent to that time) after adjusting the amounts to
account for voluntary advances made by some investors.
The following table shows investors (i) each program's exchange value,
(ii) the number and percentage of units allocated to each program if the
acquisition is consummated, with all the programs, or with only the seven
"Trudy Pat" programs and (iii) the number of units to be received per $10,000
of investment in a particular program with all programs included in
7
<PAGE>
the acquisition and with only the seven "Trudy Pat" programs included. The
information is as of June 30, 1998.
[TO BE UPDATED TO THE MONTH END PRIOR TO THE FINAL PROSPECTUS DATE]
<TABLE>
<CAPTION>
% of Total No. of Units
% of Total Units to be No. of Units per $10,000
Number of Units to be Outstanding per $10,000 of Adjusted
Units Outstanding After the of Adjusted Outstanding
Number of Allocated if After the Acquisition Outstanding Investment if
Units Only Seven Acquisition if Only Investment if Only "Trudy
Exchange Allocated if "Trudy Pat" if All "Trudy Pat" All Programs Pat"
Name of Program Value All Programs Programs Programs Programs Participate Programs
--------------- ----- Participate(1) Participate(1) Participate(2) Participate(3) Participate
-------------- -------------- -------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $1,570,486 78,524 78,524 4.55 4.61 128 128
Oceanside 5,373,057 268,653 268,653 15.56 15.77 111 111
Yosemite/Ahwahnee I 2,210,036 110,502 110,502 6.40 6.49 122 122
Yosemite/Ahwahnee II 4,590,076 229,504 229,504 13.29 13.47 117 117
Mori Point 5,413,036 270,652 270,652 15.67 15.88 219 219
Cypress Lakes 5,824,928 291,246 291,246 16.86 17.09 153 153
Palmdale/Joshua Ranch 2,621,882 131,094 131,094 7.59 7.69 72 72
Esperanza 216,356 10,818 0.63 185 -
Stacey Rose A 52,345 2,617 0.15 229 -
Stacey Rose B 194,.217 9,711 0.56 228 -
----------- ------------- ------------- ------------- ------------ ----------- ---------
TOTAL $28,066,419 1,403,321 1,380,175 81.26% 81.00% 1,564 922
----------- ------------- ------------- ------------- ------------ ----------- ---------
----------- ------------- ------------- ------------- ------------ ----------- ---------
</TABLE>
- -----------------
(1) A unit consists of one share of common stock plus warrants to buy three
additional shares at 80% of the closing price on the trading date
immediately prior to the date of exercise. See "Description of
Securities."
(2) Represents [5.60%], [19.14%], [7.87%], [16.35%], [19.29%], [20.75%],
[9.34%], [0.77%], [0.19%] and [0.69%], respectively, of the units to be
issued to investors in the acquisition.
(3) If none of the Esperanza, Stacey Rose A and Stacey Rose B programs
participate, these percentages would be 5.69%, 19.47%, 8.01%, 16.63%,
19.61%, 21.10% and 9.50%, respectively.
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 at the time the loan was made. 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. National became the
manager of the programs' assets after title was taken. Based on investors'
stated objectives, National has been directed to maximize the recovery of the
investors' principal. The significant decline in real estate values in
California during much of the 1990s (especially for undeveloped land) has
made attaining this objective unattainable for the properties under their
current independent structure.
The properties owe a significant amount of property taxes totalling over
$[1,000,000] as of June 30, 1998. This amount includes those taxes due under
payment plans that have been paid on a current basis. Under California
statute, property owners have the option of entering into a payment plan no
later than five years following June 30th of the first year a tax payment
becomes past due. Thus, the property owner may elect to accumulate up to five
years of taxes into the plan, along with any penalties and accrued interest.
Payments
8
<PAGE>
are then spread evenly over the next five years and are due each April 10th
along with accrued interest on the remaining balance. The plan remains in
effect, as long as all current property taxes and all past due plan payments
are made on time, until the balance is reduced to zero. In order to preserve
cash, National arranged for payment plans for past due taxes on behalf of
certain programs and anticipates placing others into such plans. The
following chart summarizes the status and amount paid and/or due for each
property on a cash basis. The financial statements herein account for these
taxes due on an accrual basis.
Property Taxes Paid in April 1998
<TABLE>
<CAPTION>
Past Due Payment Plan
Program Current Year Payment Plan Total Balance
------- ------------ ------------ Payments Remaining
-------- ------------
<S> <C> <C> <C> <C>
Sacramento/Delta Greens $ 16,545 $ 35,540 $ 52,085 $ 26,132
Mori Point 20,503 121,220 141,723 157,413
Palmdale/Joshua 9,461 53,200 62,661 69,092
Ranch
------------- ------------- ------------ ------------
Total $ 46,509 $ 209,960 $ 256,469 $ 252,637
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
Property Taxes Paid in June 1998
<TABLE>
<CAPTION>
Past Due Payment Plan
Program Current Year Payment Plan Total Balance
------- ------------ ------------ Payments Remaining
-------- -------------
<S> <C> <C> <C> <C>
Oceanside $ 53,690 $ 33,416 $ 87,106 $ 0
Yosemite/Ahwahnee 106,983 126,518 233,501 506,070
Stacey Rose 4,843 7,523 12,366 29,670
Properties
----------- ------------- --------- ------------
Total $ 165,516 $ 167,457 $ 332,973 $ 535,740
----------- ------------- --------- ------------
----------- ------------- --------- ------------
</TABLE>
Estimated Property Taxes Scheduled for Payment in June 2000
<TABLE>
<CAPTION>
Past Due Payment Plan
Program Current Year Payment Plan Total Balance to be
------- ------------ ------------ Payments Remaining
-------- -------------
<S> <C> <C> <C> <C>
Cypress Lakes $ 34,300 $ 62,800 $ 97,100 $ 251,200
Esperanza 3,700 5,800 9,500 23,200
------------ ------------ ---------- ------------
Total $ 38,000 $ 68,600 $ 106,600 $ 274,400
------------ ------------ ---------- ------------
------------ ------------ ---------- ------------
</TABLE>
The Sacramento/Delta Greens Program is in the fourth year of its payment
plan and the Mori Point and Palmdale/Joshua Ranch Programs are in the third
year of their respective plans. As of July 1998, the Yosemite/Ahwahnee and
Stacey Rose Programs entered into the first year of their respective payment
plans. The Cypress Lakes and
9
<PAGE>
Esperanza Programs are expected to enter into payment plans in June 2000
for five years of delinquent taxes if they are not paid prior to that time.
In addition to property tax liabilities, working capital is needed in
order to position the properties for sale on terms that might be approved by
a majority of investors. Only the golf course owned by the Oceanside Program
and the recreational vehicle park portion of the Yosemite/Ahwahnee properties
have any operating cash flow and that is not enough to cover operating
expenses much less provide working capital needed to 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 advances and mandatory assessments by
investors. Investors have progressively demonstrated a reluctance to provide
adequate working capital through the mandatory assessment process. This
reluctance on the part of investors to provide the necessary funding to
maintain the properties, pay for minimal expenses such as property taxes, and
continue the predevelopment approval process makes continuation of the status
quo tenuous at best.
The Oceanside property was sold on June 5, 1998 for a gross amount of
$6,672,099. This was significantly greater than its May 1997 appraisal of
$2,850,000. As a part of the approval process, Oceanside investors directed
that $3,000,000 of that amount be distributed back to them and that
$3,550,000 be used to purchase the Yosemite/Ahwahnee golf course and certain
additional land around the golf course that is being held for future
development. The golf course was leased back to the Yosemite/Ahwahnee
programs for five years on a fully net basis for $80,000 for the first year,
and $140,000, $250,000, $380,000 and $380,000 for the succeeding years. The
golf course currently has a negative cash flow of approximately $350,000 per
year which is the responsibility of the Yosemite/Ahwahnee Program based on
this lease-back arrangement of that property from the Oceanside Program. The
Yosemite/Ahwahnee Programs will also have the responsibility for payment of
future property taxes during the term of the lease. A sale, if possible, at
either the purchase price or the exchange value would not generate sufficient
funds to return all of the Oceanside investors money.
The Sacramento/Delta Greens property may be sold for a cash price
approximating its March 1998 value but National believes that there will be
more potential buyers if the final engineering and permitting processes are
completed at a cost of approximately $175,000. Nevertheless, since the
amount that might be realized is substantially less than the outstanding
investment, the sale of this property at current prices will not yield all or
a substantial portion of the investors' money at this time.
Without an infusion of approximately $[3,000,000] of additional capital,
the Yosemite/Ahwahnee properties (some of which are now owned by Oceanside
investors) cannot reach a point where they are developed enough to be able to
eliminate losses from operations and break even on the lease obligations to
the Oceanside program investors for the golf course. The March 1998
appraisal was used for the estate lots and for the balance of the land to be
developed with timeshare units and additional recreational vehicle sites.
Although a buyer may be found at the assigned appraised value, this amount
would not
10
<PAGE>
generate sufficient funds to return all or a substantial portion of
the investors' money at this time.
At present, Mori Point is vacant land with a proposal to be developed
into a hotel/conference center. In order to continue the predevelopment
effort, approximately $500,000 of capital is needed to proceed with the real
estate permitting process and to establish a plan to protect the habitat of
two endangered species that are located on the property. Although a buyer
may be found at the March 1998 appraised value, it is the opinion of National
that any buyer will insist that completion of a habitat conservation plan be
a condition of the closing of the sale. Even a sale at the March 1998
appraised value would not generate sufficient funds to return all of the
investors' money at this time.
The Cypress Lakes property must undergo some redesign in order to reduce
the estimated infrastructure costs, particularly those related to the
construction of a levee around it. It is estimated that this redesign and
related engineering and legal costs to change the map could cost
approximately $400,000. Without a significant increase in the demand for
property from homebuilders for additional lots in eastern Contra Costa
County, the best short-term strategy to maximize the return of capital may be
to hold the property in anticipation of being able to sell it in bulk when
that demand does finally develop. A bulk sale at the current appraised value
would not result in enough funds to return all of the investors capital at
this time.
The Palmdale/Joshua Ranch property has some significant challenges in
regard to infrastructure costs, particularly for a main road and utilities.
Without some kind of infrastructure bond financing, these costs preclude any
profitability of a build-out under current market conditions. A vested
tentative map was secured in early July 1998 on the property by National on
behalf of the investors. The vested tentative map approval is a significant
document that helps to insure that local government intervention will not
stop the development process and it helps to lock in certain governmental
fees at current rates subject to only Consumer Price Index increases.
Approximately $[140,000] of capital is needed to complete final soils and
grading studies. Based on the net value of each lot in the current market,
management believes that it may be best to sell the property in bulk unless
some of the infrastructure costs can be reduced, eliminated or financed on
realistic terms. A bulk sale at the March 1998 appraised value at this time
would not generate sufficient funds to return the investors' capital at this
time.
The Esperanza property is zoned commercial. Unfortunately, the current
market demand in the area does not justify the build out of the site at this
time. In National's opinion, the property should be discounted and sold. It
cannot be sold for the original loan amount at this time.
The Stacey Rose A and Stacey Rose B properties are contiguous properties
that are zoned residential. Additionally, National owns a third contiguous
parcel on behalf of these two groups of investors. It is estimated that it
may cost $50,000 to finalize a tentative tract map on the parcels. The
property could contain up to 160 lots. The property could also be held for a
bulk sale without spending the capital to obtain the tentative map. However, a
11
<PAGE>
bulk sale at the March 1998 appraised value would not generate sufficient
funds to return the investors' capital.
Attempts have been made to sell or develop on a joint venture basis all
or portions of each of the properties. However, the offers have been
rejected by investors (in the case of Sacramento/ Delta Greens in 1994 and
Mori Point in 1996) as inadequate or not forthcoming at all (in the case of
the Yosemite/Ahwahnee, Cypress Lakes, Palmdale/Joshua Ranch, Esperanza and
Stacey Rose programs). Prior to the recent sale of the remaining lots of the
Oceanside property, two offers had been received that were considered by
National to be inadequate. See "Background and Reasons for the Acquisition --
Efforts to Dispose of the Properties." The Sacramento/Delta Greens and
the Palmdale/Joshua Ranch properties have been presented to several local
area homebuilders in the last year without yielding any significant
negotiations toward a sale. National continues to explore the possibility of
selling these properties, but, to date, no brokers have been hired because
National is a licensed real estate broker and has the resources to identify
potential buyers for a project of this type. The estate lots have been
previously listed with a broker for sale. National also made efforts to
interest two potential buyers or joint venture partners in the
Yosemite/Ahwahnee properties as a package immediately after the foreclosure
in 1995. However, the buyers could not perform and purchase contracts were
not consummated. Since then, the property has not been packaged or listed
for a bulk sale because National feels a better price can be attained after
further development of the recreational vehicle spaces and planned timeshare
program is conducted. Joint venture partners willing to become associated
with the unwieldy tenancy-in-common ownership structure which requires so
many persons to approve any significant action have been difficult to locate.
Currently, the Yosemite/Ahwahnee properties experience a steady negative
cash flow which few, if any, buyers are willing to accept. Other than the
sale of the golf course and certain adjacent property to the Oceanside
investors, only offers for certain of the estate lots have been received. No
offers have been received for the Yosemite/Ahwahnee properties as a package.
For a period of one year in 1992 to 1993, the Mori Point property was listed
with a reputable national commercial brokerage firm. No offers were
received. The brokerage contract was not renewed, and no recent efforts have
been made to sell it because the investors instructed National to continue to
pursue obtaining the necessary governmental permits to develop a
hotel/conference center on the property. National briefly listed the
Esperanza property with a local Victorville real estate broker in the early
90s but, after about one year, took the property off the market when no
offers were received that were acceptable to investors. National did not
renew the listing agreement while waiting for the real estate market to
improve.
The acquisition has been proposed because National and the company
believe that the properties, when combined and used or sold for their mutual
benefit instead of separately operated or sold, can be sold and/or developed
in a way that will increase the overall value available to investors. This
proposal provides an alternative way to achieve the investors' goal of
maximizing a return of their original principal. While there can be no
assurance that the company will achieve that goal for the investors through
its stock price, continuing to attempt to achieve the investors' goals for
each property separately does not appear to provide any likelihood of
achieving that objective. 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.
12
<PAGE>
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 4220 Von Karman Avenue, Suite 110, Newport Beach,
California 92660, telephone number 1-800-590-7772.
ORGANIZATION CHART
After the acquisition, [86.24]% of the company's outstanding shares will
be owned by the investors and [13.76]% will be owned by the founders of the
company. Management of the properties will be coordinated through a
to-be-formed wholly-owned subsidiary to be named American Family Communities,
Inc. If all programs participate in the acquisition, title to the properties
will be held by, and day-to-day operations will be conducted through eight
separate wholly-owned subsidiaries of American Family Communities, Inc. The
ownership and organization of the company after the acquisition will be as
follows:
13
<PAGE>
<TABLE>
<S> <C> <C> <C>
Yale Partnership
for Growth and J-Pat, L.P. Consultants and
All Programs' Development, (controlled by other Employees
Investors L.P. (controlled James Orth, a of National or
by David Lasker, principal of Company
a principal of National)
National)
[81.26]%(1) [6.88]%(1) [6.88]%(1) [4.98]%(1)
American Family Holdings, Inc.
100%
American Family
Communities, Inc.(2)
100%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Delta Yosemite Palmdale/ Victorville
Greens Woods Mori Point Cypress Joshua Esperanza, Homes,
Homes, Family Destinations Lakes, Ranch, Inc.(3) Inc.(3)
Inc.(3) Resort, Inc.(2) Inc.(3) Inc.(3)
Inc.(3)
</TABLE>
- -----------------
(1) These percentages will be 94.54%, 2%, 2% and 1.45%, respectively, if all of
the warrants are exercised.
(2) A subsidiary formed to coordinate the management and operation of the
properties.
(3) 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 through auctions 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:
14
<PAGE>
- the units 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 units to be issued to reflect the exchange value
of a program is arbitrary, the trading price of the shares contained in the
units initially is likely to be substantially below the $20 value arbitrarily
assigned to the units. In our opinion, the exchange values offered to investors
for their assets allow for an equitable allocation of the units 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);
- on completion of the acquisition the investors will hold over 80% of
the outstanding stock of the company while the company's founders (principals,
employees, and consultants of National) will hold less than 20%. Founders'
stock was purchased for $.01 per share. National and its principals have
forgiven over $[3,495,000] of expenses and accrued fees of which a total of
approximately $[2,800,000] was earned under the servicing agreements after the
loans defaulted and until the acquisition actions were completed. The remainder
of the forgiven amount reflects expenses advanced to the programs on behalf of
investors by National. However, the amount of fees forgiven was not a material
factor in determining the number of shares of the company to be held by its
founders after the acquisition. See "Background and Reasons for the Acquisition
- -- General -- Servicing and Asset Management Fees" for details of the amounts
earned, the amounts actually paid, and the recipients of such post-foreclosure
fees. National believes that the amount paid for the asset and property
management services is no greater than the amount that a third party would
charge;
- the valuation of the real estate assets of each of the programs by the
independent appraisers;
- the probability that the transaction will either be tax-free to
investors or most likely yield a tax loss. Either way, National believes there
will likely be no out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have independent
representation in the structuring of the acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the programs were originally formed to have a two to four year
finite life and the investors expected to receive a return of their investment
from the original borrower, the company is an infinite life entity which will
not return the program investors' original investment based on a sale or
refinancing of the properties underlying the original programs. However, after
the borrowers defaulted on the 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
15
<PAGE>
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 seven 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.
- investors will not be able to vote on changes to or dispositions of a
particular property or borrowing secured by a particular property. Those
decisions will be made by the Board of Directors or management. Further, as
investors in a larger entity, relative voting power will be diluted;
- future cash distributions will be based on the company's earnings and
a decision of the Board of Directors to pay dividends rather than on the
performance or sale of a particular property;
- investors voting against the acquisition will have no alternative but
to accept units 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 the allocation of the units in the
acquisition. 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 liquidated
directly, in auctions or in the context of a bankruptcy, 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 contained in the units issued in the acquisition would likely
trade substantially below their arbitrary $20 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 and inherent discounting
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.
16
<PAGE>
FAIRNESS OPINION
National hired Houlihan Valuation Advisers, an independent valuation firm,
to review the fairness of the acquisition. That firm's opinion (the "Fairness
Opinion") concludes that the allocation of the units in the transaction (which
includes allocation of units to the programs and shares to the company's
founders) is financially fair to you. See "Background and Reasons for the
Acquisition -- Appraisals and Fairness Opinion" at page __.
NATIONAL'S RECOMMENDATION
While the acquisition was not negotiated at arms-length and National and
the principals of National will receive substantial benefits from the
acquisition, NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION. See "Interests of Certain Persons in the Acquisition and Conflicts
of Interest" at page __, "Background and Reasons for the Acquisition" at page
__, and "Appraisals and Fairness Opinion" at page __.
BENEFITS TO NATIONAL AND COMPANY FOUNDERS
MANAGEMENT AND COMPANY FOUNDERS WILL OWN APPROXIMATELY [18.74]% (5.45%
if all warrants are exercised) OF THE COMPANY. These individuals paid $.01
per share for their company shares. These shares were not received in
exchange for fees that National has forgiven. National and the Company's
management believe that, in order to provide adequate incentives, it is
appropriate for the executive officers and Company founders to control
slightly less than 20% of the Company.
AFTER THE ACQUISITION, NATIONAL'S PRINCIPAL STOCKHOLDERS WILL CONTROL UP
TO APPROXIMATELY [13.74]% OF THE STOCK (approximately 4% if all warrants are
exercised) IN THE COMPANY AND WILL RECEIVE SALARIES AS OFFICERS OF THE
COMPANY. David Lasker and James Orth, the principal stockholders of
National, will be President and Chief Executive officer, respectively, of the
company and entities they control will each own [6.88]% (2% if all warrants
are exercised) of the company's outstanding shares. These shares are
included in the shares described above as being owned by company founders.
Mr. Lasker and Mr. Orth also will receive annual salaries of $180,000 plus
stock options and other benefits. See "Management Following the Acquisition
- -- Directors and Executive Officers Compensation and Incentives" at page __
for additional information about executive compensation for Messrs. Lasker
and Orth.
AS A CONSEQUENCE OF THE ACQUISITION, THE INVESTORS WILL TERMINATE THE
SERVICING AGREEMENTS (ASSET MANAGEMENT ACTIVITIES) WITH NATIONAL FOR THE
PROGRAMS. Pursuant to these agreements, National provided loan servicing prior
to taking title to the properties on behalf of the investors and asset
management services after taking ownership on behalf of investors due to the
borrower's defaults. This will relieve National of its ongoing obligations
under such agreements even though National could have terminated those
agreements unilaterally if it elected to do so. See "Background and Reasons for
the Acquisition -- General -- Servicing and Asset Management Fees" at page __
for details about the various post-foreclosure services provided to investors by
National.
THE COMPANY WILL OWE NATIONAL AND ITS PRINCIPALS AND EMPLOYEES $[1,818,684]
OF ACCRUED BUT UNPAID ASSET MANAGEMENT AND PROPERTY MANAGEMENT FEES AND EXPENSES
DUE FROM THE
17
<PAGE>
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. Prior to the dates that title to the
properties securing the original program loans was taken, National was
entitled to an annual loan servicing fee equal to one percent of the original
loan amounts. When title to the properties was taken on behalf of the
programs even though the loans no longer existed, National charged an asset
management fee at the same 1% annual rate that it earned for previously
servicing the loans. While it had no obligation to do so, in order to assist
the beneficial owners in protecting their real estate assets and readying
them for sale or development, National acted as an asset manager after title
was taken to the properties. In this capacity, National obtained information
from investors about their preferences in regard to development or sale of
the properties, acted as assessing agent to raise funds necessary to pay
property taxes, insurance and other costs of property. The annual fees
payable to National are currently $50,000 for Sacramento/Delta Greens;
$300,000 for Oceanside; $65,000 for Yosemite/Ahwahnee I; $135,000 for
Yosemite/Ahwahnee II; $100,000 for Mori Point; $140,000 for Cypress Lakes;
$150,000 for Palmdale/Joshua Ranch; $5,000 for Esperanza; $3,153 for Stacey
Rose A; and $850 for Stacey Rose B. In addition to the one percent fee,
compensation has been accrued for property management services provided to
the Oceanside ($876,000 accrued since the date of ownership (November 1993);
$896,000 actually paid) and Yosemite/Ahwahnee properties ($600,535 accrued
since the date of ownership (September 1995); $-0- actually paid) by officers
and employees of National in their capacities as officers of Oceanside
Development, Inc. and Ahwahnee Golf Course & Resort, Inc. Those property
management services included, without limitation, solicitation, engagement,
coordination and supervisions of entitlement and permit processing,
environmental, engineering, planning, architectural, construction, marketing,
appraisal, legal, accounting and other experts as needed for each project;
due diligence on potential service providers; assistance in presentations and
applications for approvals to governmental agencies; packaging and
documenting the status of a project for potential financing, sale or joint
venture; supervising and managing the operational activities for construction
projects on the Oceanside and Yosemite/Ahwahnee projects; and contract
negotiations and documentation. To the extent similar property specific
services were provided to the other programs, they were provided without
extra charge because the necessary activities were less regular and
operationally intense.
SUMMARY OF BUSINESS PLAN
Our objective is to preserve as much of the investors' original principal
as is possible and improve the value and performance of the properties currently
held by the programs in the following ways:
- By developing selected properties for their highest and best use,
particularly the Yosemite/Ahwahnee property for timeshare and recreational
vehicle memberships;
- By increasing the current cash flow from the operating assets;
- By maximizing the potential profit margins of for-sale products like
lots and/or parcels;
18
<PAGE>
- By raising funds for the company's operations through the sale of
selected real estate assets acquired from the programs to outside buyers and
through the exercise of warrants; and
- By acquiring other projects or assets which are consistent with our
objectives and business plan, particularly those that can be timeshare oriented.
RESIDENTIAL DEVELOPMENTS. The Company will sell certain assets or programs
in bulk to raise operating funds that can be applied to more potentially
profitable areas of the company's business. Cash flow from the sale of parcels
for single-family homes and lots would continue our growth and build value.
We plan to continue to investigate the most feasible, profitable and
cost-effective ways to finalize the entitlements and provide for the
necessary infrastructure for the Sacramento/Delta Greens, Cypress Lakes,
Palmdale/Joshua Ranch, Esperanza and Stacey Rose properties while seeking
bulk buyers at acceptable prices and/or joint venture partners on reasonable
financial terms.
RESORT DEVELOPMENTS. We will enhance the value of Yosemite/Ahwahnee by
continuing to develop the project. While the project itself presently has
limited cash available for capital improvements, we believe the highest
potential rewards lie in this segment of the company's asset base. By using the
remaining funds available from the sale of the golf course and additional
surrounding land to the Oceanside investors or from the sale of certain assets
of other programs, we will aggressively continue to develop vacation villa
timeshare units and recreational vehicle sites. We will also continue to
process the necessary approvals for the Mori Point property which we believe has
the potential to attract hotel and conference center industry-oriented joint
venture partners or purchasers. In the future, we may also target additional
resort or over-night-stay projects for potential acquisition or joint venture.
See "Business and Properties -- Properties" at page __ and "-- Consolidation of
the Programs" at page __ for further details regarding all of the properties.
MANAGEMENT. The Board of Directors will oversee the management of the
company. After the acquisition all directors will be elected by the
shareholders. The Board will consist of six directors, including three
directors who are independent of the company. For background on management of
the company and their compensation, see "Management Following the Acquisition"
at page __.
COMPARISON OF THE PROGRAMS AND THE COMPANY
The summary information below highlights a number of significant
differences between the programs and the company. See "Comparison of the
Programs and the Company" at page __.
FORM OF ORGANIZATION. The programs began as tenancy-in-common investments
in loans secured by first liens against real estate. 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.
19
<PAGE>
LENGTH OF INVESTMENT. When you invested in the loans, you expected to
receive interest payments and repayment of the principal amount 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 future 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 at least
seven 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 under their current tenancy-in-common structure, except through
mandatory assessments. On the other hand, 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 charging fees
under the program agreements in the aggregate amount of approximately $949,000
per year. As of June 30, 1998, the programs have accrued fees and advances due
to National and its principals and employees of $[1,818,684],which will be
assumed and paid in the general course of the company's business. In addition,
National also has represented that it was owed fees and made advances to the
programs totalling $[3,495,308] which it forgave prior to 1995. Since these
fees and advances were incurred and forgiven prior to 1995, 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 units in exchange for its interests held as
an investor in each of the programs in the same manner and at the same exchange
value as all other investors. National, however, will not exercise any of the
warrants it receives with the units.
MANAGEMENT CONTROL AND RESPONSIBILITIES. Currently, under the servicing
agreements, National serves as your agent in managing the properties. 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, founders of the company will control a
maximum of [18.74]% (5.45% if all warrants are exercised) of the voting shares.
20
<PAGE>
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 at least seven of the ten programs. However, your
relative voting power will be reduced.
LIQUIDITY. The tenancy-in-common interests in the programs constitute
illiquid investments which are very difficult to sell. The shares are expected
to be listed on the _____ and be freely tradable.
TAX TREATMENT. The company will be taxed as a corporation. Currently, the
programs themselves are not taxpayers and file no program tax returns. Prior to
taking title to the properties, when income was allocated to a program investor
that was interest, National, as servicing agent, reported such income to the IRS
and the investors on Form 1099-INT. As tenancy-in-common owners of the
properties, the investors no longer receive Forms-1099 from National, but are
responsible for their pro rata share of any income, gain, loss or deductions
attributable to their program's properties. If the company makes distributions
to shareholders, it will report the distributions on Form 1099-DIV whether or
not they are taxable entities.
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 cash on hand, proceeds of the sale of the units, if any,
and 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 ten 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 and obtain city and
other governmental approvals of the project's
tentative map and design. Approximately $175,000
of capital needed to complete the engineering,
environmental and other wetlands activities to
finalize the tentative tract map process.
21
<PAGE>
Oceanside Continue to hold the Yosemite/Ahwahnee golf course
and surrounding land for lease and potential
ultimate sale back to the Yosemite/Ahwahnee
Program.
Yosemite/Ahwahnee I & II Continue to operate the golf course, expand
recreational vehicle membership park, build a new
public overnight stay park, construct timeshare
units, and market these products and services.
Approximately $3,000,000 of additional 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.
Cypress Lakes Proceed with providing the due diligence
documentation required by the current potential
buyer. Consummate the transaction if possible.
If for some reason the buyer backs out, then
approximately $400,000 of capital will be needed
for the management, engineering and legal expenses
to redesign the project to minimize infrastructure
costs and to renew the tentative map.
Palmdale/Joshua Ranch Approximately $140,000 of capital will be needed
to proceed with finalizing the engineering,
grading studies, soil analysis and other cost
estimates. (A vested tentative map was secured on
the property in early July 1998.) Pursue a bulk
sale at adequate prices, the attraction of joint
venture partners and to determine the feasibility
for infrastructure financing will be conducted.
Esperanza Pursue a bulk sale that is reasonable under the
current economic conditions, preferably before
delinquent property taxes become due in 2000.
Stacey Rose A & B Pursue the approval of a tentative tract map from
the City of Victorville. It is estimated that the
cost will exceed $50,000 and will require about
nine months. At that point, management believes
the property would be of greater interest to
prospective buyers.
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 sell one or more of the properties to
direct funds to the most profitable areas of the Company's business, most likely
timeshares, recreational vehicle membership sales and acquisitions of other
properties conducive to such business. The total capital needed is
approximately $[4,715,000]. this can be provided through the sale of units,
from debt
22
<PAGE>
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 prioritize and 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 under Section 351 of the Internal Revenue
Code. Arter & Hadden LLP, tax counsel to the company, CANNOT PROVIDE CERTAINTY
THAT THE ACQUISITION WILL QUALIFY UNDER SECTION 351.
Tax counsel is of the opinion that the acquisition will qualify under
Section 351 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 facts do not provide tax counsel with a
basis upon which to opine that the 80% test is or is not met).
The determination of whether the 80% test is met depends on whether
investors who subsequently dispose of shares acquired in the acquisition are
treated as not being holders "immediately after the acquisition." Neither the
company nor tax counsel is in a position to determine whether investors who will
acquire more than 80% but who later sell some of those shares will or will not
be deemed by the taxing authorities to have held those shares "immediately after
the acquisition." See "Federal Income Tax Consequences -- Qualification of the
Acquisition as a Qualifying Section 351 Transaction" at page __ for an in-depth
analysis of the tax issues and the reasons tax counsel is unable to provide a
definitive opinion on this aspect of the transaction.
If the acquisition qualifies under Section 351, 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, except with respect to gain, if
any, with respect to their receipt of warrants. If the acquisition does not
qualify under Section 351, tax counsel is of the opinion that the company will
recognize no gain or loss in the acquisition, but an investor will recognize
gain or loss upon receipt of shares and warrants. 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
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<PAGE>
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
- if the acquisition is completed, David Lasker and James Orth, the
principal stockholders of National, will receive some or all of the following
benefits: stock ownership in the company (up to 6.88% each (2% if all
warrants are exercised)), cash compensation in the form of salaries ($180,000
per year each) subject to annual increases and potential bonuses, stock
options, potential incentive compensation, and the right to participate in
company-wide employee benefit programs;
- 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;
- 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
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 seven of the "Trudy Pat"
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 units,
- approval of the [units][shares] for listing on the _______________,
and
- the issuance to the company of policies of title insurance on each
of the properties.
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<PAGE>
CONSEQUENCES IF ACQUISITION NOT APPROVED
If the acquisition is not approved, National will ask investors to
approve the sale of the assets of each program for the best price possible,
pay the then outstanding obligations of the investors in the programs, and
return any net proceeds of the sale to the program's investors. If no sale
acceptable to investors in a particular program can be arranged, and if
investors in that program do not provide sufficient additional funds in a
timely manner to pay property taxes and cover National's current and accrued
fees for asset and property management services, then, as permitted by the
servicing agreements, National will consider resigning. As a last resort,
National may determine that bankruptcy protection and liquidation may be in
the best interest of investors of a particular program. Under California
law, National is the investors' agent and has certain fiduciary duties. The
duties require National (i) to use reasonable care and diligence in managing
the programs, (ii) not to compete with investors without full disclosure and
consent, and (iii) not to obtain an adverse interest to the investors without
full disclosure and consent. National does not believe that any of the
foregoing actions would breach its fiduciary duties to investors. No sale
can take place without the approval of holders of a majority of the interests
in any particular program. If no acceptable sale is arranged and if the
investors in a program fail to make sufficient payments to keep the program
financially viable, National will have done all it can do to protect the
interests of that program's investors.
DELIVERY OF UNITS
The company will mail your units 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:
25
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<TABLE>
<CAPTION>
Outstanding Investment;
Name of Program Number of Votes
--------------- ---------------
[6/30/98]
<S> <C>
Sacramento/Delta Greens 6,131,638
Oceanside 24,150,000
Yosemite/Ahwahnee I 9,063,163
Yosemite/Ahwahnee II 19,565,333
Mori Point 12,342,259
Cypress Lakes 18,971,767
Palmdale/Joshua Ranch 18,107,814
Esperanza 584,653
Stacey Rose A 114,098
Stacey Rose B 425,188
</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, other than Esperanza, Stacey Rose A and Stacey Rose B, must approve
the acquisition. Based on amounts of tenancy-in-common interests purchased
in each program, National has the following votes in each of the programs:
3,118 Sacramento/Delta Greens; 2,300 Oceanside; 2,373 Yosemite/Ahwahnee I;
69,384 Yosemite/Ahwahnee II; 5,279 in Mori Point; Cypress Lakes 3,200; and
Palmdale/Joshua Ranch 2,395; Esperanza -0-; Stacey Rose A 4,247 and Stacey
Rose B $15,753 based on National's ownership costs of $20,000 for an adjacent
parcel for the benefit of the two Stacey Rose Programs. It will cast all of
its votes in favor of the acquisition.
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
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<PAGE>
the servicing agreement with National. Termination of the servicing
agreement relieves National of any future liabilities or responsibilities to
the program, but all amounts owing to National under the servicing agreement
after the acquisition will be assumed by the company.
NO DISSENTERS' RIGHTS
If you vote "NO" on the acquisition, and the acquisition is approved,
you will have no choice other than to take shares in the company. You will
not be entitled to object to the transaction and receive a cash payment for
your interest under the tenancy-in-common agreements governing the programs
or applicable law. See "Voting Procedures -- No Dissenters' Rights" at
page __.
NO RIGHT TO PROGRAM BOOKS AND RECORDS
You have no rights under your program's tenancy-in-common agreement or
your servicing agreement, or under federal or state law, to obtain a list of
the names and addresses of the other investors in your program or to inspect
other books and records of your program. If you wish to communicate with the
other investors in your program, upon receipt of the material you wish mailed
together with the amount of postage necessary to make such mailing and an
opinion of experienced counsel acceptable to National that the proposed
communication and the method of communication is reasonable and does not
violate applicable federal or state securities laws or state real estate
laws, National will promptly mail such communications to your program's
investors.
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.
27
<PAGE>
<TABLE>
<CAPTION>
Company Pro Forma The Acquisition Historical
------------------------------------ ----------------------------------------------------
Six Months Ended Year Ended
June 30, December 31,
1998 1997 Years Ended
---------------- ------------ December 31
The The -----------------------------------------------------
Acquisition Acquisition 1997 1996 1995
---------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 324,654 $ 5,193,012 $ 5,193,012 $ 6,213,299 $ 6,333,143
Cost of sales 121,187 4,081,530 4,081,530 5,224,186 5,346,735
---------------- ------------ ------------- ------------- -------------
Gross profit 203,467 1,111,482 1,111,482 989,113 986,408
Expenses:
Selling, general and
administrative 2,413,683 5,676,067 4,357,059 4,029,618 2,486,099
Land write-down 255,000 1,299,651 1,299,651 845,000 16,167,424
Management fees - 0 949,003 949,003 949,003
---------------- ------------ ------------- ------------- -------------
Total expenses $2,668,683 $ 6,975,091 $ 6,605,713 $ 5,823,621 $ 19,602,526
Net interest income
(expense) (1,117) 31,345 31,345 73,205 1,222,008
---------------- ------------ ------------- ------------- -------------
Gain on sale of property 2,256,802 - - - -
---------------- ------------ ------------- ------------- -------------
Net loss $ (209,531) $(5,832,886) $(5,462,886) $(4,761,303) $(17,394,110)
---------------- ------------ ------------- ------------- -------------
---------------- ------------ ------------- ------------- -------------
Net loss per share (0.12) (3.38) N/A N/A N/A
---------------- ------------
---------------- ------------
Average number of shares
outstanding 1,726,617 [1,726,617] N/A N/A N/A
---------------- ------------
---------------- ------------
Balance Sheet Data:
Cash and cash
equivalents 2,809,752 N/A 540,909 1,065,715 N/A
Total real estate 27,601,000 N/A 27,427,617 28,444,055 N/A
Total assets 32,059,053 N/A 32,065,559 34,561,602 N/A
Total debt 313,083 N/A 324,920 424,767 N/A
Total liabilities 5,844,634 N/A 6,938,267 4,782,370 N/A
Stockholders'/
owners' equity 26,214,419 N/A 25,127,292 29,779,232 N/A
Other Data:
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<PAGE>
Cash used in operating
activities (2,525,042) N/A (2,015,894) (1,658,879) (68,615)
Cash provided by (used
in) investing
activities 6,988,374 N/A (163,264) (186,211) (436,545)
Cash provided by (used
in) financing
activities (2,067,345) N/A 1,523,975 1,168,817 674,403
</TABLE>
[NOTE THAT THE AVERAGE NUMBER OF SHARES OUTSTANDING WILL CHANGE AS WE
RECALCULATE EXCHANGE VALUES UNTIL WE GO EFFECTIVE. THAT'S WHY THEY ARE
BRACKETED.]
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 AGAIN. 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. March 1998 appraised or updated values for
the properties were: Sacramento/Delta Greens - $1,745,000; Oceanside -
$5,080,000; Yosemite/ Ahwahnee I - $1,782,950; Yosemite/Ahwahnee II -
$3,703,050; Mori Point - $6,000,000; Cypress Lakes - $6,000,000;
Palmdale/Joshua Ranch - $2,700,000; Esperanza - $270,000; Stacey Rose A and B
properties and the adjacent parcel combined - $320,000) for a total of
$27,601,000. 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 $20 per unit, the arbitrary value assigned to the
company's units to be delivered in the acquisition is $[28,066,419] even
though the shares included in the units to be delivered to you in the
acquisition will likely trade
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initially at prices substantially below $20 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 March 1998, and do not reflect subsequent events. Exchange
values reflect adjustments to appraised values described in "Background and
Reasons for the Acquisition -- Calculation of Exchange Value" at page __.
Since the shares included in the units you receive as a result of this
transaction may initially trade at prices substantially below the arbitrarily
determined exchange value of $20 per unit, you could wind up with less money
reflected in the value of your units than if your program's property was sold
for cash. The exchange value of the units the owners of all of the
properties 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.
THE SHARES INCLUDED IN THE UNITS MAY TRADE INITIALLY AT PRICES
SUBSTANTIALLY BELOW THE ARBITRARILY DETERMINED EXCHANGE VALUE OF $20 PER
UNIT. The shares have never been sold in a public securities market. There
is no guaranty that a liquid trading market will develop, or be sustained,
for the shares. If the shares trade, the initial trading price is likely to
be substantially less than the arbitrary $20 issuance price of the units or
the book value of the company's assets. The market price of the shares
included in the units will likely be less than $20 per share after the
acquisition, particularly if investors decide to sell a large number of their
shares shortly after the acquisition.
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 or the arbitrary powers of a general partner.
However, as servicing agent, and later as asset manager for each of the
programs, National has had its 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 among others the principal shareholders of National, will hold
approximately [16.42]% (4.78% if all warrants are exercised) of the company's
stock for which they paid $0.01 per share. Other company founders will hold
approximately [2.33]% of the outstanding shares (0.68% if all warrants are
exercised) of the company for which they also paid $0.01 per share.
Therefore, the investors' total ownership interests in the programs'
properties will be diluted by the equity interest in the company to be held
by the founders of the company. The executive officers of the company will
receive annual cash compensation aggregating $[560,000]. National will be
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relieved of its asset management obligations (and cease to earn associated
fees of approximately $950,000 per year), but the company will still owe
National and its affiliates over $[1,800,000] of accrued but unpaid fees and
expenses. In addition, the founders of the company may not always have the
ability to make decisions for the company without thinking of the
consequences to themselves.
Completion of the acquisition will relieve National from its duties,
including fiduciary duties, and related costs as asset manager for each of
the programs. These duties will be assumed by the company. 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.
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.
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 DID 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 allocated fewer shares. Additionally, the allocation
of units 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
excess funds to hire a separate representative for you.
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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 but investors
may recognize realized gain, if any, with respect to their receipt of
warrants. If the acquisition does not qualify under Section 351, investors
generally will recognize gain or loss. See "Federal Income Tax Consequences"
at page __. Among other requirements to qualify the acquisition under
Section 351, investors must be treated as owning 80% or more of the
outstanding shares of the company "immediately after the exchange." As
discussed in "Federal Income Tax Consequences - Qualification of the
Acquisition as a Section 351 Transaction - 1. General Rules," this
determination depends on whether investors who subsequently dispose of shares
are subject to the "step transaction doctrine" with respect to such
dispositions and their initial acquisition of the shares.
Neither the company nor counsel to the company is in a position to make
a determination as to whether investors who will acquire more than 80% of the
outstanding shares of the company will or will not be subject to the step
transaction doctrine. Consequently, counsel to the company is unable to
opine as to whether the acquisition qualifies under Section 351. However,
because (i) investors will acquire 80% or more of the shares in the
acquisition, and (ii) the company is not aware of any facts which lead it to
believe that any subsequent disposition of shares by one or more investors
may be subject to the step transaction doctrine, the company intends to take
the position that the acquisition qualifies under Section 351. There can be
no assurance, however, that the IRS will not take a contrary position.
Investors should recognize that if a relatively small number of
investors subsequently dispose of their shares in transactions subject to the
step transaction doctrine, the acquisition will not qualify under Section 351.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, the properties will not be subject to any liens other than
possible mechanics' liens and liens imposed as a result of an aggregate of
approximately $[1,000,000] in past due property taxes owed as of June 30,
1998 and which are not paid when due in future years. 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 __.
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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 __.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long time. This means that shares in the
company are much riskier than ownership of shares of established companies.
If the company had been operating as if it owned the properties which it
desires to acquire, it would have experienced losses to date.
YOUR VOTING RIGHTS WILL CHANGE. You will not be able to vote on changes
or dispositions of a particular property. Those decisions will be made by
the board of directors or management. In addition, you will have an
investment in an entity that is larger than each of the programs and, thus,
you will lose relative voting power.
CASH DISTRIBUTION POLICIES WILL BE CHANGED. Despite the expectation of
investors that they would receive regular principal and interest payments on
their original investments, there have been no distributions from any of the
programs, other than the Oceanside program, in the past three years due to
the original borrowers' defaults. Future cash distributions will be based on
the company's earnings and the decision of the board of directors to pay
dividends. Therefore, even if a particular property were to perform well,
there is no assurance that there would be cash distributions to you.
THE METHOD OF MANAGEMENT COMPENSATION WILL BE CHANGED. National
rendered asset management and property management services to the programs
subsequent to the time when the original borrowers defaulted and the
investors became beneficial owners of the property. In the future,
compensation will be paid to officers of the company in the form of salaries,
stock options and other benefits. These salaries and other forms of
compensation will be payable to management of the company even if one or more
of the properties acquired in the acquisition is subsequently sold.
HOLDERS OF A MAJORITY OF TENANCY-IN-COMMON INTEREST BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of the
outstanding interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE DIFFERENCES IN YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THE EXCHANGE VALUES FOR THESE
PROPERTIES MAY BE TOO LOW OR TOO HIGH. As discussed in "Background and
Reasons for the Acquisition -- Exchange Values and Allocation of Shares to
the Programs" at page __, National reviewed the updated March 1998 appraisal
of the Yosemite/Ahwahnee properties which reflected an aggregate "as is"
appraised value of $20,246,000 and the October 1996 appraisal which reflected
an "as is" aggregate appraised value of $4,000,000. The results of those
appraisals clearly differed from each other, and, in management's judgment,
the difference could not be accounted for by
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improving market conditions. Some of the parcels, including the golf course,
were subsequently sold, on June 5, 1998, to the Oceanside Program investors
to obtain working capital. Based on its review of all appraisals, National
concluded that the properties currently owned by the Yosemite/Ahwahnee I and
II Programs have values of $5,486,000 ($1,782,950 and $3,703,050,
respectively), and the parcels currently owned by the Oceanside Program have
a value of $5,080,000. National believes its approach is reasonable.
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 June 30, 1998: Sacramento/Delta
Greens -approximately $27,000; Yosemite/Ahwahnee (combined) - approximately
$500,000; Mori Point - approximately $165,000; Cypress Lakes - approximately
$204,000; Palmdale/Joshua Ranch - approximately $63,000; Esperanza -
approximately $20,000; and Stacey Rose (combined) - approximately $30,000.
Annual payments required for all the properties for current taxes (including
amounts currently due on five-year payment plans) total approximately
$549,000. In the case of Sacramento/Delta Greens, Yosemite/Ahwahnee, Mori
Point, Palmdale/Joshua Ranch and Stacey Rose properties, National has entered
into statutorily authorized five-year payment plans with the applicable
taxing authorities.
CERTAIN ASSETS MAY HAVE TO BE SOLD TO RAISE WORKING CAPITAL. Unless a
minimum of approximately $4,715,000 from the sale of certain assets of the
programs or funds from the exercise of warrants become available, the company
will not be able to proceed with its entire business plan. The company will
also need financing from other sources to complete its plan. Financing
sources are not predictable and interest rates or other costs of financing
may be prohibitive. Neither the programs nor the company have received any
commitment from any sources for financing.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay assessments for
streets, schools and parks which increase the cost of development. Increased
costs can have a negative affect on the company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss
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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 $1,818,684 BY THE COMPANY. This represents accrued fees and expenses
from the programs which National has not cancelled. This amount is due and
payable and the company intends to start paying it after the Acquisition, but
only from operating revenues or proceeds from the sale of assets, but not
from working capital generated by the proceeds of unit sales.
REAL ESTATE RISKS OF SPECIFIC PROPERTIES
ALL OF THESE FACTORS CAN AFFECT OUR REVENUES, PROFITS AND DIVIDEND
DISTRIBUTIONS, IF ANY, AND THE VALUE OF YOUR INVESTMENT.
SACRAMENTO/DELTA GREENS
PERMITS TO DEVELOP THE PROPERTIES NEED TO BE OBTAINED. Construction of
the Sacramento/Delta Greens property will require approval of a new tentative
map, the filing of a final map and obtaining building permits from the city.
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 have had to be conducted to identify
any endangered species' habitat which may exist on the property. Since some
were identified, such as burrowing owls and fairy shrimp, changes to the
tentative development plans have been made that will reduce or eliminate any
damage to the habitat. A new tentative map needs to be approved by the City.
The longer this process takes, the longer it will be before any of the
property is ready for any construction, further development activity or sale.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Changing market
conditions may increase the difficulty of selling the lots. If the company
chooses to build homes on the lots, delays in construction, the lack of
reasonably priced construction or mortgage financing, and the general
California economy could lengthen the holding period for the lots. This
would mean a delay in realizing
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cash from the business operations. The average carrying costs, including
property taxes, predevelopment activities and asset management fees for this
property have averaged approximately $10,000 per month over the past three
years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential development and
represents over 5% of the assets of the company. Although there can be no
assurances, net revenues from Sacramento/Delta Greens can 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 pay the engineering costs required to mitigate endangered
species issues and pay for the planning and design expenses for final City
approvals (to cost approximately $175,000). 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.
YOSEMITE/AHWAHNEE PROPERTIES (including the golf course, which is owned
by the Oceanside Program)
PERMITS TO DEVELOP THE CONDOMINIUM-TYPE TIMESHARE ASPECT OF THE RESORT
HAVE NOT YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map
on 32 remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Planning is currently underway for vacation villa
timeshare units utilizing part of the allocated use permit space for
recreational vehicles. Additional planned usage such as traditional,
attached timeshare units will require extensive county and state approvals
through the Departments of Real Estate and Housing and Community 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
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course for its revenue. National estimates that the value of the golf course
will be less than 15% 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 timeshare resort projects as part of its growth
strategy. Economic conditions, changes in travel patterns, extreme weather
conditions, labor and other variable costs can all affect revenues and
profits. For example, Spring through Fall at the Yosemite/Ahwahnee property
are the periods of highest occupancy. Seasonality can be expected to cause
quarterly fluctuations in the company's revenues.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers who borrow to buy a home. If a buyer
defaults, we would incur costs in remarketing the timeshare.
The timeshare industry is extremely competitive and we may not be able
to secure development financing on acceptable terms.
Since the project is not yet permitted for traditional attached
timeshare units, there has been no allocation of assets. Should attached
timeshare units be approved, the company anticipates that a significant
portion of the revenue of the company will be derived from sales of these
timeshare units. It anticipates that possibly in excess of 25% of the
revenues will be derived from only the vacation villa timeshare portion of
the project.
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 $350,000) annually and
(ii) complete the construction of additional recreational vehicle sites and
obtain approvals for and construction of the first group of vacation villa
timeshare units (estimated by management to cost approximately $3,000,000).
There is also a risk that the operation of recreational vehicle sites,
timeshares and golf course activities may not be profitable.
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
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mitigation plan cannot be developed. The permitting process with the
California Coastal Commission and the City of Pacifica is expensive and time
consuming. Mori Point had a specific plan and tentative map to build a
hotel/conference center which expired in 1991. These approvals must be
reinstated prior to construction on the property.
HOTEL/CONFERENCE CENTER DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF
REASONS AND COULD RESULT IN LOSSES. In addition to normal real estate risks,
financing is hard to obtain, and the lodging industry can be unpredictable,
seasonal and very competitive. Without additional financing or capital, the
company will not be able to develop its hotel/conference center project as
part of its growth strategy. Economic conditions, changes in travel
patterns, extreme weather conditions, labor and other variable costs can all
affect revenues and profits. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues. At the hotel/conference center
property at Mori Point, we may be competing against well-known chains and
extended-stay inns.
Mori Point represents approximately 20% of the assets of the company
and, assuming it is operated as a hotel/conference center, its revenues could
ultimately 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. Financing will also be necessary for roads, utilities and other
infrastructure costs prior to construction. Finally, there is a risk that
the proposed hotel/conference center may not be profitable.
CYPRESS LAKES PROPERTY
THE VESTED TENTATIVE MAP NEEDS MODIFICATION AND BUILD OUT OF THE
PROPERTY WILL BE EXPENSIVE. Due to being located in a 100-year flood plain,
the property requires a levee to be constructed around its perimeter which is
very expensive to construct. It may be desirable to change the vesting
tentative map if the costs can be reduced significantly. However, any
changes in the existing plan could subject the project to public hearings
which might result in additional costs being placed on the project. This
would further increase the high front-end financial requirements.
Additionally, such modifications might not be approved.
Cypress Lakes is a proposed master-planned community and represents more
than 20% of the assets of the Company. Joint venture partners would have to
be brought in by the Company to help with the large capital requirements of
such a large project. It may be difficult to find substantial
builder/developers who have the financial ability to purchase or develop the
project. Changing market conditions may increase the difficulty in selling
lots.
Should the Company determine to build out the project, delays in
construction, reasonably priced mortgage and construction financing and the
local and general California economy could lengthen the holding period for
the lots. This would mean delays in realizing cash from the business
operations.
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RISKS AFFECTING OPERATION OF A GOLF COURSE. When, and if, the golf
course is developed, it will face competition from the golf courses within a
25 mile radius. Seasonality, weather and course conditions will affect the
operations of the company. 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.
RISKS OF RESIDENTIAL DEVELOPMENT. Totaling 1,330 lots, a large supply
of lots would be available ,and due to the cyclical nature of the housing
industry, demand may not stay in sync with supply. This could result in
needing to sell properties at a loss. Due to the size of the project, it
could take between six and ten years to complete, which would subject it to
new competitors entering the marketplace during the sales period.
PALMDALE/JOSHUA RANCH PROPERTY
A FINAL TRACT MAP MUST BE RECORDED. After several years of effort by
National, the vested tentative map was approved by the City of Palmdale at a
hearing before the planning commission in early July 1998. A final recorded
map must be secured by National or a buyer in order to build on the property.
Final engineering, soils, utility and various improvement studies will need
to be conducted in order to record the final map.
PERMITS TO DEVELOP THE PROPERTY NEED TO BE OBTAINED. A final recorded
map, which could take nine to twelve months after starting the process, will
be required prior to construction. Due to the size of this project which
encompasses some 739.6 acres and is currently planned for 539 lots,
additional grading studies, soils investigation and utility planning needs to
be done which could negatively impact the cost of this large-scale
development.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Finding
builder/developers that have the financial strength to handle this size
project can be difficult. Changing market conditions, the lack of
reasonably-priced construction or mortgage financing and the general or local
market conditions could lengthen the holding period for lots. This would
mean a delay in realizing cash from business operations. The average
carrying costs, including property taxes, predevelopment and asset management
services for this Property have averaged approximately $16,300 per month over
the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, the Property may be sold at a loss. The location of the lots, the
presence of other competition, customer acceptance and pricing are all
factors affecting success. Competitors may have better financial, managerial
and other resources affecting the Company's ability to successfully compete.
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<PAGE>
Palmdale/Joshua Ranch is a proposed residential development and
represents about 10% of the assets of the Company.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to pay for or finance (i) engineering, soils and utility studies
which is estimated to cost approximately $140,000, and (ii) another risk is
whether the lots to be developed may appeal to project builders.
ESPERANZA PROPERTY
RISKS OF COMMERCIAL DEVELOPMENT. The material risks associated with the
development of the Esperanza Property are (i) as of June 30, 1998,
approximately $23,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the
County of Riverside to avoid loss of the Property for delinquent property
taxes; and (ii) despite a strong economy, rents and values for many retail
properties are expected to remain soft in 1998. Pressure on rents brought
about by over building, weakness in demand for space and store closures
caused by lagging profits are the forces causing a soft market.
ADDITIONAL SPECIFIC RISKS. Within the City of Victorville there are
approximately 3,250 acres zoned for commercial use, of which 60% remains
available for development. Victorville is home to the largest enclosed
regional shopping center between San Bernardino and Las Vegas, which is known
as The Mall of Victor Valley. These commercial sites represent significant
competition to the Esperanza project. There are more than 5,400 acres within
the city limits of Victorville zoned for light and heavy industrial use.
Nearly nine percent of this 5,400 acres of land is vacant and is available in
parcels ranging in size from one-half to five hundred acres.
STACEY ROSE PROPERTIES
RISKS OF RESIDENTIAL DEVELOPMENT. The material risks associated with
the development of the Stacey Rose Properties are (i) as of June 30, 1998,
approximately $30,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the
County of Riverside to avoid loss of the Properties for delinquent property
taxes; (ii) it is estimated that it may cost about $50,000 to finalize a
tentative tract map on the parcels; (iii) a substantial, and potentially
expensive, sales and marketing effort will be necessary to sell homes
constructed on the properties if a bulk sale of the lots is not made; (iv)
the Properties are located in a lower income residential area; and (v)
increasing government fees and assessments for streets, schools, parks and
other infrastructure requirements could increase the cost of lots to the
company, thereby increasing the sales price of the lots which will delay
market absorption.
ADDITIONAL SPECIFIC RISKS. There is a risk that (i) adequate funds will
not be available to finalize a tentative tract map on the parcels
(approximately $50,000); (ii) the project will not appeal to project
builders; and (iii) home financing at reasonable costs may not be available.
There is also a risk that the development and sale of lots or home may not be
profitable.
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<PAGE>
ANTI-TAKEOVER PROVISIONS AND LIMITATION OF DIRECTOR LIABILITY
Certain provisions of the charter documents may restrict changes in
control of the company's management. These provisions may make it more
difficult or expensive for another party to acquire and exercise control of
the company or to change its management, even if that change would be
beneficial to you. These provisions include:
ADDITIONAL CLASSES OF SHARES. Under the company's certificate of
incorporation, subject to the receipt of fair value, the Board of Directors
may issue shares in other classes or series and fix the rights, powers and
limitations associated with such shares. Although the Board of Directors has
no present intention of doing so, it could issue a class or series that
could, depending on its terms, impede a merger, tender offer or other
transaction that you might believe is in your best interest or in which you
might receive a premium for your shares over the then current market price.
The issuance of such shares could also dilute your voting power. See
"Description of Shares" at page __.
STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability
to change control of the company, 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% of the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company. See
"Comparison of Programs and Company -- Restrictions on Related Party
Transactions and Business Combinations" at page __.
SUPERMAJORITY VOTES. Changes to the company's certificate of
incorporation which cover anti-takeover provisions require the approval of
two-thirds of the company's voting stock. This restriction also may deter
potential purchasers who seek control of the company. See "Comparisons of
the Programs and the Company -- Anti-Takeover Provisions" at page __.
In addition to the anti-takeover provisions, the Delaware law, as well
as the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements and limit
shareholders' claims against management. See "Fiduciary Responsibility and
Indemnification --Limitation on Liability of Directors and Officers of the
Company" at page __.
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<PAGE>
CAPITALIZED TERMS USED THROUGHOUT THE REST OF THIS PROSPECTUS AND IN THE
ACCOMPANYING SUPPLEMENT ARE DEFINED IN THE GLOSSARY LOCATED AT THE END
OF THE PROSPECTUS, JUST BEFORE THE FINANCIAL STATEMENTS.
BACKGROUND AND REASONS FOR THE ACQUISITION
GENERAL
National is a California corporation that was formed in 1986. National
is a licensed real estate broker in the State of California. Pursuant to a
series of permits issued by the California Department of Corporations,
National offered fractionalized interests in loans secured by deeds of trusts
to investors who satisfied the suitability standards set forth in the
applicable offering materials and who could invest a minimum of $2,000. The
fractionalized interests offered pursuant to the permits were commonly
referred to as trust deed participation or "Trudy Pat" investments. In
addition, National also sold through private placements fractionalized
interests in loans secured by deeds of trust. Since those interests were not
sold pursuant to permits from the California Department of Corporations,
National did not refer to them as "Trudy Pat" programs.
From 1988 through 1993, National arranged a number of loans for various
builders and land developers. In return, these borrowers offered promissory
notes and the security of a first deed of trust on their real estate
project(s) as collateral for a loan, normally at 50% or less loan-to-value
ratio (the ratio of the cumulative amount of the notes divided by the value
of the property as appraised by an independent qualified real estate
appraiser) for unimproved property and up to 85% loan-to-value of the
completed property (determined by independent appraisers) for property under
construction. The notes generally were short-term (two years), often with
extensions for one or two years at the option of the borrower and provided
interest to investors which was significantly higher than yields of other
types of investments available at the time. Pursuant to each servicing
agreement executed by each Investor, National was to receive a loan servicing
fee of one-twelfth of one percent of the initial amount of the note amount
per month.
Each Program has served as a separate investment vehicle for Investors.
Underwriting of a loan was based on an appraisal by an independent real
estate appraiser. In the case of each of the Programs described in this
document, 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 or purchase from a bankruptcy
trustee.)
SERVICING AND ASSET MANAGEMENT FEES. Pursuant to the servicing agreements,
National was entitled to an annual loan servicing fee of one percent of initial
amount of the loan. For this
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<PAGE>
fee, National was to collect interest and principal payments, remit them to
the Investors net of National's fee and other Program expenses, generally
monitor the performance of the loans and keep the Investors informed.
After title was taken to the Properties through the acquisition process
after borrowers' defaults, National's servicing fee-related activities were
no longer necessary. It was disclosed to the Investors in each Program that,
in order to assist them in protecting the value of their real estate assets
and avoiding the confusion of tenancy-in-common ownership of real estate by,
in most cases, several hundred Investors or more, National had converted its
role to that of an asset manager. Thereafter, National continued to manage
the assets of the Programs and charged the same one percent fee, even though
the asset management activities were much more intensive and costly than
servicing-related activities. Given the complexity of the tenancy-in-common
relationships involved in each Program, and the amount of work involved in
keeping Investors up-to-date and in planning for the financing and
development of the Properties, National believed the fee was at least as
reasonable as would be charged by third parties. The asset management
services are investor-related and include, but are not limited to,
identifying Investor objectives; maintaining compliance with Investor
assessment procedures set forth in the tenancy-in-common agreements;
processing ownership transfers for Investors; communicating with Investors in
writing, by telephone and, occasionally, in person; planning, coordinating
and executing Investors' directives indicated by majority vote (including the
development and implementation of a plan to obtain liquidity for, and enhance
the value of, Investors' interest in the Programs' real estate); and
monitoring and supervising third party providers of services to the Programs.
After the Oceanside and Yosemite/Ahwahnee foreclosures, in addition to
the one percent asset management fee earned by National, officers of National
(principally David Lasker and James Orth) also performed property management
services for those programs in their capacities as officers of the two
operating companies established by National for the benefit of Oceanside and
Yosemite/Ahwahnee I and II Investors, Oceanside Development, Inc. ("ODI") and
Ahwahnee Golf Course and Resort, Inc. ("AGCRI"). The property management
services and activities are property-specific and include, without
limitation, solicitation and engagement of entitlement and permit processing,
environmental, engineering, planning, architectural, construction, marketing,
appraisal, legal, accounting and other experts as needed for each project;
due diligence on potential service providers; assistance in presentations and
applications for approvals to governmental agencies; packaging and
documenting the status of a project for potential financing, sale or joint
venture; supervising and managing the operational activities for construction
projects on the Oceanside and Yosemite/Ahwahnee projects; and contract
negotiations and documentation. To the extent similar property specific
services were provided to the other Programs, they were provided without
extra charge because the necessary activities were less regular and less
operationally intense.
The following table sets forth for each of the Programs the asset
management fees National is entitled to receive for post-Ownership Date
services:
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<PAGE>
<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
Cypress Lakes 14,000,000 140,000 11,667
Palmdale/Joshua Ranch 15,000,000 150,000 12,500
Esperanza 500,000 5,000 417
Stacey Rose A 315,300 3,153 263
Stacey Rose B 85,000 850 71
</TABLE>
The following table sets forth for each of the Programs the unpaid
aggregate amount of asset management and property management fees accrued by
National and officers and employees of ODI and AGCRI after title to the
Properties was taken, loans to the Programs by National since that time,
allocated office expense of National during that time, and the remaining fees to
be owed to National and officers and employees of ODI and AGCRI after the
Acquisition:
<TABLE>
<CAPTION>
Allocated Total
Ownership Asset Property Loans to Office Amounts
Date Management(1)(2) Management(2)(3) Programs(4) Expense(5) Due(6)
--------- ---------------- ---------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens 3/93 $181,178 $ - $ 18,500 $ - $199,678
Oceanside 11/93 - 20,000 - - 20,000
Yosemite/Ahwahnee I 9/95 37,916 198,178(7) - 55,000 291,094
Yosemite/Ahwahnee II 9/95 75,831 396,357(7) - 110,000 582,188
Mori Point 8/92 537,885 - 43,655 - 581,540
Cypress Lakes 7/95 - - 47,046 - 47,046
Palmdale/Joshua Ranch 10/93 100 - 7,220 - 7,320
Esperanza 12/90 41,250 - - - 41,250
Stacey Rose A 10/92 7,066 - 3,247 - 10,313
Stacey Rose B 10/92 26,210 - 12,045 - 38,255
---------------- ---------------- ----------- ---------- ----------
Total $907,436 $ 614,535 $131,713 $165,000 $1,818,684
---------------- ---------------- ----------- ---------- ----------
---------------- ---------------- ----------- ---------- ----------
</TABLE>
- ----------
(1) For Investor-related services as described above; payable to National.
(2) See "Historical Compensation for Servicing, Asset Management and Property
Management/Effect of Acquisition" at page __ for amounts which have
actually been paid.
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<PAGE>
(3) For property-related services as described above. These amounts are
payable to officers and employees of ODI and AGCRI.
(4) Loans were made by National to cover operating needs which assessments paid
by Investors did not cover. These represent net amounts remaining owing to
National as of June 30, 1998.
(5) Despite the fact that a significant amount of work was conducted in
National's facilities for these properties, National allocated less than
ten percent of its office overhead to the Yosemite/Ahwahnee Programs in the
aggregate.
(6) For services performed prior to 1995, National was owed an aggregate of
$[3,495,308] of unpaid fees and advances made: $500,000 to Sacramento/Delta
Greens, $72,158 to Yosemite/Ahwahnee I, $1,157,867 to Yosemite/Ahwahnee II,
$461,589 to Mori Point, $1,120,000 to Cypress Lakes, $102,134 to Esperanza,
$64,293 to Stacey Rose A, and $17,267 to Stacey Rose B.
(7) Owed to officers and employees of AGCRI.
ORIGINAL DISCLOSURE AND SALES EFFORTS. Each "Trudy Pat" offering, as
well as the Esperanza and Stacey Rose A and B offerings, 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" and other interests were sold exclusively through
participating NASD member broker-dealers. At the time of purchase through
their broker, all Investors executed documents which included an
acknowledgment of receipt of the offering circular, a servicing agreement and
a tenancy-in-common agreement, as well as representations of their
suitability as participants according to the standards set forth in the
offering documents and an acknowledgment, confirmed by their broker, of their
understanding of the pertinent facts relating to the liquidity and
marketability of their interests. The servicing agreement provided for
National to collect payments from the borrower on behalf of the Investors and
distribute the proceeds of the collection net of National's servicing fees.
The servicing agreements also authorized National to take various remedial
actions on behalf of Investors in the event of a borrower default, subject to
broad discretionary powers and authorities. Pursuant to these provisions,
National has undertaken an asset management function on behalf of Investors.
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
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<PAGE>
amount of $13,500,000 with 837 Investors; for the Oceanside Program (1993) in
an aggregate amount of $30,000,000 with 1,755 Investors; for the Cypress
Lakes Program (1993) in an aggregate amount of $14,000,000 with 832
Investors; for the Palmdale/Joshua Ranch Program (1992) in an aggregate
amount of $15,000,000 with 1,011 Investors; for the Esperanza Program (1988)
in an aggregate amount of $500,000 with 42 Investors; for the Stacey Rose A
Program (1988) in an aggregate amount of $85,000 with two Investors; and for
the Stacey Rose B Program (1988) in an aggregate amount of $315,300 with 28
Investors. All of such offerings, with the exception of the Esperanza and
Stacey Rose Programs which were exempt, 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 loans were made, the
Properties were appraised by independent appraisers. The loans did not
exceed 50% of the then current appraised value for undeveloped land with the
exception of the original Oceanside Property which was a construction loan
funded at 85% of completed appraised value. The following table sets forth
the dates of the loan appraisals, the appraised values and the amount of the
loan.
<TABLE>
<CAPTION>
Date of Appraised
Program Appraisal Value Loan Amount Original Appraiser
------- --------- ---------------- ----------- ------------------
<S> <C> <C> <C> <C>
Sacramento/Delta Greens 9/8/88 $ 10,530,000(1) $ 5,000,000 Roche & Associates
Oceanside 8/26/91(2) 82,170,000(2) 30,000,000 Boznanski & Company
Yosemite/Ahwahnee I 3/22/89 13,080,000(1) 6,500,000 Arnold & Associates
Yosemite/Ahwahnee II 3/25/90 15,460,000(1) 7,000.000 Arnold & Associates
Yosemite/Ahwahnee II 9/20/92(3) 18,045,000(1) 6,500,000 Arnold & Associates
Mori Point 4/9/90 22,100,000(1) 10,000,000 Pacific Property Concepts
Cypress Lakes 6/30/93 31,060,000(1) 14,000,000 Sedway & Associates
Palmdale/Joshua Ranch 10/5/91 32-36,000,000(1) 15,000,000 Pacific Commercial Group
6/25/92(3) 40,400,000(1) Pacific Commercial Group
Esperanza 10/20/86 1,226,500(1) 500,000 Robert J. Holmes, MAI
Stacey Rose A(4) 4/2/88 5,920,000(1) 85,000 Richard V. Speck & Assoc.
Stacey Rose B(4) 4/2/88 315,300 Richard V. Speck & Assoc.
</TABLE>
- ----------
(1) Undeveloped land.
(2) Construction loans. Appraised as completed value. Appraisal updated on
November 22, 1991.
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<PAGE>
(3) Palmdale/Joshua Ranch appraisal updated at this time.
(4) Stacey Rose A and B properties were originally appraised as a single
property at $5,920,000, including an adjacent parcel acquired by National
for the benefit of Investors.
The differences between the appraised values at the time the loans were
made in the late 1980s and early 1990s and the appraised values as of March
1998 which were used to determine Exchange Values are due to market
conditions, local economy, competition, interest rates, costs of
construction, comparable prices and other factors taken into account by
appraisers. According to the Urban Land Institute, the Building Industry
Association, the Federal Savings and Loan Insurance Corporation and the
Federal Deposit Insurance Corporation, the significant recession in the
California economy during most of the 1990s was the primary cause of
reduction in real estate values throughout the State of California. Thus,
market conditions caused the decrease in appraised values between the time of
the loan appraisals and the appraisals used to determine Exchange Values.
APPRAISED VALUE AT OWNERSHIP DATES. Defaults occurred in each of the
above loans and National took title to the Properties for the benefit of the
applicable Investor group. 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:
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<PAGE>
<TABLE>
<CAPTION>
As of Ownership Date
--------------------------------------------------- Current Appraised
Unpaid Unpaid Value for
Ownership Principal Accrued Appraised Exchange Value
Program Date Balance(2) Interest(1) Value Calculations(4)
------- --------- ------------ ------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens 3/93 $ 5,000,000 $ 425,000 $ 3,075,000(4) $1,745,000
Oceanside 11/93 24,150,000 0(3) 6,484,000(4) 5,080,000(6)
Yosemite/Ahwahnee I 9/95 6,106,759 1,867,470 9,325,000(4) 1,782,950
Yosemite/Ahwahnee II 9/95 13,364,551 4,067,007 10,816,000(4) 3,703,050
Mori Point 8/92 10,000,000 1,570,834 4,100,000(4) 6,000,000
Cypress Lakes 7/95 14,000,000 3,550,264 5,200,000(5) 6,000,000
Palmdale/Joshua Ranch 10/93 15,000,000 1,073,125 5,390,000(5) 2,700,000
Esperanza 12/90 500,000 49,653 530,000(5) 270,000
Stacey Rose A 11/92 85,000 29,098 1,600,000(5)(8) 67,936(7)
Stacey Rose B 11/92 315,300 107,938 252,064(7)
</TABLE>
- ----------
(1) As of the Ownership Date.
(2) With the exception of Yosemite/Ahwahnee I and Yosemite/Ahwahnee II, at
Ownership Date no principal had been paid on these loans as they were
structured to be interest only with a "balloon" payment at maturity.
Subsequent to the Ownership Date, $5,850,000 of principal has been repaid
to Oceanside Investors.
(3) No delinquent interest at Ownership Date.
(4) Each Property's appraisal was updated as of March 31, 1998.
(5) Appraised in March 1998 to determine its value as of March 31 and as of the
Ownership Date.
(6) Represents appraised value of the outlots and golf course portions of the
Yosemite/Ahwahnee properties purchased by the Oceanside Program Investors
from the Yosemite/Ahwahnee Program Investors on June 5, 1998.
(7) Represents pro rata share of March 1998 appraisal.
(8) Consolidated for Stacey Rose A and B together.
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, in order to
enhance their value or make them more marketable, 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."
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<PAGE>
----------
Since taking title to the Properties, based on Investors' stated
preferences, National's objective has been to maximize the recovery of the
Investors' principal in the shortest period of time. See "-- Management of
the Programs since Foreclosure" and "-- Efforts to Dispose of the
Properties." After reviewing various alternatives (see "-- Alternative to the
Acquisition" and "-- Comparison of Alternatives"), National initiated and
structured the Acquisition. The proposed Acquisition involves the purchase
by the Company of the real estate assets of each of the Programs, the other
assets of each of the Programs including cash reserves and the assumption of
certain liabilities of each of the Programs. The Company proposes to use its
Common Stock arbitrarily valued at $20 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 May 1997 appraisal was updated as of March 1998.
The Property is located in Sacramento, California, and is held for the
benefit of the Sacramento/Delta Greens Investors by National Investors Land
Holding Trust IV. Subsequent to the foreclosure, on behalf of the
Sacramento/Delta Greens Investors, National hired consultants and engineers
to determine the economic, political and environmental issues surrounding the
Property. The City had approved a tentative map for detached and duplex
residential units. It was later determined by National that there was
considerable market and political resistance to any duplex housing, so it was
redesigned to be developed in multiple phases as a single-family detached,
entry-level housing product. This reduced the number of lots to 534 which
was then accepted by the City subject to mitigation of endangered species.
That mitigation resulted in the further reduction of the number of lots
available to approximately 465. The City has advised National to submit a
new tentative map application for approval. Attempts have been made to find
joint venture partners to assist in the financial requirements for processing
the final tract map, as well as to provide capital for infrastructure. In
1994, a proposed joint venture was considered and 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 to be
paid when built on and sold (or a total of $3,814,400) plus 50% of the
profits derived from home sales. It was estimated that this would have been
an approximate five year process. The transaction was never 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. Because of market conditions through 1996, most builders
in the area were attracted to real estate projects that already had finished
lots, unlike the Sacramento/Delta Green project which still faced
considerable infrastructure
49
<PAGE>
costs prior to attaining finished lot status. National has not sought
financing from third party sources for the pre-construction costs, as such a
loan, if available at all to a tenant-in-common group, was too premature and
would have exposed the Investors to loss of the Property unless a builder
could be found to become financially involved in the Property's development.
National believes that the Sacramento market for entry-level single-family
residential housing has improved and it is anticipated that, subject to the
availability of financing, the Property can be developed in parcels and homes
can be constructed in successive phases by several different builders. See
"-- Efforts to Dispose of the Properties" and "-- Alternatives to
Acquisition" for a discussion of alternatives considered for this Program by
National.
Since foreclosure, National has considered continuing development of the
Property (and, indeed, has developed and planned for the operation of, the
Property prior to the proposed Acquisition), as well as a sale of the
Property. 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 because it believes that those alternatives would
not be in the best interest of Investors as long as there are funds available
to maintain and manage the project-related activities.
OCEANSIDE PROGRAM. This was a construction loan for in excess of 300
single-family detached homes in Oceanside, California. Funding for the
Oceanside Program was completed in stages commencing in November 1991. The
final stage of funding (amounting to approximately $6,374,000) was completed
in April 1993. In November 1993, a default on the loan was caused by the
borrower's admission that funds that were to be used to pay subcontractors
had been diverted to corporate overhead. In order to avoid prolonged
litigation that could have been detrimental to the Property, National
succeeded in obtaining the borrower's agreement to grant the ownership of the
Oceanside Properties to Oceanside Development, Inc. ("ODI"), a corporation
formed to hold title to, and manage, the Oceanside Property on behalf of the
Oceanside Investors. An appraisal of the Property's value was not obtained
at the time title was taken; however, in May 1997, National obtained
appraisals to determine the Property's value as of May 1997 and as of the
date title to the Property was taken for the Investors. An experienced and
reputable homebuilder was hired and, through 1997, a total of 114 homes in
the Encore tract were built and sold for a total of approximately
$18,000,000, net of selling expenses. The initial 84 homes were built from
Program funds without the need for construction financing. Then the builder
obtained traditional construction loans for 30 of these homes from a bank.
An additional 23 lots were sold at the end of 1997 to that homebuilder for
approximately $593,000 net of selling expenses plus a $50,000 unsecured note
due in October 1998. These funds were utilized for project-related expenses
and some of the costs to prepare the Program for the Acquisition by the
Company. Principal and interest in the aggregate amount of approximately
$10,000,000 have been returned to Investors through June 30, 1998.
At the end of 1997, there remained an additional 111 lots in the
Symphony tract available to be finished and built on. An estimated $700,000
of equity was needed to qualify for a necessary construction loan to complete
the buildout and sale of home on these lots. National did not believe that
equity would be available from the Investors, so it began to attempt to sell
the Symphony tract to homebuilders in the area. By the second quarter of
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1998, there were three different homebuilders competing to buy the lots. A
selling price of $6,672,099 was negotiated and sale was consummated by
National on behalf of the Oceanside Investors on June 5, 1998 pursuant to
approval of holders of a majority of the investments in the Oceanside
Program. Investors directed that, after closing costs, taxes and other
expenses of the sale, a distribution of $3,000,000 be made to the Oceanside
Investors and $3,350,000 be allocated to purchase the golf course and
surrounding land from the Yosemite/Ahwahnee Programs. Even if National had
continued to manage the build-out of the lots for Investors, they would not
likely receive a full return of their investment from the completion of the
construction and sales of homes on those remaining lots. Since the original
projections by the borrower were based on the construction of a number of
homes which exceeded the number of lots initially acquired with loan
proceeds, the Program had anticipated that more lots would be acquired so
that a sufficient number of homes could be constructed and sold to provide
for an acceptable monetary return to Investors. Investors subsequently voted
against this. See "-- Efforts to Dispose of the Properties" and "--
Alternatives to Acquisition" for a discussion of alternatives considered for
this Program by National.
YOSEMITE/AHWAHNEE PROGRAMS. Title to the Yosemite/Ahwahnee Programs'
Properties was obtained in September 1995. An appraisal of the Property's
value was not obtained at the time title was taken; however, in May 1997,
National obtained appraisals to determine the Property's value as of May 1997
and as of the date title to the Property was taken. The May 1997 appraisal
was updated in March 1998. The properties are located in Madera County,
California, approximately 46 miles northeast of Fresno and 15 miles south of
Yosemite National Park. They included an operating 18-hole golf course,
swimming pool and tennis courts, along with approximately 47 finished estate
lots and an existing 54 site recreational vehicle park, permitting for up to
600 sites in total.
Upon completion of funding of the Yosemite/Ahwahnee II loan, the
Yosemite/ Ahwahnee I Investors were secured by a first deed of trust on the
660-acre portion 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 for the benefit of the Investors through a
corporation known as Ahwahnee Golf Course and Resort, Inc. Approximately
$3,000,000 has been funded by Investors' assessments in these Programs to
provide working capital to maintain, improve and further develop the project,
and to fund the negative cash flow from operations. 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, to develop
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vacation villa timeshare units and to pursue additional entitlements required
to develop the remainder of the project. The project is expected to
experience negative cash flow until and unless additional recreational
vehicle sites are constructed or until timeshare sales can commence. See
"-- Efforts to Dispose of the Properties" and "--Alternatives to Acquisition"
for a discussion of alternatives considered for this Program by National.
As described above, in June 1998, pursuant to a majority vote of
Investors, in order to raise badly needed cash, the golf course and outlots
to be used for future development were sold to the Oceanside Investors for an
aggregate of $3,550,000. This cash infusion was allocated to pay property
taxes (approximately $235,000), to develop the timeshare and recreational
vehicle portions of the project (approximately $1,000,000), to pay a portion
of the expenses of the Acquisition (approximately $350,000) and to maintain
current operational expenses and pay some delinquent accounts payable.
Since taking title to the property, National has considered continuing
operation of the Properties (and, indeed, has operated, or planned for the
operation of, the Properties prior to the proposed Acquisition) and sale of
the Properties. In addition, National considered, 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 and not in the best interest of Investors as long
as there continues to be adequate funds to manage, operate and develop the
Properties.
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. The May 1997 appraisal was updated in March 1998. Title is held by
National Investors Land Holding Trust as the agent of and for the benefit of
the Investors. The Property was originally to be developed into a
hotel/conference center in Pacifica, California, which is approximately 15
miles southwest of San Francisco on the coast. National has endeavored to
negotiate alternative uses for the Property which would be supported by the
local community and be more economically feasible than a hotel/conference
center. However, improvements in economic conditions in the Bay Area have
recently revived the potential for and are encouraging to segments of the
hotel industry. Reinstating the approved specific plan and tentative tract
map that expired under the original borrower's ownership will require
approximately $500,000 in order to conduct the necessary environmental
studies and mitigation of habitats for two endangered species, as well as to
complete the required land planning, engineering and preliminary
architectural plans. Such funds are not currently available and would have
to come from additional capital submitted by the Program's Investor group or
by an industry joint venture partner. Since funds are not available to
further define the ultimate use and design of the Property, National has not
attempted to obtain pre-construction financing. Assuming such financing
would be available under the present tenant-in-common structure, there would
be no potential source for repayment of such loan other than from the
Investors. An offer from a potential joint venture partner was received in
early October 1996, but such offer was rejected by Investors holding a
majority of the interests. See "--Efforts to Dispose of the Properties" and
"-- Alternatives to Acquisition" for a discussion of alternatives considered
for this Program by National.
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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. 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 unless funds are not available to maintain and further the development
of the Property on behalf of the Investors.
CYPRESS LAKES PROGRAM. The Cypress Lakes Program Property, which is
located in eastern Contra Costa County, California, was foreclosed on in July
1995 after the borrower had defaulted on interest payments due. Title is
held by the National Investors Land Holding Trust VII for the benefit of the
Cypress Lakes Investors. National then retained the services of a major,
publicly-held real estate company to determine the status of and recommend a
strategy to liquidate the Property in the most expeditious way and to
maximize the return of capital for Investors. Economic, environmental and
political issues and their impact on the project were investigated and
analyzed. The vesting tentative tract map which provided for an 18-hole golf
course with various amenities along with 1,330 dwelling units on 686 acres,
was due to expire in September 1997 and was renewed for a two year period.
In addition, two engineering firms were hired to determine the infrastructure
cost requirement. Various market studies were conducted to determine the
long-term economic feasibility of lot and home sales, as well as other uses
for the Property including a design exclusively for the "age restricted"
segment of the population. It was concluded that the infrastructure
expenses, particularly those pertinent to the requirement to structure a
levee around the Property, may necessitate a redesign of the map to
potentially reduce the cost. During this process, attempts were made to
gather enough data so a potential joint venture partner could be approached,
both in the sense of the overall development, as well as for the golf course
portion exclusively. In 1996, Investors voted to offer the golf course
portion of the property to certain qualified developers in exchange for their
commitment to the construction of the course and clubhouse facilities. Any
constructed amenities such as this would reduce many of the infrastructure
costs and create greater demand for the property. That strategy did not
result in any specific offers. In May 1998, National obtained appraisals of
the Property's value as of the Ownership Date and as of March 31, 1998. The
real estate market for large residential land development projects in the
East Bay, Contra Costa County, area has been in a recessional situation for
several years, although single-family homes have been selling well further
west. National believes that the market for this type of project is
improving enough for a well capitalized real estate development company to be
attracted to it for the purpose of land banking it for future completion. In
other words, it is still premature to develop the property into several
parcels of land that could each be developed into residential lots,
particularly in light of current values and the costs of the infrastructure.
Bur for a company or entity with capital and time available to wait for a
more attractive profitability, the timing could be right.
In Spring 1998, an offer was received from a reputable developer to
purchase the Cypress Lakes Property for a total purchase price of $11,000,000
payable $100,000 upon the opening of escrow, an additional $1,650,000 upon
the closing of escrow, and a promissory note secured a first trust on the
property for $9,350,000 bearing a market rate
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of interest at the closing of escrow. The note was to be due and payable on or
before December 15, 1999. Investors in the Cypress Lakes Program were advised
of the offer. To date, fewer than a majority of the Cypress Lakes Investors
have responded in any way so that, as of this date, the Investors have not
approved the sale. National has continued to negotiate with the potential buyer
and, if a definitive agreement can be reached with that buyer, such agreement
will be treated as an asset of the Cypress Lakes Program and transferred to the
Company if the Acquisition is approved. If no definitive agreement can be
reached, the offer will lapse and be of no further force or effect. If (i) a
definitive agreement is reached, (ii) the Acquisition is approved, and (iii) the
buyer timely pays the note, the Cypress Lakes Investors will receive a
contingent payment of Units (valued at $20 per Unit) equal to the difference in
the purchase price (exclusive of interest) received for the Property and the
exchange value assigned to the Property for purposes of the Acquisition.
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.
PALMDALE/JOSHUA RANCH PROGRAM. Final funding for the loan to the developer
occurred in February 1992. National foreclosed on behalf of the investors in
September 1993 after the borrower had defaulted on interest payments due.
Subsequent to the investors gaining ownership of the project, which is held on
their behalf in the National Investors Financial Land Holding Trust V, National
hired a firm that specialized in entitlement and land development to assess the
economic, environmental and political situation regarding the Property. The
Palmdale market has typically been dependent on the aerospace industry, as well
as the commuter base from other areas of Los Angeles County. There has been a
considerable supply of traditional middle-market single-family lot and home
inventories over the past few years. One significantly large development tract
failed with the developer defaulting on its bond obligations. The Property is
unique in that its 800 acres sits mostly on a ridge that overlooks the valley
and the City of Palmdale, so National's consultants conducted market studies
indicating that lots of a larger and equestrian type of appeal would be more
feasible both economically and politically. The City planning department had
severely downsized the quantity of lots that could be approved for a tentative
map from the time that the original developer was involved which dramatically
decreased its value. This caused National to hire engineers and land planners
to redesign the project accordingly in order to submit a tentative map that
would be approved. National was advised that the Property would be much more
marketable with a tentative map approved for a particular development rather
than without a map but with just the zoning. The vested tentative map for
approximately 500 10,000 to 20,000 square foot lots was approved in July 1998.
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
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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.
ESPERANZA PROGRAM. The funding for the Esperanza project was finalized for
the developer in March 1988. The developer defaulted on the interest payments
for the loan in March 1990 and National initiated foreclosure proceedings on
behalf of Investors. However, the borrower filed a bankruptcy action to
preclude foreclosure so National had to file a relief from the stay in the
Bankruptcy Court. In December 1990, that stay was granted and National obtained
ownership on behalf of Investors. National had the Property listed for sale by
two local Victorville, California, brokerage firms during 1991 and 1992. There
was one offer received in November 1991 that was rejected by Investors. When
the listing agreement expired, National determined that it was in the best
interest of the Investors to market the project on a non-listed basis until the
economy dictated better economic feasibility for the Victorville area, and
particularly for the location and commercial zoning represented by the project.
To date, the market has not reflected any activity or turnaround that has
resulted in a price being offered that will allow for the recovery of the
initial investment by Investors. In May 1998, National obtained appraisals for
the Property as of the date of foreclosure and March 1998. Both indicated a
deterioration in the market below the amount invested originally.
Since foreclosure, National has considered continuing operation of the
Property (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.
STACEY ROSE PROGRAMS. The Stacey Rose Properties represent three adjacent
parcels zoned for single-family residential use. Parcel A and B secured two
separate Investor loans. In March 1990, due to borrower default in interest
payments, National began foreclosure action on behalf of Investors which was
delayed by the borrower's bankruptcy filings and was not concluded until July
1992. An offer was made to the bankruptcy trustee which was accepted and the
parcels A and B were purchased for the amount of debt owed plus $20,000. The
purchase included an additional parcel that is larger, adjacent and integral to
the value of the Stacey Rose A and Stacey Rose B parcels. These parcels are
estimated to require approximately $50,000 in order to obtain a tentative tract
map from the City for a certain design for approximately 160 residential lots.
Due to lack of funds, this process has not been started. Without a tentative
tract map, coupled with the recessionary effects of the real estate market, it
was determined that the Property could not have been sold for even a fraction of
the original investment. In May 1998, National obtained appraisals for the
Property as of the date of foreclosure and March 1998. Both indicated a
deterioration in the market below the amount invested originally.
Since foreclosure, National has considered continuing operation of the
Property (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
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Investors. In addition, National continues to consider, but has made no
recommendations with respect to, prompt liquidation or bankruptcy reorganization
of the Program. National views liquidation or bankruptcy as alternatives of
last resort.
EFFORTS TO DISPOSE OF THE PROPERTIES
SACRAMENTO/DELTA GREENS PROGRAM. Subsequent to foreclosure on the Property
in 1993, the project manager, which was hired, managed and supervised by
National, presented the Property to several small and medium sized builders in
the Sacramento area. No significant interest was shown by such builders at that
time. However, in 1994, National negotiated for and received a purchase offer
and joint venture proposal from a real estate company located in San Mateo,
California, both of which were rejected by the Investors because the net amount
to them of approximately $3,000,000 was considered too low and the five year
time period over which the consideration was to be paid was considered too long.
No brokers were engaged. 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 111 Symphony
tract lots. No brokers were used in the marketing effort as National has
adequate knowledge of the builders in the area likely to be interested.
Through National, those efforts resulted in a preliminary offer from a major
homebuilder to buy the Symphony tract in bulk for approximately $41,000 per
lot, subject to due diligence. A sale escrow was opened but the details of
the offer were not submitted to the Oceanside Investors pending completion of
the buyer's due diligence. A sale at that price would not have yielded an
amount sufficient to return the Investors' capital. After conducting due
diligence, the potential buyer asserted that the cost to finish the lots
would be about $42,000 per lot instead of its original estimate of
approximately $26,000 per lot for such costs. The buyer then attempted to
negotiate the price down to approximately $25,500 per lot, $15,000 less than
the preliminary offer. Before selling expenses and closing costs, that price
per lot would have yielded $2,830,500, approximately $20,200 less than the
May 1997 appraised value. Based on advice from consultants, National
believed the potential buyer's estimate of costs to finish the lots was too
high. Thereafter, the sale escrow was cancelled. In early 1998, National
resumed its efforts to sell the Symphony lots. After an extensive
competitive situation involving three different builders, Investors approved
the proposed sale, as well as the use of $3,350,000 of the proceeds to
acquire the golf course and surrounding property from the Yosemite/Ahwahnee
Programs. On June 5, 1998, the Symphony parcel was sold for $6,672,099.
YOSEMITE/AHWAHNEE I AND II PROGRAMS. The foreclosures took place in
September 1995. At that time, the Programs' Properties also included 47
finished estate lots of 1-3 acres available for sale. Two of those lots were
sold in mid-1996 for approximately $50,000 per lot to current owners of
contiguous homes. For working capital purposes, in February 1998, National
negotiated the sale of twelve of the estate lots to the independent project
manager for the 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
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disparity in lot prices between the 1996 sales and the 1998 sales is based on
the value of contiguous lots for existing homeowners and the fact that the 1998
sale was a bulk sale designed to provide working capital for the Programs. An
additional lot was sold in February 1998 for $52,500 to an independent buyer.
Although the remaining estate lots were listed with local brokers, no further
offers were forthcoming and the listings have been allowed to expire. After the
foreclosure, National contacted several of the former borrowers' potential joint
venture partners and possible purchasers of the Properties, but no offers were
forthcoming. The golf course was sold, along with additional land surrounding
it, to the Oceanside Program to obtain working capital for timeshare and
recreational vehicle site development in the amount of $3,550,000. The golf
course has been subsequently leased back for the benefit of the
Yosemite/Ahwahnee Programs.
MORI POINT PROGRAM. After foreclosing, in 1993 the Property was listed for
sale with a national commercial brokerage firm to no avail. In January 1996,
the Investors were offered a joint venture opportunity with an Orange
County-based property developer. Holders of a majority of the tenancy-in-common
interests voted to turn down the proposal because they did not want to risk
losing the Property which the developer had proposed be put up as collateral for
a loan to further develop the Property. There have been no recent efforts to
sell the Property because of the entitlement work that needs to be done before a
value acceptable to Investors could be realized through an orderly sale process.
National continues to seek possible joint venture development arrangements for
the Property but no proposals have been received.
CYPRESS LAKES. After the borrower's default in 1994 but prior to the
foreclosure in 1995, National allowed the borrower to package the project for
presentation of the golf course portion to golf course developers in such a way
as to attract the capital necessary to begin the infrastructure on the project.
The proposal was to provide the golf course property to a developer in exchange
for that developer building the golf course. The proposal was presented to
several golf course developers without serious subsequent negotiations. The
Property was then listed for six months with a nationally known real estate
brokerage company. In 1996, the Property was listed with a real estate
brokerage company that did not result in any sales. Subsequently, a broker that
represented foreign interests, particularly one from Japan that had golf course
holdings, presented the property. That process did not generate any sale
agreements and the potential Japanese buyer did not present in any offers that
were received by the broker. National has retained the expertise of a
knowledgeable real estate development company to assist in the maintenance of
current engineering and environmental cost analyses, as well as a rapport with
the County's Planning Department to maintain the current vesting tentative map.
PALMDALE/JOSHUA RANCH: After the borrower's default and subsequent
foreclosure, National retained the expertise of a land development consulting
firm on behalf of Investors in order to further the approval status of the
Property with the City of Palmdale. After several hearings and studies, it was
determined that the project's marketability hinged on obtaining a vested
tentative tract map and the activities to obtain it along with the expenses were
authorized by Investors. The density proposed by the original borrower for
approximately 2,000 units initially was altered to less than 1,200 units in
order to conform to the more current economic and political environment. The
owners and developers of two large tracts of land in the City had recently
abandoned their plans due to
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seriously deteriorating market conditions. One had defaulted on City-backed
bonds for infrastructure improvements. National then engaged two different
market studies and, under the direction of its consulting firm, coupled with
cooperation of the City Planning Department to tend to approve a larger-lot,
equestrian-oriented site, the density was downsized to accommodate significantly
larger, but purportedly more marketable, lots. The approval process for the
tentative map has included the continuous involvement of engineers and various
consultants to obtain a complex easement from the State for access, negotiate
for the exchange of land from adjacent property owners, design utilities and
water systems that would be cost-effective, as well as most conducive to
approval by the City Council. The final hearing for approval occurred in July
1998. In addition to the approval process to make the Property more marketable,
the land development consultant presented the project on a preliminary basis to
several developers in 1996. They indicated future interest on a joint venture
basis in the future when approval for the tentative map was obtained from the
City and when potential infrastructure financing could be obtained. None
indicated interest in an outright purchase at prices approximating the
Investors' capital nor did they express any interest in committing any funds to
infrastructure improvements on a joint venture basis. National initiated
preliminary meetings with a municipal bond underwriting company to introduce
them to the project's needs. They also indicated an interest upon finalizing
tentative map approvals.
ESPERANZA: The Property is commercially zoned and is located within one
and one-half blocks from the residentially zoned Stacey Rose Program discussed
below. The Esperanza Property was listed for sale by two different local
Victorville real estate brokerage companies, one for approximately six months in
1991 and the other from the end of 1992 through 1992. One offer was received in
November 1991, but was determined to be unsatisfactory and rejected by a
majority vote of Investors. Market conditions must improve more than those that
currently exist to justify development of the Property or a sale that would
recover the Investors' capital.
STACEY ROSE PROGRAMS: Subsequent to the initiation of the foreclosure
action in 1990, the borrower filed for bankruptcy. National's efforts in the
bankruptcy court on behalf of the Program resulted in relief from the bankruptcy
stay and the foreclosure was finalized in 1992. National arranged for the
purchase of the two parcels subject to the Investors' loans in the Stacey Rose
Programs, along with an adjacent parcel from the bankruptcy court. This parcel
is being held by National for the benefit of the Programs and the Investors.
The borrower also filed an action against National and the Program alleging
collusion to illegally possess his property. After a series of court
proceedings, the suit was dismissed in 1994. In 1993, National began the
negotiations with a builder to finalize the approvals and improve the parcels so
that they could be subdivided into single-family residential lots for
construction. After studying the cost and marketing feasibility, the developer
and National determined that the lack of demand for homes and the cost of
development dictated that the Property must be held for future development or
until sale market conditions improved. National has maintained regular
communications with brokers, developers and builders that are familiar with and
active in the Victorville and Antelope Valley market and has been advised as
recently as the last quarter of 1997 that market conditions in the area of the
Properties are not yet attractive to builders, nor can the properties be sold
for enough to recover the initial capital. In 1996, Investors approved
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the deferral of the payment of property taxes until five years of delinquency
made it necessary to arrange a payment plan which would occur in 1998. Due to
lack of funds from Investors, National recently advanced funds on behalf of the
Program in the amount of approximately $12,000 for payment of the current taxes
and the first payment of a five year plan for those that are past due.
--------------------
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 believes that the Oceanside investors were willing to sell the Symphony
lots at a substantial loss relative to their initial investment in the entire
project because of the opportunity that was available to sell them at an
extremely attractive price in today's market. The proceeds enabled them to
obtain a distribution of ten percent of their initial investment and acquire a
portion of the Yosemite/Ahwahnee property which had some growth and cash flow
potential, as well as the capability to convert this ownership to shares at a
later date.
National has determined that, if the assets of the Programs are
consolidated, the funds that can be generated from the sale of one or more of
the Properties, and perhaps the exercise of warrants, 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 either directly or through an auction process or
in a bankruptcy liquidation, and (iii) a reorganization of the Programs in a
bankruptcy proceeding. In the context of analyzing a continuation of each
Program, National considered the difficulties involved in selling the Properties
described above in "-- Efforts to Dispose of the Properties," and the
difficulties in obtaining outside financing described above in "-- Management of
the Properties Since Foreclosure."
59
<PAGE>
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 asset management 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 finalize the mitigation engineering costs, obtain
tentative map and final map approvals in order to begin to finish the lots and
provide for the infrastructure is necessary for the Sacramento/Delta Greens
Program. The golf course recently acquired from the Yosemite/Ahwahnee Programs
by the Oceanside Program are being leased back to the Yosemite/Ahwahnee Programs
(in the case of the golf course for a five year period) or held by Oceanside for
future development or sale (in the case of the additional land). With respect
to the remaining parcels owned by Yosemite/Ahwahnee, the business plan for those
Programs assumes that there will be an 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 habitat mitigation process. Cypress
Lakes, Palmdale/Joshua Ranch, Esperanza and Stacey Rose projects need funds to
continue the entitlement and development process. Unfortunately, there are
limited sources of outside capital to fund the financial demands of any of these
business plans independently. Absent the Acquisition which may provide the
Company with more traditional financing alternatives and which, through the sale
of certain portions of some of the real estate assets, could generate internal
capital, THE MOST LIKELY SOURCE OF CAPITAL TO COMPLETE THE BUSINESS PLANS OF THE
RESPECTIVE PROGRAMS IS MANDATORY ASSESSMENTS AND VOLUNTARY ADVANCES
60
<PAGE>
FROM CURRENT INVESTORS. ANY DELAY ON THE PART OF INVESTORS IN PROVIDING ENOUGH
OF 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 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 $ 1,745,000 $ 349,190 $1,395,810 $ 5,706,638 $ 4,310,828
Oceanside 5,080,000 214,943 4,865,057 24,150,000 19,284,943
Yosemite/Ahwahnee I(5) 1,782,950 (248,791)(3) 2,031,741 7,195,693 5,163,952
Yosemite/Ahwahnee II(5) 3,703,050 (516,721)(3) 4,219,771 15,498,325 11,278,554
Mori Point 6,000,000 1,186,964 4,813,036 10,771,425 5,958,389
Cypress Lakes 6,000,000 775,072 5,224,928 15,421,503 10,196,575
Palmdale/Joshua Ranch 2,700,000 348,118 2,351,882 17,034,689 14,682,807
Esperanza 270,000 80,644 189,356 535,000 345,644
Stacey Rose A(5) 67,936 22,385 45,551 85,000 39,449
Stacey Rose B(5) 252,064 83,053 169,011 317,250 148,239
</TABLE>
- ---------------
(1) Each property was appraised in May 1997 or March 1998. The appraisals for
May 1997 were updated in March 1998. However, an appraisal of the
Yosemite/Ahwahnee Properties was also conducted in October 1996, the
results of which differed from the May 1997 and March 1998 appraisals.
(2) Net of book 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 minus liabilities and closing costs results in a positive
balance because of cash on hand.
(4) Reflects unpaid principal at Ownership Date plus assessments and advances
paid through June 30, 1998.
(5) Represents pro rata share of appraised value based on original investment
amount.
A sale at such discounts would be contrary to National's and the Investors'
objectives to maximize the return of the Investors' principal. While a
liquidation might be accomplished in a bankruptcy proceeding, the complexities
involved due to the tenancy-in-common format of the Programs, as well as the
administrative and other costs, have made bankruptcy liquidation particularly
unattractive. In addition, liquidation of the Programs' Properties does not
have
61
<PAGE>
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 $20 per share assigned to the Shares for purposes of the Acquisition,
a range of market values for the Shares, assuming completion of the Acquisition,
based on 75% and 50% of the Company's valuation of its Shares for purposes of
the Acquisition. A bankruptcy liquidation or reorganization was not included in
National's final comparison of alternatives because of National's belief that,
due to the costs of bankruptcy administration, such a liquidation or
reorganization would be more expensive if supervised by a Bankruptcy Court than
if not. Since the value of the consideration for alternatives to the
Acquisition is dependent upon varying market conditions, no assurance can be
given that the range of estimated values indicated establishes the highest or
lowest possible values. However, National believes that it analyzed the
alternatives in good faith and that such analysis establishes a reasonable
framework for comparison.
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
62
<PAGE>
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
Values(2) Net
Exchange of Program Liquidation Operated Market Value of Shares Included in
Value per Debts per Value per "As Is" Value Units Received in Acquisition per
$10,000 of $10,000 of $10,000 of per $10,000 of $10,000 of Adjusted Outstanding
Adjusted Adjusted Adjusted Adjusted Investment Assuming Shares Trade
-------- -------- -------- -------- --------------------------------
at
--
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 $ 2,558 $ 2,273 $ 995 $ 995 $1,918 $1,279
Oceanside 2,225 2,015 1,068 1,068 1,669 1,112
Yosemite/Ahwahnee I 2,435 2,239 1,355 1,355 1,826 1,218
Yosemite/Ahwahnee II 2,344 2,155 1,304 1,304 1,758 1,172
Mori Point 4,384 3,898 1,711 1,711 3,288 2,192
Cypress Lakes 3,062 2,746 1,327 1,327 2,296 1,531
Palmdale/Joshua Ranch 1,446 1,297 627 627 1,084 723
Esperanza 3,701 3,239 1,161 1,161 2,775 1,850
Stacey Rose A 4,589 3,993 1,313 1,313 3,441 2,294
Stacey Rose B 4,568 3.975 1,307 1,307 3,426 2,284
</TABLE>
- ---------------
(1) Exchange Value is the Company's value assigned to each of the Programs. It
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
other asset obligations were not taken into account in the appraisals.
Exchange Value is represented by Company Units arbitrarily valued at $20
per Unit for purposes of the Acquisition.
(2) The amount set forth in this column reflects the amount an Investor would
receive per $10,000 of their Adjusted Outstanding Investment if the
Property were sold at the 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 June 30, 1998.
(3) For this purpose, 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,
National believed it would take that sort of discount to attract a buyer in
three months without having to undergo the traditional four to six months
due diligence process.
(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
63
<PAGE>
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 $15.00 per Share) and at 50% of Exchange Value (or
$10.00 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 Units of the Company as consideration
for the purchase. As a part of the Acquisition, remaining 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."
The Company will receive a deed to each of the Properties and new policies of
title insurance will be included with each transfer.
The transactions described below will have occurred or will take place
simultaneously with, or shortly after, the closing of the Acquisition.
- The Company was formed as a Delaware corporation with family
partnerships of the principals of National (David Lasker and James Orth), along
with certain affiliates, consultants and employees of National and the Company,
as the founders. American Family Communities, Inc. will be formed as a
wholly-owned subsidiary of the Company to oversee all of the Programs'
Properties. Also, Delta Greens Homes, Inc., Yosemite Woods Family Resort, Inc.,
Mori Point Destinations, Inc., Cypress Lakes, Inc., Palmdale/Joshua Ranch, Inc.,
Esperanza, Inc., and Victorville Homes, 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 [18.74]%
(5.45% if all warrants are exercised) of the Company's outstanding Shares. See
"Appraisals and Fairness Opinion" for a discussion of the fairness of the
transaction.
- The [SHARES][UNITS] of the Company issued pursuant to the Acquisition
will have been approved for listing, upon notice of issuance, by the
____________.
- Certificates for the Shares and warrants included in the units will be
mailed to Investors after the Acquisition is completed.
64
<PAGE>
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 at least own five 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
Units 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 [June 30, 1998] minus
liabilities at [June 30, 1998] in the form of Company Units arbitrarily valued
at $20 per Unit. For purposes of each of the properties, the appraised value is
at March 31, 1998.
National also considered allocating the Shares among the Programs in
accordance with adjusted March 31, 1998 appraised values, 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. The adjusted
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 [June 30, 1998]. [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 Units
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 Units to be issued to each Program upon consummation of the
Acquisition will equal the Exchange Value of the Program divided by $20, an
arbitrary amount chosen for the sole purpose of allocating Units AND WHICH IS
NOT INTENDED TO IMPLY THAT THE UNITS OR THE SHARES INCLUDED IN THE UNITS WILL
TRADE AT A PRICE OF $20.
The adjusted appraised value was selected for purposes of allocating the
Company's Units 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:
65
<PAGE>
<TABLE>
<CAPTION>
Appraised Value of Net Other Assets and
Name of Program Real Estate(1) + Liabilities(3) = Exchange Value(4)
--------------- ----------- ----------- --------------
<S> <C> <C> <C>
Sacramento/Delta Greens $1,745,000 $(174,514) $1,570,486
Oceanside 5,080,000 293,057 5,373,057
Yosemite/Ahwahnee I 1,782,950 427,086 2,210,036
Yosemite/Ahwahnee II 3,703,050 887,026 4,590,076
Mori Point 6,000,000 (586,964) 5,413,036
Cypress Lakes 6,000,000 (175,012) 5,824,928
Palmdale/Joshua Ranch 2,700,000 (78,118) 2,621,882
Esperanza 270,000 (53,644) 216,356
Stacey Rose A(2) 67,936 (15,591) 52,345
Stacey Rose B(2) 252,064 (57,847) 194,217
----------- --------- -----------
TOTAL $27,601,000 $ 465,419 $28,066,419
----------- --------- -----------
----------- --------- -----------
</TABLE>
- ---------------
(1) Reflects independent appraisals or updates of previous appraisals as of
March 1998. However, appraisals of the Yosemite/ Ahwahnee Properties were
also conducted in May 1997 and October 1996. The results of the October
1996 appraisal differ from those from the appraiser who provided the other
two appraisals.
(2) Represents pro rata share of appraised value based on original investment
amount.
(3) The following table quantifies the asset and liabilities adjustments to
appraised values made in determining a Property's Exchange Value as of June
30, 1998.
<TABLE>
<CAPTION>
Book
Book Assets Liabilities Net Other Assets
Name of Program (6/30/98)* - (6/30/98)* = and Liabilities
--------------- ---------- ---------- ---------------
<S> <C> <C> <C>
Sacramento/Delta Greens $ 126,316 $ (300,830) $ (174,514)
Oceanside 809,933 (516,876) 293,057
Yosemite/Ahwahnee I 1,536,802 (1,109,716) 427,086
Yosemite/Ahwahnee II 3,191,820 (2,304,794) 887,026
Mori Point 261,140 (848,104) (586,964)
Cypress Lakes 195,878 (370,950) (175,072)
Palmdale/Joshua Ranch 132,572 (210,690) (78,118)
Esperanza 28,523 (81,897) (53,644)
Stacey Rose A 5,804 (21,395) (15,591)
Stacey Rose B 21,535 (79,382) (57,847)
</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,
Oceanside, Mori Point, Cypress Lakes, Palmdale/Joshua Ranch, Esperanza
and Stacey Rose Programs, and, after the Acquisition, there will be
no mortgage debt on the Yosemite/Ahwahnee Programs' Properties.
NOTE: For the purposes of splitting Yosemite/Ahwahnee I and II, a
percentage of the original investment was used. Amounts will differ under
the specific identification method. Book Assets represented total assets
less real estate assets due to separate appraisal values on all real estate
assets.
(4) 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, $1,395,811;
Oceanside, $4,865,057; Yosemite/Ahwahnee I, $2,031,080;
66
<PAGE>
Yosemite/Ahwahnee II, $4,219,771; Mori Point, $4,813,036; Cypress Lakes,
$5,224,928; Palmdale/Joshua Ranch, $2,354,882; Esperanza, $189,626; Stacey
Rose A, $45,551; and Stacey Rose B, $169,011.
(5) Due to the existence of an offer to purchase the Cypress Lakes property for
an amount substantially greater than the March 1998 appraised value (which
offer has been submitted to, but has not been approved by Cypress Lakes
investors), the company will pay to the Cypress Lakes investors an
additional number of units (valued at [$20] per unit regardless of the then
market value of the shares included in the units) equal to the difference
in the net sale proceeds (exclusive of interest on deferred purchase price
payments) actually received by the company from that offer ONLY on or
before December 31, 1999 (the time by which the promissory note called for
in the offer is schedule to be paid in full) and the exchange value.
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 Units will be issued by the Company in connection with the
Acquisition. Each Investor who would otherwise be entitled to a fractional
Units will receive one Unit for each fractional Unit of 0.5 or greater. No Unit
will be issued for fractional Unit of less than 0.5.
ALLOCATION OF UNITS AMONG THE PROGRAMS
The total number of Units issued in the Acquisition will be equal to the
aggregate Exchange Value of the Programs divided by the arbitrary price of $20.
The number of Units allocable to each Program will be determined by multiplying
the number of Units 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 June 30, 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:
67
<PAGE>
<TABLE>
<CAPTION>
Number of
Adjustments to Units
Amount Real Estate Real Estate Allocated if
Owed plus Appraised Appraised Exchange All Programs
Name of Program Assessments(1) Value(2) Value(3) Value Participate(4)
--------------- ----------- ----- ----- ----- -----------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 6,131,638 $ 1,745,000 $(174,514) $ 1,570,486 78,524
Oceanside 24,150,000 5,080,000 293,057 5,373,057 268,653
Yosemite/Ahwahnee I 9,063,163 1,782,950 427,086 2,210,036 110,502
Yosemite/Ahwahnee II 19,565,333 3,703,050 887,026 4,590,076 229,504
Mori Point 12,342,259 6,000,000 (586,964) 5,413,036 270,652
Cypress Lakes 18,971,767 6,000,000 (175,072) 5,824,928 291,246
Palmdale/Joshua Ranch 18,107,814 2,700,000 (78,118) 2,621,882 131,094
Esperanza 584,653 270,000 (53,644) 216,356 10,818
Stacey Rose A 114,098 67,936 (15,591) 52,345 2,617
Stacey Rose B 425,188 252,064 (57,847) 194,217 9,711
------------ ----------- -------- ----------- ---------
TOTAL $109,458,813 $27,601,000 $ 465,419 $28,066,419 1,403,321
------------ ----------- -------- ----------- ---------
------------ ----------- -------- ----------- ---------
<CAPTION>
No. of Units
per $10,000 of
Number of No. of Units Adjusted
Units per $10,000 of Outstanding
Allocated if Adjusted Investment if
Only Seven Outstanding Only "Trudy
"Trudy Pat" Investment if Pat"
Programs All Programs Programs
Participate(5) Participate Participate
----------- ----------- -----------
<S> <C> <C> <C>
Sacramento/Delta Greens 78,524 128 128
Oceanside 268,653 111 111
Yosemite/Ahwahnee I 110,502 122 122
Yosemite/Ahwahnee II 229,504 117 117
Mori Point 270,652 219 219
Cypress Lakes 291,246 153 153
Palmdale/Joshua Ranch 131,094 72 72
Esperanza 185 -
Stacey Rose A 229 -
Stacey Rose B 228 -
--------- ----- ---
TOTAL 1,380,175 1,564 922
--------- ----- ---
--------- ----- ---
</TABLE>
65
<PAGE>
- ---------------
(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 [June 30, 1998], 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 582,350 86,990
Oceanside -0- -0-
Yosemite/Ahwahnee I 972,716 121,099
Yosemite/Ahwahnee II 2,008,113 156,036
Mori Point 643,552 58,515
Cypress Lakes 820,845 543,629
Palmdale/Joshua Ranch 1,656,270 248,103
Esperanza 35,000 -0-
Stacey Rose A and B 1,950 -0-
</TABLE>
- ---------------
(2) Appraisals were conducted and updated in March 1998. However, an appraisal
of the Yosemite/Ahwahnee Properties was also conducted in October 1996, the
results of which differed from a May 1997 appraisal updated by the same
appraiser for March 31, 1998. 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 [June 30, 1998]
and to reduce that number by program liabilities at [June 30, 1998]. See "
-- Calculation of Exchange Value" at page __ for details as to the
adjustments.
(4) A unit consists of one share of common stock plus warrants to buy three
additional shares at 80% of the closing price on the trading date
immediately prior to the date of exercise.
(5) Represents [5.60%], [19.14%], [7.87%], [16.35%], [19.29%], [20.75%],
[9.34%], [0.77%], [0.19%] and [0.69%], respectively, of the units to be
issued to investors in the acquisition.
(6) If none of the Esperanza, Stacey Rose A and B programs participate, these
percentages would be 5.69%, 19.47%, 8.01%, 16.63%, 19.61%, 21.10% and
9.50%, respectively.
(7) 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. From the inception of
planning for the Acquisition, management believed that the founders should
retain less than 20% of the total outstanding shares. This was determined
after considering previous fees due to and expenses advanced by National on
behalf of Investors that were cancelled and the additional value being
brought to the Investors through the Acquisition and as incentives for
future performance. This position was validated by the Fairness Opinion.
A total of approximately [323,000]
66
<PAGE>
shares of Company common stock has been issued prior to the date of this
Prospectus at $0.01 per share. National will pay the same price as
investors for their units in the Company. 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>
Previously
Name of Program Cancelled
---------
<S> <C>
Sacramento/Delta Greens(a) $ 500,000
Oceanside(a) -0-
Yosemite/Ahwahnee I(a) 72,158
Yosemite/Ahwahnee II(a) 1,157,867
Mori Point(a) 461,589
Cypress Lakes 1,120,000
Palmdale/Joshua Ranch -0-
Esperanza 102,134
Stacey Rose A 64,293
Stacey Rose B 17,267
-----------
TOTAL $ 3,495,308
-----------
-----------
</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) 14.3% (15.1% if only the seven "Trudy Pat" Program participate) of
the total shares to be owned by the founders after the Acquisition
([46,302] shares if all Programs participate and 48,870 shares if
only the seven "Trudy Pat" Programs participate) would have been
deemed allocated from the Sacramento/Delta Greens Program.
(ii) None.
(iii) 2.06% (2.18% if only the seven "Trudy Pat" Program participate) of
the total shares to be owned by the founders after the Acquisition
([6,682] shares if all Programs participate and 7,053 shares if
only the seven "Trudy Pat" Programs participate) would have been
deemed allocated from the Yosemite/Ahwahnee I Program.
(iv) 33.1% (35% if only the seven "Trudy Pat" Program participate) of
the total shares to be owned by the founders after the Acquisition
([107,222] shares if all Programs participate and 113,170 shares if
only the seven "Trudy Pat" Programs participate) would have been
deemed allocated from the Yosemite/Ahwahnee II Program.
(v) 13.2% (13.9% if only the seven "Trudy Pat" Program participate) of
the total shares to be owned by the founders after the Acquisition
([42,745] shares if all Programs participate and 45,116 shares if
only the seven "Trudy Pat" Programs participate) would have been
deemed allocated from the Mori Point Program.
(vi) 32% (33.8% if only the seven "Trudy Pat" Program participate) of
the total shares to be owned by the founders after the Acquisition
([103,715] shares if all Programs participate and 109,469 shares if
only the seven "Trudy Pat" Programs participate) would have been
deemed allocated from the Cypress Lakes Program.
67
<PAGE>
(vii) None.
(viii) 2.9% of the total shares to be owned by the founders after the
Acquisition ([9,458] shares if all Programs participate) would have
been deemed allocated from the Esperanza Program.
(ix) 1.8% of the total shares to be owned by the founders after the
Acquisition ([5,954] shares if all Programs participate) would have
been deemed allocated from the Stacey Rose A Program.
(x) 0.49% of the total shares to be owned by the founders after the
Acquisition ([1,599] shares if all Programs participate) would have
been deemed allocated from the Stacey Rose B Program.
ALLOCATION OF UNITS AMONG INVESTORS
The method utilized to allocate Units to the Investors will involve two
steps. The Units will first be allocated among the participating 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 Units
among all of the Programs.
Next, the Units 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 Units
allocated the Program to determine the number of shares allocated to each
Investor.
All Units allocated to Investors will be exactly equal to each other. 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 Units 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. Acquisition units will be allocated to
National on the same basis as they are allocated to investors. None of the
Company's founders hold interests in any of the Programs' Properties. At June
30, 1998, National's investments were $3,118 in the Sacramento/Delta
68
<PAGE>
Greens Program; $2,300 in the Oceanside Program; $2,373 in the Yosemite/Ahwahnee
I Program; $69,384 in the Yosemite/Ahwahnee II Program; $5,279 in the Mori Point
Program; $3,200 in the Cypress Lakes Program; $2,395 in the Palmdale/Joshua
Ranch Program; $0 in the Esperanza Program; $4,247 in the Stacey Rose A Program;
$15,753 in the Stacey Rose B Program (based on National's $20,000 investment for
the benefit of Stacey Rose A and B Investors). In the Acquisition, National
will receive an aggregate of [1,547] Units, reflecting [40] Units, [26] Units,
[29] Units, [813] Units, [116] Units, [49] Units, [17] Units, [-0-] Units, [97]
Units, and [360] Units, respectively, for its investments in the
Sacramento/Delta Greens Program, Oceanside Program, Yosemite/Ahwahnee I Program,
Yosemite/Ahwahnee II Program, Mori Point Program, Cypress Lakes Program,
Palmdale/Joshua Ranch Program, Esperanza Program and Stacey Rose A and B
Programs. National will not exercise any of the warrants it received as part of
the Units. 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, [237,806] Shares, or 14.76% (approximately 4.01% if
all the warrants are exercised) of the outstanding Shares of the Company.
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, ASSET AND PROPERTY MANAGEMENT/EFFECT OF
ACQUISITION
The following table sets forth the servicing fees, asset management and
property management fees accrued by National and officers and employees, as well
as actually paid, during the years ended December 31, 1997, 1996, 1995 and 1994.
See the second table under "-- General -- Servicing and Asset Management Fees"
at page __ for information about the fees earned by National and officers and
employees of ODI and AGCRI AFTER the date title to the Programs' Properties was
taken for the benefit of Investors. In the case of the Oceanside Program,
compensation was paid for salaries payable to the officers and employees of ODI.
In the case of the Yosemite/Ahwahnee I and II Programs, compensation to National
would have been from servicing fees through September 1995, and asset management
fees thereafter, as well as salaries payable to the officers and employees of
AGCRI, as well as for a portion of its general and administrative overhead
costs.
69
<PAGE>
<TABLE>
<CAPTION>
Actually
Actually Actually Actually Actually Incurred Paid in
Incurred Paid in Incurred Paid in Incurred Paid in Incurred Paid in for Six Six
for Year Year for Year Year for Year Year for Year Year Months Months
Ended Ended 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 6/30/98 6/30/98
- --------------- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 50,000 $ -0- $ 50,000 $ -0- $ 50,000 $ -0- $ 50,000 $ 8,267 $ 25,000 $ 32,166
Oceanside 492,000 300,000 492,000 300,000 492,000 300,000 444,000 300,000 246,000 1,026,000
Yosemite/Ahwahnee I 65,000 10,000 84,051 -0- 150,800 101,626 148,439 60,700 75,333 30,392
Yosemite/Ahwahnee II 135,000 -0- 174,569 -0- 313,200 211,069 248,157 123,998 150,667 55,667
Mori Point 100,000 -0- 100,000 -0- 100,000 -0- 100,000 27,333 50,000 10,000
Cypress Lakes 140,000 140,000 140,000 140,000 140,000 140,000 140,000 140,000 70,000 70,000
Palmdale/Joshua Ranch 150,000 88,750 150,000 248,750 150,000 150,000 150,000 150,000 75,000 75,000
Esperanza 5,000 -0- 5,000 -0- 5,000 -0- 5,000 -0- 2,500 -0-
Stacey Rose A 850 -0- 850 -0- 850 -0- 850 -0- 426 -0-
Stacey Rose B 3.153 -0- 3,153 -0- 3,153 -0- 3,153 -0- 1,576 -0-
</TABLE>
70
<PAGE>
If the Acquisition had been completed during the above periods, National
would not have been entitled to receive any further servicing, asset or property
management fees and officers and employees of ODI and AGCRI would not have been
entitled to any separate compensation from the Company. The only compensation
National or any of its affiliates would have been entitled to receive would have
been from salaries payable to officers and employees of the Company. No cash
would have been available to pay bonuses or dividends.
Based on original loan amounts, the following table sets forth the
compensation, including employees of ODI and AGCRI, that would have been
allocable to the Programs had the Acquisition been completed during the four
years ended December 31, 1994, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Original
Name of Program Loan 1994 1995 1996 1997
--------------- Amount ---- ---- ---- ----
------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 5,000,000 $ 62,886 $ 62,886 $ 62,886 $ 62,886
Oceanside 30,000,000 377,315 377,315 377,315 377,315
Yosemite/Ahwahnee I 6,500,000 81,752 81,752 81,752 81,752
Yosemite/Ahwahnee II 13,500,000 169,792 169,792 169,792 169,792
Mori Point 10,000,000 125,772 125,772 125,772 125,772
Cypress Lakes 14,000,000 176,080 176,080 176,080 176,080
Palmdale/Joshua Ranch 15,000,000 188,658 188,658 188,658 188,658
Esperanza 500,000 6,289 6,289 6,289 6,289
Stacey Rose A 85,000 1,069 1,069 1,069 1,069
Stacey Rose B 315,300 3,953 3,953 3,953 3,953
TOTAL $94,900,300 $1,193,566 $1,193,566 $ 1,193,566 $1,193,566
</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:
71
<PAGE>
<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
Cypress Lakes
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $ 621,198 $ 1,781,251 $ 1,337,101 $ 62,706 $ 0 $ 0 $ 0 $ 3,802,256
Palmdale/Joshua Ranch
Principal $ 0 $ 0 $ 0 $ 0 $ 0 0 $ 0 $ 0
Interest $ 1,523,775 $ 1,885,526 $ 478,127 $ 0 $ 0 $ 0 $ 0 $ 3,887,428
Esperanza
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $ 130,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 130,000
Stacey Rose A and B
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $ 84,237 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 84,237
</TABLE>
* An additional $3,000,000 in principal was distributed to the Oceanside
Program Investors in June 1998 subsequent to the sale of the remaining
lots.
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 (and warrants)][units] 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
72
<PAGE>
Investors. Investors should be aware, however, that initially the
[units][shares] are likely to trade at prices substantially below the arbitrary
$20 per Unit assigned 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
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 five to seven properties rather than
one. 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.
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
73
<PAGE>
servicing and, later, asset management fees were earned, both of which are less
labor-intensive than property development, acquisition and property management,
which activities the Company will conduct..
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 an asset
manager for the Investors. There will be no further assessments of Investors of
any kind pursuant to those or any other 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 may not be effectively insulated
from personal liability based on the operation of those assets. Thus, if an
accident occurred, the damages of which were not wholly covered by insurance,
the individual Investors could be liable for the balance of the damages. As
shareholders of a corporation, there will be no such risk of liability.
NO CONTROL OVER TIMING OF SALE OF A PARTICULAR PROPERTY. No particular
group of Investors will have the ability to control the timing of the sale of a
particular property as they do under the current program structure. Instead,
all Investors will be required to rely on the decisions of management regarding
the sale of a Property. Management's decisions will affect cash available for
distribution.
PROCEEDS FROM SALE OF PROPERTIES. If a Property is sold or refinanced, the
proceeds will be used by the Company to further the business plan of the
Company. Presently, if a Program Property is sold in its entirety, the proceeds
would ordinarily 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 at least the holders of a majority of the tenancy-in-common
interests in each of the "Trudy Pat" 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
74
<PAGE>
Programs; (iii) receipt of the Fairness Opinion from the Independent Valuator
regarding the allocation of the Shares among the Programs; and (iv) approval of
the Shares for listing on the _______________. No federal or state regulatory
requirements must be complied with or approval obtained in connection with the
Acquisition. These conditions may not be waived. National may decide not to
pursue the Acquisition at any time before it becomes effective, whether before
or after approval by the Investors.
RECOMMENDATION OF NATIONAL AND FAIRNESS DETERMINATION
While the Acquisition was not negotiated at arm's-length and National and
its principals will receive substantial benefits from it, National believes the
Acquisition to be fair to, and in the best interests of, each of the Programs
and the Investors therein. National recommends that the Investors approve the
Acquisition.
There can be no assurance that the market value of the Shares will
ultimately be higher than the expected proceeds from liquidation. It is likely
that the Shares will trade substantially below the arbitrary value of $20 per
Unit 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, was outweighed by the
Company's (i) potential to provide improved liquidity to the Investors through
ownership of the Company's Shares; (ii) potential for growth; and (iii) 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 Units 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 included in the Units 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;
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<PAGE>
- while the number of Units to be issued to reflect the Exchange Value
of a Program is arbitrary, the trading price of the shares included in the Units
initially is likely to be substantially below the $20 value arbitrarily assigned
to the Units. In National's opinion, the Exchange Values offered to Investors
for their assets allow for an equitable allocation of the Units among the
Programs. 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 liabilities;
- on completion of the Acquisition the Investors will hold over 80% of
the outstanding stock of the Company while the Company's founders (principals,
employees, and consultants of National) will hold less than 20%. Founders'
shares were purchased for $.01 per share. National and its principals have
forgiven over $3,495,000 of expenses and accrued servicing fees of which a total
of $2,800,000 was earned after loans defaulted and before the Ownership Dates of
the Properties. The remainder reflects expenses advanced to the Programs on
behalf of Investors by National. See "-- Background and Reasons for the
Acquisition -- ____________" for detailed information about fees to be paid to
National. National believes that the amount paid for the services is no greater
than the amount that a third party would charge. The number of Shares of the
Company retained by the founders was not determined based on fees forgiven by
National or its affiliates. Prior to receiving the Fairness Opinion, National
believed that the Company's founders should hold slightly less than 20% of the
Shares after the Acquisition in order to properly incentivize such persons with
a significant, but not controlling, interest in the Company;
- the valuation of the real estate assets of each of the Programs by the
independent appraisers;
- the probability that the transaction will either be tax-free to
Investors or, at most, yield a tax loss. Either way, National believes there
will likely be no out-of-pocket tax cost to all, or the vast majority, of
Investors;
- while conflicts of interest exist in the structuring of the
Acquisition, the issuance of Shares to the founders of the Company and the
determination of management compensation and while Investors did not have
independent representation in the structuring of the Acquisition, National
believes they have been counterbalanced by the Investors' opportunity to vote on
the transaction and the Fairness Opinion;
- while the Programs were originally formed to have a two to four year
finite life and the Investors expected to receive a return of their investment
from the original borrower, the Company is an infinite life entity which will
not return the Program Investors' original investment based on sale or
refinancing of the properties underlying the original Programs. However, after
the borrowers defaulted on the 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;
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<PAGE>
- 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 seven Properties.
Thus, the poor performance of a particular Property may affect the Company's
operations as a whole regardless of the performance of the other Properties.
Further, there will be no particular time when an Investor can expect its
interest to be automatically liquidated;
- Investors' voting rights will change. Investors will not be able to
vote on changes to or dispositions of a particular Property or borrowing secured
by a particular Property. Those decisions will be made by the Board of
Directors or management. In addition, due to the number of Investors in the
Company, a particular Investor's relative voting power will decline;
- Cash distribution policies will be changed. There have been no
distributions from any of the Programs, other than the Oceanside Program, in the
past three years due to the original borrower's defaults. Future cash
distributions will be based on the Company's earnings and the decision of the
board of Directors to pay dividends. Even if a particular Property were to
perform well, there is no assurance that there will be cash distributions;
- Holders of the majority of tenancy-in-common interests in a particular
Program can bind the Program, and Investors that vote against the Acquisition
will not be able to object to the Acquisition if a majority of the Investors in
all of the Programs approve the Acquisition; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the Shares in
the Acquisition and not the amount of the consideration paid to Program
Investors in the Acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __.
National also believes that the Acquisition is procedurally fair for the
following reasons. First, the Acquisition is required to be approved by
Investors holding a majority of each of the "Trudy Pat" Program's outstanding
tenancy-in-common interests (as well as holders of a majority of the outstanding
tenancy-in-common interests of the other Programs) 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.
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<PAGE>
FAIRNESS IN VIEW OF CONFLICTS OF INTEREST
Although National reasonably believes the terms of the Acquisition are fair
to the Investors, the principals of National have conflicts of interest with
respect to the Acquisition. These conflicts include, among others, (i) the
determination not to retain independent parties to act on behalf of the
Investors or the Programs (see "Risk Factors -- Risks of the Acquisition"), (ii)
the principal shareholders of National may realize substantial economic benefits
upon completion of the Acquisition (see "Management Following the Acquisition --
Directors and Executive Officers Compensation and Incentive"), and (iii)
National's relief from on-going obligations under the servicing agreements with
respect to each of the Programs (such relief is not susceptible to meaningful
quantification except to the extent that National may be able to reduce its
overhead allocated to the asset management for the Programs). It should be
noted that, prior to 1995, National forgave $[3,495,308] of fees and advances in
its role as servicing agent. It should be further noted that, while the number
of Shares to be retained by the founders was not based on the amount of fees
forgiven, at $20 per Share, the amount of fees cancelled by National and its
principals would be equal to [174,765] Shares. Additionally, National will not
be entitled to any further fees with respect to the Properties which amounts, in
the aggregate, to $969,000 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 asset manager for each of the Programs unless a sale can be
consummated in less than three months. As a last resort, National may determine
that bankruptcy protection and liquidation may be in the best interests of one
or more of the Programs. No other transaction is currently being actively
considered as an alternative to the Acquisition. The Programs will, however,
pay the expenses of the Acquisition even if it is not approved.
ACCOUNTING TREATMENT
The transaction will be accounted for as a purchase by the accounting
acquiror, the Company, of all of the investment programs. As such, the assets
and liabilities of the investment programs being acquired will be recorded at
their fair values, while the assets and liabilities of the Company will remain
at their historical costs. The Company has been treated as the accounting
acquiror due to its shareholder group holding a greater interest in the Company,
subsequent to the Acquisition, than any other shareholder group involved in the
Acquisition
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<PAGE>
COSTS AND EXPENSES
Costs and expenses incurred in connection with the Acquisition will be
allocated to the Programs on a pro rata basis in accordance with their relative
Exchange Values, whether or not the Acquisition is consummated. If the
Acquisition fails, such liabilities will remain owing for ultimate repayment at
the sale of the applicable Property. The following is a statement of ESTIMATED
costs and expenses that have been or are likely to be incurred by the Programs
and the Company in connection with the Acquisition.
[Cost allocation pending final exchange value calculation. Total costs are
estimated to approximately $1,024,000.]
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<PAGE>
<TABLE>
<CAPTION>
Sacramento/ Yosemite/ Yosemite/
Delta Greens Oceanside Ahwahnee I Ahwahnee II Mori Point
------------ --------- ---------- ----------- ----------
<S> <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 $ $ $ $ $
<CAPTION>
Palmdale/
Cypress Joshua Stacey Stacey
Lakes Ranch Esperanza Rose A Rose B 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>
80
<PAGE>
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 seven 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 the appraisals
that differed 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."
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.
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<PAGE>
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, the Yosemite/Ahwahnee I and II Properties, the Cypress
Lakes Property, the Palmdale/Joshua Ranch Property, the Esperanza Property
and the Stacey Rose Properties, as well as unaudited pro forma consolidated
financial statements for the Company for the years ended December 31, 1996
and 1997; (v) the original offering circular for each of the "Trudy Pat" and
other loans on the Properties. 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.
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. 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, Delta Greens, Cypress Lakes, Palmdale/Joshua
Ranch, Esperanza and Stacey Rose A and B programs. 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, without independent analysis
or verification, to represent the current fair market value of the respective
properties. In the case of the properties sold to Oceanside by
Yosemite/Ahwahnee I and II programs in June 1998, we relied upon the
Company's representation that these sales were not arm's length negotiated
transactions and that the Company's reconciliation of value utilizing a
combination of the Arnold and Mentor Appraisals represents the best current
indication of the fair market value of those properties. In the case of the
property remaining in the Yosemite/Ahwahnee I and II programs, the Company
represents that the value according to the Arnold Appraisal is representative
of its current fair market value (after being reduced to reflect lot sales
since
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<PAGE>
the date of the Appraisal). In the case of the Cypress Lakes property (which
has an appraised value of $6,000,000), there is a possibility that in the
near future the Company will enter into a purchase agreement with a potential
buyer for a purchase price of $11,000,000, payable in a combination of cash
and a promissory note. However, the purchase agreement would give the buyer
the ability to cancel the sale without penalty for any reason within a 120
day due diligence period. During a subsequent 60 day period, the buyer could
cancel with forfeiture of a $100,000 deposit. Because of the terms of the
agreement, the Company believes that there is considerable uncertainty
regarding whether the property will be sold for that amount, if at all.
Therefore, our net asset value calculation is based on the $6,000,000
appraised value subject to the condition that if the sale is consummated and
the net proceeds are greater than the appraised value, the Investors in
Cypress Lakes will receive an additional number of units (valued at $20)
equal to the difference in the purchase price (exclusive of interest) and the
appraised value. In determining net asset value, the Independent Valuator
used the book value as of June 30, 1998 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 and deferred revenues which appear on the balance sheet of the
Yosemite/Ahwahnee II Program as of June 30, 1998 were included in the net
asset value calculation at book value even though they are intangible assets
and liabilities in order to reflect the on-going assets and liabilities
associated with operating the recreational vehicle park. Real property held
for sale on the Oceanside program's balance sheet as of June 30, 1998 was not
included because it was subsequently sold and the proceeds were distributed
to investors. Liabilities were subtracted out at book value. Using the
aforementioned methodology, the resulting net asset values as of June 30,
1998 were as follows (rounded to the nearest $000): $5,356,000 for Oceanside
(or 19.10 percent of the combined net asset value); $2,210,000 for
Yosemite/Ahwahnee I (or 7.88 percent of the combined net asset value);
$4,590,000 for Yosemite/Ahwahnee II (or 16.36 percent of the combined net
asset value); $5,413,000 for Mori Point (or 19.30 percent of the combined net
asset value); $1,570,000 for Sacramento/Delta Greens (or 5.60 percent of the
combined net asset value); $5,825,000 for Cypress Lakes (or 20.77 percent of
the combined net asset value); $2,622,000 for Palmdale/Joshua Ranch (or 9.35
percent of the combined net asset value); $216,000 for Esperanza (or 0.77
percent of the combined net asset value); $52,000 for Stacey Rose A Program
(or 0.90 percent of the combined net asset value); and $247,000 for Stacey
Rose (or 0.69 percent of the combined net asset value).
With respect to the 323,676 Founders Shares, the Independent Valuator
was primarily concerned with the 237,806 shares to be issued to the family
limited partnerships under the control of David Lasker and James Orth. For
our purposes, we considered a certain number of those shares to represent
consideration to Messrs. Lasker and Orth in connection with their
responsibilities as officers of the Company. The Independent Valuator
assumed this number of shares would be 89,378 shares (or 44,685 each for
Messrs. Lasker and Orth), which is based on the number of shares to be issued
to Mr. Albertson on the basis of arm's length negotiations. The remaining
148,436 shares, or 8.60% of the total shares expected to be outstanding upon
consummation of the Transaction, represents consideration for the role of
Messrs. Lasker and Orth in structuring and completing
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<PAGE>
the Acquisition, which is reasonable given the fact that the Acquisition 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 $[______]
for preparing the Fairness Opinion. In addition, the Independent Valuator
will be reimbursed for all reasonable out-of-pocket expenses, including legal
fees up to a maximum of $750, and indemnified against certain liabilities,
including certain liabilities under the federal securities laws. The fee was
negotiated between National and the Independent Valuator. Payment of the fee
is not dependent upon completion of the Acquisition. The Independent
Valuator has rendered no services to either National or the Company, or their
Affiliates, in the past.
DIVIDEND POLICY
The Company has no plans to pay dividends in the foreseeable future.
Funds otherwise available for dividends will be utilized to potentially
increase Share value through acquisition
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<PAGE>
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 The business of at least
commenced as opportunities to seven of the Programs will
participate in a loan secured be consolidated into the
by to-be-improved real Company. The Company has
property. The Programs are broader investment
not seeking to make objectives which will
additional loans or purchase include the sale or
new properties. completion of the projects
originally undertaken by the
developers which borrowed
from Investors of the
Programs, as well as
possibly expanding into
other real estate ventures.
The current plans of the
Company may be recast at the
discretion of the Board of
Directors without the
consent of the Shareholders.
DURATION The Programs were originally The Company will have
structured to have the loans perpetual life. It intends
repaid over two to four to operate indefinitely and
years. it has no plans to liquidate
assets to make returns of
capital to Investors.
DISTRIBUTIONS AND The Programs were initially The initial policy of the
DIVIDENDS designed to yield regular Company will be to preserve
interest payments to the its cash resources for
Investors and to have the growth and internal
principal of the various development and, thus, the
loans repaid in accordance Company does not plan to
with their respective terms, make dividend distributions
usually two to four years. in the foreseeable future.
The Board of Directors has
the discretion to determine
whether or not and when to
declare and pay dividends
and the amount thereof.
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<PAGE>
TAXATION The Programs are not tax The Company will be taxed as
payers and file no tax a corporation and file
returns. Prior to the corporate income tax
Ownership Date, interest returns. Distributions to
income distributed to shareholders will be
Investors was reported to the reported to the IRS and
IRS and applicable state applicable state taxing
taxing authorities on Form authorities on Form 1099-DIV
1099-INT. As tenancy-in- whether or not such
common owners of the distributions are taxable.
Properties, the Investors no
longer receive Form-1099 from
National, but are responsible
for their pro rata share of
any income, gain, loss or
deductions attributable to
their Program's Properties.
OVERHEAD AND Overhead and expenses of the Investors will have no
EXPENSES Programs are the responsibility for company
responsibility of the overhead and expenses.
Investors to the extent the Initially, overhead and
applicable Program does not expenses of the Company will
generate sufficient cash flow be derived from proceeds of
to cover them. They are the sale of one or more of
billed individually to the Company's assets.
investors in the form of Future overhead and expenses
assessments. To date, only will be funded from cash
the Oceanside program has flow from operations.
been self-funding.
MANAGEMENT The business and affairs of The business and affairs of
each of the Programs are the Company are managed by
managed by National pursuant the officers of the Company
to the applicable servicing under the direction of the
agreement. National may be Board of Directors. The
terminated as the servicing Board of Directors will
agent by the vote of holders ultimately be divided into
of a majority of the three classes serving
interests of a particular staggered three year terms.
Program. 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.
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<PAGE>
FIDUCIARY DUTIES None of the Programs are Officers and Directors of
partnerships and, thus, the Company are subject to
National does not have the the Delaware common law
common law fiduciary duties which imposes fiduciary
that it would have if it were duties of care, loyalty,
the general partner of a good faith and fair dealing
partnership. However, as an on the officers and
agent, National has directors of the Company.
fiduciary-like duties to
Investors to use reasonable
care, skill and diligence in
its work, not to compete with
Investors' interests without
consent, and not to take
adverse interests to
Investors without consent.
VOTING RIGHTS Under the tenancy-in-common Under the Charter Documents
agreements of each of the of the Company, the
Programs, the Investors have Shareholders have voting
voting rights with respect to rights with respect to (i)
collection, servicing and election of Directors; (ii)
administration of the the sale or disposition of
Outstanding Investment of the all or substantially all of
Programs, as well as the assets of the Company at
termination of the applicable any one time; (iii) the
servicing agreement. Each merger or consolidation of
holder of a tenancy-in-common the Company; (iv) the
interest is entitled to vote dissolution of the Company;
on each matter presented to and (v) certain anti-
the Investors of a takeover provisions.
particular Program. Each Share entitles its
Approval of any matter holder to cast one vote on
submitted to the Investors each matter presented to
in a particular Program holders of Shares.
requires approval of Approval of any matter
holders of a majority of submitted to holders of
the tenancy-in-common Shares generally requires
interests of that Program. 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.
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<PAGE>
REDEMPTION The tenancy-in-common The Shares are not
interests are not redeemable. redeemable. The Shares can
Investors in a particular be sold on the
Program may only receive a ________________ if an
return of their investment active trading market
upon the repayment of the exists.
applicable note or other
liquidation of all or part of
the assets of the Program.
VOTING DILUTION Investors in each Program Since seven to ten programs
have voting power based on will be consolidated into
their percentage of the funds the Company, each investor's
contributed to the Program. voting power will be
substantially reduced.
LIQUIDATION In the event of the Upon liquidation of the
RIGHTS liquidation of a particular Company, the Shareholders
Program, the assets of the will be entitled to share
Program remaining after ratably in any assets
satisfaction of all debts and remaining after the
liabilities of the Program, satisfaction of obligations
the satisfaction of expenses to creditors and any
of liquidation of the assets liquidation preferences on
of the Program and the any Preferred Stock that may
establishment of a reasonable be then outstanding.
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
DISSOLUTION tenancy-in-common interests owning at least a majority
in a particular Program may of the outstanding voting
vote to compel the sale of shares in the Company is
the Program's assets with the sufficient to cause the
result that the Program will dissolution of the Company.
be dissolved.
LIMITED LIABILITY As tenancy-in-common owners Shareholders are not
of the assets of the generally liable for
Programs, the Investors are obligations of the Company.
NOT effectively insulated
from personal liability based
on operation of those assets.
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<PAGE>
LIQUIDITY AND There is no organized The Shares will be freely
MARKETABILITY secondary market for the transferable and it is a
tenancy-in-common interests condition to the
held by Investors. Thus, consummation of the
trading in the tenancy-in- Acquisition that the Shares
common interests is sporadic be approved for listing on
and occurs solely through the ________________.
private transactions.
RESTRICTIONS ON There are certain None.
TRANSFER restrictions on transfer of
the tenancy-in-common
interests.
CONTINUITY OF None of the Programs are The Charter Documents
EXISTENCE designed to have perpetual provide for perpetual
existence. existence.
FINANCIAL REPORTS None of the Programs are The Company will be subject
subject to the reporting to the reporting
requirements of the Exchange requirements of the Exchange
Act. However, National, Act and will file annual and
without obligation to do so, quarterly reports. The
has endeavored to provide the Company currently intends to
Investors in each of the provide annual and quarterly
Programs with regular reports reports to its Shareholders.
about such Programs'
respective activities.
PAYMENTS TO National is entitled to fees While National and its
NATIONAL AND ITS and reimbursement of expenses Affiliates will hold Shares
AFFILIATES for services it renders to of the Company, the only
each of the Programs pursuant form of compensation paid to
to the servicing agreements. some of such persons will be
pursuant to their employment
agreements or otherwise.
ONLY $1,818,684 OF THE PAST
DUE FEES AND EXPENSES DUE TO
NATIONAL AND ITS PRINCIPALS
WILL REMAIN AS LIABILITIES
OF THE COMPANY.
CERTAIN LEGAL Holders of a majority of the Delaware law affords
RIGHTS Outstanding Investment in a shareholders rights to bring
Program must vote to derivative actions when the
terminate the servicing officers or Directors of the
agreement between National Company have failed to
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.
89
<PAGE>
INSPECTION OF Holders of tenancy-in-common Under Delaware law, each
BOOKS AND RECORDS interests in a Program have Shareholder has the right,
no contractual right to subject to certain
inspect books and records reasonable standards, to
maintained by National with obtain from the Company from
regard to a Program. time to time upon reasonable
However, as the servicing written demand for any
agent for the Investors, purpose reasonably related
National permits them to to the Shareholder's
review such books and records interest as a Shareholder of
on reasonable notice. 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.
90
<PAGE>
FORM OF ORGANIZATION
PROGRAM
None of the Programs are organized
business entities such as
corporations, partnerships or business
trusts. Each commenced as an
opportunity to participate in a loan
secured by to-be-improved real
property through a tenancy-in-common
investment mechanism. Each Program
remains as a tenancy-in-common among
its Investors. Investors are
individually responsible for the tax
consequences of a Program and the
reporting thereof.
COMPANY
The Company is a Delaware corporation
formed for the purpose of acquiring
the Programs' Properties, as well as
investing in and managing other real
estate opportunities. The Company
will be taxed as a corporation.
LENGTH OF INVESTMENT
PROGRAM
An investment in any of the Programs
originally was presented to Investors
as an opportunity to take a tenancy-
in-common participation in a loan
secured by real property. As such,
the investments were finite in length
with the expectation that Investors'
investments were to be returned, with
interest, within a two to four year
period.
COMPANY
Unlike the Programs, the Company
intends to continue its operations for
an indefinite time period and the
Company has no specific plans for the
disposition of assets acquired through
the Acquisition or subsequent
acquisitions. The Company is allowed
to retain net sale or refinancing
proceeds for new investments, capital
expenditures, working capital reserves
or other appropriate purposes.
NATURE OF INVESTMENT
PROGRAM
Since the respective Ownership Date of
each of the Programs, the Investors in
such Programs have been the beneficial
owners (as tenants-in-common) of the
assets and the businesses of the
respective Programs. Actual title to
the Properties is held by various
entities acting as agents for the
Investors in the several Programs.
COMPANY
The Shares constitute equity interests
in the Company. Each Shareholder will
be entitled to its pro rata share of
distributions made with respect to the
Shares. The distributions payable to
Shareholders are not fixed in amount
and are only paid when declared by the
Board of Directors. The Company has
no present plans to pay distributions.
91
<PAGE>
PROPERTIES AND DIVERSIFICATION
PROGRAM
The investment portfolio of each of
the Programs is limited to the assets
acquired as of the applicable
Ownership Date, as well as such
additional assets as may have been
acquired with mandatory Investor
assessments or voluntary Investor
advances since the Ownership Date.
None of the Programs have the
authority to raise additional funds
from third parties to expand its
investment portfolios.
COMPANY
The Company is authorized to own and
acquire the Programs' Properties, make
other investments and issue additional
equity and debt securities to acquire
additional assets.
ADDITIONAL EQUITY AND DILUTION
PROGRAM
None of the Programs are authorized to
raise additional funds other than
through the assessment/advance process
prescribed by the applicable tenancy-
in-common agreement. Therefore,
except to the extent that existing
Investors in a particular Program pay
mandatory assessments or make
voluntary advances, no dilution of an
Investor's interest in the Program can
occur.
COMPANY
The Board of Directors may, in its
discretion, issue additional equity
securities. The Company may sell
additional equity from time to time to
increase its available capital. The
issuance of additional equity
securities may result in a dilution of
the interests of the Shareholders.
BORROWING POLICIES
PROGRAM
Except to the extent authorized by
vote of Investors owning a majority of
the tenancy-in-common interests in the
loan to the original borrower, none of
the Programs is authorized to borrow
funds necessary, appropriate or
advisable to conduct its business and
affairs. Without such a majority
vote, the only additional funds which
the Programs may raise comes from
mandatory assessments from, or
voluntary advances by, existing
Investors.
COMPANY
The Company is permitted to borrow, on
a secured or unsecured basis, funds to
advance its business without limits.
No shareholder vote is required.
92
<PAGE>
RESTRICTIONS ON RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS
PROGRAM
None of the applicable servicing
agreements or tenancy-in-common
agreements for the Programs restrict
any of the Programs from entering into
business transactions with National or
its affiliates.
COMPANY
Under Delaware law, transactions
between the Company and one or more of
its directors or officers, or between
the Company or any affiliate of a
director or officer, are not void or
voidable if the transaction is
approved in good faith by a majority
of the disinterested directors or
Shareholders based on full disclosure;
or the transaction is fair as to the
Company as of the time it is
authorized, approved or ratified by
the Board of Directors, an appropriate
committee or the Shareholders. In
addition, the Company's Certificate of
Incorporation, as well as Delaware
law, prohibit certain business
combinations with owners of more than
15% of the outstanding voting stock of
the Company ("interested
stockholders"), or an affiliate of
such person, within the three year
period immediately prior to the date
on which such stockholder became an
interested stockholder.
93
<PAGE>
MANAGEMENT CONTROL AND RESPONSIBILITY
PROGRAM
National originally acted as servicing
agent for each of the Programs
pursuant to servicing agreements
entered into with each of the
Investors in each Program. Pursuant
to the servicing agreements, National
is essentially invested with
management authority to conduct the
business of each of the Programs.
Since the Ownership Dates, National's
role has evolved to that of asset
manager for each of the Programs. The
servicing agreements are terminable on
30 days' written notice, provided that
the Investors do not have the power to
terminate the servicing agreements
unless and until all amounts owed to
National thereunder have been paid in
full. National does not need to seek
re-election but instead serves unless
removed by the Investors, which is
generally an extraordinary event.
Pursuant to the tenancy-in-common
agreements for each of the Programs,
matters concerning the collection,
servicing and administration of the
Outstanding Investment for each of the
Programs is governed by the will of
Investors holding more than 50% of the
Outstanding Investment. As agent,
National is accountable as a fiduciary
to each of the Programs and is
required to exercise good faith and
integrity in its dealings in
conducting the affairs of each of the
Programs. See "Fiduciary
Responsibility."
COMPANY
The Board of Directors has exclusive
control over the Company's business
and affairs subject only to the
restrictions in the Charter Documents.
Shareholders have the right to elect
members of the Board of Directors.
The Directors are accountable to the
Company as fiduciaries and are
required to exercise good faith and
integrity in conducting the Company's
affairs. See "Fiduciary
Responsibility." The Shareholders
have greater control over the
management of the Company than the
Investors have over the Programs
because members of the Company's Board
of Directors are elected by the
Shareholders.
94
<PAGE>
MANAGEMENT LIABILITY AND INDEMNIFICATION
PROGRAM
Pursuant to the servicing agreements,
National is indemnified and held
harmless by the Investors from and
against any and all liabilities for
acts or omissions performed in the
course of its activities, except as to
such liabilities caused or contributed
to, in whole or in part, by any gross
negligence or willful misconduct on
the part of National or its Agents.
COMPANY
The Company's Directors are not
personally liable for ordinary
liabilities of the Company. The
Charter Documents provide that a
Director's liability for breach of
fiduciary duty is limited to the full
extent allowable under Delaware law.
The Charter Documents and Delaware law
provide indemnification rights to
Directors and officers who act in good
faith, and in a manner reasonably
believed to be in or not opposed to
the best interests of the Company and,
with respect to criminal actions or
proceedings, who act without
reasonable cause to believe their
conduct was unlawful. In addition,
the Charter Documents indemnify
Directors and officers against amounts
paid for settlement, authorize the
Company to advance expenses incurred
in defense upon receipt of an
appropriate undertaking to repay such
amounts if appropriate, and authorize
the Company to carry insurance for the
benefit of the officers and Directors.
See "Fiduciary Responsibility."
95
<PAGE>
ANTI-TAKEOVER PROVISIONS
PROGRAM
Changes in management of any of the
Programs can be effected only by
removal of National as agent by
holders of a majority of the
Outstanding Investment in such
Programs. This would be an
extraordinary event.
COMPANY
The Charter Documents contain a number
of provisions that may have the effect
of delaying or discouraging a hostile
takeover of the Company. These
provisions include, among others, (i)
the power of the Board of Directors to
issue additional equity securities in
the Company; (ii) the classified Board
of Directors wherein only one-third of
the Directors are re-elected to the
Board in any given year and Directors
serve three year terms; (iii) any
action required or permitted to be
taken by Shareholders of the Company
must be effected at a duly called
annual meeting or a special meeting
unless such action requiring or
permitting stockholder approval is
approved by a majority of the Board of
Directors; (iv) special meetings of
Shareholders may only be called by a
majority of the Board, a Chairman of
the Board or the President; (v)
Directors may only be removed for
cause and only by the affirmative vote
of holders of not less than two-thirds
of the voting power of all outstanding
Shares; and (vi) amendments to the
anti-takeover provisions of the
Certificate of Incorporation may only
be effected by the affirmative vote of
holders of not less than two-thirds of
the voting power of all outstanding
Shares. See "Description of Shares."
96
<PAGE>
VOTING RIGHTS
PROGRAM
Holders of a majority of the
Outstanding Investment in each Program
may control decisions respecting the
collection, servicing and
administration of such Outstanding
Investment. Otherwise, investors in
the Programs have no voting rights.
COMPANY
The Company's Board of Directors
consists of three classes.
Shareholders are entitled to elect one
class of the Company's Board of
Directors at each annual meeting of
the Company. In addition,
Shareholders have the power to amend
the Charter Documents by the votes
required therein, to dissolve the
Company and to approve business
combinations between the Company and
other entities.
LIMITED LIABILITY OF INVESTORS
PROGRAM
As tenants-in-common in the respective
programs, the Investors are not
effectively insulated from personal
liability. Pursuant to the tenancy-
in-common agreements, Investors are
also susceptible to mandatory
assessments.
COMPANY
Under Delaware law, Shareholders will
not be liable for Company debts or
obligations. Upon issuance, the
Shares will be fully paid and non-
assessable.
VOTING PROCEDURES
THE VOTE OF EACH INVESTOR IS IMPORTANT. EACH INVESTOR IS URGED TO MARK,
DATE AND SIGN THE INVESTOR BALLOT AND RETURN IT IN THE ENCLOSED ENVELOPE.
TIME OF VOTING
The vote of the Investors with respect to the Acquisition will be tabulated
on _____________, 1998, unless such date is extended by the Company in its sole
discretion. The vote will be tabulated by National and verified by BDO Seidman,
LLP, which is not affiliated with the Company, the Programs or National. See
"Investor Ballot and Vote Required."
RECORD DATE AND OUTSTANDING VOTES
The Acquisition is being submitted for approval to those Investors holding
interests in the Programs as of the Record Date. The Record Date is
[_________________] for all Programs. At the Record Date, the following number
of votes were held of record by the number of Investors indicated below.
97
<PAGE>
<TABLE>
<CAPTION>
Number of Votes
[at 6/30/98] Required for
Number of Number of Votes Approval of
Program Investors Held of Record Acquisition
- --------- ------------- ----------------- ------------------
<S> <C> <C> <C>
Sacramento/Delta Greens 332 6,131,638 3,065,819
Oceanside 1,755 24,150,000 12,075,001
Yosemite/Ahwahnee I 426 9,063,163 4,531,582
Yosemite/Ahwahnee II 837 19,565,333 9,782,667
Mori Point 486 12,342,259 6,171,130
Cypress Lakes 832 18,971,767 9,485,884
Palmdale/Joshua Ranch 1,011 18,107,814 9,053,908
Esperanza 42 584,653 292,327
Stacey Rose A 2 114,098 57,049
Stacey Rose B 28 425,188 212,595
</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 tenancy-in-common interests purchased in each
program, National has the following votes in each of the programs: 3,118
Sacramento/Delta Greens; 2,300 Oceanside; 2,373 Yosemite/ Ahwahnee I; 69,384
Yosemite/Ahwahnee II; 5,279 Mori Point; 3,200 Cypress Lakes; 2,395
Palmdale/Joshua Ranch; 0 Esperanza, and 4,247 Stacey Rose A and 15,753 Stacey
Rose B. 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
98
<PAGE>
not counted for purposes of determining whether the Acquisition and related
proposals have been approved. Abstentions and broker (or other custodian)
non-votes will have the effect of a vote against the Acquisition. See table
in "-- Record Date and Outstanding Votes" for the number of votes which must
be cast in favor of the Acquisition for it to be approved by each respective
Program.
Investors who sign and return the Investor Ballot without indicating a vote
will be deemed to have voted "YES" in favor of the Acquisition.
Investors who wish to vote against the Acquisition should also complete a
Investor Ballot. The failure to return a Investor Ballot will have the effect
of a vote against the Acquisition.
If the Acquisition is approved by all Programs, Investors in all Programs
will receive Acquisition Shares whether they voted in favor or against, or
abstained from voting on the Acquisition.
All questions as to the form of all documents and the validity
(including time of receipt) of all approvals will be determined by National
and such determinations will be final and binding. National reserves the
absolute right to waive any of the defects or irregularities in any approval
of the Acquisition or preparation of the form of Investor Ballot. National's
interpretation of the terms and conditions of the Acquisition will be final
and binding. National shall be under no duty to give notification of any
defects or irregularities in any approval of the Acquisition or preparation
of the form of Investor Ballot and shall not incur any liability for failure
to give such notification.
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
99
<PAGE>
110, Newport Beach, California 92660, telecopy number 949-752-9753. 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 and an opinion of experienced counsel acceptable to
National that the proposed communication and the method of communication is
reasonable and does not violate applicable federal or state securities laws or
state real estate laws, National will promptly mail such communications to a
Program's Investors.
ISSUANCE OF CERTIFICATES FOR ACQUISITION UNITS
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 and warrants to which such Investor is entitled.
If any certificate representing Shares and warrants 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.
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<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 that were exchanged for Units.
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 Investors. In
recognition of these conflicts, and the resulting need to independently
determine that the allocation of Shares is fair to the Investors, National and
the Company engaged Houlihan Valuation Advisers, the Independent Valuator, to
render the Fairness Opinion and the independent appraisers named on page __ to
independently determine the value of the Properties. The conflicts of interest
are summarized below.
BENEFITS TO NATIONAL
The benefits of the Acquisition for National primarily reside in the
relief from its duties, including fiduciary duties, and related costs as
asset manager for the Programs that are acquired by the Company. Asset
management for the Programs will no longer be necessary. This benefit is not
susceptible to meaningful quantification but it will reduce National's
overhead for managing the programs that have not paid National's asset
management fees. Although some of the Programs (Oceanside, Yosemite Ahwahnee
I and II, Cypress Lakes and Palmdale/Joshua Ranch) paid National its
contractual fees for such activities when funds were available to do so, some
of the Programs (Sacramento/Delta Greens, Mori Point, Esperanza and Stacey
Rose A and B) accrued some of 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, Yosemite/ Ahwahnee, Cypress Lakes,
Palmdale/Joshua Ranch, Esperanza and Stacey Rose Programs, for the benefit of
those Investors. Aside from general asset management 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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<PAGE>
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, [237,806] shares of
the Company's Common Stock. That represents over 75% of the Company's
outstanding stock. On the basis of a $20 per share value, such shares would be
deemed to have a value of $[4,756,120]. They paid, out-of-pocket, $0.01 per
share for the stock. National will pay the same price as investors for their
units in the Company. 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 6.88% (2% if all warrants are exercised) of the Company's
outstanding stock. It should be noted that, although prior to 1995 National
forgave almost $3,500,000 of fees and advances in its role as servicing agent,
neither it nor its principals or employees are being compensated based on those
forgiven fees. To the extent National invested in any of the Programs, it will
be allocated Acquisition units on the same basis as investors and at the same
price.
In addition, in the formation period of the Company, L.C. Albertson, Jr.,
Executive Vice President of the Company has purchased 44,685 shares,
respectively, at $0.01 per share. Mr. Albertson will control [2.59]% of the
Company's outstanding stock after the Acquisition.
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
up to 50% of any up to
Additional Discretionary Bonus(1) salary 50% of 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 $20
per share; 10,000 to be issued on the first anniversary of the Acquisition;
and 10,000 to be issued on the second anniversary of the Acquisition. The
last two groups are exercisable at market value on date of grant.
(3) See "Management Following the Acquisition -- Employment Agreements."
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<PAGE>
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, May 1997 and March 1998
appraisals of the Oceanside and Yosemite/Ahwahnee Properties in arriving at
the Exchange Values for the Oceanside and 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 [18.74]% (5.45% if all
warrants are exercised) of the outstanding Shares of the Company upon completion
of the Acquisition is fair under the circumstances. In addition, the Shares
will be allocated among the Programs in accordance with their respective
Exchange Values, and within the Programs among the Investors pro rata in
accordance with their Adjusted Outstanding Investment in each of the Programs.
Recognizing the inherent conflict of interest of having National establish these
numbers independently (without active involvement from persons not having a
financial interest in the Acquisition), they engaged independent appraisers to
value the real estate assets owned by each of the Programs and the Independent
Valuator to render an opinion on the overall fairness of the allocation of
Shares in the transaction, including the number of Shares in the Company
allocated to the programs, as well as to affiliates, employees, and the
principal shareholders of National and the Company. See "Appraisal and Fairness
Opinion."
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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 may 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 may continue to provide
services related to non-participating programs. As a result, possible conflicts
of interest may arise regarding allocation of services of these employees
between the Company, National and the non-participating programs. At this time,
the allocation of services between the Company and National's other programs is
not susceptible to meaningful quantification.
NON-ARM'S-LENGTH AGREEMENTS
All agreements and arrangements, including those relating to compensation,
between the Company and employees of the Company who are also employees of
National will not be the result of arm's-length negotiations.
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FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION
FIDUCIARY RESPONSIBILITY OF NATIONAL
The Programs are not partnerships and, thus, National does not have the
fiduciary duties of a general partner in dealing with the Programs. However, as
asset manager for each of the Programs, National has the specific duties to
Investors set forth in the various servicing agreements. In addition, under
California law, as an agent, National is under a fiduciary duty to Investors (i)
to use reasonable care, diligence and skill in its work, (ii) not to compete
with the Investors' interests without full disclosure to, and agreement from,
the Investors, and (iii) not to obtain an interest adverse to the Investors
without full disclosure to, and consent from, the Investors.
INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY
The directors and officers of the Company, in exercising the powers and
responsibilities of managing the Company, owe the Company and its shareholders a
duty of care and a duty of loyalty. However, under the so-called "business
judgment rule," which could apply to the officers and directors of the Company,
the officers and directors of the Company may not be liable for errors in
judgment or other acts or omissions made in good faith which are done in a
manner they believe to be in the best interests of the Company and are performed
with the care that an ordinarily prudent person in a like position would use
under similar circumstances. In the event any legal action were brought against
officers or directors of the Company, they might be able to assert defenses
based on the business judgment rule.
According to the Charter Documents, officers and directors and other agents
of the Company are entitled to indemnification from the Company for any loss,
damage or claim (including any reasonable attorneys' fees incurred by such
person in connection therewith) due to any act or omission made by him or her,
except in the case of fraudulent or illegal conduct of such person. See
"Management After the Acquisition -- Limitation of Liability and
Indemnification."
The indemnification provided by the Charter Documents is not deemed to be
exclusive of any other rights to which those indemnified may be entitled under
any agreement, vote of shareholders or directors, or otherwise, and shall inure
to the benefit of the heirs, executors and administrators of such person. Any
repeal or modification of the indemnification provisions contained in the
Charter Documents will not adversely affect any right or protection of a
director or officer of the Company existing at the time of such repeal or
modification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to officers, directors or persons controlling the Company
pursuant to any provisions described in this Consent Solicitation/Prospectus, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
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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. EXCEPT TO THE
EXTENT REQUIRED TO KEEP THIS PROSPECTUS FROM BEING MATERIALLY MISLEADING WHILE
THE OFFERING IS OPEN OR TO COMPLY WITH EXCHANGE ACT REPORTING REQUIREMENTS, THE
COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
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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 up to seven separate
subsidiaries of AFC, namely Delta Greens Homes, Inc. (Sacramento/Delta Greens
Property), Yosemite Woods Family Resort, Inc. (Yosemite/Ahwahnee Properties),
Mori Point Destinations, Inc. (Mori Point Property), Cypress Lakes, Inc.
(Cypress Lakes Property), Palmdale/Joshua Ranch, Inc. (Palmdale/Joshua Ranch
Property), Esperanza, Inc. (Esperanza Property), and Victorville Homes, Inc.
(Stacey Rose Properties).
BUSINESS OF THE COMPANY
Upon completion of the Acquisition, the Company will be a diversified real
estate company involved in the residential development industry, as well as the
lodging and recreational industries. Its overall initial objective will be to
consolidate the various business plans of the Programs into a unified Company
business plan with the ultimate goal of creating sufficient value in the
Company's Shares to allow for Investors in the Programs to have the ability to
recover a significantly larger portion of their Outstanding Investments in such
Programs than if the Acquisition did not occur.
As a part of its plan, in the future the Company may seek to acquire
certain assets and properties that are synergistic or add value to the
Company in accordance with its overall business plan. It may also seek to
acquire and develop additional properties that take advantage of its
expertise or its competitive position in order to enhance its financial
performance. Such additional acquisitions may include, but are not limited
to: (a) resort-oriented properties, such as hotels; (b)
extended-stay-oriented properties, such as recreational vehicle or timeshare
facilities; (c) leisure-oriented properties, such as golf courses and
recreation facilities; and (d) residential development properties. The
Company may also purchase or form adjunct businesses to supplement and
enhance these types of properties, such as customer financing, loan
servicing, mortgage brokerage, real estate brokerage, property management,
merchandising, marketing and telecommunications. In making such
acquisitions, to the extent possible, the Company will attempt to use shares
of its common stock for some or all of the purchase price. This would result
in a dilution of the voting power of then-existing investors in the Company.
Some of the risks which the Company may face if it makes the
acquisitions described above include, but are not limited to: (a) the
professional service fees and financing costs which the Company would incur
to complete such acquisitions; (b) significant competition from other
resort-oriented, extended-stay oriented, leisure-oriented, and residential
properties; (c) lack of management experience in operating such businesses to
the extent that experienced personnel cannot be acquired at the time of the
acquisition; (d) dilution of Investors' voting rights to the
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extent that the Company's common stock is used for such acquisitions; and (e)
costs of on-going compliance with applicable government regulation of
consumer finance, real estate brokerage or telecommunications activities.
Any of such risks, together with additional risks which may be identified in
the future, could prevent the Company from accomplishing potential future
acquisitions.
PROPERTIES
The Company will purchase the Properties in their "as is" condition from
the Investors in the Programs, except that any remaining Investors' liens will
be removed. They are presently managed by National for the Investors pursuant
to servicing agreements which entitle National to receive an annual fee equal to
one percent of the original principal amount of the applicable loan. Upon
completion of the Acquisition, the Company, through its subsidiaries, will own
up to seven Properties which are described below.
SACRAMENTO/DELTA GREENS PROPERTY. The Sacramento/Delta Greens Property
consists of a 121-acre site in South Sacramento, California, located
approximately one-half mile east of Interstate 5. Title is held by National
Investors Land Holding Trust IV as the agent of and for the benefit of the
Program's Investors. The Property is unencumbered by liens and is subject to no
leases, sales contracts or options and property taxes are currently on a payment
plan. The tentative tract map has been revised to provide for approximately 465
lots for the construction of single-family homes and final approval is currently
being sought from the City of Sacramento. The area in which the Property is
located is populated primarily by lower to lower-middle income workers with
combined family incomes of $25,000 to $35,000. The nearby Meadowview has a
reputation as a high crime area, but an active community effort is underway to
upgrade the community identity.
OCEANSIDE PROPERTY. Presently, the Property owned by the Oceanside
Program is the golf course at Yosemite/Ahwahnee (consisting of PLUS/MINUS
141.53 acres plus clubhouse, dining facilities and pro shop) and six outlots
(consisting of PLUS/MINUS 1,015.66 total acres of unimproved land designed
for residential development). The golf course was purchased in June 1998 for
$1,800,000 cash and the outlots were purchased for $1,750,000 cash pursuant
to the majority approval of the Oceanside Investors and the Yosemite/Ahwahnee
I and II Investors. The golf course has been leased to Ahwahnee Golf Course,
Inc., for the benefit of the Yosemite/Ahwahnee Programs on a net-net-net
basis for a period of five years. The lease calls for annual lease payments
to the Oceanside Program of $80,000 in the first year, $140,000 in the second
year, $250,000 in the third year, and $380,000 for each of the fourth and
fifth years.
YOSEMITE/AHWAHNEE PROPERTIES. The Yosemite/Ahwahnee Properties originally
consisted of approximately 1,650 acres divided into two parcels, one containing
660 acres and one containing 990 acres prior to the sale of the golf course and
six outlots to the Oceanside Program in order to obtain working capital. The
660 acre parcel was originally planned to be developed with 218 residential
estate lots, 1-3 acres in size. Of the 58 completed lots in this portion of the
property, 26 have been sold. The balance of the project consists of
approximately 990 acres which has been developed into an 18-hole golf course, a
clubhouse and other amenities. In addition, this portion contains a
recreational vehicle membership park
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developed for an eventual 600 spaces. It currently contains 54 "full hookup"
sites with an additional 100 sites with full hookups under construction.
"Full hookups" are spaces that have water, sewer and electrical and service
to the site. The Yosemite/Ahwahnee Program has retained ownership of the
land containing the recreational vehicle membership park and the land to be
developed into timeshare facilities. 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 remaining balance of 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 remaining balance of 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 remaining balance of the 660
acre parcel is presently encumbered by a property tax lien and a first trust
deed held for the benefit of the Investors in the Yosemite/Ahwahnee I Program.
The remaining balance of the 990 acre parcel with the exception of the golf
course property which is leased on a triple-net basis by Ahwahnee Golf Course,
Inc. from the Oceanside Program, is presently encumbered by a property tax lien
and a first trust deed held for the benefit of the Investors in the Yosemite/
Ahwahnee II Program. The aggregate principal balance due on 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 Coast Highway. There is in excess of a
quarter of a mile of oceanfront on the west. The Property is unencumbered by
liens and is subject to no leases or sales contracts or options and property
taxes are currently under a payment plan. Portions of this Property include
habitat for two endangered species. Development will not be permitted unless
it can be demonstrated that impact on the garter snake habitat can be
ultimately mitigated. The cost to develop and implement a mitigation plan is
expected to be expensive and potentially time-consuming. The Company
believes that the impact can be mitigated and that necessary approvals 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.
CYPRESS LAKES PROPERTY. The Cypress Lakes Property consists of 686 acres
and 1,330 residential lots and is located in the northeastern portion of Contra
Costa County. The Property is located 40 and 50 miles, respectively, northeast
of Oakland and San Francisco. The Property is unencumbered by liens and is
subject to no leases, sales contracts or options, however, property taxes are
delinquent since 1995 in the amount of approximately $199,000. It has vested
tentative map approved by Contra Costa County. The area in
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which it is located is primarily rural farmland. The local areas of
Brentwood and Oakley are considered to be good residential neighborhood
locations. Title is held by National Investors Financial Land Holding Trust
VII for the benefit of the Program's Investors.
PALMDALE/JOSHUA RANCH PROPERTY. The Joshua Ranch Property consists of
739.6 acres of hillside property and is comprised of 539 10,000 and 20,000
square foot lots. The City of Palmdale, through a grant by the County of Los
Angeles, will develop a hiking, biking and equestrian trail across the
Property. The project will be equestrian-oriented and is located 60 miles
north of Los Angeles in the growing City of Palmdale.
Title is held by National Investors Land Holding Trust V for the benefit of
the Programs' Investors. The Property is unencumbered by liens and is subject
to no leases, sales contracts or options and property taxes are paid currently
under a payment plan. The project received approval of a vested tentative map
by the City of Palmdale in July 1998.
The neighborhood provides for a well-conceived housing mix and is served by
adequate recreational amenities such as parks, retail, commercial and community
services. Access to the Property is good and is considered to be well located
for residential usage.
ESPERANZA PROPERTY. The Esperanza Property consists of 6.12 acres, or
266,568 square feet, of unimproved raw land with varying terrain and
topography. The site is triangular in configuration and has approximately
1,000 feet of frontage along Hesperia Road.
The Esperanza Property is zoned commercial. Victorville is regarded as a
high desert location within the Southern California region offering lower
residential and commercial real estate prices than more urban areas. This is
due, in part, to its somewhat remote location and hot summer climate. Overall,
the region's natural and man-made physical environment provides adequate
resources for commercial development.
According to the Victorville Chamber of Commerce, the number of housing
units in the City have grown from 6,108 units in 1980 to 23,143 units in January
1996, an annual growth rate of nine percent. The driving force behind
Victorville's rapid population and employment growth during the 1980s and 1990s
is Victorville's lower land prices and housing costs relative to other parts of
Southern California. The lower land basis helped draw residents looking for
more affordable housing options, as well as businesses to serve this growing
population base.
The Property is unencumbered by liens and is subject to no leases, sales
contracts or options; however, property taxes are delinquent in the amount of
approximately $19,700. A payment plan must be implemented in 2000 or the
property will be sold at a tax sale.
STACEY ROSE PROPERTIES. The Stacey Rose Properties consist of 32 acres of
unimproved raw land which is comprised of three separate parcels. The Property
is zoned residential and could contain approximately 160 lots.
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Since Victorville is regarded as a high desert location within the Southern
California region, it offers relatively lower residential and commercial real
estate prices. This is due, in part, to its somewhat remote location and hot
summer climate.
Victorville has experienced substantial growth since 1980, with the
population growing from 14,229 residents in 1980 to 40,674 residents in 1990, an
increase of 11% annually, according to the City of Victorville Chamber of
Commerce. The City is estimated to have reached 60,400 residents as of January
1, 1997, a six percent increase from 1990. The number of housing units in the
City has grown from 6,108 units in 1980 to 23,143 units in January 1996, an
annual growth rate of nine percent. The driving force behind Victorville's
rapid population and employment growth during the 1980s and 1990s is
Victorville's lower land prices and housing costs relative to other parts of
Southern California. The lower land basis helped draw residents looking for
more affordable housing options, as well as businesses to serve this growing
population base.
Title is held by National Investors Land Holding Trusts I, II and III for
the benefit of the Program Investors. The Property is unencumbered by liens and
is subject to no taxes, sales contracts or options and property taxes are
currently under a payment plan.
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. The Acquisition will allow for Palmdale/Joshua
Ranch Investors to have geographical diversification in residential development
because of the Sacramento/Delta Greens Property, as well as being diversified
into the lodging and recreation industries as made available with the
Yosemite/Ahwahnee, Oceanside and Mori Point Properties. Conversely, the
Yosemite/Ahwahnee and Mori Point Investors' opportunities will be expanded and
diversified as well to take advantage of those represented by the
Sacramento/Delta Greens, the Cypress Lakes and the Palmdale/Joshua Ranch
Properties.
Upon completion of the Acquisition, the Company's resources can be managed
such that the operation of each of its subsidiaries contributes meaningfully to
the achievement of its consolidated business objectives. Initially, the Company
will be involved in two primary industries: (1) the residential development
industry, and (2) the lodging and recreation industry.
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THE RESIDENTIAL DEVELOPMENT INDUSTRY
The Company anticipates that the demand for unimproved land will increase
in the near future and that unimproved properties with entitlements, ready for
physical improvements, will be in demand. In order to build homes, land
entitlements (necessary governmental approvals) must be obtained and maintained
in effect. Entitlements include development agreements, vesting tentative maps
and recorded maps. These give a developer the right to obtain building permits
to begin construction upon compliance with conditions that are usually within
the developer's control.
In order to acquire land for residential or timeshare development while
conserving cash, the Company may utilize options to buy land (generally
requiring a payment that is a small fraction of the purchase price to hold the
property pending financing). Such payment usually is applied to the purchase
price. It will fund additional acquisitions whenever possible with non-recourse
seller financing which does not require a full payment of the purchase price
immediately. The risk of securing the availability of property through the use
of options is that the Company will be unable to exercise the option and lose
the option payment. The risk of seller non-recourse financing is the potential
loss of the property, loss of the downpayment and loss of funds spent on
development if there is a default on the loan by the Company.
The Company views land as a component of a home's cost structure, rather
than for its speculative value. Due to the cyclical nature of the industry, the
critical role of risk-management in land development, and the low margins that
are typical in today's homebuilding market, the Company will seek to place more
emphasis on the acquisition and development of potential timeshare projects
rather than for land to entitle the actual construction of homes. The Company
intends to focus its residential development acquisitions, if any, primarily in
the infill and emerging market segments. Properties acquired by the Company
through the Acquisition will be in various stages of the approval process and
development.
THE LODGING AND RECREATION INDUSTRY
This industry includes many distinct product categories, including
commercial lodging-oriented products such as hotels and conference centers,
recreation-oriented products such as golf courses, equestrian facilities, sports
complexes, marinas, theme parks, destination resorts, recreational vehicle
resorts, and vacation-oriented products such as timeshare resorts, to name a
few. Initially, the Company will focus on the future development of an
executive conference center and timeshare resort.
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
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dedicated to accommodating small-to-medium sized groups, and meetings usually
comprise at least 60% of a facility's overall business. Due to this dedication
to meetings, conference centers tailor their facilities and services primarily
to the needs of the meeting planner by providing all necessary arrangements for
the complete schedule of activities from arrival to departure. The pricing
structure for a conference is often a single, uniform per person rate - a
package that includes lodging, meals, coffee breaks, meeting services, and
equipment fees, called a Complete Meeting Package, or the Full American Plan.
Meeting rooms are designed and used only for meetings and do not double as
banquet rooms or exhibition space. Meal functions are held in a central dining
area. The IACC defines five types of conference centers, one of which, the
Executive or Dedicated Conference center, the Company feels suits the Mori Point
site the best.
At an Executive (Dedicated) Conference Center, groups are typically
composed of corporations, associations, and other organizations that emphasize
quality of accommodations and services over price. This type of facility was
developed primarily to satisfy upper-level management meetings and
education/training seminars. Facilities usually include sophisticated equipment
and are staffed with professional conference coordinators. Because of its
proximity to San Francisco and the Silicon Valley, the Company believes that the
Mori Point Conference Center could be positioned within this category of
facilities.
According to a recent report issued by the IACC and PKF Consulting entitled
"Conference Center Industry, A Statistical and Financial Profile - North
American 1996," since the recession in 1991 to year-end 1995, U.S. conference
centers have achieved a 27.2% increase in occupancy. This compares to an 8.3%
increase in occupancy for the overall lodging industry during the same period.
Except for resort conference centers, all types of conference facilities have
enjoyed double digit increases in occupancy since 1991.
According to the same sources, total revenue, measured on a per occupied
room basis, has grown approximately 20% for resort and executive conference
centers since 1991. For comparative purposes, cumulative inflation during the
same period was 11.9% and the total revenue for U.S. hotels grew only 10.4%.
The primary competitive lodging market for the proposed conference center
at Mori Point is comprised of four hotels with a total of 508 rooms. The
selection of the competitive supply was based on location, facilities and
amenities, room rate structure, and market orientation. These hotels are all
full-service hotels and conference centers which cater to group and leisure
demand emanating primarily from the Bay Area, but with a secondary component of
national business attracted to their coastal locations. The secondary
competitive lodging market is comprised of three group-oriented airport
properties with 1,865 guest rooms, rendering the total potential current
competition to 2,373 rooms.
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
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overwhelmingly pleased with the purchase. Recreational vehicle sales have
increased by 44% between 1992 and 1995 and are projected to continue to increase
as the "boomers" enter their prime buying years of between 45 and 54. They
value the recreational vehicle as a less expensive way for the entire family to
travel together. Recreational vehicle camping topped hiking, wilderness
camping, biking, horseback riding, canoeing, boating and many other forms of
recreation for satisfaction among participants in outdoor activities. Nine of
ten recreational vehicle owners agree that recreational vehicles are a great way
to travel because they offer the convenience of home away from home; a majority
said that recreational vehicle parks are like a second neighborhood; and there
is a real camaraderie among users. Also, weekend trips have increased 85% since
1984 and recreational vehicles are well suited for such weekend travel. All of
the above information is derived from publications of the California Travel
Parks Association.
THE TIMESHARE INDUSTRY
THE MARKET. According to an American Resort Development Association
("ARDA") study, the leisure industry is primarily made up of two components for
overnight accommodations: commercial lodging establishments and timeshare or
"vacation ownership" resorts. For many vacationers, particularly those with
families, a lengthy stay at a quality commercial lodging establishment can be
very expensive, and the space provided to the guest relative to the cost
(without renting multiple rooms) is not economical for vacationers. First
introduced in Europe in the mid-1960s, ownership of vacation intervals has been
one of the fastest growing segments of the hospitality industry over the past
two decades.
The Company believes that the following factors have contributed to the
increased acceptance of the timeshare concept among the general public and the
substantial growth of the timeshare industry over the past 15 years:
- Increased consumer confidence resulting from consumer protection
regulation of the timeshare industry;
- The entrance of brand name national lodging companies to the industry;
- Increased flexibility of timeshare ownership due to the growth of
exchange organizations;
- Improvement in the quality of both the facilities themselves and the
management of available timeshare resorts;
- Increased consumer awareness of the value and benefits of timeshare
ownership; and
- 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
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Westin. However, none of such brand name lodging companies are presently
potential competitors of the Company.
THE CONSUMER. The Company believes that the prime market for vacation
intervals is customers in the 40-55 year age range who are reaching the peak of
their earning power and are rapidly gaining more leisure time.
According to ARDA, the three primary reasons cited by consumers for
purchasing a vacation interval are (i) the ability to exchange the vacation
interval for accommodations at other resorts through exchange networks (cited by
82% of vacation interval purchasers), (ii) the money savings over traditional
resort vacations (cited by 61% of purchasers) and (iii) the quality and appeal
of the resort at which they purchased a vacation interval (cited by 54% of
purchasers). The ARDA study also indicated that vacation interval buyers have a
high rate of repeat purchases. In addition, customer satisfaction increases
with length of ownership, age, income, multiple location ownership and
accessibility to vacation interval exchange networks. The Company plans to
create a timeshare facility at the Yosemite/Ahwahnee Property to take advantage
of expected growth in the timeshare industry as the baby-boom generation enters
the 40-55 year age bracket, the age group which purchased the most vacation
intervals in 1994.
TIMESHARE EXCHANGE COMPANIES. Exchange privileges simply represent the
opportunity for timeshare owners to place their timeshare interval in a pool and
exchange it for a comparable timeshare elsewhere. The ability to do this is the
single most important motivation for timeshare purchases, and appears especially
important to educated consumers, who look forward to opportunities to learn
through travel.
According to ARDA, two exchange companies dominate the industry. These are
Resort Condominiums International, which started in 1974 and controls about
two-thirds of the market, and Interval International, which began in 1976 and
controls most of the remaining one-third. Both systems operate similarly. They
compete to sign up new resorts; once a resort is affiliated with one or the
other company, anyone who purchases a timeshare at the resort is automatically
signed up with the exchange. Timeshare owners must renew their membership with
the exchange company every year for about $75. Exact figures are not available,
but it is estimated that about 75% of timeshare owners are affiliated with an
exchange company.
A timeshare owner wishing to make an exchange places his time in the
exchange system and requests a location and time to exchange into. Exchange
requests generally cost less than $100. Time placed in the exchange system does
not have to be used in order for the person who places it to receive the
exchange they request, and it is not a one-for-one trade.
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
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recreational vehicle park and is expanding the park with the addition of another
100 sites. Additionally, National is beginning the development of vacation
villa timeshare units and investigating the feasibility of future traditional
attached timeshare facilities on the site as well.
The Company expects that it will have a competitive advantage by virtue of
the location advantages of the Yosemite/Ahwahnee and Mori Point Properties. By
striving to meet this objective, the Company expects that it will be capable of
enhancing the value and financial performance of the businesses and assets
currently held by the Investors in separate Programs through the consolidation
which the Acquisition will provide.
In order to meet its objectives, the Company intends to (i) develop the
Properties for their highest and best use, thereby maximizing the value of the
Company's asset base; (ii) increase the current cash flow from the Company's
consolidated operations, thereby enhancing the value of the Company's
businesses; (iii) maximize the profit margins of tangible and intangible
for-sale products by lowering costs and promoting efficiencies through economies
of scale; (iv) raise funds through a strategic combination of the sale of units
to Investors and the sale of selected real estate assets acquired from the
Programs to outside parties in order to finance the Company's operations and
expansion; and (v) generate revenues through lateral expansion by acquiring
complimentary projects and assets which are consistent with the Company's
objectives and business plans (external growth).
EXTERNAL GROWTH STRATEGY. When appropriate, and assuming market acceptance
for the Company's Shares, it is intended that growth through acquisitions will
be initially achieved through (i) the issuance of Shares of the Company to the
seller of the asset(s) to be acquired or (ii) the utilization of options to
purchase real estate assets. Preserving cash may be preferable even though such
transactions may result in the dilution of the current Shareholders.
THE CONSOLIDATED BUSINESS PLAN
It is anticipated that the Company will have approximately $[1,500,000] of
liquidity if the Acquisition is completed before the end of 1998. The Company
will seek additional liquidity from the sale of one or more of the Company's
assets or a combination thereof. If one or more Properties have to be sold by
the Company at a substantial discount from the original loan amount to raise
cash for Company operations, which would enhance overall shareholder value, the
Company believes such a sale would make sense and will attempt it. Although
National attempted to develop the Properties after the Ownership Dates, except
for the Oceanside Program, the other Programs generally were faced with
obstacles which National was not able to overcome. The principal obstacle was
the inability to obtain project financing secured by the Properties from third
party lenders due to the unwillingness of California title insurance companies
to provide lenders' policies of title insurance when title was beneficially held
by such a large number of tenants-in-common. In addition, potential joint
venture partners found dealing with the tenancy-in-common ownership structure of
the Programs to be unattractive. The inability to obtain third party financing
and the unwillingness of Program Investors to provide sufficient additional
equity capital meant that National, on behalf of the Programs, could not proceed
to obtain necessary permits and approvals from applicable real estate regulatory
authorities without which continued development could not proceed. Furthermore,
in the case of the Yosemite/Ahwahnee Properties, prior to the cash sale of the
golf course and certain
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outlots to the Oceanside Program Investors, lack of adequate financing prevented
a more aggressive marketing of the golf course and recreational vehicle portions
of the Properties, as well as a slowdown in the sale of the estate lots. The
Company and National believe that these disadvantages will disappear when the
Properties are owned by a single corporation.
If the Company attains liquidity from the sale of units or certain of the
Properties, 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
sell the property in bulk or develop it in phases. Depending on the
availability of working capital from the sale of assets, the Company will seek
to obtain approval of the revised tentative map from the City of Sacramento by
the fourth quarter of 1998. After the final map is approved, the necessary
infrastructure (main road and utilities) can then be built along with finished
lots, model homes and the first phase of productions homes.
The material risks associated with the development of the Sacramento/Delta
Greens Property are (i) as of [JUNE 30, 1998], approximately $26,000 of
property taxes are owed for the last payment of a 5-year payment plan and must
be paid in April 1999 in order to avoid loss of the Property for delinquent
taxes; (ii) funds must be available to cover the delinquent property taxes, as
well as costs of obtaining final map approval from the City of Sacramento; (iii)
a recent ruling by local officials stated that housing tracts in this area which
are affected by the 100-year flood plain must mitigate against potential flood
damage which will add further costs of the development; (iv) a substantial sales
and marketing effort will be necessary to sell homes constructed on the Property
if a bulk sale of the lots is not made; (v) the Property is located in a lower
income residential area that has had a reputation as a high crime area; and (vi)
increasing government fees and assessments for streets, schools, parks and other
infrastructure requirements could increase the cost of lots to the Company
thereby increasing the sales price of the lots which will delay market
absorption.
Real estate values in the area of the Property improved in 1997 and the
first part of 1998. The Property is located in the South Sacramento area which
is primarily populated with lower income residents. The general population of
the Sacramento area has been growing in recent years, indicating that housing
demand should continue to improve. However, there can be no assurance that the
Company will be able to develop the Property in a manner that is ultimately
profitable.
There are currently 230 active subdivisions in the Sacramento market.
Eleven of those are within ten miles of the Property and are designed to provide
single-family housing at a cost comparable to that proposed for the Property.
THE YOSEMITE/AHWAHNEE PROPERTIES. Yosemite National Park is located within
a six hour drive of over 30 million people. The Company plans to aggressively
focus on the following
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areas of operations and development for these properties: (1) recreational
vehicle facility, (2) timeshare development, and (3) the golf course facility.
Recreational vehicle development presents additional cash flow and profit
opportunities. In addition to the existing 54 recreational vehicle sites, the
Company intends to complete the construction of 100 more. Revenue from
membership sales and dues is expected to continue to increase in 1998 based on
investing an additional amount of about $700,000 in the construction of the new
recreational vehicle sites. Additional revenues can be generated from the
financing of the installment purchases of memberships, since most memberships
are purchased on an installment basis over a two to seven year time frame.
There are virtually no competitive recreational vehicle resorts in the
immediate area of the Property. The recreational vehicle park is a member of
Coast to Coast Resorts, AOR and Western Horizons. These affiliations are
important marketing tools. They allow members reciprocal use of many other
recreational vehicle camp resorts located regionally and across the country.
Bass Lake Resort, the nearest competitor, consists of 175 sites and is located
about 12 miles from the Property's site. It has about 1,900 members and has
been operational since 1984. On the other hand, the Yosemite/Ahwahnee
recreational vehicle park has been fully operational since August 1996 with 50
sites and has over 320 members to date. The Company intends to aggressively
expand this membership base. The Bass Lake recreational vehicle resort is of
significantly lesser quality than the Yosemite/Ahwahnee recreational vehicle
park. It is older with deferred maintenance, has no golf course and lacks space
for any additional amenities or expansion.
The timeshare industry continues its significant growth pace, particularly
for developments that are well located near natural amenities, like the
Yosemite/Ahwahnee Property. A prominent timeshare industry consultant has
evaluated the project and has recommended a 170-unit timeshare development on
the Property. The planning and construction of the vacation villas has been
initiated . Additional capital of $3,000,000 will be required to finalize the
initial vacation villa timeshare construction on the recreational vehicle site
and implement an aggressive marketing program.
In terms of timeshare competition, the Property has almost none. As of
October 1996, there were 15 timeshare projects in California with active
marketing and sales programs. They include six from the Desert-Palm Springs and
Big Bear Mountain ski areas, four from the Lake Tahoe area and the remaining
five in other scattered locations. There is one relatively small project of 13
units near Bass Lake, run by Worldmark, a timeshare operator located in Seattle.
That project is of no competitive consequence because of its size and lack of
comparable amenities. There is no present or planned direct competition in the
immediate vicinity from any of the major companies involved in the timeshare
industry such as Marriott, Hyatt, Four Seasons, Disney or Hilton.
Since 1995, a significant amount of capital has been used for improvements
to the golf course. The golf course is considered to be a primary amenity to
attract future timeshare sales. Annual revenues have increased over 200% since
1995 and rounds played have more than doubled. Additional revenues are a
natural bi-product from the golf course for the ancillary products like food,
liquor and clothing. The golf course and surrounding land was recently
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sold to the Oceanside Program for $3,550,000 in order to obtain working and
development capital.
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 June 30, 1998, approximately $[506,000] of property taxes remain on a
five-year payment plan that was recently arranged with the County of Madera and
must be paid when due in order to avoid a loss of the Properties for delinquent
property taxes; (ii) the need for substantial working capital to operate and
develop the recreational vehicle facility, the proposed timeshare development,
and the golf course facility; (iii) assuming that working capital is available
to accomplish the business plan, high marketing costs could adversely affect
profitability; and (iv) due to the remote location and the resort nature of the
project, financing costs for development will be less readily available and
likely more expensive than financing costs for traditional residential
development projects in more heavily populated areas.
The Company believes that the economic outlook for the golf course
operation is favorable. Given its proximity to Yosemite National Park and the
fact that the nearest comparable golf facility is approximately 15 miles away,
the Company expects that, with proper marketing, the use of the golf course will
increase. With regard to the recreational vehicle facility, vacation villas and
the proposed attached timeshare project, given its location in the much
travelled, highly desirable area near Yosemite Park, the Company believes that
with proper marketing it will be able to attract users of resort property to
either the recreational vehicle facility or the proposed timeshare units.
Presently, California has a strong economy with relatively low unemployment.
The income demographics for the products being offered at the Yosemite/Ahwahnee
Properties range from $35,000 to over $50,000 annually, and, according to the
California Travel Parks Association, there are 5,100,000 households in
California with incomes over $35,000 and 3,100,000 households in California with
incomes exceeding $50,000.
THE MORI POINT PROPERTY. The Company will continue with the proposed
development plan for a hotel/conference center on the Property. 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. 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.
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The material risks associated with the development of the Mori Point
Property are (i) potential loss of the Property for delinquent property taxes
which, as of June 30,1998, amount to approximately $157,000 which must be paid
when due in order to avoid a loss at a tax sale; (ii) the Tentative Tract Map
and Specific Plan for the Property have expired and new entitlements must be
processed which is costly and time-consuming; (iii) two endangered species are
located on the Property requiring the preparation of an acceptable plan to
mitigate disruption of their habitats and there is no assurance that acceptable
mitigation plans can be proposed; and (iv) if an acceptable mitigation plan
cannot be developed, the Property will have little value to the Company and it
will be difficult to sell at any cost.
The Property is oceanfront property in the town of Pacifica, California,
located approximately ten miles from downtown San Francisco and five miles from
San Francisco International Airport. The San Francisco Bay Area has enjoyed an
economic boom for the last few years and it is on the cutting edge of the
emerging knowledge-based economy in the United States. The Bay Area is a
favorite destination for both tourists and conventioneers. It is desired for
its scenery, restaurants, mild climate, and varied types of entertainment.
The following table, based on information contained in the May 1997
appraisal of the Mori Point Property by PKF Consulting, provides a summary of
the current primary and second competition of the proposed executive conference
center for Mori Point.
<TABLE>
<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
---------
A - Restaurant
B - Meeting Rooms
C - Swimming Pool
D - Exercise Room
</TABLE>
Estimated year-end 1996 occupancy level for the primary competition for a
Mori Point hotel/conference center was 67.8%; the secondary competitive market's
performance was at a higher occupancy level of 83.3% for the same period.
THE CYPRESS LAKES PROPERTY. The project has an approved vested tentative
map covering 1,330 residential units on 686 acres. Several different land uses
have been planned for the project, including an 18-hold championship golf
course, lakes, a church, public parks, 23 acres of open space, wetlands, a
school, a beach club, a fire station and a
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day care center. Due to the size of the parcel and the required infrastructure
to service it, the Property will most likely be sold. The present vested
tentative map will expire April 15, 1999 and must be planned for renewal
immediately. The Property is located in the delta area of Contra Costa County
and as such is subject to flooding without proper levee protection which is
typical of the area. The most likely candidates to purchase the Property are
large master-plan builder/developers who are able to generate large front-end
capital resources to install the needed infrastructure.
In the event the Company is unable to find a willing buyer, it will need to
continue processing for governmental approval which could require an estimated
$400,000 to finalize the engineering in order to submit for a final record map.
In the event a purchaser is not found, the next step would be to install
preliminary infrastructure to the site, record lots in increments of 100 units
for potential sale to more moderately sized builders who could afford to
purchase lots in smaller quantities. Once the initial infrastructure is
installed, an aggressive sales program would be initiated with homebuilders to
coincide with the completion of the initial infrastructure to service the
project.
An additional alternative would be to bring in a joint venture partner who
can bring in cash and also act as the master developer. In either case, the
Company would attempt to phase out of any actual site work as soon as the
economics and sales of land with the project are stabilized.
The risks associated with the Property, its infrastructure challenges, the
size of the project and the high capital requirements all combine to somewhat
limit its marketability. The site is subject to
(1) A 100-year flood zone and must be protected by an earthen levee that
will surround the project's perimeter in an effort to reduce potential flood;
(2) In 1995, the Company received a property tax default notice from the
Contra Costa County Treasurer-Tax Collector. As of June 30, 1998, total taxes,
penalties and interest amounts to approximately $199,000. The Company intends
to enter into a redemption plan agreement with Contra Costa County that allows
for the payment of delinquent taxes, penalties and interest over a five-year
period. Under the terms of the agreement, all property taxes must be kept
current and all payments made on time. If the Company defaults on the agreement
or fails to enter into the agreement by the deadline of June 30, 2000, the
Property could become subject to a tax sale.
(3) The cost of grading, installing utilities, building the levee and golf
course require in-depth planning and extensive estimating in order to properly
estimate the cost of such a large-scale development.
(4) Modification of the existing vested tentative map might expose the
project to additional exactions by County government which could possibly
negatively impact the financial viability of the project.
(5) Market conditions, while improving at the present time, might well
become less positive over time as the project is built out.
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According to the Ryness Company, a residential market feasibility research
company located in California, real estate values are improving in the area;
however, the project is considered to be a "pioneering" area. Access to the
area by major transportation corridors is somewhat limited and the area is
considered to be somewhat rural. Shopping and schools are located in
neighboring Oakley and Brentwood. The project must be well thought out,
competitively priced and offer the consumer the ability to upgrade and customize
his or her house.
Also according to Ryness Company, the East Bay metropolitan statistical
area has an average annual demand for new housing of some 4,000 units per year.
Sales rates remain strong at one sale per project per week to 1.25 sales per
project per week. There were some 182 residential projects in the Bay Area in
the first quarter of 1998 with net sales averaging 1.29 sales per week.
THE PALMDALE/JOSHUA RANCH PROPERTY. The project, which contains 739.6
acres and 539 10,000 and 20,000 square foot lots, has received a vested
tentative map. Due to the relatively large scale of the project, the Property
most likely will be sold. The most likely candidate to purchase a large
master-planned community such as Joshua Ranch are large master-plan builders and
developers. It is estimated that $140,000 will be required to complete the
engineering, soils and utility planning required to obtain a record map. It is
unlikely that a purchaser can be found until a majority of these funds are
expended. If a purchaser is not found, and depending on the market, the Company
will need to secure third party financing in order to record the final map and
post the necessary bonds. The next step would be to install the initial roads
and utilities to service the site and record lots in phases of 100 units for
potential sale to more moderate size builders. Again, third party financing
will have to be obtained. An aggressive lot sales program would coincide with
the completion of the initial improvements.
Another alternative is to bring in a joint venture partner who can provide
equity capital and also act as a master developer of the lots. In either case,
the Company will attempt to phase out of any actual site development work as
soon as the economics and sales within the project are stabilized. The risks
associated with the project, its infrastructure requirements in the initial
phases of the development, the project's size and large capital requirements
tends to limit somewhat the project's marketability. There are no assurances
that the Company can secure the necessary financing to start the project.
The risks associated with the Property include:
(1) In 1996, the Company entered into an installment Plan of Redemption
("Payment Plan") with the Los Angeles County Tax Collector. The Payment Plan
allows for the annual payment of delinquent property taxes, penalties and
interest over a period not to exceed five years providing that all payments,
including current property taxes, are paid on time. If payments, which amount
to approximately $53,000 annually or current year taxes of approximately
$20,000, are missed and the agreement falls into default, the Property could
become subject to a tax sale by the County.
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(2) The cost of grading, installing utilities and building the main
infrastructure, require in-depth planning and extensive estimating in order to
properly assess the cost of such a large scale development.
(3) Market conditions, while improving marginally in the area, might well
become less favorable over time as the project is built out.
As stated in recent articles in the Business and Sunday Real Estate
Sections of the LOS ANGELES TIMES, real estate values are showing signs of
improving in the area. Access to the site is quite good with schools and major
services close by. National believes that the project is in the path of logical
development within the City. Major retail shopping is located close by as are
all other services.
National also believes that the current housing market is considered to be
of moderate supply and demand. Inventory is reducing and average unit prices
are relatively unchanged from the prior one-year period. There are presently 17
projects selling within the submarket area which the Property is located. The
project offers an equestrian feature and larger lots than typically found in the
market area which should help to ensure a relatively stable annual sales pace.
THE ESPERANZA PROPERTY. The project, which contains 6.12 acres and is
commercially zoned, will most likely be sold to a commercial developer. The
Company will initiate a sales program utilizing a local commercial broker. An
arrangement for a payment plan for past due property taxes must be made in 2000
to avoid a tax sale.
The risks associated with the Property include
(i) approximately $23,000 of property taxes are delinquent and must be
brought current or a statutory 5-year payment plan must be arranged with the
County of Riverside in the year 2000 to avoid loss of the Property for
delinquent property taxes; and
(ii) rents and values for retail properties in the Victorville area are
expected to remain soft due to the amount of property zoned for commercial use
which is available for development.
THE STACEY ROSE PROPERTIES. The Property consists of 32 acres of
unimproved raw land which is comprised of three separate parcels. The Property
is zoned residential and could contain approximately 160 lots. The Property is
most likely to be sold to residential builders and developers. It is estimated
that it may cost about $50,000 to finalize a tentative tract map on the parcels.
A payment plan for past due taxes in the amount of approximately $7,500
annually, along with current taxes of approximately $10,000 annually, must be
kept current in order to avoid the loss of the Property to a tax sale.
The risks associated with the Property include
(i) approximately $30,000 of property taxes are delinquent and must be
brought current or a statutory 5-year payment plan must be arranged with the
County of Riverside in order to avoid loss of the Properties for delinquent
property taxes;
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(ii) approximately $50,000 will be needed to finalize a tentative tract map
on the parcels;
(iii) a substantial, and potentially expensive, sales and marketing
effort will be necessary to sell homes which are constructed on the Properties
unless a bulk sale of the lots can be made;
(iv) the Properties are located in a lower income residential area;
(v) increasing government fees and assessments for streets, schools, parks
and other infrastructure requirements could increase the cost of the lots,
thereby delaying market absorption; and
(vi) home financing may not be available at reasonable costs.
PRIORITY OF PROJECTS AND ESTIMATED TIMETABLE
If adequate working capital is available from the sale of assets, the
Company will bring delinquent property taxes current and begin work on all of
the Properties promptly after the Acquisition is completed. In order to obtain
adequate working capital, the Company believes that funds may become available
from the exercise of the warrants and it also plans to sell one or more of the
Sacramento/Delta Greens, Mori Point, Cypress Lakes, Palmdale/Joshua Ranch,
Esperanza or Stacey Rose Properties to raise such working capital. Sale prices
for all of these Properties may be below the appraised values. The Company
believes these Properties can be sold at prices that would not be approved by
the respective Programs' Investors. Efforts to find such discounted 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 $4,715,000 would be required for the Company to obtain the
necessary permits and complete the development activities for all of the
Properties, except for construction financing required to actually build a
hotel/conference center on the Mori Point Property and construction financing
for the Sacramento/Delta Greens Property. Any funds from the sale of assets
will be focused on the development of the Yosemite/Ahwahnee Properties as the
Company considers the Yosemite/Ahwahnee Properties to have the most potential
for short-term cash flows and long-term profits. Thus, in an environment with
limited working capital, any costs for the development or construction of any of
the other Properties would assume lesser priority in order to maximize the
potential of the Yosemite/Ahwahnee Properties.
If enough funds are raised from the sale of assets to fulfill the
Yosemite/Ahwahnee Properties' initial requirements (approximately $3,000,000),
the balance of any asset sale proceeds would be applied to the Sacramento/Delta
Greens, Cypress Lakes, Palmdale/Joshua Ranch, Mori Point, Oceanside, Stacey
Rose, and Esperanza Properties, in that order.
The Company plans on financing as many of the costs of the Properties as
possible from third party lenders or by entering into joint venture development
agreements with third parties. There are currently no committed sources of
external financing or prospective joint venture
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partners. However, as stated above, the Company believes that third party
lenders will be more willing to provide financing where it can obtain title
insurance which was not generally available in the tenancy-in-common ownership
structure. To the extent that external sources of financing or joint venture
partners are not available on reasonable terms, the Company plans to sell one or
more of the Sacramento/Delta Greens, Cypress Lakes, Palmdale/Joshua Ranch,
Esperanza, Stacey Rose or Mori Point Properties to raise operating capital.
The Company proposes to finance development of each of the Properties in
the following order of priority and manner:
YOSEMITE/AHWAHNEE PROPERTIES. Amount needed: $3,000,000. Funds would
come first from the proceeds of the sale of other assets. Balance, if any, from
third party financing, if available, or from exercise of warrants included in
the Units.
SACRAMENTO/DELTA GREENS. Amount needed: initially $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 to be financed
for the permitting, approvals, infrastructure and to build the initial phase of
homes. Funds for the permitting process would come first from a joint venture
partner, or from sale of another Property, with construction funding to come
from a traditional third party construction lender.
CYPRESS LAKES. Amount needed: initially $400,000 to modify the existing
vested tentative map in order to be more cost effective in the physical
development stages. Funds to complete the modifications to the vested tentative
map would come from a joint venture partner or sale of the Sacramento/Delta
Greens or Palmdale/Joshua Ranch Properties.
PALMDALE/JOSHUA RANCH. Amount needed: initially $140,000 in order to
complete grading, soils and utility studies in order to analyze and reduce
overall development costs. Funds to complete this work noted would come from a
joint venture partner or sale of the Sacramento/Delta Greens Property.
ESPERANZA. Amount needed is unknown to complete preliminary planning for
the commercial site. Funds to complete the work noted would come from a joint
venture partner or sale of the Sacramento/Delta Greens Property.
STACEY ROSE. Amount needed: $50,000 in order to obtain a tentative map
and complete grading, land planning and cost structure. Funds to complete the
work noted would come from a joint venture partner or sale of the
Sacramento/Delta Greens Property.
MORI POINT. Amount needed: initially $500,000 to complete the permitting
and approval process. Funds to complete the permitting process would come from
a joint venture partner in return for a profit participation, or sale of one of
the other Properties. Funds for the equity portion would also come from those
sources. Construction funds would come from traditional construction lenders,
perhaps with the assistance of a joint venture partner.
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 would constitute a source for such financing. Except for operating
costs and property tax payments, the Company
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<PAGE>
does not anticipate any other capital or cash commitments. Pending property
taxes, if any, will be brought current, including applicable interest, from
the proceeds of the sale of other properties. Pursuant to statute, the
Company will either enter into or succeed to payment plans which permit back
property taxes to be paid over a five year period. To the extent that cash
capital is not available to make timely payments under such plans, the
Company believes that the Properties can be sold at amounts in excess of
property taxes that are due.
The Company's plans for the development of the Yosemite/Ahwahnee Properties
currently targets late summer 1998 for the completion of 100 additional
recreational vehicle sites and the readiness of the initial timeshare vacation
villa units at the recreational vehicle sites for sale. Thereafter, additional
recreational vehicle sites and vacation villa timeshare units will be built from
cash flow. If funds are available either from external sources or the sale of
other properties, the Company estimates that the Sacramento/Delta Greens
Property will involve approximately three years to complete the permitting
process, construction and sell out to homebuyers or other builders in the area.
The Mori Point permitting process will require up to two years. Assuming
necessary permits to develop a hotel/conference center are obtained, a sale of
the Property or its development with a joint venture partner will be solicited.
THERE IS NO ASSURANCE THAT THE ABOVE ESTIMATED TIMETABLES FOR ANY OF THE
PROPERTIES CAN BE MET.
TYPES OF BORROWING REQUIRED
The Company has not sought any financing, and will not commence the search
for financing unless and until the Acquisition is successfully completed. At
that time, the Company anticipates that it will seek infrastructure financing
and construction financing. Infrastructure financing is designed to provide
borrowed funds to construct roads, install utilities and other things necessary
for a Property to function in the manner anticipated. For example, a
residential development requires the installation of roads, sidewalks, sewer
lines, water lines, and power lines for it to be able to function as a
community. The principal risks involved in infrastructure financing involve the
cost (usually higher for infrastructure loans than construction or permanent
financing loans) and the risk that there will be no replacement financing in the
form of construction or permanent loans available when the loan is due resulting
in a default and a potential loss of the property.
Construction loans involve the financing necessary to actually build a
proposed project once the infrastructure is in place. As with infrastructure
financing, it is secured by the real estate meaning the failure to generate
sales or operating cash flow sufficient to pay the loans will result in a
default and a potential loss of the land which has been provided as collateral.
While less risky than infrastructure loans, construction loans usually bear a
higher interest rate than permanent loans do. See "-- Impact of Interest Rates
on the Company."
IMPACT OF INTEREST RATES ON THE COMPANY
The Company intends to use traditional construction loan financing for the
buildout of the lots and homes on its Sacramento/Delta Greens Property, as well
as for the construction of the traditional and vacation villa timeshare units
beyond the initial models. If interest rates rise during the construction of
and prior to the sell out of the completed homes, then the prices of the homes
would have to be increased or the Company would have to absorb the increased
cost and
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<PAGE>
associated decrease in profits. If prices are increased, some buyers may be
priced out of the market in, which case the Properties would have less potential
buyers and could suffer from a decline in volume of homes sold. In addition,
the sale of homes is dependent on adequate and competitive buyer financing.
Higher interest rates for potential homebuyers will result in a decrease in the
velocity of homes sold. The Company may also consider some infrastructure
financing, for roads and utilities, for the Sacramento/Delta Greens Property.
If that occurs, then higher interest rates will negatively affect the
profitability of the Property. A falling interest rate environment will have
the opposite effect on these two Properties.
The Company intends to use its working capital to perform the planning,
engineering and other approval work for the Mori Point Property. It also
intends to use working capital and internally generated funds to finalize the
construction of an additional 100 recreational vehicle sites and vacation villa
timeshares, as well as the costs for the traditional timeshare approvals and
initial model construction on the Yosemite/Ahwahnee Properties. In these cases,
a rising or falling interest rate environment will have little or no direct
affect on those Properties. If the Company decides later to use a construction
loan to build the initial timeshare models, then a change in interest rates will
have the same affect as stated above relative to the construction of the
Sacramento/Delta Greens Property.
INSURANCE
Management of the Company believes that each of the Properties is
adequately insured for title, property and casualty matters.
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.
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<PAGE>
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE. Initially, the Company will invest in the
Properties it receives in the Acquisition. This is a portfolio of properties in
various stages of development. As the business plans for the various Properties
described herein are either completed or matured, the Company will seek to
acquire and develop or manage, as appropriate, properties which are compatible
with its existing properties. Some of such properties could be properties owned
by tenant-in-common lenders in other programs sponsored by National. Such
properties may include resort properties (in the development phase or
completed), residential properties (in the development phase), or such other
types of properties as the Board of Directors may from time to time in its sole
discretion deem to be appropriate investments for the Company. The Company
expects that most of its initial investments will be located in the State of
California, although there is no requirement that such be the case. In making
such acquisitions, to the extent possible, the Company will attempt to use
shares of its common stock for some or all of the purchase price. This would
result in a dilution of the voting power of then-existing investors in the
Company.
The Company has no policy with regard to whether it will acquire assets
primarily for possible capital gain or primarily for income. It will acquire
the Properties in the Acquisition and properties in the future in the manner
deemed by the Board of Directors to be in the best interests of the Company and
its shareholders in making profits. The Company has no specific policy as to
the percentage of assets which will be concentrated in any specific property;
however, the Board of Directors will use its best efforts to diversify the
Company's investment portfolio as much as possible.
INVESTMENTS IN REAL ESTATE MORTGAGES. While the Company will emphasize
equity real estate investments, it may, in its discretion, invest in mortgages
and other interests related to real estate. The Company does not presently
intend to invest in mortgages, but may do so. The mortgages which the Company
may purchase may be first mortgages or junior mortgages and may or may not be
insured by a governmental agency.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES. The Company may also invest in securities of entities engaged in
real estate activities or securities of other issuers, including for the purpose
of exercising control over such entities. However, the 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.
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<PAGE>
REPURCHASING ITS OWN SHARES. The Company may purchase or repurchase Shares
from any person for such consideration as the Board of Directors may determine
in its reasonable discretion, whether more or less than the original issuance
price of such Share or the then trading price of such Share.
ISSUANCE OF ADDITIONAL SECURITIES. The Board of Directors may, in its
discretion, issue additional equity securities from time to time to increase its
available capital. Such issuance will result in a dilution of the interests of
the then-existing Shareholders.
FINANCING POLICIES
ISSUANCE OF SENIOR SECURITIES. The Company may, at any time, issue
securities senior to the Shares, upon such terms and conditions as may be
determined by the Board of Directors.
BORROWING POLICY. The Company may, at any time, borrow, on a secured or
unsecured basis, funds to finance its business and, in connection therewith,
execute, issue and deliver promissory notes, commercial paper, notes,
debentures, bonds and other debt obligations which may be convertible into
shares or other equity interests or be issued together with warrants to acquire
shares or other equity interests. The Charter Documents impose no limit upon
the Company's debt. The Board has not established any maximum debt limit for
the Company, although it intends to act prudently in borrowing funds for Company
operations.
LENDING POLICIES. The Company may, at any time, make mortgage loans
secured by properties of the type in which the Company may invest, subject to
restrictions on related party transactions contained in the Delaware General
Corporation Law.
MISCELLANEOUS POLICIES
REPORTS TO SHAREHOLDERS. The Company will be subject to the reporting
requirements of the Exchange Act and will file annual and quarterly reports.
The Company currently intends to provide annual and quarterly reports to its
Shareholders.
COMPANY CONTROL. The Board of Directors has exclusive control over the
Company's business and affairs subject only to restrictions in the Charter
Documents and the Delaware General Corporation Law. Shareholders have the right
to elect members of the Board of 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.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1998 after giving effect to the completion of the Acquisition.
[June 30], 1998
<TABLE>
<CAPTION>
Pro Forma
Acquisition
------------
<S> <C>
DEBT:
Capital lease obligations . . . . . . . . . . . . . . . $313,083
-----------
Total debt. . . . . . . . . . . . . . . . . . . . . . 313,083
STOCKHOLDERS' EQUITY:
Common Stock(1) . . . . . . . . . . . . . . . . . . . . 1,727
Additional paid-in capital(1) . . . . . . . . . . . . . 26,212,692
Accumulated deficit(2). . . . . . . . . . . . . . . . . -
------------
Total stockholders' equity. . . . . . . . . . . . . . 26,214,419
------------
Total capitalization. . . . . . . . . . . . . . . . . . $26,527,502
------------
------------
</TABLE>
- ----------------
(1) Gives pro forma effect to the Acquisition and the conversion of
investor interests into common stock ownership in the Company.
DILUTION
Assuming completion of the Acquisition, the following table sets forth on a
pro forma basis as of June 30, 1998, with respect to the founders, consultants
and existing Program Investors, a comparison of the number and percentage of
Shares purchased and cash or other consideration paid and the average price per
share.
<TABLE>
<CAPTION>
Acquisition
-----------------------------------------------------------------------
Average
Price per
Shares Purchased Total Consideration Share
---------------- ------------------- -----
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Founders and Consultants 323,296 19% $ 3,233 0% $ 0.01
Program Investors 1,403,321 81 28,066,429 100 20.00
--------- --- ------------ ----- ------
Total 1,726,617 100% $28,069,662 100% $16.48
--------- --- ------------ ----- ------
--------- --- ------------ ----- ------
</TABLE>
- ---------------
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<PAGE>
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.
131
<PAGE>
<TABLE>
<CAPTION>
Company Pro Forma The Acquisition Historical
-----------------------------------------------------------------------------------------
Six Months Year Ended
Ended June 30, December 31, Years Ended
1998 1997 December 31
---- ---- ----------------------------------------------
The Acquisition The Acquisition 1997 1996 1995
--------------- --------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 324,654 $ 5,193,012 $ 5,193,012 $ 6,213,299 $ 6,333,143
Cost of sales 121,187 4,081,530 4,081,530 5,224,186 5,346,735
------------- ----------- ----------- ------------ ------------
Gross profit 203,467 1,111,482 1,111,482 989,113 986,408
Expenses:
Selling, general and
administrative 2,413,683 5,676,067 4,357,059 4,029,618 2,486,099
Land write-down 255,000 1,299,651 1,299,651 845,000 16,167,424
Management fees - 0 949,003 949,003 949,003
------------- ----------- ----------- ------------ ------------
Total expenses $ 2,668,683 $ 6,975,091 $ 6,605,713 $ 5,823,621 $19,602,526
Net interest income
(expense) (1,117) 31,345 31,345 73,205 1,222,008
------------- ----------- ----------- ------------ ------------
Gain on sale of
property 2,256,802 - - - -
Net loss $ (209,531) $(5,832,886) $(5,462,886) $(4,761,303) $(17,394,110)
------------- ----------- ----------- ------------ ------------
------------- ----------- ----------- ------------ ------------
Net loss per share (0.12) (3.38) N/A N/A N/A
------------- -----------
------------- -----------
Average number of
shares outstanding 1,726,617 1,726,617 N/A N/A N/A
------------- -----------
------------- -----------
Balance Sheet Data:
Cash and cash
equivalents 2,809,752 N/A 540,909 1,065,715 N/A
Total real estate 27,601,000 N/A 27,427,617 28,444,055 N/A
Total assets 32,059,053 N/A 32,065,559 34,561,602 N/A
Total debt 313,083 N/A 324,920 424,767 N/A
Total liabilities 5,844,634 N/A 6,938,267 4,782,370 N/A
Stockholders'/
owners' equity 26,214,419 N/A 25,127,292 29,779,232 N/A
Other Data:
Cash used in
operating activities (2,525,042) N/A (2,015,894) (1,658,879) (68,615)
Cash provided by
(used in) investing
activities 6,988,374 N/A (163,264) (186,211) (436,545)
Cash provided by
(used in) financing
activities (2,067,345) N/A 1,523,975 1,168,817 674,403
</TABLE>
[NOTE THAT THE AVERAGE NUMBER OF SHARES OUTSTANDING WILL CHANGE AS WE
RECALCULATE EXCHANGE VALUES UNTIL WE GO EFFECTIVE. THAT'S WHY THEY ARE
BRACKETED.]
132
<PAGE>
<TABLE>
<CAPTION>
The Acquisition Historical
------------------------------------------------------------------------
Six Months
Ended June 30, Years Ended
1998 December 31
-------------- ----------------------------------------------------
1998 1997 1996 1995
-------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Investment Program Data
OCEANSIDE
Cash and cash equivalents $ 17,037 $ 145,072 $ 660,207 $ N/A
Real estate 3,525,539 3,322,329 3,219,920 N/A
Total assets 4,335,472 5,443,408 7,938,216 N/A
Total debt - - 3,910 N/A
Total liabilities 516,876 1,271,694 1,207,402 N/A
Total owners' equity 3,818,596 4,171,714 6,730,814 N/A
Revenues - 4,290,850 5,490,180 5,920,600
Gross margin - 461,868 515,020 624,859
Net Loss (Income) (2,646,882) 1,857,850 548,675 367,219
YOSEMITE/AHWAHNEE
Cash and cash equivalents $ 2,751,587 $ - $ 101,551 $ N/A
Real estate 5,423,254 10,137,074 10,404,135 N/A
Total assets 10,151,876 11,704,727 11,499,429 N/A
Total debt 313,083 340,563 420,857 N/A
Total liabilities 3,414,510 3,495,010 2,141,259 N/A
Total owners' equity 6,737,366 8,209,717 9,358,130 N/A
Revenues 324,654 902,162 723,119 412,543
Gross margin 203,467 649,614 474,093 361,549
Net Loss 1,753,651 2,059,368 2,078,604 915,537
MORI POINT
Cash and cash equivalents $ 5,176 $ 7,204 $ 39,032 $ N/A
Real estate 4,100,000 4,100,000 4,100,000 N/A
Total assets 4,361,140 4,339,911 4,139,032 N/A
Total debt - - - N/A
Total liabilities 848,104 868,964 807,514 N/A
Total owners' equity 3,513,036 3,490,947 3,331,518 N/A
Revenues - - - -
Gross margin - - - -
Net Loss 123,848 279,448 189,125 146,867
SACRAMENTO/
DELTA GREENS
Cash and cash equivalents 7,886 $ 4,099 $ 62,583 $ N/A
Real estate 1,745,000 2,000,000 2,230,000 N/A
Total assets 1,871,316 2,108,627 2,292,583 N/A
Total debt - - - N/A
Total liabilities 300,830 322,271 259,066 N/A
Total owners' equity 1,570,486 1,786,356 2,033,517 N/A
Revenues - - - -
Gross margin - - - -
Net Loss 315,545 394,796 1,062,684 131,590
</TABLE>
132
<PAGE>
<TABLE>
<CAPTION>
The Acquisition Historical
------------------------------------------------------------------------------
Six Months
Ended June 30, Years Ended
1998 December 31
-------------- ------------------------------------------------------
1998 1997 1996 1995
-------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT
PROGRAM DATA
CYPRESS LAKES
Cash and cash equivalents $ 20,542 $ 148,068 $ 75,373 $ N/A
Real estate 5,200,000 5,200,000 5,200,000 N/A
Total assets 5,395,878 5,348,068 5,275,373 N/A
Total debt - - - N/A
Total liabilities 370,950 180,193 107,977 N/A
Total owners' equity 5,024,928 5,167,875 5,167,396 N/A
Revenues - - - -
Gross margin - - - -
Net Loss 234,378 392,353 254,791 14,484,305
PALMDALE/JOSHUA RANCH
Cash and cash equivalents $ 199 $ 98,898 $ 119,922 $ N/A
Real estate 2,700,000 2,700,000 2,700,000 N/A
Total assets 2,832,572 2,798,898 2,819,922 N/A
Total debt - - - N/A
Total liabilities 210,690 152,843 142,898 N/A
Total owners' equity 2,621,882 2,646,055 2,677,024 N/A
Revenues - - - -
Gross margin - - - -
Net Loss 232,302 455,476 615,688 1,211,310
STACEY ROSE
Cash and cash equivalents $ 339 $ - $ - $ N/A
Real estate 320,000 320,000 320,000 N/A
Total assets 347,339 320,000 320,000 N/A
Total debt - - - N/A
Total liabilities 100,777 68,978 55,775 N/A
Total owners' equity 246,562 251,022 264,225 N/A
Revenues - - - -
Gross margin - - - -
Net Loss 6,410 13,203 12,445 76,571
ESPERANZA
Cash and cash equivalents $ 3,753 $ 7,191 $ 7,047 $ N/A
Real estate 270,000 270,000 270,000 N/A
Total assets 298,253 277,191 277,047 N/A
Total debt - - - N/A
Total liabilities 81,897 55,481 44,944 N/A
Total owners' equity 216,356 221,710 232,103 N/A
Revenues - - - -
Gross margin - - - -
Net Loss 5,354 10,393 9,859 65,678
</TABLE>
133
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the "Selected
Financial Information" as well as the financial statements listed in the index
on page F-1. If approved by the Investors in the five former "Trudy Pat"
programs, the programs discussed below will be acquired by the Company. Except
for historical information contained herein, the matters discussed in this
report contain forward-looking statements that involve risks and uncertainties
that could cause results to differ materially.
RESULTS OF OPERATIONS - THE SACRAMENTO/DELTA GREENS PROGRAM
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
No activity occurred during the period on this property location. There
were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses decreased from $69,059 at June
30, 1997 to $35,610 at June 30, 1998, a decrease of $33,449. The operating
expenses primarily consist of property taxes and consulting expenses. Property
tax expense remained consistent for both periods, while consulting expenses
decreased as a result of a decrease in the feasibility studies performed on the
property during the first quarter of 1998 compared to the same period in 1997.
Management fees were consistent for both periods at $25,000 per period. These
fees were for the management and administration of the property.
The appraised value of the Sacramento/Delta Greens property decreased from
$2,230,000 at December 31, 1996 to $2,000,000 at June 30, 1997 due to a decrease
in the median price of the homes in this community during 1996 and due to the
decrease in the number homes zoned for this property. This decrease was
reflected in the statement of operations as a property write down loss.
During 1998, there was a further writedown of the Sacramento/Delta Greens
property from $2,000,000 at December 31, 1997 to $1,750,000 at June 30, 1998.
The decrease was attributable to a further decrease in the number of homes zoned
for this property. This decrease was reflected in the statement of operations
as a property writedown loss.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
No development activity occurred during the periods on this property.
There were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses decreased from $169,649 for the
year ended December 31, 1996 to $115,620 at December 31, 1997, a decrease of
$54,029. The difference is a result of the employment of consultants during
1997 to perform studies related to the proposed
134
<PAGE>
development of the property. Management fees were consistent for both years at
$50,000 per year.
Due to a decrease of approximately 35% in the median prices of homes in the
communities surrounding Sacramento/Delta Greens during 1996 and a decrease in
the number homes zoned for this property during 1997, impairment losses of
$845,000 and $230,000 were recorded on the property's financial statements
during the periods presented. Originally, 596 homes were zoned for this
property, while 534 homes are currently zoned for this property.
RESULTS OF OPERATIONS - THE OCEANSIDE PROGRAM
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
For the six months ended June 30, 1998, net income amounted to $2,646,882
compared to a net loss of $659,911 for the six months ended June 30, 1997. The
increase in net income is primarily due to the following factors: a realization
of the gain on the sale of real estate of $2,991,836 in 1998; a decrease in the
gross profit of $368,036, a decrease in selling, general and administrative
expenses of $346,516 and a decrease in real estate inventory writedown of
$360,172.
The gain on sale of real estate of $2,991,836 is a result of the sale of
the Symphony lots made during the second quarter of 1998.
The decrease in gross profit by $368,036 is due to the fact that there were
no home sales made during 1998, compared to the sale of 17 homes during the
first quarter of 1997.
Selling, general and administrative expenses decreased by $346,516 due to a
decrease in the accounting, legal and consulting fees as a result of the
decrease of the homes sold during 1998.
As a result of the sales of homes on the Encore project, capitalized
construction costs incurred on these homes in excess of the consideration
received were written off during 1997.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
For the year ended December 31, 1997, the net loss amounted to $1,857,850
compared to a net loss of $548,675 for the year ended December 31, 1996. The
change of results are primarily from the following factors: a decrease in
revenue of $1,199,330, which has been offset by a decrease in cost of sales of
$1,146,678, an increase in selling, general and administrative expenses of
$171,725 and a writedown in the real estate inventory of $1,069,651.
Revenues decreased in 1997 by $1,199,330 or 22% as compared to 1996. The
decrease was caused by 11 less homes being sold in 1997 as compared to 1996,
which has been partially offset by an increase in the average selling price of
each home of approximately five percent. This increase in average price is
principally due to the recovery in the California real estate
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<PAGE>
market in 1997. In addition, the company sold the remaining two undeveloped
phases of the Encore project during 1997.
Cost of sales decreased in 1997 by $1,146,678 or 23% as compared to 1996
primarily due to the decrease in the number of houses sold discussed above.
Selling, general and administrative expenses increased $171,725 (20%) due
to an increase in the sales incentives provided on houses sold during 1997 as
compared to 1996. The increase is also due to increases in salaries and wages
and consulting fees paid to employees and consultants in 1997 compared to 1996.
Based on the net proceeds received from the sale of the remaining inventory
lots during 1997, the Program wrotedown its real estate inventory to its
estimated fair value resulting in a $1,069,651 charge against income during the
year ended December 31, 1997.
RESULTS OF OPERATIONS - THE YOSEMITE/AHWAHNEE PROGRAMS
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
For the six months ended June 30, 1998 the net loss amounted to $1,753,651
compared to a net loss of $1,129,395 for the six months ended June 30, 1997.
The change of results are primarily from the following factors: a decrease in
revenues of $121,625, a decrease in selling, general and administrative expenses
of $269,423 and the realization of the loss on sale of real estate of $735,034
during 1998..
The decrease in revenues of $121,625 (27%) is due to the decline in golf
course activity during the first six months in 1998, compared to the same period
in 1997.
Selling, general and administrative expenses decreased by $269,423 (20%) as
a result of the decrease in the golf course activity during the first six months
of 1998, compared to the same period in 1997.
As a result of the sale of the golf course and estate lots during 1998, a
$735,034 loss was realized during the six months ended June 30,1998.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
For the year ended December 31, 1997, the net loss amounted to $2,059,368,
compared to a net loss of $2,078,604 for the year ended December 31, 1996. The
change of results is primarily from the following factors: an increase in
revenues of $179,043 which has been offset by an increase in selling, general
and administrative expenses of $136,466 and an increase in interest expense of
$19,819.
The increase in revenues of $179,043 (25%) was primarily due to the
operation of the golf course for the entire period of 1997, while it was closed
for refurbishing for a portion of the year ended December 31, 1996, as well as
an increase of $85,615 of recreational vehicle memberships during 1997.
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The increase in selling, general and administrative expenses of $136,466
(6%) is a result of the increased operations of the golf course and the
increased recreational vehicle membership sales effort during 1997 as compared
to 1996.
RESULTS OF OPERATIONS - THE MORI POINT PROGRAM
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
No activity occurred during the period on this property location. There
were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses remained consistent at June 30,
1998, compared to June 30, 1997. The operating expenses consist of property
taxes and consulting expenses. Management fees were consistent for both periods
at $50,000. These fees were for the management and administration of the
property.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
No sales activity occurred during the period on this property location.
There were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses increased from $190,348 for the
year ended December 31,1996 to $281,034 at December 31, 1997, an increase of
$90,686. The operating expenses primarily consist of property taxes and
consulting fees related to feasibility studies performed on the property.
Property tax expense increased by $26,405 due to an increase in the assessed
property value, while consulting fees significantly increased as the Program
explored various development and entitlement options for the property.
Management fees were consistent for both years at $100,000 per year. These fees
were for the management and administration of the property.
RESULTS OF OPERATIONS - THE CYPRESS LAKES PROGRAM
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
No activity occurred during the period on this property location. There
were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses increased from $140,454 at June
30,1997 to $165,596 at June 30, 1998, an increase of $25,142. The operating
expenses primarily consist of property taxes and consulting expenses. Property
tax expense remained consistent for both periods, while consulting expenses
increased as a result of an increase in the work performed on feasibility
studies during the first quarter of 1998 compared to the same period in 1997.
Management fees were consistent for both periods at $70,000 per period. These
fees were for the management and administration of the property.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
No activity occurred during the period on this property location. There
were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses increased from $120,114 at
December 31,1996 to $254,272 at December 31, 1997, an increase of $134,158. The
operating expenses primarily consist of property
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taxes, legal and development expenses. Property taxes remained consistent for
both periods. Legal expenses increased by $75,331 and development expenses
increased by $59,150. These legal and development expenses mainly relate to
land planning, feasibility studies, permits and environmental consulting issues
related to the property. Management fees were consistent for both year ends at
$140,000 per year. These fees were for the management and administration of the
property.
RESULTS OF OPERATIONS - THE PALMDALE/JOSHUA RANCH PROGRAM
COMPARISON OF PERIOD ENDED JUNE, 1998 TO 1997
No activity occurred during the period on this property location. There
were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses increased from $144,883 at June
30,1997 to $157,376 at June 30, 1998, an increase of $52,493. The operating
expenses primarily consist of property taxes and consulting expenses. The
increase in operating expenses were primarily attributable to an increase in
consulting expenses as a result of feasibility studies performed on the property
relating to the potential development of the property. Property taxes remained
consistent for both periods. Management fees were also consistent for both
periods at $75,000 per period. These fees were for the management and
administration of the property.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
No activity occurred during the period on this property location. There
were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses decreased from $469,910 at
December 31,1996 to $306,484 at December 31, 1997, a decrease of $163,426. The
operating expenses primarily consist of property taxes, legal and development
and consulting expenses. Property taxes remained consistent for both periods.
Legal expenses increased by $86,111 and development and consulting expenses
decreased by $241,552. These legal and development expenses mainly relate to
land planning, feasibility studies, permits and environmental consulting issues
related to the property. Management fees were consistent for both year ends at
$150,000 per year. These fees were for the management and administration of the
property.
RESULTS OF OPERATIONS - THE ESPERANZA PROGRAM
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
No activity occurred during the period on this property location. There
were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses remained consistent at June
30,1998 compared to June 30, 1997. The operating expenses consist of property
taxes. Management fees were consistent for both periods at $2,500 per period.
These fees were for the management and administration of the property.
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COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
No activity occurred during the period on this property location. There
were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses remained consistent for both
years ending December 31,1997 and December 31, 1996. The operating expenses
consist of property taxes. Management fees were consistent for both year ends
at $5,000 per year. These fees were for the management and administration of
the property.
RESULTS OF OPERATIONS - THE STACEY ROSE PROGRAMS
COMPARISON OF PERIOD ENDED JUNE 30, 1998 TO 1997
No activity occurred during the period on this property location. There
were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses remained consistent at June
30,1998 compared to June 30, 1997. The operating expenses consist of property
taxes. Management fees were consistent for both periods at $2,002 per period.
These fees were for the management and administration of the property.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
No activity occurred during the period on this property location. There
were however, operating expenses and management fees incurred in order to
maintain these properties. Operating expenses remained consistent for both
years ending December 31,1997 and December 31, 1996. The operating expenses
consist of property taxes. Management fees were consistent for both year ends
at $4,003 per year. These fees were for the management and administration of
the property.
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Acquisition on a pro forma basis as of June 30,
1998, the Company will have approximately $2,800,000 of unrestricted cash
available to operate the Company and develop its owned real estate. The Company
is also attempting to raise additional funds by offering units for sale in
conjunction with the Acquisition, which if fully subscribed would result in net
proceeds of approximately $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 June 30,
1998, the Company had approximately $313,000 of debt and approximately
$1,009,000 of delinquent property taxes levied against its real estate, some of
which is being paid pursuant to statutorily permitted 5-year payment plans.
Based on its lack of significant leverage, the Company believes that some
liquidity can be generated through additional borrowings, if necessary. The
Company believes that mortgage debt will be available to it, when it was not
available to National on behalf of the Programs, because of the elimination of
the tenancy-in-common ownership
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structure. This will make available lenders' policies of title insurance which
are not available under the current structure.
(b) Obtain additional funding by selling off additional Properties: The
Company believes some of the Properties, or portions thereof, can be sold to
generate sufficient liquidity to develop the remaining Properties. In
conjunction with this strategy, the Company has made various property sales
during 1997 and 1998. In October 1997, the remaining 23 parcels of the Encore
property, a development within the Oceanside Program, were sold for net proceeds
of $593,115. In addition to this sale, during June 1998, the 111 lots of the
Symphony property, a second development within the Oceanside Program, were sold
for net proceeds of $6,576,859. In February 1998, the Ahwahnee Program sold 13
single-family development lots for a sale price of $307,500. The Company
believes that the sale of the Sacramento/Delta Greens or Mori Point Properties
would be possible in bulk at prices discounted from the March 1998 appraisal
values but for more than the property taxes due.
(c) Reduce development capital needs through joint venture arrangements:
The Company believes that, due to the elimination of the tenancy-in-common
ownership structure which was cumbersome for potential partners, it will be able
to enter into joint venture arrangements to develop and operate one or more of
its current properties.
(d) Conserve development capital by slowing down the currently planned
development process: If the Company is unable to raise sufficient development
funds utilizing the methods discussed above, the pace of property development
can be slowed until necessary internal or external funding is generated.
Listed below is a summary, by project, of the estimated time period to
develop each project as well as the projected external financing needed to
complete development:
YOSEMITE/AHWAHNEE
The Company plans to continue to develop the recreational vehicle park,
continue to operate the golf course, build a new public overnight stay park,
construct timeshare units and market these products and services. The Company
estimates that this will require approximately $3,000,000 of funding. The
source of the funds is intended to be the proceeds from the sale of the golf
course and the estate lots which were sold in June 1998 to the Oceanside Program
for proceeds of $3,550,000. If additional financing is required, the proceeds
of the unit offering, third party financing or sale of the Sacramento/Delta
Greens or Mori Point Properties should be sufficient.
OCEANSIDE
The Company would continue to hold the Yosemite/Ahwahnee golf course and
surrounding land for lease and potential ultimate sale back to the
Yosemite/Ahwahnee Program.
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MORI POINT
The Company anticipates developing a state of the art business conference
center located near San Francisco, California. The Company anticipates that
approximately $500,000 and 1.5 years is needed to complete the entitlement and
mapping process.
SACRAMENTO/DELTA GREENS
The Company anticipates finishing the permitting process and obtaining the
city and other governmental approvals of the project's tentative map and design.
Approximately $175,000 of capital is needed to complete the engineering,
environmental and other wetlands activities to finalize the tentative tract map
process.
CYPRESS LAKES
The Company will proceed with providing the due diligence documentation
required by the current potential buyer. The Company will then either
consummate the transaction or if the deal is not approved, then approximately
$400,000 of capital will be needed for the management, engineering and legal
expenses to redesign the project to minimize infrastructure costs and to renew
the tentative map.
PALMDALE/JOSHUA RANCH
The Company will most likely pursue a bulk sale at an adequate price.
Approximately $140,000 of capital is required in order to proceed with
finalizing the engineering plans.
ESPERANZA
The Company will most likely pursue a bulk sale that is reasonable under
the current economic conditions, preferably before delinquent property taxes
become due in 2000.
STACEY ROSE
The Company will most likely pursue the approval of a tentative tract map
from the City of Victorville. It is estimated that the cost will exceed $50,000
and will require about nine months.
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.
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HISTORICAL CASH FLOWS
THE OCEANSIDE PROGRAM
The Oceanside Program continued its development and sale of houses on the
Encore site during 1997 and decided to sell the remaining 23 undeveloped lots on
its Encore site at the end of 1997. This sale caused a decrease in the number
of houses sold by the Program from 30 in 1996 to 19 in 1997 and was the
significant factor causing the decrease in cash flows from operations of
$1,002,238 in 1996 to $297,288 in 1997. The Program continued limited
development of the Symphony site during 1996 and 1997 and repaid the line of
credit utilized to build houses on the Encore site during 1997.
As there were no homes sold in 1998, while 17 homes were sold in the first
six months of 1997, cash flows from operations decreased from $784,227 for the
six months ended June 30, 1997 to $8,513 for the six months ended June 30, 1998.
The Program sold the Symphony lots during 1998, which generated $6,671,836 in
cash inflows. With the proceeds of the sale, the Program purchased the Ahwahnee
golf course and estate lots for $3,552,314 and distributed $3,000,000 back to
the investors.
THE YOSEMITE/AHWAHNEE PROGRAM
The Yosemite/Ahwahnee Programs experienced significant cash outflows from
operations during 1996 and 1997 due to the property of the Programs being in a
very early stage of development. As the property continues to progress toward
being fully developed, the amount of operational cash outflows should decrease
as a larger customer base will utilize current and future resort amenities.
These operational outflows, as well as the minimal expenditures made by the
Programs to expand the recreational vehicle park of the property, were funded by
contributions from current investors of the Programs.
The significant increase in the cash balance at June 30, 1998 is primarily
attributable to the sale of the golf course and some of the outlots in 1998.
The proceeds from the sale of the golf course and outlots amounted to
$3,868,852.
THE MORI POINT, SACRAMENTO/DELTA GREENS, CYPRESS LAKES, PALMDALE/JOSHUA RANCH,
ESPERANZA AND STACEY ROSE PROGRAMS
The Mori Point, Sacramento/Delta Greens, Cypress Lakes, Palmdale/Joshua
Ranch, Esperanza and Stacey Rose Programs continued to explore opportunities for
development of their real estate assets during 1996, 1997 and 1998. The
expenditures made to investigate various development opportunities were paid for
by contributions from current investors of each Program.
NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS 130
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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."
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.
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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>
<CAPTION>
Director
Term
Name Age Position Expires
---- --- -------- -------
<S> <C> <C> <C>
David G. Lasker 52 Co-Chairman of the Board, 2000(1)
President and Chief
Financial Officer
James N. Orth 51 Co-Chairman of the Board, 2000(1)
Chief Executive Officer and
Secretary
L.C. "Bob" Albertson, Jr. 54 Executive Vice President of 1999(1)
the Company and President
and Chief Executive Officer
of American Family
Communities, Inc., Director
Charles F. Hanson 61 Director 1999(1)
Dudley Muth 58 Director 1998(2)
James G. LeSieur, III 56 Director 1998(2)
</TABLE>
(1) Elected in 1997.
(2) Elected in 1998.
The following is a biographical summary of the experience of the directors
and executive officers of the Company.
DAVID G. LASKER - Co-Chairman of the Board, President and Chief Financial
Officer of the Company. Mr. Lasker has served as Chairman and President of
National Investors Financial, Inc. since 1986. Prior to that, he served as
Chairman and Vice chairman of the Board of Directors of American Merchant Bank,
a commercial bank headquartered in Orange County, California, from 1985 to 1986.
His experience includes all phases of negotiating, underwriting, closing and
servicing of residential and commercial loans. Since the Ownership Date, Mr.
Lasker has overseen the development and construction of the Oceanside Property.
He has served as project manager of the Mori Point Property. He and Mr. Orth
have supervised the predevelopment activities of the Sacramento/Delta Greens
Property and they have shared the responsibility for the management and ultimate
development of a business plan for the Yosemite/Ahwahnee Properties. He and Mr.
Orth are responsible for overall management of the Company. Mr. Lasker holds a
Bachelor of Science degree from Purdue University and an M.B.A. from the
University of Southern California.
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
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member of NIF Securities, Inc., a securities broker-dealer oriented to the
capitalization of start-up and second-stage business ventures. In addition, he
has been a founder and executive officer of a variety of companies specializing
in financial management, marketing and distribution. From 1969 through 1976,
Mr. Orth was employed by IBM Corporation as a marketing representative and
territory manager. From 1978 to 1980, he was vice president and branch manager
of ENI Corporation, an oil and gas exploration company. He received a Bachelor
of Science in Mathematics-Statistics, French and Economics from the University
of Wyoming in 1969 and did post-graduate work in the MBA-Finance program at the
University of Colorado.
L.C. "BOB" ALBERTSON, JR. - Executive Vice President and Director of the
Company, President and Chief Executive Officer of American Family
Communities, Inc., a wholly-owned subsidiary of the Company. Mr.
Albertson is responsible for the operation of the Company's Properties
and the implementation of the Company's business plan. Mr. Albertson
is a 32-year veteran of the homebuilding industry. From 1985 to 1996,
he served as President of a division of Presley Homes, Southern
California Region, a large publicly-traded homebuilding company. From
1981 to 1983, he was President of Barrett American, Irvine, a
publicly-traded homebuilding company based in Great Britain. Mr.
Albertson is President of HomeAid America, a non-profit organization
supported by the National Association of Homebuilders. From 1985 to
1986, he served as President of the Building Industry
Association/Orange County Region.
CHARLES F. HANSON - Director of the Company. Since 1989, Mr. Hanson has
served as Co-Chairman of the Board of Larson Training Centers, Inc., a
vocational training company with campuses in the Cities of Orange and
Carson, California. Also, since 1994, he has served as an independent
marketing director for a major pharmaceutical company. In 1991, he
developed Coastal Pacific Commercial Corporation, a consulting company
to the real estate industry. From 1987 to 1989, Mr. Hanson was
associated with CIS Corporation, a New York stock exchange listed
company and a leading equipment leasing firm, as Vice President and
National Sales Manager. In 1985, he developed Half-Time Associates,
Inc., a national seminar company. From 1983 to 1985, Mr. Hanson was
associated with Integrated Resources, Inc. as Vice President, Director
of Marketing. Prior positions at Integrated Resources, Inc. included
Senior Executive Vice President of Integrated Resources Equity Corp.
and Executive Vice President, National Sales Manager and Director of
Marketing for Integrated Resources Energy Group. Mr. Hanson received
his Liberal Arts degree from the University of Washington.
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
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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.
COMPENSATION COMMITTEE. In due course, the Board of Directors will
establish a compensation committee (the "Compensation Committee") to determine
compensation, including awards under the Company's Stock Incentive Plan for the
Company's executive officers. The Company expects that the Compensation
Committee will ultimately consist of two Independent Directors. Until the
Committee is established, the Independent Directors will serve as the
Compensation Committee.
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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>
Common
Annual Stock
Name Position Salary(1) Options
---- -------- ------ -------
<S> <C> <C> <C>
David G. Lasker* Co-Chairman of the $180,000 30,000(2)
Board, President and
Chief Financial Officer
James N. Orth Co-Chairman of the $180,000 30,000(2)
Board, Chief Executive
Officer and Secretary
L.C. "Bob" Albertson, Jr. Executive Vice $200,000 30,000(2)
President and Director
of the Company;
President and Chief
Executive Officer of
American Family
Communities, Inc.,
Director
Charles F. Hanson Director - 2,500(3)
Dudley Muth* Director - 2,500(3)
James G. LeSieur, III* Director - 2,500(3)
</TABLE>
- -------------
* Initial members of Audit Committee.
(1) Employment Agreements for Messrs. Lasker, Orth and Albertson contain
provisions for bonus payments based on performance criteria.
(2) 10,000 to be issued upon completion of the Acquisition to Messrs. Lasker,
Orth and Albertson and 10,000 additional options to be issued to each of
them on the first and second anniversaries of the Acquisition. These
options are nonqualified stock options which are not issued pursuant to the
Company's 1997 Stock Option and Incentive Plan. They have a ten year term.
Messrs. Lasker, Orth and Albertson may exercise options for 3,333 shares
immediately. Options issued at later dates will be exercisable at market
value on the date of issuance.
(3) To be issued upon completion of the Acquisition. These options are issued
pursuant to the Company's 1997 Stock Option and Incentive Plan. They have
a ten-year term and are
148
<PAGE>
exercisable one year from the date of grant at $20 per Share. The number
of options is determined by formula for the Independent Directors.
STOCK INCENTIVE PLAN
The Company has established a stock incentive plan (the "Stock Incentive
Plan") to enable executive officers, key employees and directors of the Company
and its subsidiaries to participate in the ownership of the Company. The Stock
Incentive Plan is designed to attract and retain executive officers, other key
employees and directors of the Company and its subsidiaries and to provide
incentives to such persons to maximize the Company's value, as well as cash
flow, available for distribution. The Stock Incentive Plan provides for the
award to such executive officers and employees of the Company and its
subsidiaries of stock-based compensation alternatives such as restricted stock,
nonqualified stock options and incentive stock options and provides for the
grant to Independent Directors of nonqualified stock options on a formula basis.
The Stock Incentive Plan will be administered by the Compensation
Committee, which is authorized to select from among the eligible employees of
the Company and its subsidiaries the individuals to whom options are to be
granted and to determine the number of shares to be subject thereto and the
terms and conditions thereof. The Compensation Committee is also authorized to
adopt, amend and rescind rules relating to the administration of the Stock
Incentive Plan. Nonqualified stock options shall be granted to Independent
Directors in accordance with the formula set forth in the Stock Incentive Plan.
The Stock Incentive Plan was approved by the Company's founding
shareholders September 15, 1997. The following awards may be made under the
Plan:
NONQUALIFIED STOCK OPTIONS will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the date
of grant (but not less than par value), and usually will become exercisable in
installments after the grant date. Nonqualified stock options may be granted
for any reasonable term.
INCENTIVE STOCK OPTIONS, if granted, will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of fair market value of
Common Stock on the grant date and a ten year restriction on their term, but may
be subsequently modified to disqualify them from treatment as an incentive stock
option.
RESTRICTED STOCK is Common Stock of the Company which may be awarded to key
employees of the Company by the Compensation Committee, subject to such
restrictions on the exercise of full ownership as such Committee may determine.
Restrictions may relate, among other things, to duration of employment, Company
performance and individual performance
Promptly after the Closing of the Acquisition, the Company expects to issue
to certain officers, directors and key employees of the Company and its
subsidiaries options to purchase an 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
149
<PAGE>
after the date of grant at a price per share equal to the public offering price
per Share in the Offering. The expected allocations of the options to such
persons is as presented above in the "Directors and Executive Officers
Compensation and Incentives." Except for those options, the Company does not
plan to grant options under the Stock Incentive Plan until after the first year
of operations.
NO CRITERIA FOR ISSUANCE OF OPTIONS OR RESTRICTED STOCK HAVE YET BEEN
DEVELOPED BY THE COMPENSATION COMMITTEE. There is no maximum number of options
that a single individual may receive.
185,000 shares of Common Stock, subject to adjustment, will be reserved for
issuance under the Stock Incentive Plan. There is no limit on the number of
awards that may be granted to any one individual (other than Independent
Directors who annually receive a fixed number of options automatically)
FEDERAL INCOME TAXES. If the option has no readily ascertainable fair
market value, no income is recognized by a participant at the time an option is
granted. If the option is an incentive stock option ("ISO"), no income will be
recognized upon the participant's exercise of the option. Income is recognized
by a participant when he or she disposes of shares acquired under an ISO. The
exercise of a nonqualified stock option ("NQSO") generally is a taxable event
that requires the participant to recognize, as ordinary income, the difference
between the shares' fair market value on the exercise date and the option price.
The employer (either the Company or its affiliate) will be entitled to
claim a federal income tax deduction on account of the exercise of a NQSO. The
amount of the deduction is equal to the ordinary income recognized by the
participant. The employer will not be entitled to a federal income tax
deduction on account of the grant or the exercise of an ISO. The employer may
claim a federal income tax deduction on account of certain dispositions of
Common Stock acquired upon the exercise of an ISO.
401(k) PLAN
The Company intends to establish a qualified retirement plan, with a salary
deferral feature designed to qualify under Section 401 of the Code (the "401(k)
Plan"). The 401(k) Plan will permit the employees of the Company and the
Operating Partnership to defer a portion of their compensation in accordance
with the provisions of Section 401(k) of the Code. The 401(k) Plan will allow
participants to defer up to 15% of their eligible compensation on a pre-tax
basis subject to certain maximum amounts. Matching contributions may be made in
amounts and at times determined by the Company. Amounts contributed by the
Company for a participant will vest over a period of years to be determined and
will be held in trust until distributed pursuant to the terms of the 401(k)
Plan.
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
150
<PAGE>
permitted before age 59 1/2, except in the event of death, disability, certain
financial hardships or termination of employment.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Lasker and
Orth for a term of five years and Mr. Albertson for a term of three years, each
subject to automatic one year extensions unless terminated. The agreements
provide for signing bonuses of $25,000 each for Messrs. Lasker, Orth and
Albertson and for initial annual salary compensation as follows: Messrs. Lasker
and Orth, each $180,000; and Mr. Albertson $200,000. Each of the agreements for
Messrs. Lasker and Orth provides for annual increases of the greater of ten
percent per annum or the increase in the consumer price index for the
metropolitan area in which Newport Beach, California, is located and Mr.
Albertson's provides for annual salary increases of $25,000 per year for the
second and third years of his agreement. In addition, the salaries may be
raised at the discretion of the Board upon recommendation of the Compensation
Committee. No criteria other than prudent stewardship of Company resources
exist for the exercise of such discretion. Each agreement also contains
provisions for discretionary bonus consideration and a fixed bonus equal to two
percent of pre-tax profits in the case of Messrs. Orth, Lasker and Albertson.
In addition, Messrs. Lasker, Orth and Albertson may receive discretionary
bonuses of up to 50% of base salary if certain to-be-budgeted financial results
are exceeded. Except to the extent required to carry on pre-existing duties to
investors in other programs managed by 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, the
officer's average salary and bonus over the past five years (or such shorter
time as the officer was employed), payable in 18 equal monthly installments for
Messrs. Lasker, Orth and Albertson. Change of control is generally defined to
include a consolidation in the hands of one Person of 40% or more of the voting
securities of the Company, a business combination after which the existing
shareholders of the Company hold less than 51% of the voting securities of the
resulting entity, or a change in membership of the Board of Directors resulting
in 50% or more of the Board of Directors not being nominated by management.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Charter Documents limit the liability of the Company's
directors to the Company and its stockholders for money damages to the fullest
extent permitted from time to time by Delaware law. Delaware law presently
permits the liability of directors to a corporation or its shareholders for
money damages to be limited, except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith 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
151
<PAGE>
Delaware law. The Company's Certificate of Incorporation and By-Laws also
permit the Company to indemnify its agents who have served another corporation
or enterprise in various capacities at the request of the Company. The Delaware
law presently permits a corporation to indemnify its agents against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the Company, unless it is established
that: (i) the act or omission of the indemnified party was material to the
matter giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; (ii) the indemnified party actually
received an improper personal benefit; or (iii) in the case of any criminal
proceeding, the indemnified party had reasonable cause to believe that the act
or omission was unlawful. Indemnification may be made against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by the
director or officer in connection with the proceeding; provided, however, that
if the proceeding is one by or in the right of the Company, indemnification may
not be made with respect to any proceeding in which the director or officer has
been adjudged to be liable to the Company. In addition, a director or officer
may not be indemnified with respect to any proceeding charging improper personal
benefit to the director or officer in which the director or officer was adjudged
to be liable on the basis that the personal benefit was improperly received.
The termination of any proceeding by conviction, or upon a plea of NOLO
CONTENDERE or its equivalent, or an entry of any order of probation prior to
judgment, creates a rebuttable presumption that the director or officer did not
meet the requisite standard of conduct required for indemnification to be
permitted. Indemnification under the provisions of the Delaware law is not
deemed exclusive to any other rights, by indemnification or otherwise, to which
an officer or director may be entitled under the Company's Charter or By-Laws,
or under resolutions of shareholders or directors, contract or otherwise.
The Company will apply for a directors and officers liability insurance
policy in an amount of $5,000,000. The directors and officers liability
insurance insures (i) the directors and officers of the Company from any claim
arising out of an alleged wrongful act by such persons while acting as directors
and officers of the Company and (ii) the Company to the extent that it has
indemnified the directors and officers for such loss.
PRIOR PROGRAMS
None of the executive officers of the Company have participated in the
operation of an entity with similar objectives to those of the Company, although
each of such officers has skills and experience in one or more of the types of
property to be acquired and operated by the 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 10
152
<PAGE>
California properties. One-half of one percent of the loans were made to
developers of shopping centers, approximately 30% to developers of mixed use
projects (commercial and residential) and approximately 70% to developers of
residential properties. All of the properties involved previously undeveloped
land. Of the amount loaned, approximately $16,000,000 was distributed back to
investors. Of the 12 lending programs, ten eventually were defaulted upon by
the borrowers and two paid the lender/investors in full. In each of the
programs where borrowers defaulted and National did not replace the borrower
with another entity, possession of the applicable property was taken through
National's efforts and the investors became the tenant-in-common owners of the
properties through trusts established for their benefit by National. Where
possible, National is in the process of trying to bring these properties to a
point where they can be sold or otherwise return as much as possible to the
investors.
None of the 12 tenancy-in-common lending programs had investment objectives
similar to those of the Company.
The names of the programs are: Sacramento/Delta Greens "Trudy Pat"
Program, Oceanside "Trudy Pat" Program, Yosemite/Ahwahnee I "Trudy Pat" Program,
Yosemite/Ahwahnee II "Trudy Pat" Program, Mori Point "Trudy Pat" Program,
Cypress Lakes "Trudy Pat" Program (located in Contra Costa County, California),
Joshua Ranch "Trudy Pat" Program (located in Palmdale, California),
Arciero-Diamond Ridge "Trudy Pat" Program (located in Diamond Bar, California),
Esperanza Program (located in Victorville, California), Stacey Rose "A" Program
(located in Victorville, California), Stacey Rose "B" Program (located in
Victorville, California), and Franklin Meadows "Trudy Pat" Program (located in
Sacramento, California). None of such programs have been required to file
reports with the Commission.
Only the Yosemite/Ahwahnee Properties and the Cypress Lakes property have
been acquired through foreclosure in the past three years. Detailed information
regarding the Yosemite/Ahwahnee Properties may be found at "Business and
Properties -- Properties -- Yosemite/Ahwahnee Properties." The Cypress Lakes
property consists of approximately 686 acres which were intended to be developed
into an 18-hole golf course along with 1,330 residential units.
The principal adverse business development which caused 10 of the 12 loans
to default was the precipitous decline of the value of real estate throughout
California brought about by the economic recession that commenced in California
in the early 1990s. The decline in real estate values changed the economics of
the projects planned by the developers so that they were no longer able to
project profitability for themselves. Further, the availability of traditional
financing for construction was significantly reduced due to (i) the savings and
loan association failures of the late 1980s and (ii) bank regulatory
requirements which tightened the availability of credit generally and
substantially increased the amount of equity required as a prerequisite to
obtaining a real estate development loan.
With real estate values down and the availability of credit substantially
reduced, the borrowers elected to cut their losses, default on the loans and
turn the Properties over to the lender/Investors. This decision resulted in the
Investors in the various Programs becoming
153
<PAGE>
tenancy-in-common beneficial owners of the real estate which secured the loans.
This economic reality was not unique to the Programs.
PRIOR PERFORMANCE SCHEDULES
Certain prior performance schedules are included in the following
schedules. Schedule A shows, as of December 31, 1997, general information about
funds raised by the only program the offering for which closed in the last three
years. Schedule B shows, as of December 31, 1997, compensation paid to National
or its affiliates by the eleven programs which have not been completed.
Schedule C shows, as of December 31, 1997, the annual operating results of the
eight "Trudy Pat" programs the offering for which closed in the last five years.
Schedule D shows general information about the one program that was completed
within the last five years and the two programs which obtained title to the real
estate securing their loans in the last five years. See also "Background and
Reasons for the Acquisition -- Historical Compensation for Servicing, Asset and
Property Management/Effect of Acquisition" and "-- Historical Cash Distributions
to Investors" for further information about compensation paid to National and
its affiliates and distributions to Investors in the Programs.
154
<PAGE>
SCHEDULE A
The purpose of Schedule A is to show, as of June 30, 1998, information about the
funds raised and the associated offering expenses of the only "Trudy Pat"
program which closed in the three most recent years. The business objective of
the program was to earn a higher rate of interest on money than was available
from financial institutions and to receive a return of the principal advance in
four years or less. THIS PROGRAM DID NOT HAVE INVESTMENT OBJECTIVES SIMILAR TO
THOSE OF THE COMPANY. Prospective investors should be aware that the results of
this program are not necessarily indicative of the potential results of the
Company. See "Prior Programs" at page __ for a narrative summary of similar
programs in which National was involved.
<TABLE>
<CAPTION>
Arciero-Diamond Ridge
---------------------
<S> <C>
Dollar amount offered $ 14,000,000
Dollar amount raised 5,538,800
Less offering expenses:
Organizational expenses(1) 0
Sales commissions(1) 0
Discounts retained by affiliates(1) 0
Loan Amount $ 5,538,800
Date offering began July 21, 1993
Length of offering in months 12.75
Months to investment all available for one
investment
</TABLE>
- ------------
(1) The borrower repaid the loan proceeds on August 17, 1994 before the entire
amount offered was raised. No offering expenses were paid by the
investors.
155
<PAGE>
SCHEDULE B
The purpose of Schedule B is to show, as of June 30, 1998, aggregate
compensation paid over the last three years to National and its affiliates by
the eleven public "Trudy Pat" programs which have not been completed. The
business objective of the program was to earn a higher rate of interest on money
than was available from financial institutions and to receive a return of the
principal advance in four years or less. NONE OF THE PROGRAMS HAVE INVESTMENT
OBJECTIVES SIMILAR TO THOSE OF THE COMPANY. Prospective investors should be
aware that the results of these programs are not necessarily indicative of the
potential results of the Company. See "Prior Programs" at page __ for a
narrative summary of similar programs in which National was involved.
<TABLE>
<CAPTION>
Arciero-
Sacramento/ Yosemite/ Yosemite/ Cypress Diamond
Delta Greens Oceanside Ahwahnee I Ahwahnee II Mori Point Joshua Ranch Lakes Ridge
------------ --------- ---------- ----------- ---------- ------------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Date offering 11/1/88 11/15/91 5/2/89 9/10/90 11/20/89 3/26/90 2/19/91 7/21/93
commenced
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
156
<PAGE>
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>
SCHEDULE B (continued)
<TABLE>
<CAPTION>
Esperanza Stacey Rose "A" Stacey Rose "B"
--------- --------------- ---------------
<S> <C> <C> <C>
Date offering commenced 11/18/87 5/5/88 5/5/88
Dollar amount raised $ 500,000 $ 85,000 $ 315,300
Servicing fees
Jan. 1995 to Dec. 1997:
Accrued 0 0 0
Paid 0 0 0
Property management fees
Jan. 1995 to Dec. 1997:
Accrued 15,000 2,550 9,459
Paid 0 0 0
Amount paid to
157
<PAGE>
National
from proceeds of offerings
closed in the most recent
three years N/A N/A N/A
</TABLE>
SCHEDULE C
The purpose of Schedule C is to show, as of June 30, 1998, the annual operating
results of the seven public "Trudy Pat" programs the offerings of which closed
in the most recent five years. No tax information is included as
tenancy-in-common arrangements are not required to file information tax returns.
Each investor determines the tax treatment of distributions. The business
objective of the program was to earn a higher rate of interest on money than was
available from financial institutions and to receive a return of the principal
advance in four years or less. NONE OF THE PROGRAMS HAVE INVESTMENT OBJECTIVES
SIMILAR TO THOSE OF THE COMPANY. Prospective investors should be aware that the
results of these programs are not necessarily indicative of the potential
results of the Company. See "Prior Programs" at page __ for a narrative summary
of similar programs in which National was involved.
158
<PAGE>
<TABLE>
<CAPTION>
Sacramento/Delta Greens Oceanside
----------------------------------- -------------------------------------------------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <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 3,000,000
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.
159
<PAGE>
SCHEDULE C (continued)
<TABLE>
<CAPTION>
Yosemite/Ahwahnee I Yosemite/Ahwahnee II
------------------------------------------------------ ------------------------------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrower loan
repayments:
Principal $ 103,085 $ 0 $ 0 $ 0 $ 0 $ 68,264 $ 0 $ 0 $ 0 $ 0
Interest 920,794 4,756 0 0 0 688,303 10,273 0 0 0
Cash from sale N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Distributions to
investors:(1)
Principal 103,085 0 0 0 0 68,264 0 0 0 0
Interest 920,794 4,756 0 0 0 688,303 10,273 0 0 0
Distributions per
$1,000 invested:
Principal 15.86 0 0 0 0 5.06 0 0 0 0
Interest 141.66 .73 0 0 0 50.99 .76 0 0 0
</TABLE>
- ---------
(1) Net of servicing fees and property management fees and expenses.
160
<PAGE>
SCHEDULE C (continued)
<TABLE>
<CAPTION>
Mori Point Joshua Ranch
------------------------------------------------------ ------------------------------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrower loan
repayments:
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest 0 0 0 0 0 478,127 0 0 0 0
Cash from sale 0 0 0 0 0 N/A 0 0 0 0
Distributions to
investors:(1)
Principal 0 0 0 0 0 0 0 0 0 0
Interest 0 0 0 0 0 478,127 0 0 0 0
Distributions per
$1,000 invested:
Principal 0 0 0 0 0 0 0 0 0 0
Interest 0 0 0 0 0 31.88 0 0 0 0
</TABLE>
- -----------
(1) Net of servicing fees and property management fees and expenses.
161
<PAGE>
SCHEDULE C (continued)
<TABLE>
<CAPTION>
Cypress Lakes Arciero-Diamond Ridge
-------------------------------------------------- --------------------------------------------------
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrower loan
repayments:
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 5,538,800 N/A N/A N/A
Interest 1,337,101 62,706 0 0 0 113,531 297,077 N/A N/A N/A
Cash from sale N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Distributions to
investors:(1)
Principal 0 0 0 0 0 $ 0 5,538,800 N/A N/A N/A
Interest 1,337,101 62,706 0 0 0 113,551 997,027 N/A N/A N/A
Distributions per $1,000
invested:
Principal 0 0 0 0 0 $ 0 1,000 N/A N/A N/A
Interest 95.57 4.48 0 0 0 20.50 53.64 N/A N/A N/A
</TABLE>
- ------------
(1) Net of servicing fees and property management fees and expenses.
162
<PAGE>
SCHEDULE D
The purpose of Schedule D is to show, as of June 30, 1998, the results of the
"Trudy Pat" programs which closed or in which the loan has been completely
repaid or title obtained to the property within the last five years. No tax
information is available as tenancy-in-common arrangements are not required to
file information income tax returns. The business objective of the program was
to earn a higher rate of interest on money than was available from financial
institutions and to receive a return of the principal advance in four years or
less. NONE OF THE PROGRAMS HAVE INVESTMENT OBJECTIVES SIMILAR TO THOSE OF THE
COMPANY. Prospective investors should be aware that the results of these
programs are not necessarily indicative of the potential results of the Company.
See "Prior Programs" at page __ for a narrative summary of similar programs in
which National was involved.
<TABLE>
<CAPTION>
Arciero-Diamond Palmdale/
Ridge Joshua Ranch Cypress Lakes
----- ------------ -------------
<S> <C> <C> <C>
Dollar amount raised $ 5,538,800 $ 15,000,000 $ 14,000,000
Loan secured by one property one property one property
Date loan fully funded July 25, 1994 February 24, 1992 February 26, 1993
Date loan paid off or title to property August 17, 1994(1) October 8,1993 July 14, 1995
obtained
Repayment/Distributions:
Principal $ 5,538,800 $ -0- $ -0-
Interest $ 297,077(2) $ 3,887,428 $ 3,739,550
Distributions per $1,000 invested:
Principal $ 1,000 $ -0- $ -0-
Interest $ 53.64(2) $ 259.16 $ 267.11
</TABLE>
- ----------
(1) This loan was funded over the course of 12.75 months, commencing on July
21, 1993. Funds were first advanced to the borrower on September 16, 1993.
(2) Net of compensation to National. In 1993, interest in the amount of
$113,551 ($53.64 per $1,000 of investment), net of compensation to
National, was distributed to investors.
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<PAGE>
SECONDARY MARKET FOR TENANCY-IN-COMMON INTERESTS
There is no organized market for the tenancy-in-common interests held by
Investors in the Programs. Any transfers of such interests must be privately
negotiated among willing parties.
PRINCIPAL SHAREHOLDERS
The following tables set forth information as of the date hereof as to each
person or entity who owns of record or is known by the Company to own
beneficially five percent or more of the Company's outstanding voting securities
and information as to the securities ownership of management. All stock
ownership shown below is direct unless otherwise indicated.
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
Percent of All
Voting Shares
Name and Address Common Stock Outstanding
---------------- ------------ -----------
<S> <C> <C>
Yale Partnership for Growth and [118,903] 6.88%
Development, L.P.(1) (2% if all
4220 Von Karman Avenue warrants are
Suite 110 exercised)
Newport Beach, CA 92660
J-Pat, L.P.(2) [118,903] 6.88%
4220 Von Karman Avenue (2% if all
Suite 110 warrants are
Newport Beach, CA 92660 exercised)
</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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<PAGE>
DIRECTOR AND OFFICER STOCK OWNERSHIP
<TABLE>
<CAPTION>
Percent
of Class if
Acquisition Common Percent
Common Completed Stock of Class
Name/Position Stock Only Options --------
------------- ----- ---- -------
<S> <C> <C> <C> <C>
David G. Lasker,
President, Chief [118,903] 6.88% 10,000(1) 23.53%
Financial Officer and (2% if all
Director(2) warrants
are
exercised)
James Orth, Chief
Executive Officer, [118,903] 6.88% 10,000(1) 23.53%
Secretary and Director(3) (2% if all
warrants
are
exercised)
L.C. "Bob" Albertson, Jr.
Executive Vice President, [44,685] 2.59% 10,000(1) 23.53%
Director (0.75% if all
warrants are
exercised)
Charles F. Hanson, Jr., - - 2,500 5.88%
Director
Dudley Muth, Director - - 2,500 5.88%
James G. LeSieur III, - - 2,500 5.88%
Director
Directors and Officers as [282,491] [16.35]% 42,500 100.00%
a group (4.76% if all
warrants are
excercised)
</TABLE>
- ---------------------
(1) Messrs. Lasker, Orth and Albertson each may exercise options to purchase
3,333 shares presently. 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 SECURITIES
The following description of the Shares and other capital stock of the
Company does not purport to be complete but contains a summary of portions of
the Company's Certificate of
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<PAGE>
Incorporation and is qualified in its entirety by reference to the Company's
Certificate of Incorporation.
GENERAL
The total number of shares of stock which the Company has authority to
issue is 12,000,000 shares, of which 10,000,000 are shares of Common Stock,
$0.001 par value per share ("Common Stock"), and 2,000,000 are shares of
Preferred Stock, $0.001 par value per share ("Preferred Stock"). The Board of
Directors is authorized to provide for the issuance of shares of Preferred Stock
in one or more series, to establish the number of shares in each series and to
fix the designation, powers, preferences and the rights of such series and the
qualifications, limitations or restrictions thereof.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of any other shares
or series of shares of Preferred Stock, holders of Common Stock will be entitled
to receive distributions on such Common Stock if, as and when authorized and
declared by the Board of Directors of the Company out of assets legally
available therefor and to share ratably in the assets of the Company legally
available for distribution to its Shareholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for, all known
debts and liabilities of the Company.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of Shareholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of stock, the holders of such
shares of Common Stock will possess the exclusive voting power. There is no
cumulative voting in the election of directors, which means that the holders of
a majority of the outstanding shares of Common Stock can elect all of the
directors then standing for election and the holders of the remaining shares, if
any, will not be able to elect any directors. Holders of Common Stock have no
conversion, sinking fund, redemption rights or any preemptive rights to
subscribe for any securities of the Company.
PREFERRED STOCK
The Preferred Stock may be issued from time to time in one or more series
as authorized by the Board of Directors. Prior to issuance of shares of each
series, the Board of Directors by resolution shall designate that series to
distinguish it from all other series and classes of stock of the Company, shall
specify the number of shares to be included in the series and shall set the
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
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<PAGE>
or more respects, from time to time before issuing the shares, and the terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption of the shares of any series of Preferred Stock. There
are no shares of Preferred Stock outstanding and the Company has no present
plans to issue any.
WARRANTS
The only presently existing warrants will be issued as part of the Units
and are denominated "A" Warrants, "B" Warrants and "C" Warrants. Each warrant
will be exercisable for 30 days commencing on the exercise date and will allow
the holder to purchase one share 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. "A" Warrants are
exercisable 12 months after issuance. "B" Warrants are exercisable 18 months
after issuance. "C" Warrants are exercisable 24 months after issuance. These
warrants are detachable from the Units 60 days after 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 intends to list the warrants in the same manner
the Common Stock is listed. National will not exercise any of the warrants it
receives with units allocated to it as an investor in each of the Programs.
CERTAIN SHAREHOLDER VOTING REQUIREMENTS
The Company's Certificate of Incorporation requires the concurrence of the
holders of two-thirds of the voting power of the outstanding voting stock to
amend specified provisions of the Company's Certificate of Incorporation and
By-Laws, which provide that (i) shareholders generally may not call a special
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.
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<PAGE>
THE OFFERING
OFFERING OF ACQUISITION UNITS
Subject to the conditions set forth in this Prospectus, the Company is
offering to Investors in the Programs an aggregate of [1,403,321] Units
("Acquisition Units") in exchange for all of the real estate, certain of the
liabilities and business of all of the Programs. The Acquisition Shares will be
allocated to the Programs based on Exchange Values and will be further allocated
within each of the Programs pro rata in respect of the Adjusted Outstanding
Investments of the Investors in the respective Programs. For example,
<TABLE>
<CAPTION>
If your Adjusted Outstanding You will receive the following number
Investment is $10,000 in of Acquisition Shares
------------------------ ---------------------
If Only the Seven
If All Programs "Trudy Pat" Programs
Participate Participate
----------- -----------
<S> <C> <C>
Sacramento/Delta Greens 128 128
Oceanside 111 111
Yosemite/Ahwahnee I 122 122
Yosemite/Ahwahnee II 117 117
Mori Point 219 219
Cypress Lakes 154 154
Palmdale/Joshua Ranch 72 72
Esperanza 185 -
Stacey Rose A 229 -
Stacey Rose B 228 -
</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.
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
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<PAGE>
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 and March 1998
Yosemite/Ahwahnee I and II Arnold Associates
751 West 18th Street
Post Office Box 272
Merced, California 95341
Date: May 1997 and March 1998
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 and March 1998
Cypress Lakes Sedway Group
3 Embarcadero Centre, Suite 1150
San Francisco, California 94111
Date: March 1998
Palmdale/Joshua Ranch Likas & Associates
20101 S.W. Birch Street, Suite 150B
Newport Beach, California 92660
Date: March 1998
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<PAGE>
Esperanza Likas & Associates
20101 S.W. Birch Street, Suite 150B
Newport Beach, California 92660
Date: March 1998
Stacey Rose A and B Likas & Associates
20101 S.W. Birch Street, Suite 150B
Newport Beach, California 92660
Date: March 1998
</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
$27,601,000.
The above appraisers were selected because of their respective reputations
and experience in appraising the value of real estate of the type involved. In
addition, in the cases of Arnold Associates and Boznanski & Company, the
original borrowers had used these companies for the appraisals delivered to the
lenders (Investors) at the time the original "Trudy Pat" loan was made.
National felt their prior experience with the Yosemite/Ahwahnee Properties and
the Oceanside Property, respectively, might provide some cost savings to their
respective Programs.
National then engaged Houlihan Valuation Advisors, 2029 Century Park East,
Suite 2890, Los Angeles, California 90067, the Independent Valuator, to render
an opinion that the allocation of Shares among the Programs, as well as the
number of Shares retained by management of the Company and other founders of the
Company, is fair to the Investors from a financial point of view. The Fairness
Opinion is attached as Appendix 1 to this Prospectus. The Fairness Opinion and
appraisals have been filed as exhibits to the Registration Statement of which
this Prospectus is a part. Copies may be obtained without charge by writing to
Vivian Kennedy, National Investors Financial, Inc., 4220 Von Karman Avenue,
Suite 110, Newport Beach, California 92660.
National did not impose any limitations on the scope of the investigations
of the independent appraisers or the Independent Valuator to enable them to
render their respective appraisals and the Fairness Opinion. National and the
Company determined the consideration to be paid to the Investors. The
Independent Valuator has no obligation to update its Fairness Opinion. Neither
National nor the Company plans to request an update at present. There is no
contract, agreement or understanding between National or the Company on the one
hand and the Independent Valuator on the other hand regarding any future
engagement.
The Fairness Opinion is discussed in detail in "Background and Reasons for
the Acquisition -- Appraisals and Fairness Opinion."
EXPERIENCE OF INDEPENDENT APPRAISERS
Each of the independent appraisers is a member in a nationally recognized
society such as the American Institute of Real Estate Appraisers ("MAI"). Each
has been involved in the appraisal of real estate in California for many years.
National believes that each of the independent appraisers is recognized among
such appraiser's peers as being well experienced in
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<PAGE>
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 AND MARCH 1998 APPRAISALS
On behalf of the Programs, National engaged the independent appraisers
identified in "-- General" above 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
Yosemite/Ahwahnee I and II Programs, the independent appraiser determined that
the sales comparison, income and cost methods for appraising real estate were
appropriate to use on various portions of the Properties. In the case of the
real estate in the Mori Point Program, the independent appraiser determined that
the discounted cash flow, ground rent capitalization and sales comparison
methods for appraising real estate were appropriate to use. In the case of the
real estate in the Palmdale/Joshua Ranch, Esperanza and Stacey Rose A and B
Programs, the independent appraiser determined that the sales comparison
approach was appropriate to use. In the case of the Cypress Lakes Program, the
independent appraiser determined the sales comparison approach and the
subdivision development approach were appropriate to use. See Appendix 2 for
definitions of these appraisal methods.
In conducting each of the appraisals, representatives of the several
appraisers reviewed and relied upon, without independent verification, certain
information provided by National, including, but not limited to: applicable
financial information; property descriptions; historical acquisition
information; title information relating to encumbrances; and such other
information as was requested by the appraiser and available to National.
Representatives of each of the appraisers performed site inspections on the real
estate of each of the Programs in 1997. In the course of these visits, any
physical facilities were inspected and information on the local market, as well
as the subject property, was gathered.
Where appropriate, applicable government records were reviewed and
information was gathered from applicable government officials. As appropriate,
historical operating statements for certain of the Properties were reviewed.
Each appraiser then estimated the value of the real estate of the
applicable Programs based on the approaches to valuation described above.
CONCLUSION AS TO APPRAISED VALUE. Based on the valuation methodology used
by each of the appraisers, the estimated "as is" value of the real estate for
each of the Programs is as follows:
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<PAGE>
<TABLE>
<CAPTION>
Real Estate "As Is" Ownership Date Real Estate
Name of Program Value Conclusion(1) Value Conclusions
- --------------- -------------------- --------------------------
<S> <C> <C>
Sacramento/Delta Greens $ 1,745,000 $ 3,075,000
Oceanside N/A(2) 6,484,000(3)
Yosemite/Ahwahnee I and II 20,916,000 19,641,000
Mori Point 5,500,000 4,100,000
Cypress Lakes 6,000,000 5,200,000
Palmdale/Joshua Ranch 2,700,000 5,390,000
Esperanza 270,000 530,000
Stacey Rose A And B 320,000 1,600,000
----------- -----------
TOTAL $37,451,000 $46,020,000
----------- -----------
----------- -----------
</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) Parcels of Yosemite/Ahwahnee properties were purchased on June 5, 1998.
These parcels represent $10,350,000 of the total value.
(3) The value of the original Oceanside Program's property at the time title
was taken. That property was subsequently 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
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<PAGE>
requested by the appraiser and available to National. Representatives of the
appraiser performed site inspections on the real estate of each of the
Programs in the Fall of 1997. In the course of these visits, any physical
facilities were inspected and information on the local market, as well as the
subject property, was gathered.
Where appropriate, applicable government records were reviewed and
information was gathered from applicable government officials. As
appropriate, historical operating statements for certain of the Properties
were reviewed.
The appraiser then estimated the value of the real estate of the
Yosemite/Ahwahnee Properties based on the approaches to valuation described
above.
CONFLICTING YOSEMITE/AHWAHNEE PROPERTIES' APPRAISALS
Faced with the significant disparity between the Yosemite/Ahwahnee
valuation conclusions of The Mentor Group and Arnold Associates (as the Arnold
Associates appraisal was updated to March 31, 1998), in order to arrive at an
Exchange Value for the Yosemite/Ahwahnee Properties, National used its judgment
regarding the two appraisals as follows:
First, with regard to the Ahwahnee Country Club portion of the combined
Properties, National judged the Arnold Associates appraisal as more reasonable
due to substantial improvements to the golf course and a doubling in the number
of golf course rounds played since the Mentor appraisal. Thus, the Arnold
appraisal of $3,810,000 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 400
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,
sales subsequent to the Mentor appraisal support the Arnold Associates estimate
of value.
Fourth, as to the balance of the land, National accepted the conservative
Mentor appraisal as more reasonable due to the time and costs required to
develop these parcels.
Fifth, the aggregate revised appraisal was allocated between the
Yosemite/Ahwahnee I and II Programs in accordance with the amounts of the
respective original loans by each Program. National deemed this allocation
reasonable because there is no other way to allocate the respective financial
contribution to the current status of the entire property. This allocation
yielded a revised appraised value of $1,782,950 to the Yosemite/Ahwahnee I
Property and $3,703,050 to the Yosemite/Ahwahnee II Property.
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<PAGE>
ON-GOING RELATIONSHIPS
Each of the appraisers was paid a fee for its appraisals deemed to be
reasonable by National. The fees for such appraisals were paid out of funds
available to the respective Programs through cash flow or assessments. In
addition, each appraiser was reimbursed for reasonable travel and other
out-of-pocket expenses incurred in making site visits and in preparing the
valuations. The fees were negotiated between National and each of the
appraisers and payment thereof is not dependent upon completion of the
Acquisition. Neither National nor the Company has retained any of the
appraisers in the past, although the borrower in the Oceanside Program used
Boznanski & Company and the borrower in the Yosemite/Ahwahnee I and II
Programs used Arnold Associates in connection with the original "Trudy Pat"
loans. National and the Company may engage one or more of the appraisers to
provide appraisal and other services in the future. There is no contract,
agreement or understanding between National or the Company on the one hand
and any of the appraisers on the other hand regarding any future engagement.
UPDATES/CHANGES
None of the appraisers have any obligation to update their appraisals and,
at present, neither National nor the Company plan to obtain further 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 Units
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.
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<PAGE>
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 qualify under Section 351 of the Code, as discussed below.
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 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 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 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 doctrine. Consequently, counsel to the Company is unable to opine
as to whether the Acquisition
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will qualify 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 [81.26]% of the Units. See "Prospectus Summary --
Exchange Value/Allocation of Shares." Accordingly, if Investors dispose of more
than [65]% of the Shares included in the Units 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(b), no loss will be recognized by
Investors in a Program which transfers a property to the Company in exchange for
Units. However, if the fair market value of the Shares and warrants received by
an Investor for this interest in a property exceeds the Investor's tax basis in
the Property, the Investor will recognize such gain in an amount not to exceed
the fair market value of such warrants.
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 tax basis of his interests in the
Properties at that time, minus the fair market value of the warrants he
receives, plus 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. An Investor's tax basis in his warrants will equal the fair market
value of the warrants on the Effective Date.
(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
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
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<PAGE>
1231(b) assets, for which tacking of holding periods is allowed, and
non-capital assets, for which tacking of holding periods is not allowed. In
such event, it may be necessary to make an allocation under Section 1223(1),
with the result that the tax basis of each Share received by the Investor
will be divided for holding-period purposes. See Rev. Rul. 85-164, 1985-2
C.B. 117. An Investor's holding period for his warrants will commence on the
day after the Effective Date.
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 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 and warrants in exchange for his 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 and warrants he acquires and his share of any
liabilities to which the Properties are subject. The character of an
Investor's gain or loss will depend on his holding periods with respect to
his interests in the Properties and whether such interests are capital
assets, Section 1231(b) assets or non-capital assets.
(ii) An Investor's initial tax bases in the Shares he acquires
will be equal to the fair market value of the Shares and warrants, respectively,
on the Effective Date. An Investor's holding periods of such Shares and
warrants 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 Units. The
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initial tax basis of the Company in the Properties generally will be equal
to the sum of the fair market value of the Shares and warrants 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.
(b) WARRANTS. No gain or loss will be recognized by an Investor or
the Company upon the Investor's 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.
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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
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).
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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.
"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.
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"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 $20 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 and its affiliates in the Acquisition.
"Fairness Opinion" means the opinion of the Independent Valuator to the
Programs as to the fairness, from a financial point of view, of the Acquisition
transaction to the Investors.
"Independent Director" means a Director of the Company whose primary
business or professional affiliations, if any, are with organizations not
affiliated with the Company. As of the date of the Prospectus, there are no
Independent Directors.
"Independent Valuator" means Houlihan Valuation Advisors.
"Investor" means a Person that purchased a tenancy-in-common interest in
one of the "Trudy Pat" loans, secured by a deed of trust, that formed the basis
of one of the Programs.
"Investor Ballot" means the ballot accompanying this Prospectus to be used
by the Investor to vote its wishes to approve or disapprove participation of a
particular Program in the Acquisition, and to subscribe for units.
"IRS" or "Service" means the U.S. Internal Revenue Service.
"NASD" means the National Association of Securities Dealers, Inc.
"National" means National Investors Financial, Inc., the company which
organized, and acts as servicing agent for the Investors in, each of the
Programs.
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"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 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.
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"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.
"Unit" means one share of Common Stock plus warrants to purchase three
additional shares; one warrant exercisable 12 moths from the date of issuance;
one 18 months from the date of issuance; and one 24 months from the date of
issuance.
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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 June 30, 1998. . . . . . . . .F-4
Notes to Pro Forma Combined Balance Sheet . . . . . . . . . . . . . .F-5
Pro Forma Combined Statement of Operations for the year ended
December 31, 1997 and for the six months ended June 30, 1998. . . .F-7
Notes to Pro Forma Combined Statement of Operations . . . . . . . . .F-8
AMERICAN FAMILY HOLDINGS, INC.
Report of Independent Certified Public Accountants. . . . . . . . . F-10
Balance Sheet as of June 30, 1998 . . . . . . . . . . . . . . . . . F-11
Notes to Balance Sheet . . . . . . . . . . . . . . . . . . . . . . F-12
THE OCEANSIDE PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-14
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-15
Statements of Operations for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-16
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-17
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-18
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-19
THE YOSEMITE/AHWAHNEE PROGRAMS
Report of Independent Certified Public Accountants. . . . . . . . . F-23
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-24
Statements of Operations for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-26
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-28
THE MORI POINT PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-34
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-35
Statements of Operations for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-36
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-37
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-38
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-39
F-1
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-42
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-43
Statements of Operations for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-44
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-45
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-46
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-47
THE CYPRESS LAKES PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-50
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-51
Statements of Operations for two years ended December 31, 1997
and 1998 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-52
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-53
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-54
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-55
THE PALMDALE/JOSHUA RANCH PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-58
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-59
Statements of Operations for two years ended December 31,
1997 and 1998 and for the six months ended June 30, 1998
and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . F-60
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998
and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . F-61
Statements of Cash Flows for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-62
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-63
THE STACEY ROSE PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-66
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-67
Statements of Operations for two years ended December 31,
1997 and 1998 and for the six months ended June 30, 1998
and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . F-68
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-69
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-70
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-71
THE ESPERANZA PROGRAM
Report of Independent Certified Public Accountants. . . . . . . . . F-74
Balance Sheet as of December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-75
Statements of Operations for two years ended December 31,
1997 and 1998 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-76
Statements of Owners' Equity for two years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-77
Statements of Cash Flows for two years ended December 31, 1997
and 1996 and for the six months ended June 30, 1998 and
1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . F-78
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-79
</TABLE>
F-2
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED BALANCE SHEET
The following unaudited Pro Forma Combined Balance Sheet as of June 30,
1998 and the Pro Forma Combined Statement of Operations for the year ended
December 31, 1997 and for the six months ended June 30, 1998 have been prepared
to reflect the acquisitions of the assets, certain liabilities and business of
the Oceanside Program, the Yosemite/Ahwahnee Programs, the Mori Point Program,
the Sacramento/Delta Greens Program, the Cypress Lakes Program, the
Palmdale/Joshua Ranch Program, the Stacey Rose Programs and the Esperanza
Program (collectively, "The Acquisition"). The unaudited Pro Forma Balance
Sheet has been prepared as if The Acquisition had been consummated as of June
30, 1998. The unaudited Pro Forma Statement of Operations for the year ended
December 31, 1997 and for the six months ended June 30, 1998 has been prepared
as if The Acquisition occurred at the beginning of 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-3
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30, 1998
--------------------------------------------------------------------
The Pro Forma Pro Forma
Company Programs(1) Adjustments Combined
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
THE ACQUISITION
ASSETS:
Real estate, net . . . . . . . . . . . . . . $ - $23,283,793 $ 4,317,207 (2) $27,601,000
Cash and cash equivalents. . . . . . . . . . 3,901 2,806,519 (668)(4) 2,809,752
Restricted cash. . . . . . . . . . . . . . . - 221,726 - 221,726
Notes receivable . . . . . . . . . . . . . . - 295,629 295,629
Goodwill . . . . . . . . . . . . . . . . . . - - 100,000 (3) 100,000
Property and equipment . . . . . . . . . . . - 340,350 340,350
Deferred membership selling expense. . . . . - 581,781 - 581,781
Other assets . . . . . . . . . . . . . . . . - 108,815 108,815
Due from affiliate . . . . . . . . . . . . . - 1,955,243 (1,955,243)(5) -
Deferred acquisition costs . . . . . . . . . 1,955,243 (1,955,243)(3) -
---------- ---------- ----------- ----------
Total assets. . . . . . . . . . . . . . 1,959,144 29,593,856 32,059,053
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
LIABILITIES:
Deferred membership revenue. . . . . . . . . - 1,385,710 1,385,710
Capital lease obligations. . . . . . . . . . - 313,083 313,083
Accounts payable and other liabilities . . . - 2,327,157 2,327,157
Due to affiliate . . . . . . . . . . . . . . 1,955,243 1,818,684 (1,955,243)(5) 1,818,684
---------- ---------- ----------- ----------
Total liabilities . . . . . . . . . . . 1,955,243 5,844,634 5,844,634
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
STOCKHOLDERS' EQUITY:
Common Stock . . . . . . . . . . . . . . . . 391 0 1,403 (2) 1,723
(67)(4)
Additional paid-in-capital . . . . . . . . . 3,510 0 28,065,026 (2) 26,212,692
(1,855,243)(3)
(601)(4)
Accumulated deficit. . . . . . . . . . . . . - - -
Owners' equity . . . . . . . . . . . . . . . - 23,749,222 (23,749,222)(2) -
---------- ---------- ----------- ----------
Total stockholders' equity. . . . . . . 3,901 23,749,222 26,214,419
---------- ---------- ----------- ----------
Total liabilities and
stockholders' equity. . . . . . . . 1,959,144 29,593,856 32,059,053
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
F-4
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED BALANCE SHEETS
PRO FORMA ADJUSTMENTS
These pro forma adjustments reflect the completion of the Acquisition. The
following sets forth the adjustments:
(1) Reflects the historical combined balance sheets of the Programs as of June
30, 1998.
(2) To record the fair market value of the stock issued to the investment
programs being acquired in conjunction with the Acquisition in accordance
with the following schedule:
<TABLE>
<S> <C>
Net book value of Programs $23,749,222
Add: Excess of real estate appraised
value over book value 4,317,207(a)
-----------
Fair value of assets acquired and stock
issued in Acquisition $28,066,429
Less: Par value of stock issued (1,403)
-----------
Net increase to additional paid-in-capital
and accumulated deficit $28,065,026
-----------
-----------
</TABLE>
(a) The carrying value of all non-real estate assets and liabilities are
deemed to approximate their fair values at the time of the Acquisition.
Due to the original shareholder group having a significant ownership
interest in the Company and control of senior management and board of
director positions, the Company is considered the accounting acquirer in
the Acquisition. The transaction will be consummated by issuing 1,403,321
shares of common stock of the Company, valued at $20 per share, to the
investors in the Programs. The value per share of the Company's common
stock is based on the following calculation:
<TABLE>
<S> <C>
Fair value of net assets acquired in Acquisition $28,066,429
divided by the number of shares issued 1,403,321
----------
Fair value per common share $ 20
----------
----------
</TABLE>
This excess purchase price is due to the appraised value of the properties held
by some of the programs being greater than their carrying value on the program's
historical financial statements. These excess values are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Program Historical Financial Appraised Value Excess Purchase Price
Value
Mori Point $4,100,000 $6,000,000 $1,900,000
Oceanside 3,525,539 5,080,000 1,554,461
Cypress Lakes 5,200,000 6,000,000 800,000
Yosemite/Ahwahnee 5,423,254 5,486,000 62,746
--------- --------- ---------
TOTAL $4,317,207
--------- --------- ---------
--------- --------- ---------
</TABLE>
(3) To reclass the various professional fees incurred to consummate the
securities registration ($1,855,243) to equity, and the direct costs of
consummating the Acquisition to goodwill.
(4) To reflect the cancellation of 66,807 shares of common stock of the Company
in conjunction with the final allocation of units between Program investors
and founders.
(5) To eliminate intercompany receivables.
F-5
<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 JUNE 30
Vacation and Residential Home
Leisure Resort Development All Other Total
-------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C>
Segment Assets 10,214,627 5,889,933 17,806,503 33,911,063
</TABLE>
<TABLE>
<CAPTION>
RECONCILIATION OF ASSETS
<S> <C>
Total assets for reportable segments 33,911,063
Cash 3,233
Goodwill 100,000
Elimination of receivables from corporate headquarters (1,955,243)
----------
Consolidated total assets after adjustments 32,059,053
----------
----------
</TABLE>
F-6
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The pro forma combined statements of operations presented below reflect the
acquisition as previously described as if it occurred at the beginning of the
periods presented. The Company was omitted from the statements presented below
since it had no operations during the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------- -----------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Programs(1) Adjustments Combined Programs(1) Adjustments Combined
---------- ----------- -------- ---------- ----------- --------
THE ACQUISITION
<S> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . $5,193,012 $ $5,193,012 $324,654 $324,654
Cost of sales. . . . . . . . . . 4,081,530 4,081,530 121,187 121,187
---------- --------- ---------- --------- --------- ---------
Gross profit . . . . . . . . . . 1,111,482 1,111,482 203,467 203,467
Selling, general and
administrative . . . . . . . . 4,357,059 350,000(2) 5,676,062 1,754,181 175,000(2) 2,413,683
949,003(3) 474,502(3)
20,000(4) 10,000(4)
Land write down. . . . . . . . . 1,299,651 1,299,651 255,000 - 255,000
Management fees. . . . . . . . . 949,003 (949,003)(3) 0 474,502 (474,502)(3)
---------- --------- ---------- --------- --------- ---------
Total expenses . . . . . . . . . 6,605,713 6,975,713 2,483,683 2,668,683
---------- --------- ---------- --------- --------- ---------
Interest income (expense). . . . 31,345 31,345 (1,117) (1,117)
Gain on sale of property . . . . - - 2,256,802 2,256,802
---------- --------- ---------- --------- --------- ---------
Net income (loss). . . . . . . . (5,462,886) (5,832,886) (24,531) (209,531)
---------- --------- ---------- --------- --------- ---------
---------- --------- ---------- --------- --------- ---------
Net loss per
common share(5). . . . . . . . . (3.42) (0.12)
---------- --------- ---------- --------- --------- ---------
---------- --------- ---------- --------- --------- ---------
</TABLE>
F-7
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
PRO FORMA ADJUSTMENTS
(1) Reflects the historical combined statements of operations of the Programs
for the year ended December 31, 1997 and for the six months ended June 30,
1998.
(2) To reflect the replacement of National as asset manager of the investment
programs with the new management structure of the Company:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1997 June 30, 1998
----------------- -------------
<S> <C> <C>
Officers and staff salaries to be $ 806,000 $ 403,000
included in selling, general and
administration after Acquisition
Officers salaries included in selling,
general and administration prior to $(456,000) $(228,000)
Acquisition -------- -------
Pro forma adjustment to selling, general
and administration $ 350,000 $ 175,000
-------- -------
-------- -------
</TABLE>
(3) To reflect the cancellation of the servicing agreements between National
and the investment programs and the reclass of this associated overhead to
administrative expenses.
(4) To amortize goodwill arising from the Acquisition over its estimated useful
life of 5 years.
(5) Net loss per share is based on 1,703,345 weighted average number of shares
outstanding and does not include any warrants to be issued in conjunction
with the company's units offering or the Acquisition.
(6) Segment Information
American Family Holdings, Inc. ("American") has two reportable segments:
vacation and leisure resort properties and residential home properties.
The vacation and leisure resort property is used to generate revenue
through a recreational vehicle membership plan, as well as a golf course
and resort operation. The residential home properties segment derives its
revenue from the development and sales of residential housing.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. However, in the
calculation of the pro forma loss for these segments, American officers
salaries, management fees and acquisition expenses were excluded.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
<S> <C> <C> <C> <C>
Vacation and Residential Home
Leisure Resort Development All Other Total
-------------- ----------- --------- -----
Revenues 902,162 4,290,850 5,193,012
Segment profit/(loss) (1,795,368) (1,665,850) (1,545,668) (5,006,886)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
<S> <C> <C> <C> <C>
Vacation and Residential Home
Leisure Resort Development All Other Total
-------------- ----------- --------- -----
Revenues 324,654 - - 324,654
Segment profit/(loss) (1,753,651) 2,646,882 (689,762) 203,469
</TABLE>
F-8
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(6) Segment Information (continued)
<TABLE>
<CAPTION>
PROFIT OR LOSS RECONCILIATION DECEMBER 31, 1997 JUNE 30, 1998
<S> <C> <C>
Total profit or loss for reportable segments (5,006,886) 203,469
Adjustment for expenses not included in
segment loss:
Officers salaries (806,000) (403,000)
Amortization of goodwill (20,000) (10,000)
--------- -------
Total pro forma loss after adjustments (5,832,886) (209,531)
--------- -------
--------- -------
</TABLE>
F-9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Family Holdings, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of American Family Holdings, Inc.
as of June 30, 1998. The balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on the balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, based on our audit, the balance sheet referred to above presents
fairly, in all material respects, the financial position of American Family
Holdings, Inc. of as of June 30, 1998 in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
July 17, 1998
F-10
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
BALANCE SHEET
June 30, 1998
<TABLE>
<S> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,901
Deferred acquisition costs . . . . . . . . . . . . . . . . . 1,955,243
---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . 1,959,144
---------
---------
LIABILITIES
Due to affiliate . . . . . . . . . . . . . . . . . . . . . . 1,955,243
STOCKHOLDERS' EQUITY (Note 2):
Preferred Stock, shares authorized - 2,000,000;
issued and outstanding 0 . . . . . . . . . . . . . . . . . -
Common Stock, $0.001 par value; shares authorized -
10,000,000; shares issued and outstanding - 390,103. . . . 391
Additional paid in capital . . . . . . . . . . . . . . . . 3,510
---------
Total stockholders' equity . . . . . . . . . . . . . . . 3,901
---------
Total liabilities and stockholders' equity . . . . . . . . . 1,959,144
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO BALANCE SHEET
NOTE 1. ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
American Family Holdings, Inc. (the Company) was organized and incorporated
in Delaware to become a publicly held corporation which would acquire the
assets, certain liabilities and business activities owned by investors in the
investment programs listed below in exchange for ownership in the Company. The
Company will also attempt to sell a maximum of 1,000,000 units consisting of one
share of it's common stock plus one warrant at a price of $20 per Unit. Each
warrant entitled the holder to purchase three additional shares of common stock
at 80% of the closing price of the stock on the day prior to exercise of the
warrant. The warrant has a term of two years following the completion of the
Offering. Listed below are the investment programs to be acquired and the
number of units of the Company issued to the investors in these programs:
<TABLE>
<CAPTION>
Number of
Investment Program Units
- ------------------ -----
<S> <C>
Oceanside 268,653
Yosemite/Ahwahnee I and II 340,006
Mori Point 270,652
Sacramento/Delta Greens 78,524
Cypress Lakes 291,246
Palmdale/Joshua Ranch 131,094
Esperanza 10,818
Stacey Rose A and 12,328
---------
1,403,321
</TABLE>
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs represent costs incurred by the Company in
conjunction with the acquisition of the net assets of investment programs and
the registration of the units to be issued in the Acquisition. If the
transaction is not successfully completed, these costs will be expensed.
Upon a successful completion of the transaction, the direct costs associated
with the acquisition of the programs, which are approximately $100,000, has
been: capitalized and will be allocated in conjunction with the acquisition
allocations. The remaining balance of $1,855,243, which represents the costs
associated with the registration of the securities to be issued in the
Acquisition, will be recorded as an adjustment to additional paid in capital.
NOTE 2. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, contingent upon the
successful completion of the Acquisition, with two members of senior
management for a term of five years and one member of senior management for a
term of three years, each subject to automatic one year extensions unless
terminated. The agreements provide for annual compensation of $180,000,
$180,000 and $200,000 and contain provisions for bonus consideration based on
performance standards. The agreements also provide for the issuance of 10,000
nonqualified stock options to each member upon completion of the Acquisition
and 10,000 additional nonqualified stock options to be issued to each of
these members on the first and second anniversaries of the Acquisition.
These options have ten year terms. The original tranche of options are
exercisable at $20 per share, while the remaining two tranches are
exercisable at the market price of the Company's stock at the date of grant.
In addition, except to the extent required to carry on pre-existing duties to
investors in other programs managed by National or other pre-existing real
estate investments, each agreement includes provisions restricting the
officers from competing with the Company during the term of such employment;
providing for certain salary and benefit continuance for six months if the
officer is permanently disabled; and, providing for a severance payment in
the amount of 2.99 times the officer's average salary and bonus over the past
five years (or such shorter time as the officer was employed), payable in 36
equal monthly installments, in the event of a change of control of the
Company within two years of the change of control event.
F-12
<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-13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Oceanside "Trudy Pat"
Program ("Oceanside Program") (as defined in Note 1) as of December 31, 1997,
and the related statements of operations, changes in owners' equity and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the
Oceanside Program as of December 31, 1997, and the results of operations and
cash flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-14
<PAGE>
THE OCEANSIDE PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $145,072 $17,037
Restricted cash 1,421,670 221,726
Note receivable (Note 7) 50,000 50,000
Real estate and improvements - 3,525,539
Real estate property held for sale 3,322,329 -
Property and equipment, net (Note 3) 14,093 36,436
Other assets 46,597 32,712
Due from affiliate (Note 1) 443,647 452,022
----------- -----------
Total assets $5,443,408 $4,335,472
----------- -----------
----------- -----------
LIABILITIES:
Accounts payable $274,664 292,478
Due to affiliate (Note 4) 800,000 20,000
Accrued expenses and other liabilities 197,030 204,398
----------- -----------
Total liabilities 1,271,694 516,876
COMMITMENTS AND CONTINGENCIES (Note 4)
OWNERS' EQUITY:
Owners' Equity 4,171,714 3,818,596
----------- -----------
Total liabilities and owners' equity $5,443,408 $4,335,472
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
Year Ended December 31, June 30,
-------------------------- --------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
REVENUES FROM HOME SALES $4,290,850 $5,490,180 $ - $3,240,050
COST OF HOME SALES 3,828,982 4,975,160 - 2,872,014
--------- --------- --------- ---------
GROSS PROFIT 461,868 515,020 - 368,036
EXPENSES:
Selling, general and administrative 1,014,712 842,987 205,047 551,563
Real estate inventory writedown (Note 7) 1,069,651 - - 360,172
Related party management fees (Note 4) 300,000 300,000 150,000 150,000
--------- --------- --------- ---------
Total expenses 2,384,363 1,142,987 355,047 1,061,735
Interest income 64,645 79,292 10,093 33,788
Gain on sale of real estate (Note 8) - - 2,991,836 -
--------- --------- --------- ---------
Net income (loss) $(1,857,850) $(548,675) $2,646,882 $(659,911)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Balance January 1, 1996 $8,179,489
Capital distributions (900,000)
Net loss for the year (548,675)
---------
Balance December 31, 1996 6,730,814
Capital distributions (701,250)
Net loss for the year (1,857,850)
---------
Balance December 31, 1997 4,171,714
Capital distributions (3,000,000)
Net profit for the Period (unaudited) 2,646,882
Balance June 30, 1998 (unaudited) $3,818,596
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------
Year Ended December 31, June 30,
----------------------------- --------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
-----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,857,850) $ (548,675) $ 2,646,882 $ (659,911)
Adjustments net loss to cash
provided by (used in) operating
activities:
Depreciation and amortization 12,584 3,352 4,432 4,255
Gain on sale of Real Estate - - (2,991,836) -
Real estate inventory writedown 1,069,651 - - -
Increase (decrease) from changes in:
Restricted cash 358,471 326,089 1,199,944 250,360
Note receivable (50,000) - -
Real estate inventory 1,161,508 1,155,537 - 1,231,159
Other assets (21,631) (24,120) 13,885 (35,948)
Due from affiliate (443,647) - (8,375) -
Accounts payable (311,104) 286,196 17,814 (108,989)
Accrued expenses and
other liabilities 379,306 (196,141) (772,632) 103,301
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities 297,288 1,002,238 (110,114) 784,227
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (4,854) (17,600) - (4,854)
Additions to real estate property held
for sale (102,409) (96,462) (17,921) -
Cash received on sale of real estate - - 3,000,000 -
--------- --------- --------- ---------
Net cash provided by (used in)
investing activities (107,263) (114,062) 2,982,079 (4,854)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds 1,821,560 3,600,000 - 1,821,560
Line of credit repayments (1,825,470) (3,596,090) - (1,825,470)
Contributions (distributions) (701,250) (900,000) (3,000,000) (450,000)
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities (705,160) (896,090) (3,000,000) (453,910)
--------- --------- --------- ---------
Net increase (decrease) in
cash and cash equivalents (515,135) (7,914) (128,035) 325,463
Cash and cash equivalents
at beginning of period 660,207 668,121 145,072 660,207
--------- --------- --------- ---------
Cash and cash equivalents
at end of period $ 145,072 $ 660,207 $ 17,037 $ 985,670
--------- --------- --------- ---------
--------- --------- --------- ---------
Cash paid during the
period for interest $ 4,272 $ 9,526 - $ 4,272
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Interest capitalized for the year ended December 31, 1996 and 1997 were $14,939
and $4,536.
See accompanying notes to financial statements.
F-18
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1993 National Investors Financial, Inc. ("National"), represented by
NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Oceanside Program (the "Program") to entities affiliated
with the Ved Corporation, the original borrowers, in the amount of $30,000,000
by selling undivided tenant-in-common interests in such loan to 1,755 investors.
In November of 1993, the borrower granted the property ("Oceanside Development")
securing the loan to Oceanside Development, Inc., a California corporation (the
"Company"), formed by National on behalf of the investors in the Oceanside
Program. The first lien was kept intact after the date of grant to protect the
investors' interests in the underlying property during its development. As the
investors' interests are to be converted to common stock in conjunction with a
proposed acquisition of the Program, the underlying protection of the lien is no
longer needed and will be extinguished as part of the acquisition. Oceanside
Development is a single family detached home development consisting of two
tracts, Encore and Symphony. The property is located in Oceanside, California
and is currently held by Oceanside Development, Inc. on behalf of the Oceanside
Investors. The Oceanside property was appraised at $6,484,000 as of the date of
grant from the original borrower. Therefore, the property has been written down
to its fair market value at the time of grant and the investors' interests in
the property is reflected as Owners' Equity in the financial statements.
The accompanying financial statements include the accounts of the Program, which
consist of Oceanside Development, Inc. and Oceanside Development, LLC, and do
not include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), was
formed to be a publicly-held corporation to acquire the businesses of certain
investment programs previously syndicated by National in exchange for equity in
American. In addition, American Family Holdings, Inc. will offer a maximum of
1,000,000 units, which consists of one share of common stock and one warrant at
a price of $20 per unit. Each warrant entitled the holder to purchase three
additional shares of common stock at 80% of the closing price of the stock on
the day prior to exercise of the warrant. The warrant has a term of two years
following the completion of the Offering.
In conjunction with the contemplated transactions, the Program is currently
capitalizing the associated costs and recording these costs as due from the
American. These costs are currently shown as deferred acquisition costs on the
books of American. These costs will, however, be allocated against a ratio of
the proceeds received from the units offering and the value of the shares given
to the program investors in exchange for their undivided tenant-in-common
interests after the completion of both transactions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS AND RESTRICTED CASH
The Oceanside Program management considers all highly liquid investments with
an original maturity of three months or less when purchased to be cash
equivalents. The Program has restricted bonded cash accounts which may only be
used for capital expenditures on the residential properties. The restricted
cash balance at December 31, 1997 and June 30, 1998 were $1,421,670 and
$221,726.
F-19
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE INVENTORIES AND REAL ESTATE PROPERTY HELD FOR SALE
Costs incurred which are included in real estate inventories and property
held for sale consist of land, land development costs, direct and indirect costs
of construction, other overhead costs, interest and property taxes. Interest
and property taxes are capitalized to real estate inventories when development
activities begin, and capitalization ends when the qualifying assets are ready
for their intended use. As of December 31, 1997, the Oceanside Development had
111 lots classified as property held for sale.
Effective January 1, 1996, the Program adopted the provisions of Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which requires impairment losses to be recorded on long-lived assets being
developed, based on fair value, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Examples of indicators of impairment include
a significant decrease in the market value of an asset, a significant change in
the extent or manner in which an asset is used or a significant adverse change
in legal or business factors that could affect the value of an asset. Assets
held for sale are to be carried at the lower of cost or fair value less the
costs to sell.
The estimation process in determining the fair value of real estate assets is
inherently uncertain and relies to a considerable extent on current and future
economic and market conditions, the availability of suitable financing to fund
holding, development, and construction activities, and the repayment or
refinancing of existing indebtedness. Such economic and market conditions may
effect management's development and marketing plans. Accordingly, the ultimate
realizations to differ from amounts presently estimated.
SALE AND PROFIT RECOGNITION
Revenues from home sales are recognized when closings have occurred. At the
time of revenue recognition, costs of home sales are charged with direct costs
of construction and an allocation of a project's total estimated costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
being provided principally on the straight line method over the estimated useful
lives or the related assets. Estimated useful lives range from 3-5 years.
INCOME TAXES
The financial statements include the activity of the Program, which income or
losses are included in the investors' respective tax returns.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however, in the opinion of management of the Program, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation o the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
F-20
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles required management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Based upon certain market assumptions and information available to
management, the carrying values of financial instruments as of December 31, 1997
and June 30, 1998 approximate their fair values. The carrying value of cash and
cash equivalents, accounts payable and accrued expenses are assumed to
approximate fair value as they are short term in nature and receivable or
payable on demand. The fair value of the line of credit was estimated based on
similar interest rates available for comparable financial instruments.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31 June 30,
1997 1998
----------- ----------
<S> <C> <C>
Office and computer equipment $ 5,787 $16,776
Furniture and fixtures 25,145 40,931
------ ------
30,932 57,707
Less accumulated depreciation (16,839) (21,271)
------ ------
$14,093 $36,436
------ ------
------ ------
</TABLE>
NOTE 4. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages seven other programs under similar
servicing agreements. As documented within the servicing agreement, National is
to receive an annual fee equal to 1% of the original loan balance. National's
requirements under the servicing agreement include managing the assets of the
Program to assure that the purpose and the activities of the Program are
continued for the investors. The Program incurred asset management expenses of
$300,000, $300,000, $150,000 and $150,000 for the years ended December 31, 1996
and 1997 and for the six months ended June 30, 1997 and 1998. Additionally, the
Program accrued compensation expense of $192,000, $192,000, $96,000 and $96,000
for the years ended December 31, 1996 and 1997 and for the six months ended June
30, 1997 and 1998 payable to senior management of the Program, who are also the
principals of National. Total accrued and unpaid management fees and
compensation as of December 31, 1997 and June 30, 1998 were $800,000 and $-0-.
F-21
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4. COMMITMENTS (CONTINUED)
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant effect
on the financial position of the Program.
NOTE 5. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in the
Program to make additional capital contributions. Such contributions are only
recorded to the extent of cash received.
NOTE 6. CONCENTRATION OF CREDIT RISK
The Program's financial instruments that are exposed to concentrations of
credit risk consist of cash and cash equivalents and restricted cash accounts
placed with federally insured financial institutions. Such accounts may at
times exceed federally insured limits. The Program has not experienced any
losses on such accounts.
NOTE 7. REAL ESTATE INVENTORY WRITEDOWN
In October 1997, the Program sold the remaining lots on the Encore project
for $650,000, which included a note receivable of $50,000. This note bears
interest at 10% per annum and is due the earlier of (i) the close of escrow of
the last Encore lot sold by the purchaser or (ii) one year. All capitalized
construction costs incurred on the related lots in excess of the consideration
received have been written off in the current year.
NOTE 8. RELATED PARTY TRANSACTIONS
In June 1998, the Program sold its 111 lots held for sale to the
Yosemite/Ahwahnee Program ("Yosemite"), which immediately sold the same land
to an outside third party for approximately $6,550,000 in net cash proceeds
and a gain of $2,991,836. In exchange for the sale of the Program's land to
Yosemite, the Program received $3,000,000 in cash, and land and a golf
course, valued at $3,550,000, from Yosemite. The valuation of the land and
golf course received from Yosemite was derived by subtracting the value of
the land sold by the Program, which was $6,550,000 based upon the sale of
this land to an outside third party, from the $3,000,000 of cash received
from Yosemite. The Program also entered into a lease agreement with Yosemite
for a five year lease of the golf course back to Yosemite. Annual lease
revenue to be received as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
Years Ending December 31 Amount
------------------------ ------
<S> <C>
1998 $ 80,000
1999 220,000
2000 390,000
2001 630,000
2002 760,000
Thereafter 380,000
---------
$2,460,000
---------
---------
</TABLE>
NOTE 9. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
As part of the purchase and sale transaction disclosed in Note 8, land
valued at approximately $3,550,000 was exchanged between the Program and the
Yosemite/Ahwahnee Program.
F-22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Yosemite/Ahwahnee I and II
"Trudy Pat" Programs (the "Yosemite/Ahwahnee Programs") (as defined in Note 1)
as of December 31, 1997, and the related consolidated statements of operations,
changes in owners' equity and cash flows for each of the two years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the
Yosemite/Ahwahnee Programs as of December 31, 1997, and the results of
operations and cash flows for each of the two years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-23
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS:
Real estate and improvements (Note 3) $10,137,074 $5,423,254
Cash and cash equivalents - 2,751,587
Notes receivable (Note 4) 353,028 245,629
Property and equipment, net (Note 5) 371,058 303,904
Deferred membership selling expense (Note 11) 538,993 581,781
Other assets 61,935 76,103
Due from affiliate (Note 1) 242,639 769,618
---------- ----------
Total assets $11,704,727 $10,151,876
---------- ----------
---------- ----------
LIABILITIES:
Capital lease obligations (Note 6) 340,563 313,083
Accounts payable 303,400 166,693
Due to affiliate (Note 7) 841,763 873,282
Accrued property taxes (Note 7) 683,558 499,606
Accrued expenses and other liabilities 144,149 176,136
Deferred revenues (Note 11) 1,181,577 1,385,710
---------- ----------
Total liabilities 3,495,010 3,414,510
COMMITMENTS AND CONTINGENCIES (NOTE 7)
OWNERS' EQUITY:
Owners' Equity 8,209,717 6,737,366
---------- ----------
Total liabilities and
owners' equity $11,704,727 $10,151,876
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
Year Ended December 31, June 30,
-------------------------- --------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
---------
<S> <C> <C> <C> <C>
REVENUES
Golf course operations $ 765,167 $ 571,778 $ 252,953 $ 416,898
Sale of RV memberships 136,995 51,380 71,701 29,381
Sale of developed lots - 99,961 - -
---------- ---------- ---------- ----------
Total revenues 902,162 723,119 324,654 446,279
COST OF SALES
Golf course operations 252,548 165,836 121,187 90,827
Developed lots - 83,190 - -
---------- ---------- ---------- ----------
Total cost of sales 252,548 249,026 121,187 90,827
GROSS PROFIT 649,614 474,093 203,467 355,452
EXPENSES:
Selling, general and administrative 2,470,201 2,333,735 1,110,194 1,379,617
Related party management fees (Note 7) 200,000 200,000 100,000 100,000
---------- ---------- ---------- ----------
Total expenses 2,670,201 2,533,735 1,210,194 1,479,617
Interest expense 38,781 18,962 11,890 5,230
Loss on sale of real estate (Notes 12 and 13) - - 735,034 -
---------- ---------- ---------- ----------
Net loss $(2,059,368) $(2,078,604) $(1,753,651) $(1,129,395)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
Balance January 1, 1996 $10,295,663
Capital contributions 1,141,111
Net loss for the year (2,078,604)
----------
Balance December 31, 1996 9,358,170
Capital contributions 910,915
Net loss for the period (2,059,368)
----------
Balance December 31, 1997 8,209,717
Capital contributions (unaudited) 281,300
Net loss for the period (unaudited) (1,753,651)
----------
Balance June 30, 1998 (unaudited) $6,737,366
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
Year Ended December 31, June 30,
-------------------------- --------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,059,368) $(2,078,604) $(1,753,651) $(1,129,395)
Adjustments net loss to cash
provided by (used in) operating activities:
Cost of developed lots sold - 83,190 - -
Loss on sale of real estate - - 735,034 -
Depreciation and amortization 381,299 336,229 175,902 184,155
Increase (decrease) from changes in:
Other assets (114,023) (264,478) 93,231 (196,083)
Due from affiliate (242,639) - (526,979) -
Accounts payable 92,661 172,210 (135,521) 117,633
Accrued expenses and
other liabilities 622,226 304,920 (120,446) 318,272
Net deferral of sales revenues and
selling expenses 443,673 198,910 161,345 242,888
---------- ---------- --------- ---------
Net cash provided by (used in)
operating activities (876,171) (1,247,623) (1,371,085) (462,530)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment - (48,899) - -
Net Cash proceeds from the purchase and sale of
assets (Notes 12 and 13) - - 3,868,852 -
Additions to real estate (56,001) (23,250) (35,577)
---------- ---------- --------- ---------
Net cash provided by (used in)
investing activities (56,001) (72,149) 3,868,852 (35,577)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease repayments (80,294) (67,088) (27,480) (104,345)
Contributions 910,915 1,141,111 281,300 674,898
---------- ---------- --------- ---------
Net cash provided by (used in)
financing activities 830,621 1,074,023 253,820 570,553
---------- ---------- --------- ---------
Net increase (decrease) in
cash and cash equivalents (101,551) (245,749) 2,751,587 72,446
Cash and cash equivalents
at beginning of period 101,551 347,300 - 101,551
---------- ---------- --------- ---------
Cash and cash equivalents
at end of period $ - $ 101,551 $ 2,751,587 $ 173,997
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Cash paid during the
period for interest $ 40,628 $ 27,557 $31,885 $21,354
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1989 and 1992 National Investors Financial, Inc. ("National"),
represented by NASD registered securities broker-dealers, completed the funding
of two real estate loans for the Yosemite/Ahwahnee Programs (the "Programs") by
selling undivided tenant-in-common interests in such loans to investors. The
Yosemite/Ahwahnee I loan was in the amount of $6,500,000 to 426 investors and
Yosemite/Ahwahnee II was in the amount of $13,500,000 to 837 investors. In
September of 1995, on behalf of the Yosemite/Ahwahnee investors, National
foreclosed on the borrower and took title to the property ("Ahwahnee Golf Course
and Resort") involved. The first liens were kept intact after the foreclosure
to protect the investors' interests in the underlying property during its
development. As the investors' interests are to be converted to common stock in
conjunction with a proposed acquisition of the Programs, the underlying
protection of the liens are no longer needed and will be extinguished as part of
the acquisition. Ahwahnee Golf Course and Resort is projected to be a
multi-faceted resort, which currently includes a country club and a partially
completed recreational vehicle park, with plans to develop the remainder of the
project, potentially as a timeshare facility. The 1,650 acre property is
located in Madera County, California, approximately 15 miles south of Yosemite
National Park and is currently held in trust by National on behalf of the
Yosemite/Ahwahnee Investors. The Company obtained an appraisal as of the date of
foreclosure, which assumes that the property is developed at its highest and
best use, and the result of the appraisal, after certain accounting-related
adjustments made by the Company, was a fair market value of $10,800,000.
Therefore, the property has been written down to its fair market value at the
time of the foreclosure and the investors' interest in the property is reflected
as Owners' Equity in the financial statements. Since taking over these
properties, National has operated them on behalf of the investors through a
corporation known as Ahwahnee Golf Course and Resort, Inc.
The accompanying financial statements include the accounts of the Programs,
which consist of Ahwahnee Golf Course and Resort, Inc., National Investors Land
Holding Trust VII and National Investors Land Holding Trust IX, and do not
include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), was
formed to be a publicly-held corporation to acquire the businesses of certain
investment programs previously syndicated by National in exchange for equity in
American. In addition, American will offer a maximum of 1,000,000 units, which
consist of one share of common stock and one warrant at a price of $20 per unit.
Each warrant entitled the holder to purchase three additional shares of common
stock at 80% of the closing price of the stock on the day prior to exercise of
the warrant. The warrant has a term of two years following the completion of the
Offering.
In conjunction with the contemplated transactions, the Program is currently
capitalizing the associated costs and recording these costs as due from the
American. These costs are currently shown as deferred acquisition costs on the
books of American. These costs will, however, be allocated against a ratio of
the proceeds received from the units offering and the value of the shares given
to the program investors in exchange for their undivided tenant-in-common
interests after the completion of both transactions.
F-28
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Programs' management considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents.
REAL ESTATE AND IMPROVEMENTS
Real estate and improvements are carried at cost. Expenditures for
additions and improvements are capitalized, and expenditures for repairs and
maintenance are charged to expense as incurred. Depreciation is provided on a
straight-line basis on land improvements and buildings and improvements over
estimated useful lives ranging from 5-30 years.
Effective January 1, 1996, the Programs adopted the provisions of Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which requires impairment losses to be recorded on long-lived assets being
developed, based on fair value, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Examples of indicators of impairment include
a significant decrease in the market value of an asset, a significant change in
the extent or manner in which an asset is used or a significant adverse change
in legal or business factors that could affect the value of an asset.
The estimation process in determining the fair value of real estate assets is
inherently uncertain and relies to a considerable extent on current and future
economic and market conditions, the availability of suitable financing to fund
holding, development, and construction activities, and the repayment or
refinancing of existing indebtedness. Such economic and market conditions may
effect management's development and marketing plans. Accordingly, the ultimate
realizations may differ from amounts presently estimated.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are being provided principally on the straight line method over the estimated
useful lives or the related assets. Estimated useful lives range from 3-5
years.
REVENUE RECOGNITION
The Programs generate revenues from its golf course operations and sales of
recreational vehicle memberships. Revenues from the sale of recreational
vehicle memberships are not recognized until the Programs have received at least
10% of the total purchase price and the statutory 3 day rescission period has
elapsed. Until a contract to purchase a recreational vehicle membership
qualifies as a sale, all payments received are accounted for as customer
deposits. The Program sells these recreational vehicle memberships to members
on a timeshare plan. The length of this plan ranges from the length of the
remaining lifetime of the primary member to the lifetimes of the primary member,
the primary member's child and the primary member's grandchild. The membership
rights include the use of the recreational vehicle park and facilities. The
only restriction to the membership is that members may only use the recreational
vehicle park for a maximum of seven days at a time with a minimum of seven days
between visits. These revenues are recognized into income on a straight-line
basis over the expected life of the memberships sold, which approximates 10
years. In addition, costs directly related to the sale of such memberships are
deferred and recognized as selling expenses over this same amortization period.
F-29
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED SELLING EXPENSES
The Company expenses most forms of advertising, except for costs associated
with commissions and direct mail costs, which is capitalized and amortized over
its expected period of failure benefits.
Commissions include commissions paid to salespeople, which are directly
associated with the successful sale of individual memberships. The commissions
paid to salespeople are amortized over the same period that the membership
revenue is recognized. Direct mail advertising consists primarily of the
campaigns held to promote the sale of the recreational vehicle lots. The
Company is able to determine which membership sales occur because of the direct
mailings. As a result, the total mailing costs are allocated to these
membership sakes and amortized over the same period
INCOME TAXES
The financial statements include the activity of the Programs, whose income
or losses are included in the investors' respective tax returns.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1998 are
unaudited; however, in the opinion of management of the Program, the interim
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation o the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Based upon certain market assumptions and information available to
management, the carrying values of financial instruments as of December 31, 1997
and June 30, 1998 approximate their fair values. The carrying value of cash and
cash equivalents, accounts payable and accrued expenses are assumed to
approximate fair value as they are short term in nature and receivable or
payable on demand. The fair values of notes receivable and capital lease
obligations were estimated based on similar interest rates available for
comparable financial instruments.
NOTE 3. REAL ESTATE AND IMPROVEMENTS
Real estate and improvements consist of the following:
<TABLE>
<CAPTION>
December 31, JUNE 30,
1997 1998
----------- ----------
<S> <C> <C>
Land $ 8,114,645 $5,205,536
Land improvements 1,890,656 223,800
Buildings and improvements 820,783 152,681
----------- ----------
10,826,084 5,582,017
Less accumulated depreciation (689,010) (158,763)
----------- ----------
$10,137,074 $5,423,254
----------- ----------
----------- ----------
</TABLE>
F-30
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4. NOTES RECEIVABLE
The Programs make unsecured loans to individuals in conjunction with its
sales of recreational vehicle memberships. These loans bear interest at rates
between 0% and 17%, range in length from one to seven years and may be prepaid
at any time without penalty. Notes receivable are shown net of discounts of
$24,950 and $25,150 as of December 31, 1997 and June 30, 1998. As of December
31, 1997 and June 30, 1998, a total of $324,502 and $284,704 of the notes
receivable balance is expected to be collected after one year. The total
allowance for doubtful accounts as of December 31, 1997 and June 30, 1998 is
$41,073 and $4,080.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, JUNE 30,
1997 1998
----------- ----------
<S> <C> <C>
Capital lease equipment $505,998 $515,317
Furnitures and fixtures 25,349 2,987
Machinery and equipment 37,033 -
----------- ----------
568,380 518,304
Less accumulated depreciation (197,322) (214,400)
----------- ----------
$371,058 $303,904
----------- ----------
----------- ----------
</TABLE>
NOTE 6. CAPITAL LEASE OBLIGATIONS
Future minimum rental payments under noncancellable capital leases as of
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
1998 120,923
1999 113,893
2000 113,893
2001 59,184
-------
Total minimum lease payments 407,893
Amount representing interest 67,330
-------
Present value of minimum lease payments 340,563
-------
-------
</TABLE>
F-31
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Programs are currently managed, subject to a servicing agreement, by
National. National also currently manages five other programs under similar
servicing agreements. As documented within the servicing agreement, National is
to receive an annual fee equal to 1% of the original loan balance. National's
requirements under the servicing agreement include managing the assets of the
Programs to assure that the purpose and activities of the Programs are continued
for the investors. The Programs incurred asset management expenses of $200,000,
$200,000, $100,000 and $100,000 for the years ended December 31, 1996 and 1997
and for the six months ended June 30, 1997 and 1998. Additionally, the Programs
accrued compensation expense of $264,000, $264,000, $114,000 and $114,000 for
the years ended December 31, 1996 and 1997 and for the six months ended June 30,
1997 and 1998 payable to senior management of the Company, who are also
principals of National. Total accrued and unpaid management fees and
compensation as of December 31, 1997 and June 30, 1998 were $841,763 and
$873,282.
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant effect
on the financial position of the Program.
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $683,558 and $499,606 as of
December 31, 1997 and June 30, 1998. The Program is in the process of
negotiating a payment plan with appropriate taxing authorities relative to the
payment of these past due taxes.
NOTE 8. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in the
Program to make additional capital contributions. Such contributions are only
recorded to the extent of cash received.
NOTE 9. DEBT FORECLOSURE
In September 1995, the management company, for the benefit of investors in
debt securities secured by the Property, foreclosed on the Property. Due to the
debtor's financial position as of December 31, 1994, the foreclosure has been
accounted for as if it took place prior to January 1, 1995.
NOTE 10. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the years ended December 31, 1996 and 1997, the Company entered into
capital lease obligations of $298,572 and $0.
As part of the purchase and sale transaction disclosed in Note 13, land
valued at approximately $3,550,000 was exchanged between the Program and the
Oceanside Program.
F-32
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 11. DEFERRED REVENUE AND MEMBERSHIP SELLING EXPENSES
Deferred revenue consists of amounts deferred in conjunction with the sales
of campground memberships. Components of the changes in deferred membership
selling expenses and deferred membership sales revenue are as follows:
<TABLE>
<CAPTION>
December 31, JUNE 30,
1997 1996 1998 1997
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Deferred Selling Expenses:
Deferred selling expenses, beginning of year $ 263,508 $ 0 $ 538,993 $263,508
Expenses deferred 338,627 292,787 76,219 163,313
Expenses recognized (63,142) (29,279) (33,431) (30,592)
Deferred expenses written off - - - -
---------- -------- ---------- --------
Net change 275,485 263,508 42,788 132,721
---------- -------- ---------- --------
Deferred selling expenses, end of year $ 538,993 $263,508 $ 581,781 $396,229
---------- -------- ---------- --------
---------- -------- ---------- --------
Deferred Revenue:
Deferred revenue, beginning of year $ 462,419 $ 0 1,181,577 462,419
Revenue deferred 856,153 513,799 275,834 428,076
Revenue recognized (136,995) (51,380) (71,701) (29,381)
---------- -------- ---------- --------
Net change 719,158 462,419 204,133 398,695
---------- -------- ---------- --------
Deferred Revenue, end of year $1,181,577 $462,419 $1,385,710 $861,114
---------- -------- ---------- --------
---------- -------- ---------- --------
</TABLE>
Note 12. SALE OF LAND
On February 19, 1998, the Program entered into a sale transaction with a
consultant on the project for the sale of 13 single-family development estate
lots. The total sale price for these lots was $307,500 which realized a
$477,757 loss on the sale. Included in the sale agreement was a repurchase
provision which gives the Program the option to repurchase 12 of these lots from
the buyer for $300,000. In order to maintain this option, the Program must make
monthly option payments of $4,165 per month until the options are exercised.
The repurchase option expires in January 2001.
NOTE 13. RELATED PARTY TRANSACTIONS
In June 1998, the Program purchased land held for sale from the Oceanside
Program ("Oceanside"), and immediately sold the same land to an outside third
party for approximately $6,550,000 in net cash proceeds. In exchange for the
purchase of the Program's land from Oceanside, the Program gave to Oceanside
$3,000,000 in cash, and land and a golf course, valued at $3,550,000. The
valuation of the land and golf course was derived by subtracting the value of
the land sold to an outside third party of $6,550,000 from the $3,000,000 of
cash given to Oceanside. This transaction resulted in a loss on the sale of
the land and golf course of approximately $478,000. The Program then entered
into a five year lease agreement for the operation of the golf course.
Future minimum lease payments under the operating lease as of June 30, 1998
were as follows:
<TABLE>
<CAPTION>
Years Ending December 31 Amount
------------------------ ------
<S> <C>
1998 $ 80,000
1999 220,000
2000 390,000
2001 630,000
2002 760,000
Thereafter 380,000
$2,460,000
</TABLE>
F-33
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Mori Point "Trudy Pat"
Program (the "Mori Point Program") (as defined in Note 1) as of December 31,
1997, and the related statements of operations, changes in owners' equity and
cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the Mori
Point Program as of December 31, 1997, and the results of operations and cash
flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-34
<PAGE>
THE MORI POINT PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Land $4,100,000 $4,100,000
Cash and cash equivalents 7,204 5,176
Due from affiliate (Note 1) 232,707 255,964
---------- ----------
Total assets $4,339,911 $4,361,140
---------- ----------
LIABILITIES:
Due to affiliate (Note 3) $ 497,885 $ 537,885
Notes to affiliate (Note 3) - 43,655
Accrued property taxes (Note 3) 264,464 164,497
Accrued expenses 86,615 102,067
---------- ----------
Total liabilities $ 848,964 $ 848,104
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 3,490,947 3,513,036
---------- ----------
Total liabilities and
owners' equity $4,339,911 $4,361,140
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
------------------------
Year Ended December 31, June 30,
------------------------ ------------------------
1997 1996 1998 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 181,034 $ 90,348 $ 73,072 $ 73,340
Related party management fees (Note 3) 100,000 100,000 50,000 50,000
--------- --------- --------- ---------
Total expenses 281,034 190,348 123,072 123,340
Interest income/(expense) 1,586 1,223 (776) 488
--------- --------- --------- ---------
Net loss $(279,448) $(189,125) $(123,848) $(122,852)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
Total
----------
<S> <C>
Balance January 1, 1996 3,352,238
Capital contributions 202,310
Net loss for the year (189,125)
----------
Balance December 31, 1996 3,365,423
Capital contributions 404,972
Net loss for the period (279,448)
----------
Balance December 31, 1997 $3,490,947
Capital contributions (unaudited) 145,937
Net loss for the period (unaudited) (123,848)
----------
Balance June 30, 1998 (unaudited) $3,513,036
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
------------------------
Year Ended December 31, June 30,
------------------------ ------------------------
1997 1996 1998 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(279,448) $(189,125) $(123,848) $(122,852)
Increase (decrease) from changes in:
Due from affiliate (232,707) - (23,257) (6,522)
Accrued expenses 75,355 25,847 (44,515) (47,606)
--------- --------- --------- ---------
Net cash used in operating
activities (436,800) (163,278) (191,620) (176,980)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 404,972 202,310 145,937 196,376
Proceeds from notes to affiliate - - 43,655 -
--------- --------- --------- ---------
Net cash provided by
financing activities 404,972 202,310 189,592 196,376
Net increase (decrease) in cash and cash
equivalents (31,828) 39,032 (2,028) 19,396
Cash and cash equivalents at beginning
of period 39,032 - 7,204 39,032
--------- --------- --------- ---------
Cash and cash equivalents
at end of period $ 7,204 $ 39,032 $ 5,176 $ 58,428
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1990 National Investors Financial, Inc. ("National"), represented by
NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Mori Point "Trudy Pat" Program (the "Program") in the amount
of $10,000,000 by selling undivided tenant-in-common interests in such loan to
486 investors. In August of 1992, on behalf of the Mori Point Program
investors, National foreclosed on and took title to the property ("Mori Point")
involved in the Mori Point Program. Mori Point is currently raw land which is
zoned for a 275 room hotel/conference center, 60 residential units and an
equestrian/commercial facility. The property is located in Pacifica, California
and is currently held in trust by National on behalf of the Mori Point
Investors. The Mori Point property was recently appraised at $4,100,000 as of
the date of foreclosure. Therefore, the property has been written down to its
fair market value at the time of the foreclosure and the investors' interest in
the property is reflected as Owners' Equity in the financial statements.
The accompanying financial statements include the accounts of the Program, which
consists of the Mori Point Land Holding Trust, and do not include the accounts
of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), was
formed to be a publicly-held corporation to acquire the businesses of certain
investment programs previously syndicated by National in exchange for equity in
American. In addition, American will offer a maximum of 1,000,000 units, which
consist of one share of common stock and one warrant at a price of $20 per unit.
Each warrant entitled the holder to purchase three additional shares of common
stock at 80% of the closing price of the stock on the day prior to exercise of
the warrant. The warrant has a term of two years following the completion of the
Offering.
In conjunction with the contemplated transactions, the Program is currently
capitalizing the associated costs and recording these costs as due from
American. These costs are currently shown as deferred acquisition costs on the
books of American. These costs will, however, be allocated against a ratio of
the proceeds received from the units offering and the value of the shares given
to the program investors in exchange for their undivided tenant-in-common
interests after the completion of both transactions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Management of the Program considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents.
F-39
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LAND
Land is carried at cost. Effective January 1, 1996, the Program adopted
the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS
No. 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires impairment losses to be recorded on
long-lived assets being developed, based on fair value, when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Examples of
indicators of impairment include a significant decrease in the market value of
an asset, a significant change in the extent or manner in which an asset is used
or a significant adverse change in legal or business factors that could affect
the value of an asset.
The estimation process in determining the fair value of real estate assets is
inherently uncertain and relies to a considerable extent on current and future
economic and market conditions, the availability of suitable financing to fund
holding, development, and construction activities, and the repayment or
refinancing of existing indebtedness. Such economic and market conditions may
effect management's development and marketing plans. Accordingly, the ultimate
realizations may differ from amounts presently estimated.
INCOME TAXES
The financial statements include the activity of the Program, whose income
or losses are included in the investors' respective tax returns..
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however, in the opinion of management of the Program, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles required management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages six other programs under similar
servicing agreements. As documented within the servicing agreement, National is
to receive an annual fee equal to 1% of the original loan balance. National's
requirements under the servicing agreement include managing the assets of the
Program to assure that the purpose and activities of the Program are continued
for the investors. The Program incurred asset management expenses of $100,000,
$100,000, $50,000 and $50,000 for the years ended December 31, 1996 and 1997
and for the six months ended June 30, 1997 and 1998. Total accrued and unpaid
management fees as of December 31, 1997 and June 30, 1998 were $497,885 and
$537,885.
F-40
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
NOTES TO AFFILIATE
The Program received advances from National during 1998 amounting to $42,700.
These advances are evidenced by demand notes with interest at the rate of 10%
per annum.
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant effect
on the financial position of the Program.
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $264,464 and $164,497 as of
December 31, 1997 and June 30, 1998. The Program has entered into a five-year
payment plan with appropriate taxing authorities relative to the payment of
these past due taxes.
NOTE 4. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in the
Program to make additional capital contributions. Such contributions are only
recorded to the extent of cash received.
F-41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Sacramento/Delta Greens
"Trudy Pat" Program (the "Sacramento/Delta Greens Program") (as defined in Note
1) as of December 31, 1997, and the related statements of operations, changes in
owners' equity and cash flows for each of the two years in the period ended
December 31, 1997. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the
Sacramento/Delta Greens Program as of December 31, 1997, and the results of
operations and cash flows for each of the two years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
February 24, 1998
F-42
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Land $ 2,000,000 $ 1,745,000
Cash and cash equivalents 4,099 7,886
Due from affiliate (Note 1) 104,528 118,430
----------- -----------
Total assets $ 2,108,627 $ 1,871,316
----------- -----------
----------- -----------
LIABILITIES:
Accounts payable $ 25,641 $ 14,094
Due to affiliate (Note 3) 188,344 181,178
Notes to affiliate (Note 3) - 18,500
Accrued property taxes (Note 3) 58,536 27,308
Accrued expenses 49,750 59,750
----------- -----------
Total liabilities 322,271 300,830
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 1,786,356 1,570,486
----------- -----------
Total liabilities and owners' equity $ 2,108,627 $ 1,871,316
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
Year Ended December 31, June 30,
----------------------------- -----------------------------
1997 1996 1998 1997
----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 115,620 $ 169,649 $ 35,610 $ 69,059
Land write-down (Note 5) 230,000 845,000 255,000 230,000
Related party management fees (Note 3) 50,000 50,000 25,000 25,000
----------- ----------- ----------- -----------
Total expenses 395,620 1,064,649 315,610 324,059
Interest income 824 1,965 65 479
----------- ----------- ----------- -----------
Net income (loss) $ (394,796) $(1,062,684) $ (315,545) $ (323,580)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
Total
-----------
<S> <C>
Balance January 1, 1996 $ 2,820,595
Capital contributions 262,572
Net loss for the year (1,062,684)
-----------
Balance December 31, 1996 2,020,483
Capital contributions 160,669
Net loss for the year (394,796)
-----------
Balance December 31, 1997 $ 1,786,356
Capital contributions (unaudited) 99,675
Net loss for the period (unaudited) (315,545)
-----------
Balance June 30, 1998 (unaudited) $ 1,570,486
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
Year Ended December 31, June 30,
----------------------------- ------------------------------
1997 1996 1998 1997
------------ ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (394,796) $(1,062,684) $ (315,545) $ (323,580)
Adjustment to reconcile net income
(loss) to net cash provided by (used in)
operating activities -
Real estate property write-down 230,000 845,000 255,000 230,000
Increase (decrease) from changes in:
Due from affiliate (104,528) - (13,902) (2,813)
Accounts payable (4,283) 29,924 (11,547) (4,284)
Accrued expenses 54,454 (19,834) (28,394) (15,759)
----------- ----------- ----------- -----------
Net cash used in operating activities (219,153) (207,594) (114,388) (116,436)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 160,669 262,572 99,675 76,125
Proceeds from notes to affiliate - - 18,500 -
----------- ----------- ----------- -----------
Net cash provided by
financing activities 160,669 262,572 118,175 76,125
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (58,484) 54,978 3,787 (40,311)
Cash and cash equivalents at beginning
of period 62,583 7,605 4,099 62,583
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period $ 4,099 $ 62,583 $ 7,886 $ 22,272
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash paid during the period for interest $ - $ - $ - $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1989 National Investors Financial, Inc. ("National"), represented by
NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Sacramento/Delta Greens Program (the "Program") in the
amount of $5,000,000 by selling undivided tenant-in-common interests in such
loan to 332 investors. In March of 1993, on behalf of the Sacramento/Delta
Greens Program investors, National foreclosed on the property and took title to
the property ("Sacramento/Delta Greens") involved in the Sacramento/Delta Greens
Program. Sacramento/Delta Greens is currently raw land which is zoned and has
an approved tentative tract map for a single-family detached housing development
of 534 homes. The property is located in Sacramento, California and is
currently held in Trust by National on behalf of the Sacramento/Delta Greens
investors. The Sacramento/Delta Greens property was recently appraised at
$3,075,000 as of the date of foreclosure. Therefore, the property has been
written down to its fair market value at the time of the foreclosure and the
investors' interest in the property is reflected as Owners' Equity in the
financial statements.
The accompanying financial statements include the accounts of the Program, which
consists of the Sacramento/Delta Greens Land Holding Trust, and do not include
the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), was
formed to be a publicly-held corporation to acquire the businesses of certain
investment programs previously syndicated by National in exchange for equity in
American. In addition, American Family Holdings, Inc. will offer a maximum of
1,000,000 units, which consist of one share of common stock and one warrant at a
price of $20 per unit. Each warrant entitled the holder to purchase three
additional shares of common stock at 80% of the closing price of the stock on
the day prior to exercise of the warrant. The warrant has a term of two years
following the completion of the Offering.
In conjunction with the contemplated transactions, the Program is currently
capitalizing the associated costs and recording these costs as due from
American. These costs are currently shown as deferred acquisition costs on the
books of American. These costs will, however, be allocated against a ratio of
the proceeds received from the units offering and the value of the shares given
to the program investors in exchange for their undivided tenant-in-common
interests after the completion of both transactions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Management of the Program considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents.
F-47
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LAND
Land is carried at cost. Effective January 1, 1996, the Program adopted
the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS No.
121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires impairment losses to be recorded on
long-lived assets being developed, based on fair value, when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Examples of
indicators of impairment include a significant decrease in the market value of
an asset, a significant change in the extent or manner in which an asset is used
or a significant adverse change in legal or business factors that could affect
the value of an asset.
The estimation process in determining the fair value of real estate assets is
inherently uncertain and relies to a considerable extent on current and future
economic and market conditions, the availability of suitable financing to fund
holding, development, and construction activities, and the repayment or
refinancing of existing indebtedness. Such economic and market conditions may
effect management's development and marketing plans. Accordingly, the ultimate
realizations may differ from amounts presently estimated.
INCOME TAXES
The financial statements include the activity of the Program, whose income
or losses are included in the investors' respective tax returns..
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however, in the opinion of management of the Program, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages seven other programs under similar
servicing agreements. As documented within the servicing agreement, National
is to receive an annual fee equal to 1% of the original loan balance.
National's requirements under the servicing agreement include managing the
assets of the Program to assure that the purpose and activities of the
program are continued for the investors. The Program incurred asset
management expenses of $50,000, $50,000, $25,000 and $25,000 for the years
ended December 31, 1996 and 1997 and for the six months ended June 30, 1997
and 1998. Total accrued and unpaid management fees as of December 31, 1997
and June 30, 1998 were $188,344 and $181,178.
F-48
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
NOTES TO AFFILIATE
The program received advances from National during 1998 amounting to
$18,457. These advances are evidenced by demand notes with interest at the
rate of 10% per annum.
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant effect
on the financial position of the Program.
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $58,536 and $27,308 as of
December 31, 1997 and June 30, 1998. The Program has entered into a five-year
payment plan with appropriate taxing authorities relative to the payment of
these past due taxes.
NOTE 4. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in the
Program to make additional capital contributions. Such contributions are only
recorded to the extent of cash received.
NOTE 5. LAND WRITE-DOWN
In 1993, 596 lots were approved and appraised at a value of $5,159 per lot.
Based on an appraisal done in May 1997, the appraised value of the land had
decreased in 1996 by approximately 27% due to a decline in economic conditions
of the Sacramento/Delta Greens surrounding area, which resulted in the writedown
of the cost of the land of $845,000. Due to a decrease in zoning of the lots to
534 in 1997, a $230,000 writedown in the cost of the land was recorded during
the year ended December 31, 1997.
Based on an appraisal done in June 1998, the appraised value of the land
had decreased in 1998 by approximately 13% due to a change in the map of the
property to include a wetlands/habitat area, reducing the number of lots to 465
in 1998. Due to this decrease, an additional $255,000 writedown in the cost of
the land was recorded during the six months ended June 30, 1998.
F-49
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Cypress Lakes "Trudy Pat"
Program (the "Cypress Lakes Program") (as defined in Note 1) as of December 31,
1997, and the related statements of operations, changes in owners' equity and
cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the Cypress
Lakes Program as of December 31, 1997, and the results of operations and cash
flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 22, 1998
F-50
<PAGE>
THE CYPRESS LAKES PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Land $5,200,000 $5,200,000
Cash and cash equivalents 148,068 20,542
Due from affiliate (Note 1) - 175,336
----------- -----------
Total assets $5,348,068 $5,395,878
----------- -----------
----------- -----------
LIABILITIES:
Accrued property taxes (Note 3) 180,193 204,404
Notes to affiliate (Note 3) - 47,046
Accrued expenses - 119,500
----------- -----------
Total liabilities $ 180,193 $ 370,950
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 5,167,875 5,024,928
----------- -----------
Total liabilities and owners' equity $5,348,068 $5,395,878
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
THE CYPRESS LAKES PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------- -----------------------------
1997 1996 1998 1997
------------ ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 254,272 $ 120,114 $ 165,596 $ 140,454
Related party management fees (Note 3) 140,000 140,000 70,000 70,000
----------- ----------- ----------- -----------
Total expenses 394,272 260,114 235,596 210,454
Interest income 1,919 5,323 1,218 987
----------- ----------- ----------- -----------
Net loss $(392,353) $(254,791) $(234,378) $(209,467)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
THE CYPRESS LAKES PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
Total
-----------
<S> <C>
Balance January 1, 1996 $5,398,074
Capital Contributions 8,579
Net loss for the year (254,791)
-----------
Balance December 31, 1996 5,151,862
Capital Contributions 408,366
Net loss for the period (392,353)
-----------
Balance December 31, 1997 5,167,875
Capital Contributions (unaudited) 91,431
Net loss for the period (unaudited) (234,378)
-----------
Balance June 30, 1998 (unaudited) $5,024,928
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
THE CYPRESS LAKES PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------- -----------------------------
1997 1996 1998 1997
------------ ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(392,353) $(254,791) $(234,378) $(209,467)
Increase (decrease) from changes in:
Due from affiliate - - (175,336) -
Accrued expenses 56,682 (137,803) 143,711 44,798
----------- ----------- ----------- -----------
Net cash used in operating
activities (335,671) (392,594) (266,003) (164,669)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 408,366 8,579 91,431 183,231
Proceeds from notes to affiliate - - 47,046 -
----------- ----------- ----------- -----------
Net cash provided by
financing activities 408,366 8,579 138,477 183,231
Net increase (decrease) in cash
and cash equivalents 72,695 (384,015) (127,526) 18,562
Cash and cash equivalents at beginning
of period 75,373 459,388 148,068 75,373
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period $ 148,068 $ 75,373 $ 20,542 $ 93,935
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash paid during the period for interest $ - $ - $ - $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
THE CYPRESS LAKES PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1993 National Investors Financial, Inc. ("National"), represented by
NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Cypress Lakes "Trudy Pat" Program (the "Program") in the
amount of $14,000,000 by selling undivided tenant-in-common interests in such
loan to 832 investors. In July of 1995, on behalf of the Cypress Lakes Program
investors, National foreclosed on the property and took title to the property
("Cypress Lakes") involved in the Cypress Lakes Program. Cypress Lakes currently
consists of 686 acres of raw land. The development rights granted include 1,330
single-family residential lots; an 18-hole golf course, clubhouse, and tennis
courts. The property is located in Contra Costa County, California, which is
located along the northeastern shore of San Francisco Bay and is currently held
in trust by National on behalf of the Cypress Lakes Investors. The Cypress
Lakes property was recently appraised at $5,200,000 as of the date of
foreclosure. Therefore, the property has been written down to its fair market
value at the time of the foreclosure and the investors' interest in the property
is reflected as Owners' Equity in the financial statements.
The accompanying financial statements include the accounts of the Program, which
consists of the Cypress Lakes Land Holding Trust, and do not include the
accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), was
formed to be a publicly-held corporation to acquire the businesses of certain
investment programs previously syndicated by National in exchange for equity in
American. In addition, American will offer a maximum of 1,000,000 units, which
consist of one share of common stock and one warrant at a price of $20 per unit.
Each warrant entitled the holder to purchase three additional shares of common
stock at 80% of the closing price of the stock on the day prior to exercise of
the warrant. The warrant has a term of two years following the completion of the
Offering.
In conjunction with the contemplated transactions, the Program is currently
capitalizing the associated costs and recording these costs as due from
American. These costs are currently shown as deferred acquisition costs on the
books of American. These costs will, however, be allocated against a ratio of
the proceeds received from the units offering and the value of the shares given
to the program investors in exchange for their undivided tenant-in-common
interests after the completion of both transactions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Management of the Program considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents.
LAND
Land is carried at cost. Effective January 1, 1996, the Program adopted
the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS
No. 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires impairment losses to be recorded on
long-lived assets being developed, based on fair value, when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Examples of
indicators of impairment include a significant decrease in the market value of
an asset, a significant change in the extent or manner in which an asset is used
or a significant adverse change in legal or business factors that could affect
the value of an asset.
F-55
<PAGE>
THE CYPRESS LAKES PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimation process in determining the fair value of real estate assets is
inherently uncertain and relies to a considerable extent on current and future
economic and market conditions, the availability of suitable financing to fund
holding, development, and construction activities, and the repayment or
refinancing of existing indebtedness. Such economic and market conditions may
effect management's development and marketing plans. Accordingly, the ultimate
realizations may differ from amounts presently estimated.
INCOME TAXES
The financial statements include the activity of the Program, whose income
or losses are included in the investors' respective tax returns.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however in the opinion of the Property's management, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages seven other programs under similar
servicing agreements. As documented within the servicing agreement, National is
to receive an annual fee equal to 1% of the original loan balance. National's
requirements under the servicing agreement include managing the assets of the
Program to assure that the purpose and activities of the Program are continued
for the investors. The Program incurred asset management expenses of $140,000,
$140,000, $70,000 and $70,000 for the years ended December 31, 1996 and 1997 and
for the six months ended June 30, 1997 and 1998. As of June 30, 1998 there were
no outstanding management fees.
NOTES TO AFFILIATE
The program received advances from National during 1998 amounting to
$46,850. These advances are evidenced by demand notes with interest at the rate
of 10% per annum.
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant effect
on the financial position of the Program.
F-56
<PAGE>
THE CYPRESS LAKES PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $180,193 and $204,404 as of
December 31, 1997 and June 30, 1998. The Program has entered into a five-year
payment plan with appropriate taxing authorities relative to the payment of
these past due taxes.
NOTE 4. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in the
Program to make additional capital contributions. Such contributions are only
recorded to the extent of cash received.
F-57
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Palmdale/Joshua Ranch
"Trudy Pat" Program (the "Palmdale/Joshua Ranch Program") (as defined in Note 1)
as of December 31, 1997, and the related statements of operations, changes in
owners' equity and cash flows for each of the two years in the period ended
December 31, 1997. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the
Palmdale/Joshua Ranch Program as of December 31, 1997, and the results of
operations and cash flows for each of the two years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 24, 1998
F-58
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
---------- -----------
(unaudited)
ASSETS:
<S> <C> <C>
Land $2,700,000 $2,700,000
Cash and cash equivalents 98,898 199
Due from affiliate (Note 1) - 132,373
---------- -----------
Total assets $2,798,898 $2,832,572
---------- -----------
---------- -----------
LIABILITIES:
Accounts payable $ 42,527 $ 35,527
Due to affiliate (Note 3) 3,100 100
Notes to affiliate - 7,220
Accrued property taxes (Note 3) 107,216 63,343
Accrued Expenses - 104,500
---------- -----------
Total liabilities 152,843 210,690
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 2,646,055 2,621,882
---------- -----------
Total liabilities and owners' equity $2,798,898 $2,832,572
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
----------------
Year Ended December 31, June 30,
----------------------- --------
1997 1996 1998 1997
---- ---- ---- ----
(UNAUDITED)
EXPENSES:
<S> <C> <C> <C> <C>
Selling, general and administrative $ 306,484 $ 469,910 $ 157,376 $ 104,883
Related party management fees (Note 3) 150,000 150,000 75,000 75,000
------- ------- ------ ------
Total expenses 456,484 619,910 232,376 179,883
Interest income 1,008 4,222 74 702
----- ----- -- ---
Net income (loss) $ (455,476) $ (615,688) $ (232,302) $ (179,181)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
Total
-----
<S> <C>
Balance January 1, 1996 $ 2,775,289
Capital contributions 517,423
Net loss for the year (615,688)
---------------
Balance December 31, 1996 2,677,024
Capital contributions 424,507
Net loss for the year (455,476)
---------------
Balance December 31, 1997 2,646,055
Capital contributions (unaudited) 208,129
Net loss for the period (unaudited) (232,302)
---------------
Balance June 30, 1998 (unaudited) $ 2,621,882
---------------
---------------
</TABLE>
See accompanying notes to financial statements.
F-61
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
----------------
Year Ended December 31, June 30,
----------------------- --------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net loss $ (455,476) $ (615,688) $ (232,302) $ (179,181)
Increase (decrease) from changes in:
Due from affiliate - - (132,373) (12,500)
Accounts payable 42,527 - (7,000) -
Accrued expenses (32,582) (34,432) 57,627 (44,909)
-------- -------- -------- -------
Net cash used in operating activities (445,531) (650,120) (314,048) (236,590)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 424,507 517,423 208,129 255,364
Proceeds from notes to affiliate - - 7,220 -
-------- -------- -------- -------
Net cash provided by
financing activities 424,507 517,423 215,349 255,364
Net increase (decrease) in cash and cash
equivalents (21,024) (132,697) (98,699) 18,774
Cash and cash equivalents at beginning
of period 119,922 252,619 98,898 119,922
-------- -------- -------- -------
Cash and cash equivalents
at end of period $ 98,898 $ 119,922 $ 199 $ 138,696
-------- -------- -------- -------
-------- -------- -------- -------
Cash paid during the period for interest $ - $ - $ - $ -
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
See accompanying notes to financial statements.
F-62
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1992 National Investors Financial, Inc. ("National"), represented by
NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Palmdale/Joshua Ranch "Trudy Pat" Program (the "Program") in
the amount of $15,000,000 by selling undivided tenant-in-common interests in
such loan to 1011 investors. In October of 1993, on behalf of the
Palmdale/Joshua Ranch Program investors, National foreclosed on the property and
took title to the property ("Palmdale/Joshua Ranch") involved in the
Palmdale/Joshua Ranch Program. Palmdale/Joshua Ranch currently consists of 794
acres of raw land. The land consists of 539 proposed single-family lots and 472
acres of open space and proposed streets. The property is located in Palmdale,
California, which is approximately 37 miles north of Los Angeles. The property
is currently held in Trust by National on behalf of the Palmdale/Joshua Ranch
investors. The Palmdale/Joshua Ranch property was recently appraised at
$5,390,000 as of the date of foreclosure. Therefore, the property has been
written down to its fair market value at the time of the foreclosure and the
investors' interest in the property is reflected as Owners' Equity in the
financial statements.
The accompanying financial statements include the accounts of the Program, which
consists of the Esperanza Land Holding Trust, and do not include the accounts of
National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), was
formed to be a publicly-held corporation to acquire the businesses of certain
investment programs previously syndicated by National in exchange for equity in
American. In addition, American Family Holdings, Inc. will offer a maximum of
1,000,000 units, which consist of one share of common stock and one warrant at a
price of $20 per unit. Each warrant entitled the holder to purchase three
additional shares of common stock at 80% of the closing price of the stock on
the day prior to exercise of the warrant. The warrant has a term of two years
following the completion of the Offering.
In conjunction with the contemplated transactions, the Program is currently
capitalizing the associated costs and recording these costs as due from the
American. These costs are currently shown as deferred acquisition costs on the
books of American. These costs will, however, be allocated against a ratio of
the proceeds received from the units offering and the value of the shares given
to the program investors in exchange for their undivided tenant-in-common
interests after the completion of both transactions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Management of the Program considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents.
LAND
Land is carried at cost. Effective January 1, 1996, the Program adopted
the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS No.
121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires impairment losses to be recorded on
long-lived assets being developed, based on fair value, when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Examples of
indicators of impairment include a significant decrease in the market value of
an asset, a significant change in the extent or manner in which an asset is used
or a significant adverse change in legal or business factors that could affect
the value of an asset.
F-63
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimation process in determining the fair value of real estate assets is
inherently uncertain and relies to a considerable extent on current and future
economic and market conditions, the availability of suitable financing to fund
holding, development, and construction activities, and the repayment or
refinancing of existing indebtedness. Such economic and market conditions may
effect management's development and marketing plans. Accordingly, the ultimate
realizations may differ from amounts presently estimated.
INCOME TAXES
The financial statements include the activity of the Program, whose income
or losses are included in the investors' respective tax returns.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however in the opinion of the Property's management, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages seven other programs under similar
servicing agreements. As documented within the servicing agreement, National is
to receive an annual fee equal to 1% of the original loan balance. National's
requirements under the servicing agreement include managing the assets of the
Program to assure that the purpose and activities of the program are continued
for the investors. The Program incurred asset management expenses of $150,000,
$150,000, $75,000, and $75,000 for the years ended December 31, 1996 and 1997
and for the six months ended June 30, 1997 and 1998. Total accrued and unpaid
management fees as of December 31, 1997 and June 30, 1998 were $3,100 and $100.
NOTES TO AFFILIATE
The program received advances from National during 1998 amounting to
$7,200. These advances are evidenced by demand notes with interest at the rate
of 10% per annum.
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant effect
on the financial position of the Program.
F-64
<PAGE>
THE PALMDALE/JOSHUA RANCH PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $107,216 and $63,343 as of
December 31, 1997 and June 30, 1998. The Program has entered into a five-year
payment plan with appropriate taxing authorities relative to the payment of
these past due taxes.
NOTE 4. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in the
Program to make additional capital contributions. Such contributions are only
recorded to the extent of cash received.
F-65
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Stacey Rose A and B "Trudy
Pat" Programs (the "Stacey Rose Programs") (as defined in Note 1) as of December
31, 1997, and the related statements of operations, changes in owners' equity
and cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the Stacey
Rose Programs as of December 31, 1997, and the results of operations and cash
flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 22, 1998
F-66
<PAGE>
THE STACEY ROSE PROGRAMS
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
---------- -----------
(unaudited)
ASSETS:
<S> <C> <C>
Land $320,000 $320,000
Cash and cash equivalents - 339
Due from affiliate (Note 1) - 27,000
---------- -----------
Total assets $320,000 $347,339
---------- -----------
---------- -----------
LIABILITIES:
Due to affiliate (Note 3) $ 31,275 $ 33,276
Notes to affiliate (Note 3) - 15,292
Accrued property taxes (Note 3) 37,703 29,709
Accrued expenses - 22,500
---------- -----------
Total liabilities $ 68,978 $100,777
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 251,022 246,562
---------- -----------
Total liabilities and owners' equity $320,000 $347,339
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE>
THE STACEY ROSE PROGRAMS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
1997 1996 1998 1997
---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 9,200 $ 8,442 $ 4,370 $ 4,594
Related party management fees (Note 3) 4,003 4,003 2,002 2,002
--------- --------- --------- ---------
Total expenses 13,203 12,445 6,372 6,596
Interest expense - - 38 -
--------- --------- --------- ---------
Net loss $ (13,203) $ (12,445) $ (6,410) $ (6,596)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE>
THE STACEY ROSE PROGRAMS
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
Total
-----
<S> <C>
Balance January 1, 1996 $ 276,670
Net loss for the year
(12,445)
---------
Balance December 31, 1996
264,225
Net loss for the period (13,203)
---------
Balance December 31, 1997
251,022
Capital contributions (unaudited)
1,950
Net loss for the period (unaudited) (6,410)
---------
Balance June 30, 1998 (unaudited) $ 246,562
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE>
THE STACEY ROSE PROGRAMS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,203) $ (12,445) $ (6,410) $ (6,596)
Increase (decrease) from changes in:
Due from affiliate - - (27,000) -
Accrued expenses 13,203 12,445 16,507 (6,596)
---------- ---------- --------- ---------
Net cash used in operating
activities - - (16,903) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions - - 1,950 -
Proceeds from notes to affiliate - - 15,292 -
---------- ---------- --------- ---------
Net cash provided by
financing activities - - 17,242 -
Net increase in cash and cash equivalents - - 339 -
Cash and cash equivalents at beginning
of period - - - -
---------- ---------- --------- ---------
Cash and cash equivalents
at end of period $ - $ - $ 339 $ -
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
THE STACEY ROSE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1988 National Investors Financial, Inc. ("National"), represented by
NASD registered securities broker-dealers, completed the funding on two real
estate loans for the Stacey Rose "Trudy Pat" Programs (the "Programs") by
selling undivided tenant-in-common interests in such loans to investors. The
Stacey Rose A loan was in the amount of $85,000 to two investors and the Stacey
Rose B loan was in the amount of $315,300 to 28 investors. In October 1992, on
behalf of the Stacey Rose Program investors, National foreclosed on the property
and took title to the property ("Stacey Rose") involved in the Stacey Rose
Programs. Stacey Rose is currently raw land which is zoned for approximately
160 single-family residential units. The property is located in Victorville,
California, and is currently held in trust by National on behalf of the Stacey
Rose Investors. The Stacey Rose property was recently appraised at $1,600,000
as of the date of foreclosure. Therefore, the property has been written down to
its fair market value at the time of the foreclosure and the investors' interest
in the property is reflected as Owners' Equity in the financial statements.
The accompanying financial statements include the accounts of the Programs,
which consists of the Stacey Rose Land Holding Trust, and do not include the
accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), was
formed to be a publicly-held corporation to acquire the businesses of certain
investment programs previously syndicated by National in exchange for equity in
American. In addition, American will offer a maximum of 1,000,000 units, which
consist of one share of common stock and one warrant at a price of $20 per unit.
Each warrant entitled the holder to purchase three additional shares of common
stock at 80% of the closing price of the stock on the day prior to exercise of
the warrant. The warrant has a term of two years following the completion of the
Offering.
In conjunction with the contemplated transactions, the Programs are
currently capitalizing the associated costs and recording these costs as due
from American. These costs are currently shown as deferred acquisition costs on
the books of American. These costs will, however, be allocated against a ratio
of the proceeds received from the units offering and the value of the shares
given to the program investors in exchange for their undivided tenant-in-common
interests after the completion of both transactions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Management of the Programs consider all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents.
LAND
Land is carried at cost. Effective January 1, 1996, the Programs adopted
the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS
No. 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires impairment losses to be recorded on
long-lived assets being developed, based on fair value, when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Examples of
indicators of impairment include a significant decrease in the market value of
an asset, a significant change in the extent or manner in which an asset is used
or a significant adverse change in legal or business factors that could affect
the value of an asset.
F-71
<PAGE>
THE STACEY ROSE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimation process in determining the fair value of real estate assets is
inherently uncertain and relies to a considerable extent on current and future
economic and market conditions, the availability of suitable financing to fund
holding, development, and construction activities, and the repayment or
refinancing of existing indebtedness. Such economic and market conditions may
effect management's development and marketing plans. Accordingly, the ultimate
realizations may differ from amounts presently estimated.
INCOME TAXES
The financial statements include the activity of the Programs, whose income
or losses are included in the investors' respective tax returns..
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however in the opinion of the Property's management, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Programs are currently managed, subject to a servicing agreement, by
National. National also currently manages seven other programs under similar
servicing agreements. As documented within the servicing agreement, National is
to receive an annual fee equal to 1% of the original loan balance. National's
requirements under the servicing agreement include managing the assets of the
Programs to assure that the purpose and activities of the Programs are continued
for the investors. The Programs incurred asset management expenses of $4,003,
$4,003, $2,002 and $2,002 for the years ended December 31, 1996 and 1997 and for
the six months ended June 30, 1997 and 1998. Total accrued and unpaid
management fees as of December 31, 1997 and June 30, 1998 were $31,275 and
$33,276.
NOTES TO AFFILIATE
The program received advances from National during 1998 amounting to
$15,250. These advances are evidenced by demand notes with interest at the rate
of 10% per annum.
LAWSUITS
The Programs are, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant effect
on the financial position of the Programs.
F-72
<PAGE>
THE STACEY ROSE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of 37,703 and 29,709 as of
December 31, 1997 and June 30,1998. The Program has entered into a five-year
payment plan with appropriate taxing authorities relative to the payment of
these past due taxes.
NOTE 4. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in the
Programs to make additional capital contributions. Such contributions are only
recorded to the extent of cash received.
F-73
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of the Esperanza "Trudy Pat"
Program (the "Esperanza Program") (as defined in Note 1) as of December 31,
1997, and the related statements of operations, changes in owners' equity and
cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the
Esperanza Program as of December 31, 1997, and the results of operations and
cash flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 24, 1998
F-74
<PAGE>
THE ESPERANZA PROGRAM
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS:
Land $ 270,000 $ 270,000
Cash and cash equivalents 7,191 3,753
Due from affiliate (Note 1) - 24,500
---------- ----------
Total assets $ 277,191 $ 298,253
---------- ----------
---------- ----------
LIABILITIES:
Due to affiliate (Note 3) $ 38,750 $ 41,250
Accrued property taxes (Note 3) 16,731 19,647
Accrued Expenses - 21,000
---------- ----------
Total liabilities $ 55,481 $ 81,897
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
OWNERS' EQUITY:
Owners' Equity 221,710 216,356
---------- ----------
Total liabilities and owners' equity $ 277,191 $ 298,253
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-75
<PAGE>
THE ESPERANZA PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
EXPENSES:
Selling, general and administrative $ 5,537 $ 5,001 $ 2,916 $ 2,681
Related party management fees (Note 3) 5,000 5,000 2,500 2,500
---------- --------- --------- ---------
Total expenses 10,537 10,001 5,416 5,181
---------- --------- --------- ---------
Interest income 144 142 62 71
--------- --------- --------- ---------
Net income (loss) $ (10,393) $ (9,859) $ (5,354) $ (5,110)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-76
<PAGE>
THE ESPERANZA PROGRAM
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<CAPTION>
Total
-----
<S> <C>
Balance January 1, 1996 241,962
Net loss for the year (9,859)
----------
Balance December 31, 1996 232,103
Net loss for the year (10,393)
----------
Balance December 31, 1997 221,710
Net loss for the period (unaudited) (5,354)
Balance June 30, 1998 (unaudited) $ 216,356
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE>
THE ESPERANZA PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,393) $ (9,859) $ (5,354) $ (5,110)
Increase (decrease) from changes in:
Due from affiliate - - (24,500) -
Accrued expenses 10,537 9,951 26,416 5,181
---------- --------- --------- ---------
Net cash provided by (used in)
operating activities 144 92 (3,438) 71
Net increase (decrease)
in cash and cash equivalents 144 92 (3,438) 71
Cash and cash equivalents at beginning
of period 7,047 6,955 7,191 7,047
---------- --------- --------- ---------
Cash and cash equivalents
at end of period $ 7,191 $ 7,047 $ 3,753 $ 7,118
---------- --------- --------- ---------
---------- --------- --------- ---------
Cash paid during the period for interest $ - $ - $ - $ -
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE>
THE ESPERANZA PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1988 National Investors Financial, Inc. ("National"), represented by
NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Esperanza "Trudy Pat" Program (the "Program") in the amount
of $500,000 by selling undivided tenant-in-common interests in such loan to 42
investors. In December of 1990, on behalf of the Esperanza Program investors,
National foreclosed on the property and took title to the property ("Esperanza")
involved in the Esperanza Program. Esperanza is currently raw land which is
zoned for various commercial activities, including retail and office buildings,
with a minimum building site area of 10,000 square feet. The property is
located in Victorville, California and is currently held in Trust by National on
behalf of the Esperanza investors. The Esperanza property was recently
appraised at $530,000 as of the date of foreclosure. Therefore, the property
has been written down to its fair market value at the time of the foreclosure
and the investors' interest in the property is reflected as Owners' Equity in
the financial statements.
The accompanying financial statements include the accounts of the Program, which
consists of the Esperanza Land Holding Trust, and do not include the accounts of
National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), was
formed to be a publicly-held corporation to acquire the businesses of certain
investment programs previously syndicated by National in exchange for equity in
American. In addition, American Family Holdings, Inc. will offer a maximum of
1,000,000 units, which consist of one share of common stock and one warrant at a
price of $20 per unit. Each warrant entitled the holder to purchase three
additional shares of common stock at 80% of the closing price of the stock on
the day prior to exercise of the warrant. The warrant has a term of two years
following the completion of the Offering.
In conjunction with the contemplated transactions, the Program is currently
capitalizing the associated costs and recording these costs as due from
American. These costs are currently shown as deferred acquisition costs on the
books of American. These costs will, however, be allocated against a ratio of
the proceeds received from the units offering and the value of the shares given
to the program investors in exchange for their undivided tenant-in-common
interests after the completion of both transactions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Management of the Program considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents.
LAND
Land is carried at cost. Effective January 1, 1996, the Program adopted
the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS No.
121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires impairment losses to be recorded on
long-lived assets being developed, based on fair value, when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Examples of
indicators of impairment include a significant decrease in the market value of
an asset, a significant change in the extent or manner in which an asset is used
or a significant adverse change in legal or business factors that could affect
the value of an asset.
F-79
<PAGE>
THE ESPERANZA PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimation process in determining the fair value of real estate assets is
inherently uncertain and relies to a considerable extent on current and future
economic and market conditions, the availability of suitable financing to fund
holding, development, and construction activities, and the repayment or
refinancing of existing indebtedness. Such economic and market conditions may
effect management's development and marketing plans. Accordingly, the ultimate
realizations may differ from amounts presently estimated.
INCOME TAXES
The financial statements include the activity of the Program, whose income
or losses are included in the investors' respective tax returns..
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the six months ended June 30, 1997 and
1998 are unaudited; however in the opinion of the Property's management, the
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period. The results of operations for such interim period are not
necessarily indicative of the results to be obtained for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages seven other programs under similar
servicing agreements. As documented within the servicing agreement, National is
to receive an annual fee equal to 1% of the original loan balance. National's
requirements under the servicing agreement include managing the assets of the
Program to assure that the purpose and activities of the program are continued
for the investors. The Program incurred asset management expenses of $5,000,
$5,000, $2,500, and $2,500 for the years ended December 31, 1996 and 1997 and
for the six months ended June 30, 1997 and 1998. Total accrued and unpaid
management fees as of December 31, 1997 and June 30, 1998 were $38,750 and
$41,250.
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant effect
on the financial position of the Program.
F-80
<PAGE>
THE ESPERANZA PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. COMMITMENTS (CONTINUED)
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $16,731 and $19,647 as of
December 31, 1997 and June 30, 1998. The Program has entered into a five-year
payment plan with appropriate taxing authorities relative to the payment of
these past due taxes.
NOTE 4. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in the
Program to make additional capital contributions. Such contributions are only
recorded to the extent of cash received.
F-81
<PAGE>
APPENDICES
Appendix 1 Fairness Opinion
Appendix 2 Selected Additional Appraisal Information
<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
Cypress Lakes "Trudy Pat" Program
Palmdale/Joshua Ranch "Trudy Pat" Program
Esperanza Program
Stacey Rose Properties A Program
Stacey Rose Properties B 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, as well as certain similarly structured non-Trudy Pat
loan programs sponsored by National Investors Financial, Inc. ("National").
The Trudy Pat )and non-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"), two separate parcels in Oakhurst, California
("Yosemite/Ahwahnee I" and "Yosemite/Ahwahnee II"), Contra Costa County,
California ("Cypress Lakes"), Palmdale, California (Palmdale/Joshua Ranch"),
as well as non-Trudy Pat loans on three separate parcels of real property in
Victorville, California ("Esperanza," "Stacey Rose Properties A Program" and
"Stacey Rose Properties B Program"). The Company's capitalization
immediately prior to the Transaction is expected to be [323,676] shares of
common stock, represented by 118,903 shares each to two partnerships
controlled by the principals of National and 85,870 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 units consisting of common
stock (the "Shares"), as well as warrants to purchase additional common stock,
to the respective Investors in the following amounts: [78,520] Shares to the
Sacramento/Delta Greens Investors (representing [4.55] percent of the
A1.1
<PAGE>
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),
[513,755] Shares to the Yosemite/Ahwahnee II Investors (representing [20.58]
percent of the total Shares outstanding after the issuance of the Shares),
[_______] Shares to the Cypress Lakes Investors (representing [_____]percent of
the total Shares outstanding after the issuance of the Shares), [_______]
Shares to the Palmdale/Joshua Ranch Investors (representing [_____]percent of
the total Shares outstanding after the issuance of the Shares), [_______]
Shares to the Esperanza Investors (representing [_____] percent of the total
Shares outstanding after the issuance of the Shares), [_______] Shares to the
Stacey Rose A Investors (representing [_____] percent of the total Shares
outstanding after the issuance of the Shares), and [_______] Shares to the
Stacey Rose B Investors (representing [_____] 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 ________.
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, Yosemite/Ahwahnee II, Cypress Lakes, Palmdale/Joshua Ranch,
Esperanza, Stacey Rose A and Stacey Rose B. Our Opinion is limited to the
allocation of Shares to the Investors in connection with the Transaction. We
have not performed an analysis of, and express no opinion with respect to the
fair market value of the Shares, 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, nor have we analyzed alternatives to the transaction from
the standpoint of the Investors.
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 (collectively, the
"Appraisals") with respect to the Properties:
a) an appraisal of a property in Oakhurst, California, formerly
wholly-owned by the Yosemite/Ahwahnee I and II Properties (portions
of which were subsequently sold to Oceanside in June 1998), prepared
by Arnold Associates, as of March 31, 1998 (the "Arnold Appraisal"),
A1.2
<PAGE>
b) an appraisal of a property in Oakhurst, California, formerly
wholly-owned by the Yosemite/Ahwahnee I and II Programs (portions
of which were subsequently sold to Oceanside in June 1998), 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 March 31, 1998,
d) an appraisal of the Delta Greens Property, prepared by David E, Lane,
Inc., as of March 31, 1998,
e) an appraisal of the Cypress Lakes Property, prepared by Sedway Group,
as of March 31, 1998, and
f) appraisals of the Palmdale/Joshua Ranch, Esperanza and Stacey Rose
Properties A and B prepared by Likas & Associates, as of March 31,
1998.
3. Reviewed the following feasibility studies with respect to the Properties:
a) a study of the Yosemite/Ahwahnee I and II Properties, prepared by
LEXES Enterprises, dated August 28, 1996,
b) a study of the Yosemite/Ahwahnee I and II Properties, prepared by RCI
Consulting, dated July 1998, 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 National and a third party, dated as of __________ (the "Purchase
Agreement"), relating to a potential sale of the Cypress Lakes Property;
5. Reviewed audited financial statements for each of the Delta Greens
Property, the Mori Point Property, the Oceanside Property, the
Yosemite/Ahwahnee I and II Properties, the Cypress Lakes Property, the
Palmdale/Joshua Ranch Property, the Esperanza Property and the Stacey Rose
A and B Properties, as well as pro forma consolidated financial statements
for the Company, for the two years ended December 31, 1997 through the six
months ended June 30, 1998;
6. Met with management of the Company and National regarding matters
pertinent to our analysis;
A1.3
<PAGE>
7. Reviewed a draft copy of the Golf Course Net Lease between Oceanside
Development, Inc. and Ahwahnee Golf Course, Inc., dated ______________,
1998
8. Conducted site visits to each of the Properties, and met with the General
Manager of the Yosemite/Ahwahnee I and II Properties;
9. Reviewed certain documents related to the Trudy Pat loans on the
Properties;
10. Reviewed certain other documents and schedules which were pertinent to our
analysis; and
11. 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.
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. 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, Delta Greens, Cypress Lakes, Palmdale/Joshua Ranch, Esperanza and Stacey
Rose A and B programs. 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, without independent analysis or
verification, to represent the current fair market value of the respective
properties. In the case of the properties sold to Oceanside by
Yosemite/Ahwahnee I and II programs in June 1998, we relied upon the Company's
representation that these sales were not arm's length negotiated transactions
and that the Company's reconciliation of value utilizing a combination of the
Arnold and
A1.4
<PAGE>
Mentor Appraisals represents the best current indication of the fair market
value of those properties. In the case of the property remaining in the
Yosemite/Ahwahnee I and II programs, the Company represents that the value
according to the Arnold Appraisal is representative of its current fair
market value (after being reduced to reflect lot sales since the date of the
Appraisal). In the case of the Cypress Lakes property (which has an
appraised value of $6,000,000), there is a possibility that in the near
future the Company will enter into a purchase agreement with a potential
buyer for a purchase price of $11,000,000, payable in a combination of cash
and a promissory note. However, the purchase agreement would give the buyer
the ability to cancel the sale without penalty for any reason within a 120
day due diligence period. During a subsequent 60 day period, the buyer could
cancel with forfeiture of a $100,000 deposit. Because of the terms of the
agreement, the Company believes that there is considerable uncertainty
regarding whether the property will be sold for that amount, if at all.
Therefore, our net asset value calculation is based on the $6,000,000
appraised value subject to the condition that if the sale is consummated and
the net proceeds are greater than the appraised value, the Investors in
Cypress Lakes will receive an additional number of units (valued at $20)
equal to the difference in the purchase price (exclusive of interest) and the
appraised value. In determining net asset value, the Independent Valuator
used the book value as of June 30, 1998 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 and deferred revenues which appear on the balance sheet of the
Yosemite/Ahwahnee II Program as of June 30, 1998 were included in the net
asset value calculation at book value even though they are intangible assets
and liabilities in order to reflect the on-going assets and liabilities
associated with operating the recreational vehicle park. Real property held
for sale on the Oceanside program's balance sheet as of June 30, 1998 was not
included because it was subsequently sold and the proceeds were distributed
to investors. Liabilities were subtracted out at book value. Using the
aforementioned methodology, the resulting net asset values as of June 30,
1998 were as follows (rounded to the nearest $000): $5,356,000 for Oceanside
(or 19.10 percent of the combined net asset value); $2,210,000 for
Yosemite/Ahwahnee I (or 7.88 percent of the combined net asset value);
$4,590,000 for Yosemite/Ahwahnee II (or 16.36 percent of the combined net
asset value); $5,413,000 for Mori Point (or 19.30 percent of the combined net
asset value); $1,570,000 for Sacramento/Delta Greens (or 5.60 percent of the
combined net asset value); $5,825,000 for Cypress Lakes (or 20.77 percent of
the combined net asset value); $2,622,000 for Palmdale/Joshua Ranch (or 9.35
percent of the combined net asset value); $216,000 for Esperanza (or 0.77
percent of the combined net asset value); $52,000 for Stacey Rose A Program
(or 0.90 percent of the combined net asset value); and $247,000 for Stacey
Rose Properties B Program (or 0.69 percent of the combined net asset value).
With respect to the ______ Founders Shares, the Independent Valuator was
primarily concerned with the ______ shares to be issued to the family limited
partnerships under the
A1.5
<PAGE>
control of David Lasker and James Orth. For our purposes, we considered a
certain number of those shares to represent consideration to 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
______ shares, which represents the approximate amount of shares to be issued
to Mr. Albertson on the basis of arm's length negotiations. The remaining
_______ shares, or ____% 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 Acquisition 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 the Investors in Delta Greens,
Mori Point, Oceanside, Yosemite/Ahwahnee I and Yosemite/Ahwahnee II, from a
financial point of view.
This Opinion is furnished solely for your benefit and may not be relied upon by
any other person without our express, prior written consent. We understand,
however, that this Opinion may be referred to in the Prospectus to be filed by
the Company in connection with this Transaction. This Opinion is delivered to
you subject to the conditions, scope of engagement, limitations and
understandings set forth in this Opinion and subject to the understanding that
the obligations of HVA in the Transaction are solely corporate obligations, and
no officer, director, employee, agent, shareholder or controlling person of HVA
shall be subjected to any personal liability whatsoever to any person, nor will
any such claim be asserted by or on behalf of you or your affiliates.
HOULIHAN VALUATION ADVISORS
A1.6
<PAGE>
Appendix 2
SELECTED ADDITIONAL APPRAISAL INFORMATION
The following selected additional information about the appraisals of the
Programs' Properties is presented so that the Investors can better understand
the methods used and results of the appraisals.
SACRAMENTO/DELTA GREENS PROGRAM (David E. Lane, Inc.)
<TABLE>
<S> <C> <C>
Sales Comparison Approach(1) $2,134,000
Land Residual Approach(2) 2,403,000
Discounted Cash Flow(3) 1,815,000
Conclusion of "as is" value $2,000,000(a)
-------------
-------------
</TABLE>
- ----------------
(a) $1,745,000 at March 31, 1998. Reduction in value was caused by a change to
the tentative map which reduced the number of lots from 534 to 465.
Reduction in number of lots was caused by requirement of a wetlands/habitat
set aside. Material assumptions from May 1997 were unchanged.
Heaviest reliance in the May 1997 appraisal 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.
A.2-1
<PAGE>
- Commission and marketing of 5%, as limited sales agreements are
envisioned.
- Real estate taxes based on an interpolated value of $2,000,000, times
the combined 1.5% tax and levies rate, with the declining total value of the
remaining lots increased by 2% annually.
- Miscellaneous costs, such as insurance and overhead, of 1% of sales.
- A discount rate of 20%.
MORI POINT PROGRAM (PKF Consulting)
<TABLE>
<S> <C> <C>
Discounted Cash Flow(3) $5,300,000
Ground Rent Capitalization Approach(4) 6,000,000
Sales Comparison Approach(1) 5,400,000
Conclusion of "as is" value $5,500,000(a)
-------------
-------------
</TABLE>
- ----------------
(a) $6,000,000 at March 31, 1998. Increase in value from May 1997 is
attributable to modestly improved real estate conditions in the area.
Material Assumption
- The project will be open by January 1, 2002.
As the sales comparisons available were not similarly sized or located, of
a similar development potential, the greatest reliance was placed on the
Discounted Cash Flow Approach as good market information was available to
support the potential cash flow and development cost of the potential project.
The Ground Rent Capitalization Approach was used as a test of reasonableness.
YOSEMITE/AHWANHEE I AND II PROGRAMS (Arnold Associates)
GOLF COURSE/COUNTRY CLUB
------------------------
<TABLE>
<S> <C> <C>
Sales Comparison Approach(1) $5,400,000
Income Approach(5) 4,810,000
Cost Approach(6) 6,270,000
Conclusion of "as is" value $4,480,000*(a)
--------------
--------------
</TABLE>
* Reflects a $5,100,000 stabilized value less $620,000 of lost income
during stabilization process of the golf course.
- ----------------
(a) $3,810,000 at March 31, 1998 reflecting a $4,450,000 stabilized value less
$640,000 of lost income during stabilization process. Reduction was caused
by a general decline in the golf industry since May 1997 plus lost income
due to heavy rains in 1998.
A.2-2
<PAGE>
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.
RV PARK
-------
<TABLE>
<S> <C> <C>
Sales Comparison Approach(1) $3,886,000
Cost Approach(6) 3,986,000
Conclusion of "as is" value $3,886,000(a)
-------------
-------------
</TABLE>
- -----------------
(a) Value unchanged from May 1997.
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(a)
Estate "Outlots" F, G AND H ("as is") $5,800,000(a)
Other "Outlots" C, D AND E ("as is") $4,500,000(a)
</TABLE>
- ---------------
(a) Value unchanged from May 1997.
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 PROGRAMS (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(a)
-------------
-------------
</TABLE>
- ----------------
(a) No update was sought for this appraisal.
A.2-3
<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.
PALMDALE/JOSHUA RANCH PROGRAM (Likas & Associates)
<TABLE>
<S> <C> <C>
Sales Comparison Approach(1) $2,700,000
Conclusion of "as is" value $2,700,000
----------
----------
</TABLE>
Since the subject property consists only of vacant land, with no grading
plans or approved tract maps, the Sales Comparison Approach was deemed the most
reliable indicator of value. Thus, only this valuation methodology was
utilized.
Material Assumptions
- The subject property consists of 539 proposed single-family lots.
- No soil or environmental reports were uncovered or made available to
the appraisers. The appraisers assume that a soils report would not reveal any
unusual conditions and that there are no adverse soil conditions at the subject
property. The appraisers also assume that the subject property's soils
conditions will not negatively affect the value of the subject property.
- No title report reflecting the subject property was made available to
the appraisers. The appraisers explicitly assume that the only easements are
normal street, utility and access easements which do not adversely affect the
value of the subject property.
- The property taxes for the subject property are past due and
delinquent in the amount of $103,637. There is currently a structured pay-off
agreement with the balance to be paid off in April of 2000. Within the
valuation analysis, the appraisers explicitly assume all taxes are current.
- Drainage is assumed to be adequate.
STACEY ROSE PROGRAMS (Likas & Associates)
<TABLE>
<S> <C> <C>
Sales Comparison Approach $320,000
Conclusion of "as is" value $320,000
----------
----------
</TABLE>
Since the subject property consists only of vacant land, with no approved
tract maps, the Sales Comparison Approach was deemed the most reliable
indicator of value. Thus, only this valuation methodology was utilized.
Material Assumptions
A.2-4
<PAGE>
- According to the City of Victorville Engineering Department, the Oro
Grande wash traverses over approximately 10,000 square feet of the subject
property. However, the City of Victorville Engineering Department has also
stated that this area could be utilized as open area, thus not restricting the
density of development. The appraisers have explicitly assumed this to be true.
- No soil or environmental reports were uncovered or made available to
the appraisers. The appraisers assume that a soils report would not reveal any
unusual conditions and that there are no adverse soil conditions at the subject
property. The appraisers also assume that the subject property's soils
conditions will not negatively affect the value of the subject property.
- No title report reflecting the subject property was made available to
the appraisers. The appraisers explicitly assume that the only easements are
normal street, utility and access easements which do not adversely affect the
value of the subject property.
- The property taxes for the subject property are past due and
delinquent in the amount of $36,440. This figure does not include the 1997 tax
year, and is only valid until April 30, 1998. Within the valuation analysis,
the appraisers explicitly assume all taxes are current.
- Drainage is assumed to be adequate.
ESPERANZA PROGRAM (Likas & Associates)
<TABLE>
<S> <C> <C>
Sales Comparison Approach $270,000
Conclusion of "as is" value $270,000
--------
--------
</TABLE>
Since the subject property consists only of vacant land, with no approved
tract maps, the Sales Comparison Approach was deemed the most reliable
indicator of value. Thus, only this valuation methodology was utilized.
Material Assumptions
- No soil or environmental reports were uncovered or made available to
the appraisers. The appraisers assume that a soils report would not reveal any
unusual conditions and that there are no adverse soil conditions at the subject
property. The appraisers also assume that the subject property's soils
conditions will not negatively affect the value of the subject property.
- No title report reflecting the subject property was made available to
the appraisers. The appraisers explicitly assume that the only easements are
normal street, utility and access easements which do not adversely affect the
value of the subject property.
- The property taxes for the subject property are past due and
delinquent in the amount of $15,542.25. This figure does not include the 1997
tax year and is only valid
A.2-5
<PAGE>
until April 30, 1998. Within the valuation analysis, the appraisers explicitly
assume all taxes are current.
- Drainage is assumed to be adequate.
CYPRESS LAKES (Sedway Group)
<TABLE>
<S> <C> <C>
Sales Comparison Approach $6,100,000
Subdivision Development Approach $6,000,000
Conclusion of "as is" value $6,000,000
----------
----------
</TABLE>
Since the subject property has received a vesting tentative map, both the
Sales Comparison Approach and Subdivision Development Approach to value were
utilized. Because the Subdivision Development Approach takes into account
estimated costs and other factors the appraisers believe this approach is better
able to accommodate the particular characteristics of the Cypress Lakes project.
Accordingly, this approach was given the primary consideration in the
determination of value.
Material Assumptions
- The subject property consists of 1,330 single-family lots.
- No soil or environmental reports were uncovered or made available to
the appraisers. The appraisers assume that a soils report would not reveal any
unusual conditions and that there are no adverse soil conditions at the subject
property. The appraisers also assume that the subject property's soils
conditions will not negatively affect the value of the subject property.
- The property taxes for the subject property are past due and
delinquent in the amount of $168,446.22. The appraisers have been informed that
the owner of the subject property intends to satisfy the property taxes before a
transfer of title occurs. Within the valuation analysis, the appraisers
explicitly assume all taxes are current.
- There are five separately owned parcels of land that are entirely
surrounded by the subject property. The owners of these parcels have been
approached to sell their land in order for it to be a part of the Cypress Lakes
development. However, the owners have declined to sell their land. The local
school district has been approached with regard to condemning these properties
for use as a school site that would exist on the subject property. While these
parcels remain in private ownership, the appraisal assumes that this
condemnation will occur and that these properties will be used as a school site.
- Because of the Subdivision Development Approach to value utilized in
the appraisal, the value conclusion is extremely sensitive to the reliability of
the cost estimates
A.2-6
<PAGE>
prepared by the prior landowners of the subject property
Accordingly, the appraisers assume that the cost estimates provided by the prior
landowners are accurate and reliable.
- -----------------
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 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.
5 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.
6 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.
7 The SUBDIVISION DEVELOPMENT APPROVAL combined the sales comparison approach
with an estimate of costs to be incurred, along with certain income
capitalization techniques..
A.2-7
<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. 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
A.2-8
<PAGE>
property is appraised assuming it to be under responsible ownership and
competent management, and available for its highest and best use.
- The appraiser assumes no responsibility for hidden or unapparent
conditions of the property, subsoil, ground water or structures that render the
subject property more or less valuable. No responsibility is assumed for
arranging for engineering, geologic or environmental studies that may be
required to discover such hidden or unapparent conditions.
- The appraiser has not been provided any information regarding the
presence of any material or substance on or in any portion of the subject
property or improvements thereon, which material or substance possesses or may
possess toxic, hazardous and/or other harmful and/or dangerous characteristics.
Unless otherwise stated in the report, the appraiser did not become aware of the
presence of any such material or substance during the appraiser's inspection of
the subject property. However, the appraiser is not qualified to investigate or
test for the presence of such materials or substances. The presence of such
materials or substances may 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.
3. 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.
A.2-9
<PAGE>
- Responsible ownership and competent property management are assumed.
- The information furnished by others is believed to be reliable.
However, no warranty is given for its accuracy.
- The appraiser assumes no responsibility for economic or physical
factors occurring after the date of value which may affect the opinions herein
stated. The projections included in this report are subject to changes in
future conditions that cannot be accurately predicted by the appraiser and could
affect the future income or value projections.
- No engineering survey has been made by the appraiser. Except as
specifically stated, data relative to size and area were taken from sources
considered reliable. The plot plans 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.
A.2-10
<PAGE>
4. 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.
5. JOSHUA RANCH
- No responsibility is assumed for matters which are legal in nature.
A.2-11
<PAGE>
- There are easements which are assumed to be typical utility easements
and do not negatively impact the value of the property.
- No opinion of title is rendered, and the subject property is appraised
as though free of all easements, liens, or encumbrances. Title is assumed to be
marketable.
- No survey of the boundaries of the subject property was undertaken by
the appraisers. All areas and dimensions furnished to the appraisers are
presumed to be correct.
- No soils report has been reviewed in connection with the valuation
analysis. Unless otherwise stated, it is assumed that there are no adverse
subsurface conditions.
- Forecasts of future events that influence the valuation process are
predicated on the continuation of historic and current trends in the market.
- The subject property is appraised assuming it to be under responsible
ownership and competent management and available for its highest and best use.
- No environmental site assessment report was provided for the
appraisers' review. It is assumed that there are no hidden or unappparent
conditions of substances in the soil or subsoil that may be hazardous or toxic.
- It is assumed that there are no deed restrictions to a single use of
the subject property. The presence of such restrictions could adversely impact
the value of the site.
6. STACEY ROSE AT VICTORVILLE
- No responsibility is assumed for matters which are legal in nature.
- There are easements which are assumed to be typical utility easements
and do not negatively impact the value of the property.
- No opinion of title is rendered, and the subject property is appraised
as though free of all easements, liens, or encumbrances. Title is assumed to be
marketable.
- No survey of the boundaries of the subject property was undertaken by
the appraisers. All areas and dimensions furnished to the appraisers are
presumed to be correct.
- No soils report has been reviewed in connection with the valuation
analysis. Unless otherwise stated, it is assumed that there are no adverse
subsurface conditions.
- Forecasts of future events that influence the valuation process are
predicated on the continuation of historic and current trends in the market.
A.2-12
<PAGE>
- The subject property is appraised assuming it to be under responsible
ownership and competent management and available for its highest and best use.
- No environmental site assessment report was provided for the
appraisers' review. It is assumed that there are no hidden or unappparent
conditions of substances in the soil or subsoil that may be hazardous or toxic.
- It is assumed that there are no deed restrictions to a single use of
the subject property. The presence of such restrictions could adversely impact
the value of the site.
7. ESPERANZA AT VICTORVILLE
- No responsibility is assumed for matters which are legal in nature.
- There are easements which are assumed to be typical utility easements
and do not negatively impact the value of the property.
- No opinion of title is rendered, and the subject property is appraised
as though free of all easements, liens, or encumbrances. Title is assumed to be
marketable.
- No survey of the boundaries of the subject property was undertaken by
the appraisers. All areas and dimensions furnished to the appraisers are
presumed to be correct.
- No soils report has been reviewed in connection with the valuation
analysis. Unless otherwise stated, it is assumed that there are no adverse
subsurface conditions.
- Forecasts of future events that influence the valuation process are
predicated on the continuation of historic and current trends in the market.
- The subject property is appraised assuming it to be under responsible
ownership and competent management and available for its highest and best use.
- No environmental site assessment report was provided for the
appraisers' review. It is assumed that there are no hidden or unappparent
conditions of substances in the soil or subsoil that may be hazardous or toxic.
- It is assumed that there are no deed restrictions to a single use of
the subject property. The presence of such restrictions could adversely impact
the value of the site.
8. CYPRESS LAKES
- No opinion of title is rendered, and the subject property is appraised
as though free of all easements, liens, or encumbrances. Title is assumed to be
marketable.
A.2-13
<PAGE>
- The subject property is appraised assuming it to be under responsible
ownership and competent management and available for its highest and best use.
- No environmental site assessment report was provided for the
appraisers' review. It is assumed that there are no hidden or unappparent
conditions of substances in the soil or subsoil that may be hazardous or toxic.
- No engineering study, property survey, soil study or environmental
investigation has been made and no liability is assumed in connection with such
matters.
- Dimensions and areas are as supplied by others or based upon field
measurements and are subject to a survey by qualified professional surveyors or
architects.
- It is assumed that all necessary entitlements, licenses, agreements,
franchises, etc., remain in full force and effect in order to continue the
operations of the property throughout the financial analysis period of this
appraisal, unless otherwise noted.
A.2-14
<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 units of its securities in
exchange for the assets (including cash reserves), certain liabilities and
business activities owned by Investors in seven former "Trudy Pat" programs
and three other programs managed by National Investors Financial, Inc.
("National"). For this proposed Acquisition, the Company will issue an
aggregate of $[28,066,419] of units arbitrarily valued at $20 per unit. A
unit consists of one share of common stock plus warrants to purchase three
additional shares. The [units][shares and warrants] 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, eliminate the assessment process, focus on revenue-generating
potential, improve efficiency of operations in order to reduce costs and
increase profit potential, and provide the investors with liquidity for their
investments.
Of the [1,403,321] units ([1,380,175] units if only the "Trudy Pat"
programs participate) to be issued by the Company in the Acquisition, Investors
in the Sacramento/Delta Greens Program will receive a total of [78,524] units or
[128] units 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 units 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
SEVEN "TRUDY PAT" PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE
PLACE.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a tenancy-in-common
interest in your program's property. Instead, you will hold shares in a
publicly-traded real estate company and will not receive liquidation proceeds
when, or if, your program's property is sold. As an investor in a
publicly-traded company with many stockholders, you will have relatively less
voting power.
- - If the acquisition is approved, your investment will be subject to the
risks associated with residential development plus new risks associated with a
business which also operates a golf course and a recreational vehicle park, and
which plans to pursue commercial development and 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 unit assigned for
purposes of the acquisition. Thus, the value of the units 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 16.42% of the Company's stock (4.78% if all warrants are
exercised) for which they paid $0.01 per share and will receive annual cash
compensation aggregating $560,000 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 $950,000 annually.
However, the Company will still owe National over $1,800,000 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 certain of its properties or the
exercise of the warrants included in the units, it will be no more successful
than the programs have been individually in completing the development of some
or all of the properties.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE ACQUISITION.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found on
pages [__] through [__] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If the
acquisition is completed, there will be a change in the nature of the investment
of each investor from holding a tenancy-in-common interest in real estate to
holding shares in an on-going company, the assets of which may be changed from
time to time without approval of investors. If the acquisition is completed,
investors will be able to liquidate their investments only by selling their
[units][shares] on the _____ or in private transactions, and they will not
receive a return of their investment in the form of liquidation proceeds through
property sales. If the acquisition is completed, investors will have an
investment in an entity that is larger than each of the programs and will thus
lose relative voting power. Investors will have an investment in a business
which also operates a golf course and a recreational vehicle park, and which
plans to pursue the development of timeshare facilities and a hotel/conference
center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL SALES
PRICE. Investors are subject to the risk that the exchange value of a program
does not reflect the price a program's assets might bring in a sale. If the
property of a program were to be sold, the net proceeds of the sale and the
amount finally distributed to an investor in that program may be more or less
than the exchange value. There is no assurance that the future value of the
shares and warrants received in the acquisition will be greater than the most
recent appraised value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may trade
at prices substantially below the arbitrarily determined exchange value of $20
per unit or the 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
$20 due to a potentially large number of shares that investors may sell
immediately after the acquisition.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of interest.
The principal shareholders and employees of National and the company will hold
approximately [16.42]% of the company's outstanding stock (4.78% if all warrants
are exercised) for which they paid $0.01 per share. Other founders of the
company will hold approximately [2.3]% 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 $560,000 as officers and employees of the company.
National will be relieved of its servicing and asset management obligations and
will no longer earn asset
2
<PAGE>
management or servicing related fees. However, the company will still owe
National over $1,800,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not favored
by the board of directors. These provisions include a board of directors with
three classes serving staggered three year terms, the inability to remove a
particular director before the expiration of his or her term without a
two-thirds supermajority vote , and the inability to amend the anti-takeover
provisions of the charter documents without a similar vote. Thus, if investors
are unhappy with management's performance, it will be more difficult to remove
directors not favored by the investors.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF THE
INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of each
program, the terms of the acquisition may have been more favorable to certain or
all of the programs and fewer shares and less favorable employment contracts may
have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to opine
conclusively on the tax consequences of the acquisition to investors. The
acquisition may be taxable, if at all, only with respect to the investors'
receipt of warrants. Alternatively, if the acquisition is a fully 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 $20 per
unit. If the acquisition is treated as fully taxable, National believes most
investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the acquisition,
none of the properties will be subject to any liens other than for property
taxes. The board of directors could authorize borrowing by the company the debt
service for which may adversely affect the company's ability to make
distributions to shareholders. The company may incur full recourse debt which
exposes all of the assets of the company to repayment instead of limited
recourse debt which generally exposes specific properties for the repayment of
debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS.
If you vote against the acquisition, and it is approved, you will not be able to
object to the acquisition and receive the appraised value of your
tenancy-in-common interest in your program's assets. You will have no choice
other than to accept units for your interests.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long
3
<PAGE>
time. This means that shares in the company are much riskier than ownership of
shares of established companies. If the company had been operating as if it
owned the properties which it desires to acquire, it would have experienced
losses to date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE ACQUISITION
TAKES PLACE. Rather than being focused on a single property, the company will
be an infinite life entity focused on the management of at least the seven
properties of the former "Trudy Pat" programs. 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. Prior to the dates
that title to the properties securing the original program loans was taken,
National was entitled to an annual loan servicing fee equal to one percent of
the original loan amounts. When title to the properties was taken on behalf of
the programs, even though the loans no longer existed, National continued to
charge the same rate as the servicing fee for the asset management services it
provided to investors. The investors in each of the programs had become the
beneficial tenant-in-common owners of real estate, most of which was
undeveloped. While it had no obligation to do so, in order to assist the
beneficial owners in protecting their real estate assets and readying them for
sale or development, National assumed the duties of an asset manager after title
was taken to the properties. In this capacity, National obtained information
from investors about their preferences in regard to development or sale of the
properties, acted as assessing agent to raise funds necessary to pay property
taxes, insurance and other costs of property ownership.
The annual fees payable to National are currently $50,000 for
Sacramento/Delta Greens; $300,000 for Oceanside; $65,000 for Yosemite/Ahwahnee
I; $135,000 for Yosemite/Ahwahnee II; $100,000 for Mori Point; $140,000 for
Cypress Lakes; $150,000 for Palmdale/Joshua Ranch; $5,000 for Esperanza; $3,153
for Stacey Rose A; and $850 for Stacey Rose B.
In addition to the one percent fee, compensation has been earned for
property management services provided to the Oceanside program ($896,000 accrued
since the date of
4
<PAGE>
ownership (November 1993) through June 30, 1998; $876,000 actually paid) and
Yosemite/Ahwahnee properties ($594,535 accrued since the date of ownership
(September 1995); $-0- actually paid) by officers and employees of National in
their capacities as officers and employees of Oceanside Development, Inc. and
Ahwahnee Golf Course & Resort, Inc. Those property management services
included, without limitation, solicitation, engagement, coordination and
supervision of: entitlement and permit processing, environmental, engineering,
planning, architectural, construction, marketing, appraisal, legal, accounting
and other experts as needed for each project; due diligence on potential service
providers; assistance in presentations and applications for approvals to
governmental agencies; packaging and documenting the status of a project for
potential financing, sale or joint venture; supervising and managing the
operational activities for construction projects on the Oceanside and
Yosemite/Ahwahnee projects; and contract negotiations and documentation. To the
extent similar property specific services were provided to the other programs,
they were provided without extra charge because the necessary activities were
less regular and less operationally intense.
In the future, compensation will be paid to officers of the company in the
form of salaries (aggregating $560,000 annually plus contractual bonus
opportunities and salary increases), stock options and other benefits. See
"Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for details of stock options and other benefits.
These salaries and other forms of compensation will be payable to management of
the company even if one or more of the properties acquired in the acquisition is
subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE DIFFERENCES IN YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THAT THE EXCHANGE VALUES FOR THOSE
PROPERTIES COULD BE TOO LOW OR TOO HIGH. National reviewed the updated March
1998 appraisal of the Yosemite/Ahwahnee properties which reflected an aggregate
"as is" appraised value of $20,246,000 and the October 1996 appraisal which
reflected an "as is" aggregate appraised value of $4,000,000. The results of
those appraisals clearly differed from each other, and, in management's
judgment, the difference could not be accounted for by improving market
conditions. Some of the parcels, including the golf course, were subsequently
sold, on June 5, 1998, to the Oceanside Program investors to obtain working
capital. Based on its review of all appraisals, National concluded that the
properties currently owned by the Yosemite/Ahwahnee I and II Programs have
values of $5,486,000 ($1,782,950 and $3,703,050, respectively), and the parcels
currently owned by the Oceanside Program have a value of $5,080,000. National
believes its approach is reasonable and has received an opinion from Houlihan
Valuation Advisors that the allocation of the shares among the programs is fair.
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
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<PAGE>
programs' properties is subject to the following delinquent property taxes as of
June 30, 1998: Sacramento/Delta Greens - approximately $27,000;
Yosemite/Ahwahnee (combined) - approximately $500,000; Mori Point -
approximately $165,000; Cypress lakes - approximately $204,000; Palmdale (Joshua
Ranch) - approximately $63,000; Esperanza - approximately $20,000; and Stacey
Rose - approximately $30,000. Annual payments required for all the properties
for current taxes (including amounts currently due on five-year payment plans)
total approximately $549,000. In the case of Sacramento/Delta Greens,
Yosemite/Ahwahnee, Mori Point, Palmdale/Joshua Ranch and Stacey Rose properties,
National has entered into statutorily authorized 5-year payment plans with the
applicable taxing authorities.
CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a minimum of
approximately $[4,715,000] from sale of certain assets of the programs or from
the exercise of warrants become available, the company will not be able to
proceed with its entire business plan. The company will also need financing
from other sources to complete its plan. Financing sources are not predictable
and interest rates or other costs of financing may be prohibitive. Neither the
programs nor the company have received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE EXPENSIVE
HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the properties.
As a result, there may be environmental liability. Local governments have
required residential developers to pay assessments for streets, schools and
parks which increase the cost of development. Increased costs can have a
negative affect on the company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as earthquakes
and floods may be uninsurable or too expensive to insure. The company does not
plan to carry earthquake or flood insurance. If an uninsured loss occurs, the
company would lose capital as well as revenues, and would still owe other debts
related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do so.
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.
6
<PAGE>
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE OWED
$[1,818,684] BY THE COMPANY. This represents accrued fees and expenses from the
programs which National has not cancelled. This amount is due and payable and
the company intends to start paying it after the Acquisition, but only from
operating revenues 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 approval of a new tentative map,
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.
Since some were identified, changes to the tentative development plans have been
made that will reduce or eliminate any damage to the habitat. A new tentative
map needs to be approved by the City. The longer this process takes, the longer
it will be until the company can make money from the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays in
construction, the lack of reasonably priced construction or mortgage financing,
and the general California economy could lengthen the holding period for the
lots. This would mean a delay in realizing cash from the business operations.
The average carrying costs, including property taxes, management and servicing
related fees, for this property has averaged approximately $10,000 per month
over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real estate
is cyclical and the residential lot development industry is highly competitive.
If the demand for new lots does not keep pace with competitive supply, our
properties may be sold at a loss. The location of the company's lots, the
presence of other competition, customer acceptance and pricing are all factors
affecting success. Competitors may have better financial, managerial and other
resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 5% of the assets of the company. Although there can be no
assurances and net revenues from Sacramento/Delta Greens may equal or exceed
$3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to finance engineering and endangered species studies (estimated by
management to cost approximately $175,000). 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.
7
<PAGE>
REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE CONDOMINIUM-TYPE TIMESHARE ASPECT OF THE RESORT HAVE
NOT YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map on 32
remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Planning is underway for vacation villa timeshare
units utilizing part of the allocated use permit space for recreational
vehicles. Additional planned usage such as traditional, attached timeshare
units 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 15% of the assets of the company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard to
obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not be
able to develop its resort projects as part of its growth strategy. Economic
conditions, changes in travel patterns, extreme weather conditions, labor and
other variable costs can all affect revenues and profits. For example, Spring
through Fall at the Yosemite/Ahwahnee property are the periods of highest
occupancy. Seasonality can be expected to cause quarterly fluctuations in the
company's revenues.
The recreational vehicle park at Yosemite/Ahwahnee may generate as much as
ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or eliminate
profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers
8
<PAGE>
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 $350,000) annually and (ii)
complete the construction of additional recreational vehicle sites and 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
the City of Pacifica is expensive and time consuming. Mori Point had a specific
plan and tentative map to build a hotel/conference center which expired in 1991.
These approvals must be reinstated prior to construction on the property.
HOTEL/CONFERENCE CENTER DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF
REASONS AND COULD RESULT IN LOSSES. In addition to normal real estate risks,
financing is hard to obtain, and the lodging industry can be unpredictable,
seasonal and very competitive. Without additional financing or capital, the
company will not be able to develop its hotel/conference center project as part
of its growth strategy. Economic conditions, changes in travel patterns,
extreme weather conditions, labor and other variable costs can all affect
revenues and profits. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues. At the hotel/conference center property
at Mori Point, we may be competing against well-known chains and extended-stay
inns.
9
<PAGE>
Mori Point represents approximately 20% of the assets of the company and,
assuming it is operated as a hotel/conference center, its revenues could
ultimately 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.
REAL ESTATE RISKS OF CYPRESS LAKES PROPERTY
THE VESTED TENTATIVE MAP NEEDS MODIFICATION AND BUILD OUT OF THE PROPERTY
WILL BE EXPENSIVE. Due to being located in a 100-year flood plain, the property
requires a levee to be constructed around its perimeter which is very expensive
to construct. It may be desirable to change the vesting tentative map if the
costs can be reduced significantly. However, any changes in the existing plan
could subject the project to public hearings which might result in additional
costs being placed on the project. This would further increase the high
front-end financial requirements. Additionally, such modifications might not be
approved.
Cypress Lakes is a proposed master-planned community and represents more
than 20% of the assets of the Company. Joint venture partners would have to be
brought in by the Company to help with the large capital requirements of such a
large project. It may be difficult to find substantial builder/developers who
have the financial ability to purchase or develop the project. Changing market
conditions may increase the difficulty in selling lots.
Should the Company determine to build out the project, delays in
construction, reasonably priced mortgage and construction financing and the
local and general California economy could lengthen the holding period for the
lots. This would mean delays in realizing cash from the business operations.
RISKS AFFECTING OPERATION OF A GOLF COURSE. When, and if, the golf course
is developed, it will face competition from the golf courses within a 25 mile
radius. Seasonality, weather and course conditions will affect the operations
of the company. 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.
RISKS OF RESIDENTIAL DEVELOPMENT. Totaling 1,330 lots, a large supply of
lots would be available ,and due to the cyclical nature of the housing industry,
demand may not stay in sync with supply. This could result in needing to sell
properties at a loss. Due to the size of the project, it could take between six
and ten years to complete, which would subject it to new competitors entering
the marketplace during the sales period.
10
<PAGE>
REAL ESTATE RISKS OF PALMDALE/JOSHUA RANCH PROPERTY
A FINAL TRACT MAP MUST BE RECORDED. After several years of effort by
National, the vested tentative map was approved by the City of Palmdale at a
hearing before the planning commission in early July 1998. A final recorded map
must be secured by National or a buyer in order to build on the property. Final
engineering, soils, utility and various improvement studies will need to be
conducted in order to record the final map.
PERMITS TO DEVELOP THE PROPERTY NEED TO BE OBTAINED. A final recorded map,
which could take nine to twelve months after starting the process, will be
required prior to construction. Due to the size of this project which
encompasses some 739.6 acres and is currently planned for 539 lots, additional
grading studies, soils investigation and utility planning needs to be done which
could negatively impact the cost of this large-scale development.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Finding
builder/developers that have the financial strength to handle this size project
can be difficult. Changing market conditions, the lack of reasonably-priced
construction or mortgage financing and the general or local market conditions
could lengthen the holding period for lots. This would mean a delay in
realizing cash from business operations. The average carrying costs, including
property taxes, predevelopment and asset management services for this Property
have averaged approximately $16,300 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real estate
is cyclical and the residential lot development industry is highly competitive.
If the demand for new lots does not keep pace with competitive supply, the
Property may be sold at a loss. The location of the lots, the presence of other
competition, customer acceptance and pricing are all factors affecting success.
Competitors may have better financial, managerial and other resources affecting
the Company's ability to successfully compete.
Palmdale/Joshua Ranch is a proposed residential development and represents
about 10% of the assets of the Company.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to pay for or finance (i) engineering, soils and utility studies which
is estimated to cost approximately $140,000, and (ii) another risk is whether
the lots to be developed may appeal to project builders.
REAL ESTATE RISKS OF ESPERANZA PROPERTY
RISKS OF COMMERCIAL DEVELOPMENT. The material risks associated with the
development of the Esperanza Property are (i) as of June 30, 1998, approximately
$23,000 of property taxes are delinquent and must be brought current or a
statutory five-year payment plan must be arranged with the County of Riverside
to avoid loss of the Property for delinquent property taxes; and (ii) despite a
strong economy, rents and values for many retail properties are expected to
remain soft in 1998. Pressure on rents brought about by
11
<PAGE>
over building, weakness in demand for space and store closures caused by lagging
profits are the forces causing a soft market.
ADDITIONAL SPECIFIC RISKS. Within the City of Victorville there are
approximately 3,250 acres zoned for commercial use, of which 60% remains
available for development. Victorville is home to the largest enclosed regional
shopping center between San Bernardino and Las Vegas, which is known as The Mall
of Victor Valley. These commercial sites represent significant competition to
the Esperanza project. There are more than 5,400 acres within the city limits
of Victorville zoned for light and heavy industrial use. Nearly nine percent of
this 5,400 acres of land is vacant and is available in parcels ranging in size
from one-half to five hundred acres.
REAL ESTATE RISKS OF STACEY ROSE PROPERTIES
RISKS OF RESIDENTIAL DEVELOPMENT. The material risks associated with the
development of the Stacey Rose Properties are (i) as of June 30, 1998,
approximately $30,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the County
of Riverside to avoid loss of the Properties for delinquent property taxes; (ii)
it is estimated that it may cost about $50,000 to finalize a tentative tract map
on the parcels; (iii) a substantial, and potentially expensive, sales and
marketing effort will be necessary to sell homes constructed on the properties
if a bulk sale of the lots is not made; (iv) the Properties are located in a
lower income residential area; and (v) increasing government fees and
assessments for streets, schools, parks and other infrastructure requirements
could increase the cost of lots to the company, thereby increasing the sales
price of the lots which will delay market absorption.
ADDITIONAL SPECIFIC RISKS. There is a risk that (i) adequate funds will
not be available to finalize a tentative tract map on the parcels (approximately
$50,000); (ii) the project will not appeal to project builders; and (iii) home
financing at reasonable costs may not be available. There is also a risk that
the development and sale of lots or home 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.
12
<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.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's certificate
of incorporation, as well as Delaware law, prohibits certain business
combinations with owners of more than 15% of the outstanding voting stock of the
company ("interested stockholders") within the three year period immediately
prior to the date on which the interested stockholder became an interested
stockholder. These restrictions on certain business combinations may deter
potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of incorporation
which cover anti-takeover provisions require the approval of two-thirds of the
company's voting stock. This restriction also may deter potential purchasers
who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well as
the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections National
enjoys under the programs' servicing agreements.
FAIRNESS TO INVESTORS IN THE SACRAMENTO/DELTA GREENS PROGRAM
From a financial point of view, the company and National believe the terms
of the acquisition are fair as a whole and to the investors in each of the
programs. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that develops
will be sustained;
- while the number of units to be issued to reflect the exchange value
of a program is arbitrary, the trading price of the shares included in the units
initially is likely to be substantially below the $20 value arbitrarily assigned
to the units. In our opinion, the exchange values offered to investors for
their assets allow for an equitable allocation of the [1,403,321] units
([1,380,175] units if only the "Trudy Pat" programs participate) 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. After the acquisition, a total of [4.55]%
of the outstanding stock of the Company will be held by Sacramento/Delta Greens
investors (4.61% if only the "Trudy Pat" programs participate). After the
acquisition, founders of the company (principals, employees, and consultants of
National) will hold less than 15%. Founders' shares were purchased for $.01 per
share. National and its principals have forgiven over $3,495,000 of expenses
and accrued fees of which a total of approximately $2,800,000 was earned for
asset management and property management services after the loans defaulted and
before the Ownership Dates of the properties. The balance was earned
13
<PAGE>
after foreclosure for asset and property management services and expenses. Of
such amount, $500,000 is attributable to fees owed by Sacramento/Delta Greens
investors. National believes that the amount paid for the property management
services is no greater than the amount that a third party would charge;
- the current appraised value of the Sacramento/Delta Greens real estate
assets ($1,745,000) (as well as the real estate assets of the other programs)
and the fact that substantial financing is needed to further the property's
development;
- the probability that the transaction will have minimal, if any,
negative tax affect on investors. National believes there will likely be no
out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have independent
representation in the structuring of the acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the Sacramento/Delta Greens Program was originally formed to
have a two to four year finite life which, for Sacramento/Delta Greens, should
have ended between 1991 and 1992 and the investors expected to receive a return
of their investment from the original borrower, the company is an infinite life
entity which will not return the program investors' original investment based on
a sale or refinancing of the properties underlying the original programs.
However, after the borrowers defaulted on the "Trudy Pat" loans, the investors
became beneficial owners of the underlying properties with the need to complete
development, manage or otherwise ready the properties for sale. Those endeavors
had no fixed timetable and, thus, the finite life aspect of their original
investments was significantly changed. Therefore, the infinite life aspect of
the company is not viewed by National to be a material change from the
investors' CURRENT situation;
- the acquisition will cause fundamental changes in the business plan of
the Sacramento/Delta Greens program. Rather than being focused on the
development of a single property for residential purposes, the company will be
focused on the management of at least seven properties. Thus, the poor
performance of a particular property may affect the Company's operations as a
whole regardless of the performance of the Sacramento/Delta Greens property.
Further, there will be no particular time when an Investor can expect its
interest to be automatically liquidated;
- the fact that Sacramento/Delta Greens investors have twice rejected
offers to acquire the property due to price and terms of the proposed
transactions;
- investors will not be able to vote on changes to or dispositions of
the Sacramento/Delta Greens property or borrowing secured by that property.
Those decisions will be made by the Board of Directors or management of the
Company. Further, as investors in a larger entity, relative voting power will
be diluted;
14
<PAGE>
- future cash distributions will be based on the company's earnings and
the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Sacramento/Delta Greens property;
- investors voting against the acquisition will have no alternative but
to accept shares in the company if the acquisition is approved by holders of a
majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a change
in management which is not favored by the Board of Directors of the company; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the units in
the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection with
the acquisition and compared it with what you might receive if (i) the
Sacramento/Delta Greens property were operated "as is" ($995 per $10,000 of
Adjusted Outstanding Investment), (ii) the Sacramento/Delta Greens property was
sold in a quick sale in three months or less ($995 per $10,000 of Adjusted
Outstanding Investment), or (iii) the Sacramento/Delta Greens property was sold
at the appraised value (net of program debts) used to determine the
Sacramento/Delta Greens exchange value ($2,273 per $10,000 of Adjusted
Outstanding Investment). Based on that review, and even acknowledging that,
initially, the company's shares included in the units issued in the acquisition
would likely trade substantially below the arbitrary $20 issuance value for the
units, National believes that there is a higher probability of realizing value
from the Sacramento/Delta Greens property through the acquisition than through
the other alternatives. This belief is based on the expectation that some
financing opportunities will become available based on the form of the entity
and the time pressure associated with forced sales or liquidation will be
relieved. See "Background and Reasons for the Acquisition -- Comparison to
Alternatives" and "Recommendation of National and Fairness Determination" at
pages __ and __ of the Prospectus. Based on this comparison, National concluded
that the acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Sacramento/Delta Greens Program (as well as each
of the other Programs) is essentially the consideration at which the Company is
offering in exchange for the real estate assets, cash reserves, certain
liabilities and business of the Program. The value is reflected as a number of
units of the Company (in the case of the Sacramento/Delta Greens Program, 78,524
units) multiplied by an arbitrary $20 per unit value.
The Exchange Value for the Sacramento/Delta Greens Program was calculated
as follows: appraised value of the Sacramento/Delta Greens Program property at
March 31,
15
<PAGE>
1998, plus book value of other Sacramento/Delta Greens Program assets at June
30, 1998, less Sacramento/Delta Greens Program liabilities at June 30, 1998.
The following table summarizes the calculation of the Exchange Value of the
Sacramento/Delta Greens Program and the value assigned on $10,000 of Adjusted
Outstanding Investment:
<TABLE>
<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>
$ 1,745,000 $[ (174,514)] $[ 1,570,486] $ [ 2,558](3)
</TABLE>
- ----------------
(1) Reflects independent appraisal as of March 1998.
(2) The following table quantifies the adjustments to appraised values made in
determining Sacramento/Delta Greens property's Exchange Value as of June
30, 1998.
<TABLE>
<CAPTION>
Book Assets Book Liabilities Net Other Assets
(6/30/98)* - (6/30/98)* = and Liabilities
--------- --------- ---------------
<S> <C> <C>
$ 126,316 $ (300,830) $ (174,514)
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no mortgage debt on the Sacramento/Delta Greens
property.
(3) Equals [128] Company shares arbitrarily valued at $20 per unit.
ALLOCATION OF SHARES
The [1,403,321] shares of Company common stock being offered to Investors
in the Acquisition represent over 80% of the Company's shares (94% if all
warrants are exercised) 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 Programs pro rata in
accordance with Exchange Values. The Sacramento/Delta Greens Program will be
allocated [78,524] shares.
The shares allocated to the Sacramento/Delta Greens Program will be
allocated among Investors in the Program based on their respective pro rata
investments in the Program (taking into account assessments paid and unpaid, as
well as interest accrued to each Investor through the date beneficial ownership
of the Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Sacramento/Delta Greens Program with an adjusted
investment amount of $10,000 will receive [128] units in the Company arbitrarily
valued at $20 per unit.
Neither National nor the Company's founders have any economic interest
in the Sacramento/Delta Greens Program except for National's contractual right
to asset management fees and the $3,118 of tenancy-in-common interests purchased
by National at the inception of the Program for which interests National will
receive units in the Acquisition pro rata with the
16
<PAGE>
other Sacramento/Delta Greens Investors. National will undertake not to
exercise the warrants in the units.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Sacramento/Delta Greens Program (including accrued but
unpaid interest) plus the amount of assessments and advances paid by Investors
at June 30, 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
Outstanding
After the
Amount Real Estate Acquisition if
Owed plus Appraised Exchange No. of Shares all Programs
Name of Program Assessments Value Value(1) Allocated(1)(2) Participate
--------------- ----------- ----- ----- --------- -----------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 6,131,638 $ 1,745,000 $[ [78,524] [4.55]%
1,570,486]
</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 [323,676] Company shares after the
Acquisition (18.74% of the outstanding shares post-Acquisition, 5.45% if
all warrants are exercised) which, if valued at $20 per share, would have
an aggregate value of $[6,473,520]. The Company was formed, and shares
were purchased by the founders for $.01 per share, prior to making the
Acquisition proposal. 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:
17
<PAGE>
<TABLE>
<CAPTION>
Previously
Name of Program Cancelled
---------
<S> <C>
Sacramento/Delta Greens $ 500,000
Oceanside -0-
Yosemite/Ahwahnee I 72,158
Yosemite/Ahwahnee II 1,157,867
Mori Point 461,589
Cypress Lakes 1,120,000
Palmdale (Joshua Ranch) -0-
Esperanza 102,134
Stacey Rose A 64,293
Stacey Rose B 17,267
-----------
TOTAL $ 3,495,308
-----------
-----------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [14.3]% ([15.1]% if only the
seven "Trudy Pat" programs participate) of the total shares to be owned by
the Company's founders after the Acquisition ([46,302] shares if all
programs participate and [48,870] shares if only the seven "Trudy Pat"
programs participate) 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, and for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Incurred Actually Incurred Actually Actually Incurred for Actually Paid
for Paid for for Year Paid for Incurred for Paid for Six Months in Six Months
Year Ended Year Ended Ended Year Ended Year Ended Year 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 6/30/98 6/30/98
--------------- -------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $50,000(2) $-0- $50,000(2) $-0- $50,000 (2) $8,267 $25,000 $32,166
</TABLE>
- --------------
(1) These amounts represent accrued asset management fees.
(2) Approximately $62,886 per year if the Acquisition had been completed during
the above periods including $32,700 of estimated salaries to be paid by the
Company to its officers and which were allocated to the Sacramento/Delta
Greens Program based on Exchange Values. No cash would have been available
to pay officers' bonuses or dividends to shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/
EFFECT OF THE ACQUISITION
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995, 1996 and
1997:
18
<PAGE>
<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 the Sacramento/Delta Greens Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
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 units of its securities in exchange for the assets
(including cash reserves), certain liabilities and business activities owned by
Investors in seven former "Trudy Pat" programs and three other programs managed
by National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[28,066,419] of units
arbitrarily valued at $20 per unit. A unit consists of one share of common
stock plus warrants to purchase three additional shares. The [UNITS][SHARES AND
WARRANTS] 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, eliminate the assessment process, focus on revenue-generating
potential, improve efficiency of operations in order to reduce costs and
increase profit potential, and provide the investors with liquidity for their
investments.
Of the [1,403,321] units ([1,380,175] units if only the "Trudy Pat"
programs participate) to be issued by the Company in the Acquisition, Investors
in the Oceanside Program will receive a total of [268,653] units or [111] units
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 units 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
SEVEN "TRUDY PAT" PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE
PLACE.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a tenancy-in-common
interest in your program's property. Instead, you will hold shares in a
publicly-traded real estate company and will not receive liquidation proceeds
when, or if, your program's property is sold. As an investor in a
publicly-traded company with many stockholders, you will have relatively less
voting power.
- - If the acquisition is approved, your investment will be subject to the
risks associated with residential and commercial development plus new risks
associated with a business which also operates a golf course and a recreational
vehicle park, and which plans to pursue the development of timeshare facilities
and a hotel/conference center.
- - If a trading market develops, the initial trading price for the stock will
likely be substantially below the arbitrary value of $20 per unit assigned for
purposes of the acquisition. Thus, the value of the units 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 16.42% of the Company's stock (4.78% if all warrants are
exercised) for which they paid $0.01 per share and will receive annual cash
compensation aggregating $560,000 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 $950,000 annually.
However, the Company will still owe National over $1,800,000 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 certain of its properties or the
exercise of the warrants included in the units, it will be no more successful
than the programs have been individually in completing the development of some
or all of the properties.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE ACQUISITION.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found on
pages [__] through [__] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If the
acquisition is completed, there will be a change in the nature of the investment
of each investor from holding a tenancy-in-common interest in real estate to
holding shares in an on-going company, the assets of which may be changed from
time to time without approval of investors. If the acquisition is completed,
investors will be able to liquidate their investments only by selling their
[UNITS][SHARES] on the _____ or in private transactions, and they will not
receive a return of their investment in the form of liquidation proceeds through
property sales. If the acquisition is completed, investors will have an
investment in an entity that is larger than each of the programs and will thus
lose relative voting power. Investors will have an investment in a business
which also operates a golf course and a recreational vehicle park, and which
plans to pursue the development of timeshare facilities and a hotel/conference
center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL AND
SALES PRICE. Investors are subject to the risk that the exchange value of a
program does not reflect the price a program's assets might bring in a sale. If
the property of a program were to be sold, the net proceeds of the sale and the
amount finally distributed to an investor in that program may be more or less
than the exchange value. There is no assurance that the future value of the
shares and warrants received in the acquisition will be greater than the most
recent appraised value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may trade
at prices substantially below the arbitrarily determined exchange value of $20
per unit or the 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
$20 due to a potentially large number of shares that investors may sell
immediately after the acquisition.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of interest.
The principal shareholders and employees of National and the company will hold
approximately [16.42]% of the company's outstanding stock (4.78% if all warrants
are exercised) for which they paid $0.01 per share. Other founders of the
company will hold approximately [2.3]% 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 $560,000 as officers and employees of the company.
National will be relieved of its servicing and asset management obligations and
will no longer earn asset
2
<PAGE>
management or servicing related fees. However, the company will still owe
National over $1,800,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not favored
by the board of directors. These provisions include a board of directors with
three classes serving staggered three year terms, the inability to remove a
particular director before the expiration of his or her term without a
two-thirds supermajority vote, and the inability to amend the anti-takeover
provisions of the charter documents without a similar vote. Thus, if investors
are unhappy with management's performance, it will be more difficult to remove
directors not favored by the investors.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF THE
INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of each
program, the terms of the acquisition may have been more favorable to certain or
all of the programs and fewer shares and less favorable employment contracts may
have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to opine
conclusively on the tax consequences of the acquisition to investors. The
acquisition may be taxable, if at all, only with respect to the investors'
receipt of warrants. Alternatively, if the acquisition is a fully 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 $20 per
unit. If the acquisition is treated as fully taxable, National believes most
investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the acquisition,
none of the properties will be subject to any liens other than for property
taxes. The board of directors could authorize borrowing by the company the debt
service for which may adversely affect the company's ability to make
distributions to shareholders. The company may incur full recourse debt which
exposes all of the assets of the company to repayment instead of limited
recourse debt which generally exposes specific properties for the repayment of
debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS.
If you vote against the acquisition, and it is approved, you will not be able to
object to the acquisition and receive the appraised value of your
tenancy-in-common interest in your program's assets. You will have no choice
other than to accept units for your interests.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long
3
<PAGE>
time. This means that shares in the company are much riskier than ownership of
shares of established companies. If the company had been operating as if it
owned the properties which it desires to acquire, it would have experienced
losses to date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE ACQUISITION
TAKES PLACE. Rather than being focused on a single property, the company will
be an infinite life entity focused on the management of at least the seven
properties of the former "Trudy Pat" programs. 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. Prior to the dates
that title to the properties securing the original program loans was taken,
National was entitled to an annual loan servicing fee equal to one percent of
the original loan amounts. When title to the properties was taken on behalf of
the programs, even though the loans no longer existed, National continued to
charge the same rate as the servicing fee for the asset management services it
provided to investors. The investors in each of the programs had become the
beneficial tenant-in-common owners of real estate, most of which was
undeveloped. While it had no obligation to do so, in order to assist the
beneficial owners in protecting their real estate assets and readying them for
sale or development, National assumed the duties of an asset manager after title
was taken to the properties. In this capacity, National obtained information
from investors about their preferences in regard to development or sale of the
properties, acted as assessing agent to raise funds necessary to pay property
taxes, insurance and other costs of property ownership.
The annual fees payable to National are currently $50,000 for
Sacramento/Delta Greens; $300,000 for Oceanside; $65,000 for Yosemite/Ahwahnee
I; $135,000 for Yosemite/Ahwahnee II; $100,000 for Mori Point; $140,000 for
Cypress Lakes; $150,000 for Palmdale/Joshua Ranch; $5,000 for Esperanza; $3,153
for Stacey Rose A; and $850 for Stacey Rose B.
In addition to the one percent fee, compensation has been earned for
property management services provided to the Oceanside program ($896,000 accrued
since the date of
4
<PAGE>
ownership (November 1993) through June 30, 1998; $876,000 actually paid) and
Yosemite/Ahwahnee properties ($594,535 accrued since the date of ownership
(September 1995); $-0- actually paid) by officers and employees of National in
their capacities as officers and employees of Oceanside Development, Inc. and
Ahwahnee Golf Course & Resort, Inc. Those property management services
included, without limitation, solicitation, engagement, coordination and
supervision of: entitlement and permit processing, environmental, engineering,
planning, architectural, construction, marketing, appraisal, legal, accounting
and other experts as needed for each project; due diligence on potential service
providers; assistance in presentations and applications for approvals to
governmental agencies; packaging and documenting the status of a project for
potential financing, sale or joint venture; supervising and managing the
operational activities for construction projects on the Oceanside and
Yosemite/Ahwahnee projects; and contract negotiations and documentation. To the
extent similar property specific services were provided to the other programs,
they were provided without extra charge because the necessary activities were
less regular and less operationally intense.
In the future, compensation will be paid to officers of the company in the
form of salaries (aggregating $560,000 annually plus contractual bonus
opportunities and salary increases), stock options and other benefits. See
"Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for details of stock options and other benefits.
These salaries and other forms of compensation will be payable to management of
the company even if one or more of the properties acquired in the acquisition is
subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE DIFFERENCES IN YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THE EXCHANGE VALUES FOR THESE PROPERTIES
MAY BE TOO LOW OR TOO HIGH. National reviewed the updated March 1998 appraisal
of the Yosemite/Ahwahnee properties which reflected an aggregate "as is"
appraised value of $20,246,000 and the October 1996 appraisal which reflected an
"as is" aggregate appraised value of $4,000,000. The results of those
appraisals clearly differed from each other, and, in management's judgment, the
difference could not be accounted for by improving market conditions. Some of
the parcels, including the golf course, were subsequently sold, on June 5, 1998,
to the Oceanside Program investors to obtain working capital. Based on its
review of all appraisals, National concluded that the properties currently owned
by the Yosemite/Ahwahnee I and II Programs have values of $5,486,000 ($1,782,950
and $3,703,050, respectively), and the parcels currently owned by the Oceanside
Program have a value of $5,080,000. National believes its approach is
reasonable and has received an opinion from Houlihan Valuation Advisors that the
allocation of the shares among the programs is fair.
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
5
<PAGE>
programs' properties is subject to the following delinquent property taxes as of
June 30, 1998: Sacramento/Delta Greens - approximately $27,000;
Yosemite/Ahwahnee (combined) - approximately $500,000; Mori Point -
approximately $165,000; Cypress lakes - approximately $204,000; Palmdale (Joshua
Ranch) - approximately $63,000; Esperanza - approximately $20,000; and Stacey
Rose - approximately $30,000. Annual payments required for all the properties
for current taxes (including amounts currently due on five-year payment plans)
total approximately $549,000. In the case of Sacramento/Delta Greens,
Yosemite/Ahwahnee, Mori Point, Palmdale/Joshua Ranch and Stacey Rose properties,
National has entered into statutorily authorized 5-year payment plans with the
applicable taxing authorities.
CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a minimum of
approximately $[4,715,000] from sale of certain assets of the programs or from
the exercise of warrants become available, the company will not be able to
proceed with its entire business plan. The company will also need financing
from other sources to complete its plan. Financing sources are not predictable
and interest rates or other costs of financing may be prohibitive. Neither the
programs nor the company have received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE EXPENSIVE
HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the properties.
As a result, there may be environmental liability. Local governments have
required residential developers to pay assessments for streets, schools and
parks which increase the cost of development. Increased costs can have a
negative affect on the company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as earthquakes
and floods may be uninsurable or too expensive to insure. The company does not
plan to carry earthquake or flood insurance. If an uninsured loss occurs, the
company would lose capital as well as revenues, and would still owe other debts
related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do so.
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.
6
<PAGE>
WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE OWED
$[1,818,684] BY THE COMPANY. This represents accrued fees and expenses from the
programs which National has not cancelled. This amount is due and payable and
the company intends to start paying it after the Acquisition, but only from
operating revenues 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 approval of a new tentative map,
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.
Since some were identified, changes to the tentative development plans have been
made that will reduce or eliminate any damage to the habitat. A new tentative
map needs to be approved by the City. The longer this process takes, the longer
it will be until the company can make money from the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays in
construction, the lack of reasonably priced construction or mortgage financing,
and the general California economy could lengthen the holding period for the
lots. This would mean a delay in realizing cash from the business operations.
The average carrying costs, including property taxes, management and servicing
related fees, for this property has averaged approximately $10,000 per month
over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real estate
is cyclical and the residential lot development industry is highly competitive.
If the demand for new lots does not keep pace with competitive supply, our
properties may be sold at a loss. The location of the company's lots, the
presence of other competition, customer acceptance and pricing are all factors
affecting success. Competitors may have better financial, managerial and other
resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 5% of the assets of the company. Although there can be no
assurances and net revenues from Sacramento/Delta Greens may equal or exceed
$3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to finance engineering and endangered species studies (estimated by
management to cost approximately $175,000). 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.
7
<PAGE>
REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES (OF WHICH THE GOLF COURSE
AND CERTAIN RESIDENTIAL LOTS ARE OWNED BY THE OCEANSIDE INVESTORS)
PERMITS TO DEVELOP THE CONDOMINIUM-TYPE TIMESHARE ASPECT OF THE RESORT HAVE
NOT YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map on 32
remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Planning is underway for vacation villa timeshare
units utilizing part of the allocated use permit space for recreational
vehicles. Additional planned usage such as traditional, attached timeshare
units 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 15% of the assets of the company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard to
obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not be
able to develop its resort projects as part of its growth strategy. Economic
conditions, changes in travel patterns, extreme weather conditions, labor and
other variable costs can all affect revenues and profits. For example, Spring
through Fall at the Yosemite/Ahwahnee property are the periods of highest
occupancy. Seasonality can be expected to cause quarterly fluctuations in the
company's revenues.
The recreational vehicle park at Yosemite/Ahwahnee may generate as much as
ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or eliminate
profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers
8
<PAGE>
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 $350,000) annually and complete
the construction of additional recreational vehicle sites and 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
the City of Pacifica is expensive and time consuming. Mori Point had a specific
plan and tentative map to build a hotel/conference center which expired in 1991.
These approvals must be reinstated prior to construction on the property.
HOTEL/CONFERENCE CENTER DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF
REASONS AND COULD RESULT IN LOSSES. In addition to normal real estate risks,
financing is hard to obtain, and the lodging industry can be unpredictable,
seasonal and very competitive. Without additional financing or capital, the
company will not be able to develop its hotel/conference center project as part
of its growth strategy. Economic conditions, changes in travel patterns,
extreme weather conditions, labor and other variable costs can all affect
revenues and profits. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues. At the hotel/conference center property
at Mori Point, we may be competing against well-known chains and extended-stay
inns.
9
<PAGE>
Mori Point represents approximately 20% of the assets of the company and,
assuming it is operated as a hotel/conference center, its revenues could
ultimately 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.
REAL ESTATE RISKS OF CYPRESS LAKES PROPERTY
THE VESTED TENTATIVE MAP NEEDS MODIFICATION AND BUILD OUT OF THE PROPERTY
WILL BE EXPENSIVE. Due to being located in a 100-year flood plain, the property
requires a levee to be constructed around its perimeter which is very expensive
to construct. It may be desirable to change the vesting tentative map if the
costs can be reduced significantly. However, any changes in the existing plan
could subject the project to public hearings which might result in additional
costs being placed on the project. This would further increase the high
front-end financial requirements. Additionally, such modifications might not be
approved.
Cypress Lakes is a proposed master-planned community and represents more
than 20% of the assets of the Company. Joint venture partners would have to be
brought in by the Company to help with the large capital requirements of such a
large project. It may be difficult to find substantial builder/developers who
have the financial ability to purchase or develop the project. Changing market
conditions may increase the difficulty in selling lots.
Should the Company determine to build out the project, delays in
construction, reasonably priced mortgage and construction financing and the
local and general California economy could lengthen the holding period for the
lots. This would mean delays in realizing cash from the business operations.
RISKS AFFECTING OPERATION OF A GOLF COURSE. When, and if, the golf course
is developed, it will face competition from the golf courses within a 25 mile
radius. Seasonality, weather and course conditions will affect the operations
of the company. 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.
RISKS OF RESIDENTIAL DEVELOPMENT. Totaling 1,330 lots, a large supply of
lots would be available ,and due to the cyclical nature of the housing industry,
demand may not stay in sync with supply. This could result in needing to sell
properties at a loss. Due to the size of the project, it could take between six
and ten years to complete, which would subject it to new competitors entering
the marketplace during the sales period.
10
<PAGE>
REAL ESTATE RISKS OF PALMDALE/JOSHUA RANCH PROPERTY
A FINAL TRACT MAP MUST BE RECORDED. After several years of effort by
National, the vested tentative map was approved by the City of Palmdale at a
hearing before the planning commission in early July 1998. A final recorded map
must be secured by National or a buyer in order to build on the property. Final
engineering, soils, utility and various improvement studies will need to be
conducted in order to record the final map.
PERMITS TO DEVELOP THE PROPERTY NEED TO BE OBTAINED. A final recorded map,
which could take nine to twelve months after starting the process, will be
required prior to construction. Due to the size of this project which
encompasses some 739.6 acres and is currently planned for 539 lots, additional
grading studies, soils investigation and utility planning needs to be done which
could negatively impact the cost of this large-scale development.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Finding
builder/developers that have the financial strength to handle this size project
can be difficult. Changing market conditions, the lack of reasonably-priced
construction or mortgage financing and the general or local market conditions
could lengthen the holding period for lots. This would mean a delay in
realizing cash from business operations. The average carrying costs, including
property taxes, predevelopment and asset management services for this Property
have averaged approximately $16,300 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real estate
is cyclical and the residential lot development industry is highly competitive.
If the demand for new lots does not keep pace with competitive supply, the
Property may be sold at a loss. The location of the lots, the presence of other
competition, customer acceptance and pricing are all factors affecting success.
Competitors may have better financial, managerial and other resources affecting
the Company's ability to successfully compete.
Palmdale/Joshua Ranch is a proposed residential development and represents
about 10% of the assets of the Company.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to pay for or finance (i) engineering, soils and utility studies which
is estimated to cost approximately $140,000, and (ii) another risk is whether
the lots to be developed may appeal to project builders.
REAL ESTATE RISKS OF ESPERANZA PROPERTY
RISKS OF COMMERCIAL DEVELOPMENT. The material risks associated with the
development of the Esperanza Property are (i) as of June 30, 1998, approximately
$23,000 of property taxes are delinquent and must be brought current or a
statutory five-year payment plan must be arranged with the County of Riverside
to avoid loss of the Property for delinquent property taxes; and (ii) despite a
strong economy, rents and values for many retail properties are expected to
remain soft in 1998. Pressure on rents brought about by
11
<PAGE>
over building, weakness in demand for space and store closures caused by lagging
profits are the forces causing a soft market.
ADDITIONAL SPECIFIC RISKS. Within the City of Victorville there are
approximately 3,250 acres zoned for commercial use, of which 60% remains
available for development. Victorville is home to the largest enclosed regional
shopping center between San Bernardino and Las Vegas, which is known as The Mall
of Victor Valley. These commercial sites represent significant competition to
the Esperanza project. There are more than 5,400 acres within the city limits
of Victorville zoned for light and heavy industrial use. Nearly nine percent of
this 5,400 acres of land is vacant and is available in parcels ranging in size
from one-half to five hundred acres.
REAL ESTATE RISKS OF STACEY ROSE PROPERTIES
RISKS OF RESIDENTIAL DEVELOPMENT. The material risks associated with the
development of the Stacey Rose Properties are (i) as of June 30, 1998,
approximately $30,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the County
of Riverside to avoid loss of the Properties for delinquent property taxes; (ii)
it is estimated that it may cost about $50,000 to finalize a tentative tract map
on the parcels; (iii) a substantial, and potentially expensive, sales and
marketing effort will be necessary to sell homes constructed on the properties
if a bulk sale of the lots is not made; (iv) the Properties are located in a
lower income residential area; and (v) increasing government fees and
assessments for streets, schools, parks and other infrastructure requirements
could increase the cost of lots to the company, thereby increasing the sales
price of the lots which will delay market absorption.
ADDITIONAL SPECIFIC RISKS. There is a risk that (i) adequate funds will
not be available to finalize a tentative tract map on the parcels (approximately
$50,000); (ii) the project will not appeal to project builders; and (iii) home
financing at reasonable costs may not be available. There is also a risk that
the development and sale of lots or home 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.
12
<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.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's certificate
of incorporation, as well as Delaware law, prohibits certain business
combinations with owners of more than 15% of the outstanding voting stock of the
company ("interested stockholders") within the three year period immediately
prior to the date on which the interested stockholder became an interested
stockholder. These restrictions on certain business combinations may deter
potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of incorporation
which cover anti-takeover provisions require the approval of two-thirds of the
company's voting stock. This restriction also may deter potential purchasers
who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well as
the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections National
enjoys under the programs' servicing agreements.
FAIRNESS TO INVESTORS IN THE OCEANSIDE PROGRAM
From a financial point of view, the company and National believe the terms
of the acquisition are fair as a whole and to the investors in each of the
programs. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that develops
will be sustained;
- while the number of units to be issued to reflect the exchange value
of a program is arbitrary, the trading price of the shares included in the units
initially is likely to be substantially below the $20 value arbitrarily assigned
to the units. In our opinion, the exchange values offered to investors for
their assets allow for an equitable allocation of the [1,403,321] units
([1,380,175] units if only the "Trudy Pat" programs participate) 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. After the acquisition, a total of
[15.56]% of the outstanding stock of the Company will be held by Oceanside
investors (15.77% if only the "Trudy Pat" programs participate). After the
acquisition, founders of the company (principals, employees, and consultants of
National) will hold less than 15%. Founders' shares were purchased for $.01 per
share. Among the Properties, National and its principals have forgiven over
$3,495,000 of expenses and accrued fees of which a total of approximately
$2,800,000 was earned for asset management and property management services
after the loans defaulted and before the Ownership Dates of the properties. The
balance was earned
13
<PAGE>
after foreclosure for asset and property management services and expenses.
However, none of such amount is attributable to fees owed by Oceanside
investors. National believes that the amount paid for the property management
services is no greater than the amount that a third party would charge;
- the current appraised value of the Oceanside real estate assets
($5,080,000) (as well as the real estate assets of the other programs) and the
fact that substantial financing is needed to further the property's development;
- the probability that the transaction will have minimal, if any,
negative tax affect on investors. National believes there will likely be no
out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have independent
representation in the structuring of the acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the Oceanside Program (as well as the other programs) were
originally formed to have a two to four year finite life which, for Oceanside,
should have ended between 1995 and 1996 and the investors expected to receive a
return of their investment from the original borrower, the company is an
infinite life entity which will not return the program investors' original
investment based on a sale or refinancing of the properties underlying the
original programs. However, after the borrowers defaulted on the "Trudy Pat"
loans, the investors became beneficial owners of the underlying properties with
the need to complete development, manage or otherwise ready the properties for
sale. Those endeavors had no fixed timetable and, thus, the finite life aspect
of their original investments was significantly changed. Therefore, the
infinite life aspect of the company is not viewed by National to be a material
change from the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the individual
business plan of the Oceanside program. Rather than being focused on the
development of a single property for residential purposes or the management of a
golf course and country club, the company will be focused on the management of
at least seven properties. Thus, the poor performance of a particular property
may affect the company's operations as a whole regardless of the performance of
the Oceanside property. Further, there will be no particular time when an
Investor can expect its interest to be automatically liquidated;
- the fact that Oceanside investors recently elected to sell their
remaining residential lots and reinvest a portion of the sale proceeds in the
golf course/country club and certain other residential lots formerly owned by
the Yosemite/Ahwahnee investors;
- Oceanside investors will not be able to vote on changes to or
dispositions of the Oceanside property or borrowing secured by that property.
Those decisions will be made by the Board of Directors or management of the
Company. 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
the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Oceanside property;
- investors voting against the acquisition will have no alternative but
to accept shares in the company if the acquisition is approved by holders of a
majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a change
in management which is not favored by the Board of Directors of the company; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the units in
the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection with
the acquisition and compared it with what you might receive if (i) the Oceanside
property was operated "as is" ($1,068 per $10,000 of Adjusted Outstanding
Investment), (ii) the Oceanside property was sold in a quick sale in three
months or less ($1,068 per $10,000 of Adjusted Outstanding Investment), or (iii)
the Oceanside property was sold at the appraised value (net of program debts)
used to determine the Oceanside exchange value ($2,015 per $10,000 of Adjusted
Outstanding Investment). Based on that review, and even acknowledging that,
initially, the company's shares included in the units issued in the acquisition
would likely trade substantially below the arbitrary $20 issuance value for the
units, National believes that there is a higher probability of realizing value
from the Oceanside property through the acquisition than through the other
alternatives. This belief is based on the expectation that some financing
opportunities will become available based on the form of the entity and the time
pressure associated with forced sales or liquidation will be relieved. See
"Background and Reasons for the Acquisition -- Comparison to Alternatives" and
"Recommendation of National and Fairness Determination" at pages __ and __ of
the Prospectus. Based on this comparison, National concluded that the
acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Oceanside Program (as well as each of the other
Programs) is essentially the consideration which the Company is offering in
exchange for the real estate assets, cash reserves, certain liabilities and
business of the Program. The value is reflected as a number of units of the
Company (in the case of the Oceanside Program, [268,653] units) multiplied by an
arbitrary $20 per unit value.
The Exchange Value for the Oceanside Program was calculated as follows:
appraised value of the Oceanside Program's Property at March 31, 1998, plus book
value of other
15
<PAGE>
Oceanside Program assets at June 30, 1998, less Oceanside Program liabilities at
June 30, 1998.
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 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>
$ 5,080,000 $ 293,057 $[5,373,057] $ [2,225](3)
</TABLE>
- ----------------
(1) Reflects independent appraisal as of March 1998.
(2) The following table quantifies the adjustments to appraised values made in
determining the Oceanside property Exchange Value as of June 30, 1998.
<TABLE>
<CAPTION>
Book Assets Book Liabilities Net Other Assets
(6/30/98)* - (6/30/98)* = and Liabilities
--------- ---------- ---------------
<S> <C> <C>
$ 809,933 $ (516,876) $ 293,057
</TABLE>
* See balance sheet of the Oceanside Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no third party mortgage debt on the Oceanside
property.
(3) Equals [111] Company shares arbitrarily valued at $20 per unit.
ALLOCATION OF SHARES
The [1,403,321] shares of Company common stock being offered to Investors
in the Acquisition represent over 80% of the Company's shares (94% if all
warrants are exercised) 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 Programs pro rata in
accordance with Exchange Values. The Oceanside Program will be allocated
[268,653] shares.
The shares allocated to the Oceanside Program will be allocated among
Investors in the Program based on their respective pro rata investments in the
Program (taking into account assessments paid and unpaid, as well as interest
accrued to each Investor through the date beneficial ownership of the Program's
Property was taken for the Investors) as adjusted for voluntary advances. An
Investor in the Oceanside Program with an adjusted investment amount of $10,000
will receive [111] units in the Company arbitrarily valued at $20 per unit.
Neither National nor the Company's founders have any economic interest
in the Oceanside Program except for National's contractual right to asset
management fees and the $[2,300] of tenancy-in-common interests purchased by
National at the inception of the Program for which interests National will
receive units in the Acquisition pro rata with the other Oceanside Investors.
National will undertake not to exercise the warrants in the units.
16
<PAGE>
The following table and its footnotes sets forth the amount owed by the
original borrower to the Oceanside Program (including accrued but unpaid
interest) plus the amount of assessments and advances paid by Investors at June
30, 1998, 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
Outstanding
After the
Amount Real Estate Acquisition if
Owed plus Appraised Exchange No. of Shares All Programs
Name of Program Assessments Value Value(1) Allocated(1)(2) Participate
--------------- ----------- ----- ----- --------- -----------
<S> <C> <C> <C> <C> <C>
Oceanside $ 24,150,000 $ 5,080,000 $ 5,373,057 [268,653] [15.56]%
</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 [323,676] Company shares after the
Acquisition (18.74% of the outstanding shares post-Acquisition, 5.45% if
all warrants are exercised) which, if valued at $20 per share, would have
an aggregate value of $[6,473,520]. The Company was formed, and shares
were purchased by the founders for $.01 per share, prior to making the
Acquisition proposal. 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>
Previously
Name of Program Cancelled
---------
<S> <C>
Sacramento/Delta Greens $ 500,000
Oceanside -0-
Yosemite/Ahwahnee I 72,158
Yosemite/Ahwahnee II 1,157,867
Mori Point 461,589
Cypress Lakes 1,120,000
Palmdale (Joshua Ranch) -0-
Esperanza 102,134
Stacey Rose A 64,293
Stacey Rose B 17,267
-----------
TOTAL $ 3,495,308
-----------
-----------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees none of the total shares to be
owned by the Company's founders after the Acquisition would have been
deemed allocated from this Program.
17
<PAGE>
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1997,
1996 and 1995, and for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Incurred
Actually Actually Actually for Actually Paid
Incurred for Paid for Incurred for Paid for Incurred for Paid for Six Months in Six Months
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Ended Ended
Name of Program 12/31/95(1) 12/31/95(2) 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2) 6/30/98 6/30/98
--------------- -------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oceanside $492,000(3) $300,000 $492,000(3) $300,000 $444,000(3) $300,000 $246,000 $1,026,000
</TABLE>
- ---------------
(1) These amounts represent asset management fees and officer and employees
salaries for property management services rendered for Oceanside
Development, Inc.
(2) These amounts represent asset management fees only.
(3) Approximately $377,315 per year if the Acquisition had been completed
during the above periods including $196,204 of estimated salaries to be
paid by the Company to its officers and which were allocated to the
Oceanside Program based on Exchange Values. No cash would have been
available to pay officers' bonuses or dividends to shareholders.
18
<PAGE>
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>
Name of Program 1992 1993 1994 1995 1996 1997 Total
--------------- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Oceanside
Principal $ 0 $ 0 $ 375,000 $ 900,000 $ 900,000 $ 675,000 $2,850,000*
Interest $ 1,080,804 $ 3,145,869 $ 393,750 $ 0 $ 0 $ 0 $4,620,423
</TABLE>
- ---------------
* An additional $3,000,000 in principal was distributed in June 1998
subsequent to sale of the program's inventory of remaining lots.
There have been no recent distributions to Investors. The Acquisition is
not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Oceanside Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
19
<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 securities in exchange for the
assets (including cash reserves), certain liabilities and business activities
owned by Investors in seven former "Trudy Pat" programs managed by National
Investors Financial, Inc. ("National"). For this proposed Acquisition, the
Company will issue an aggregate of $[28,066,419] of units arbitrarily valued
at $20 per unit. A unit consists of one share of common stock plus warrants
to purchase three additional shares. The [units][shares and warrants] 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, eliminate the assessment process, focus on revenue-generating
potential, improve efficient of operations in order to reduce costs and
increase profit potential, and provide the investors with liquidity for their
investments.
Of the [1,403,321] units ([1,380,175] units if only the "Trudy Pat"
programs participate) to be issued by the Company in the Acquisition, Investors
in the Yosemite/Ahwahnee I Program will receive a total of [110,502] units or
[122] units 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 units 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
SEVEN "TRUDY PAT" PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE
PLACE.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - If the Acquisition is approved, your investment will be subject to the
risks associated with resort development and management plus new risks
associated with a business which also plans to construct and sell residential
properties, and which plans to pursue the development of a hotel/conference
center.
- - If a trading market develops, the initial trading price for the stock will
likely be substantially below the arbitrary value of $20 per unit assigned for
purposes of the acquisition. Thus, the value of the units 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 16.42% of the Company's stock (4.78% if all warrants are
exercised) for which they paid $0.01 per share and will receive annual cash
compensation aggregating $560,000 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 $950,000 annually.
However, the Company will still owe National over $1,800,000 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 certain of its properties or the
exercise of the warrants included in the units, it will be no more successful
than the programs have been individually in completing the development of some
or all of the properties.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE ACQUISITION.
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MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found on
pages [__] through [__] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If the
acquisition is completed, there will be a change in the nature of the investment
of each investor from holding a tenancy-in-common interest in real estate to
holding shares in an on-going company, the assets of which may be changed from
time to time without approval of investors. If the acquisition is completed,
investors will be able to liquidate their investments only by selling their
[UNITS][SHARE] on the _____ or in private transactions, and they will not
receive a return of their investment in the form of liquidation proceeds through
property sales. If the acquisition is completed, investors will have an
investment in an entity that is larger than each of the programs and will thus
lose relative voting power. Investors will have an investment in a business
which also plans to construct and sell residential properties, and which plans
to pursue the development of a hotel/conference center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL SALES
PRICE. Investors are subject to the risk that the exchange value of a program
does not reflect the price a program's assets might bring in a sale. If the
property of a program were to be sold, the net proceeds of the sale and the
amount finally distributed to an investor in that program may be more or less
than the exchange value. There is no assurance that the future value of the
shares and warrants received in the acquisition will be greater than the most
recent appraised value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may trade
at prices substantially below the arbitrarily determined exchange value of $20
per unit or the 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
$20 due to a potentially large number of shares that investors may sell
immediately after the acquisition.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of interest.
The principal shareholders and employees of National and the company will hold
approximately [16.42]% of the company's outstanding stock (4.78% if all warrants
are exercised) for which they paid $0.01 per share. Other founders of the
company will hold approximately [2.3]% 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 $560,000 as officers and employees of the company.
National will be relieved of its servicing and asset management obligations and
will no longer earn asset
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management or servicing related fees. However, the company will still owe
National over $1,800,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote , and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF
OF THE INVESTORS. Therefore, terms of the acquisition may be less favorable
to investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject
to arm's-length negotiation. Had an independent party negotiated on behalf
of each program, the terms of the acquisition may have been more favorable to
certain or all of the programs and fewer shares and less favorable employment
contracts may have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due
to uncertainties in the facts of this transaction, tax counsel is unable to
opine conclusively on the tax consequences of the acquisition to investors.
The acquisition may be taxable, if at all, only with respect to the
investors' receipt of warrants. Alternatively, if the acquisition is a fully
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
$20 per unit. If the acquisition is treated as fully taxable, National
believes most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, none of the properties will be subject to any liens other than
for property taxes. The board of directors could authorize borrowing by the
company the debt service for which may adversely affect the company's ability
to make distributions to shareholders. The company may incur full recourse
debt which exposes all of the assets of the company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING
INVESTORS. If you vote against the acquisition, and it is approved, you will
not be able to object to the acquisition and receive the appraised value of
your tenancy-in-common interest in your program's assets. You will have no
choice other than to accept units for your interests.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long
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time. This means that shares in the company are much riskier than ownership
of shares of established companies. If the company had been operating as if
it owned the properties which it desires to acquire, it would have
experienced losses to date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE
ACQUISITION TAKES PLACE. Rather than being focused on a single property, the
company will be an infinite life entity focused on the management of at least
the seven properties of the former "Trudy Pat" programs. 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. Prior to the dates
that title to the properties securing the original program loans was taken,
National was entitled to an annual loan servicing fee equal to one percent of
the original loan amounts. When title to the properties was taken on behalf of
the programs, even though the loans no longer existed, National continued to
charge the same rate as the servicing fee for the asset management services it
provided to investors. The investors in each of the programs had become the
beneficial tenant-in-common owners of real estate, most of which was
undeveloped. While it had no obligation to do so, in order to assist the
beneficial owners in protecting their real estate assets and readying them for
sale or development, National assumed the duties of an asset manager after title
was taken to the properties. In this capacity, National obtained information
from investors about their preferences in regard to development or sale of the
properties, acted as assessing agent to raise funds necessary to pay property
taxes, insurance and other costs of property ownership.
The annual fees payable to National are currently $50,000 for
Sacramento/Delta Greens; $300,000 for Oceanside; $65,000 for
Yosemite/Ahwahnee I; $135,000 for Yosemite/Ahwahnee II; $100,000 for Mori
Point; $140,000 for Cypress Lakes; $150,000 for Palmdale/Joshua Ranch; $5,000
for Esperanza; $3,153 for Stacey Rose A; and $850 for Stacey Rose B.
In addition to the one percent fee, compensation has been earned for
property management services provided to the Oceanside program ($896,000 accrued
since the date of
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ownership (November 1993) through June 30, 1998; $876,000 actually paid) and
Yosemite/Ahwahnee properties ($594,535 accrued since the date of ownership
(September 1995); $-0- actually paid) by officers and employees of National
in their capacities as officers and employees of Oceanside Development, Inc.
and Ahwahnee Golf Course & Resort, Inc. Those property management services
included, without limitation, solicitation, engagement, coordination and
supervision of: entitlement and permit processing, environmental,
engineering, planning, architectural, construction, marketing, appraisal,
legal, accounting and other experts as needed for each project; due diligence
on potential service providers; assistance in presentations and applications
for approvals to governmental agencies; packaging and documenting the status
of a project for potential financing, sale or joint venture; supervising and
managing the operational activities for construction projects on the
Oceanside and Yosemite/Ahwahnee projects; and contract negotiations and
documentation. To the extent similar property specific services were
provided to the other programs, they were provided without extra charge
because the necessary activities were less regular and less operationally
intense.
In the future, compensation will be paid to officers of the company in the
form of salaries (aggregating $[560,000] annually plus contractual bonus
opportunities and salary increases), stock options and other benefits. See
"Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for details of stock options and other benefits.
These salaries and other forms of compensation will be payable to management of
the company even if one or more of the properties acquired in the acquisition is
subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE DIFFERENCES IN YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THE EXCHANGE VALUES FOR THESE PROPERTIES
MAY BE TOO LOW OR TOO HIGH. National reviewed the updated March 1998 appraisal
of the Yosemite/Ahwahnee properties which reflected an aggregate "as is"
appraised value of $20,246,000 and the October 1996 appraisal which reflected an
"as is" aggregate appraised value of $4,000,000. The results of those
appraisals clearly differed from each other, and, in management's judgment, the
difference could not be accounted for by improving market conditions. Some of
the parcels, including the golf course, were subsequently sold, on June 5, 1998,
to the Oceanside Program investors to obtain working capital. Based on its
review of all appraisals, National concluded that the properties currently owned
by the Yosemite/Ahwahnee I and II Programs have values of $5,486,000 ($1,782,950
and $3,703,050, respectively), and the parcels currently owned by the Oceanside
Program have a value of $5,080,000. National believes its approach is
reasonable and has received an opinion from Houlihan Valuation Advisors that the
allocation of the shares among the programs is fair.
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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 June 30, 1998: Sacramento/Delta
Greens -approximately $27,000; Yosemite/Ahwahnee (combined) - approximately
$500,000; Mori Point - approximately $165,000; Cypress lakes - approximately
$204,000; Palmdale (Joshua Ranch) - approximately $63,000; Esperanza -
approximately $20,000; and Stacey Rose - approximately $30,000. Annual
payments required for all the properties for current taxes (including amounts
currently due on five-year payment plans) total approximately $549,000. In
the case of Sacramento/Delta Greens, Yosemite/Ahwahnee, Mori Point,
Palmdale/Joshua Ranch and Stacey Rose properties, National has entered into
statutorily authorized 5-year payment plans with the applicable taxing
authorities.
CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a minimum of
approximately $[4,715,000] from sale certain assets of the programs or from the
exercise of warrants become available, the company will not be able to proceed
with its entire business plan. The company will also need financing from other
sources to complete its plan. Financing sources are not predictable and
interest rates or other costs of financing may be prohibitive.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay assessments for
streets, schools and parks which increase the cost of development. Increased
costs can have a negative affect on the company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. 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
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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
$[1,818,684] BY THE COMPANY. This represents accrued fees and expenses from the
programs which National has not cancelled. This amount is due and payable and
the company intends to start paying it after the Acquisition, but only from
operating revenues 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 approval of a new tentative map,
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.
Since some were identified, changes to the tentative development plans have been
made that will reduce or eliminate any damage to the habitat. A new tentative
map needs to be approved by the City. The longer this process takes, the longer
it will be until the company can make money from the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays in
construction, the lack of reasonably priced construction or mortgage financing,
and the general California economy could lengthen the holding period for the
lots. This would mean a delay in realizing cash from the business operations.
The average carrying costs, including property taxes, management and servicing
related fees, for this property has averaged approximately $10,000 per month
over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real estate
is cyclical and the residential lot development industry is highly competitive.
If the demand for new lots does not keep pace with competitive supply, our
properties may be sold at a loss. The location of the company's lots, the
presence of other competition, customer acceptance and pricing are all factors
affecting success. Competitors may have better financial, managerial and other
resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 5% of the assets of the company. Although there can be no
assurances and net revenues from Sacramento/Delta Greens may equal or exceed
$3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to finance engineering and endangered species studies (estimated by
management to cost approximately $175,000). Another risk is whether the lots to
be developed will appeal to
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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 YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE CONDOMINIUM-TYPE TIMESHARE ASPECT OF THE RESORT HAVE
NOT YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map on 32
remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Planning is underway for vacation villa timeshare
units utilizing part of the allocated use permit space for recreational
vehicles. Additional planned usage such as traditional, attached timeshare
units 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 15% 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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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 $350,000) annually and
(ii) complete the construction of additional recreational vehicle sites and
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 the City of Pacifica is expensive and time consuming. Mori
Point had a specific plan and tentative map to build a hotel/conference
center which expired in 1991. These approvals must be reinstated prior to
construction on the property.
HOTEL/CONFERENCE CENTER DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF
REASONS AND COULD RESULT IN LOSSES. In addition to normal real estate risks,
financing is hard to obtain, and the lodging industry can be unpredictable,
seasonal and very competitive. Without additional financing or capital, the
company will not be able to develop its hotel/conference center project as part
of its growth strategy. Economic conditions, changes in travel patterns,
extreme weather conditions, labor and other variable costs can all affect
revenues and profits. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues. At the hotel/conference center property
at Mori Point, we may be competing against well-known chains and extended-stay
inns.
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Mori Point represents approximately 20% of the assets of the company and,
assuming it is operated as a hotel/conference center, its revenues could
ultimately 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.
REAL ESTATE RISKS OF CYPRESS LAKES PROPERTY
THE VESTED TENTATIVE MAP NEEDS MODIFICATION AND BUILD OUT OF THE
PROPERTY WILL BE EXPENSIVE. Due to being located in a 100-year flood plain,
the property requires a levee to be constructed around its perimeter which is
very expensive to construct. It may be desirable to change the vesting
tentative map if the costs can be reduced significantly. However, any
changes in the existing plan could subject the project to public hearings
which might result in additional costs being placed on the project. This
would further increase the high front-end financial requirements.
Additionally, such modifications might not be approved.
Cypress Lakes is a proposed master-planned community and represents more
than 20% of the assets of the Company. Joint venture partners would have to be
brought in by the Company to help with the large capital requirements of such a
large project. It may be difficult to find substantial builder/developers who
have the financial ability to purchase or develop the project. Changing market
conditions may increase the difficulty in selling lots.
Should the Company determine to build out the project, delays in
construction, reasonably priced mortgage and construction financing and the
local and general California economy could lengthen the holding period for the
lots. This would mean delays in realizing cash from the business operations.
RISKS AFFECTING OPERATION OF A GOLF COURSE. When, and if, the golf course
is developed, it will face competition from the golf courses within a 25 mile
radius. Seasonality, weather and course conditions will affect the operations
of the company. 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.
RISKS OF RESIDENTIAL DEVELOPMENT. Totaling 1,330 lots, a large supply of
lots would be available ,and due to the cyclical nature of the housing industry,
demand may not stay in sync with supply. This could result in needing to sell
properties at a loss. Due to the size of the project, it could take between six
and ten years to complete, which would subject it to new competitors entering
the marketplace during the sales period.
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REAL ESTATE RISKS OF PALMDALE/JOSHUA RANCH PROPERTY
A FINAL TRACT MAP MUST BE RECORDED. After several years of effort by
National, the vested tentative map was approved by the City of Palmdale at a
hearing before the planning commission in early July 1998. A final recorded map
must be secured by National or a buyer in order to build on the property. Final
engineering, soils, utility and various improvement studies will need to be
conducted in order to record the final map.
PERMITS TO DEVELOP THE PROPERTY NEED TO BE OBTAINED. A final recorded map,
which could take nine to twelve months after starting the process, will be
required prior to construction. Due to the size of this project which
encompasses some 739.6 acres and is currently planned for 539 lots, additional
grading studies, soils investigation and utility planning needs to be done which
could negatively impact the cost of this large-scale development.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Finding
builder/developers that have the financial strength to handle this size project
can be difficult. Changing market conditions, the lack of reasonably-priced
construction or mortgage financing and the general or local market conditions
could lengthen the holding period for lots. This would mean a delay in
realizing cash from business operations. The average carrying costs, including
property taxes, predevelopment and asset management services for this Property
have averaged approximately $16,300 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real estate
is cyclical and the residential lot development industry is highly competitive.
If the demand for new lots does not keep pace with competitive supply, the
Property may be sold at a loss. The location of the lots, the presence of other
competition, customer acceptance and pricing are all factors affecting success.
Competitors may have better financial, managerial and other resources affecting
the Company's ability to successfully compete.
Palmdale/Joshua Ranch is a proposed residential development and represents
about 10% of the assets of the Company.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to pay for or finance (i) engineering, soils and utility studies which
is estimated to cost approximately $140,000, and (ii) another risk is whether
the lots to be developed may appeal to project builders.
REAL ESTATE RISKS OF ESPERANZA PROPERTY
RISKS OF COMMERCIAL DEVELOPMENT. The material risks associated with the
development of the Esperanza Property are (i) as of June 30, 1998, approximately
$23,000 of property taxes are delinquent and must be brought current or a
statutory five-year payment plan must be arranged with the County of Riverside
to avoid loss of the Property for delinquent property taxes; and (ii) despite a
strong economy, rents and values for many retail properties are expected to
remain soft in 1998. Pressure on rents brought about by
11
<PAGE>
over building, weakness in demand for space and store closures caused by
lagging profits are the forces causing a soft market.
ADDITIONAL SPECIFIC RISKS. Within the City of Victorville there are
approximately 3,250 acres zoned for commercial use, of which 60% remains
available for development. Victorville is home to the largest enclosed regional
shopping center between San Bernardino and Las Vegas, which is known as The Mall
of Victor Valley. These commercial sites represent significant competition to
the Esperanza project. There are more than 5,400 acres within the city limits
of Victorville zoned for light and heavy industrial use. Nearly nine percent of
this 5,400 acres of land is vacant and is available in parcels ranging in size
from one-half to five hundred acres.
REAL ESTATE RISKS OF STACEY ROSE PROPERTIES
RISKS OF RESIDENTIAL DEVELOPMENT. The material risks associated with the
development of the Stacey Rose Properties are (i) as of June 30, 1998,
approximately $30,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the County
of Riverside to avoid loss of the Properties for delinquent property taxes; (ii)
it is estimated that it may cost about $50,000 to finalize a tentative tract map
on the parcels; (iii) a substantial, and potentially expensive, sales and
marketing effort will be necessary to sell homes constructed on the properties
if a bulk sale of the lots is not made; (iv) the Properties are located in a
lower income residential area; and (v) increasing government fees and
assessments for streets, schools, parks and other infrastructure requirements
could increase the cost of lots to the company, thereby increasing the sales
price of the lots which will delay market absorption.
ADDITIONAL SPECIFIC RISKS. There is a risk that (i) adequate funds will
not be available to finalize a tentative tract map on the parcels (approximately
$50,000); (ii) the project will not appeal to project builders; and (iii) home
financing at reasonable costs may not be available. There is also a risk that
the development and sale of lots or home 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.
12
<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.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's certificate
of incorporation, as well as Delaware law, prohibits certain business
combinations with owners of more than 15% of the outstanding voting stock of the
company ("interested stockholders") within the three year period immediately
prior to the date on which the interested stockholder became an interested
stockholder. These restrictions on certain business combinations may deter
potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of incorporation
which cover anti-takeover provisions require the approval of two-thirds of the
company's voting stock. This restriction also may deter potential purchasers
who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well as
the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections National
enjoys under the programs' servicing agreements.
FAIRNESS TO INVESTORS IN THE YOSEMITE/AHWAHNEE I PROGRAM
From a financial point of view, the company and National believe the terms
of the acquisition are fair as a whole and to the investors in each of the
programs. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that
develops will be sustained;
- while the number of units to be issued to reflect the exchange
value of a program is arbitrary, the trading price of the shares included in
the units initially is likely to be substantially below the $20 value
arbitrarily assigned to the units. In our opinion, the exchange values
offered to investors for their assets allow for an equitable allocation of
the [1,403,321] units ([1,380,175] units if only the "Trudy Pat" programs
participate) 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. After the acquisition, a total of
[6.40]% of the outstanding stock of the Company will be held by
Yosemite/Ahwahnee I investors (6.49% if only the "Trudy Pat" programs
participate). After the acquisition, founders of the company (principals,
employees, and consultants of National) will hold less than 15%. Founders'
shares were purchased for $.01 per share. Among the properties, National and
its principals have forgiven over $3,495,000 of expenses and accrued fees of
which a total of approximately $2,800,000 was earned for asset management and
property management services after the loans defaulted and before the
Ownership Dates of the properties. The
13
<PAGE>
balance was earned after foreclosure for asset and property management
services and expenses. Of such amount, $72,158 is attributable to fees owed
by Yosemite/Ahwahnee I investors. National believes that the amount paid for
the property management services is no greater than the amount that a third
party would charge;
- the current appraised value of the Yosemite/Ahwahnee I real estate
assets ($1,782,950) (as well as the real estate assets of the other programs)
and the fact that substantial financing is needed to further the property's
development;
- the probability that the transaction will have minimal, if any,
negative tax affect on investors. National believes there will likely be no
out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have independent
representation in the structuring of the acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the Yosemite/Ahwahnee I Program (as well as the other programs)
were originally formed to have a two to four year finite life which, for
Yosemite/Ahwahnee I, should have ended between 1991 and 1992 and the investors
expected to receive a return of their investment from the original borrower, the
company is an infinite life entity which will not return the program investors'
original investment based on a sale or refinancing of the properties underlying
the original programs. However, after the borrowers defaulted on the "Trudy
Pat" loans, the investors became beneficial owners of the underlying properties
with the need to complete development, manage or otherwise ready the properties
for sale. Those endeavors had no fixed timetable and, thus, the finite life
aspect of their original investments was significantly changed. Therefore, the
infinite life aspect of the company is not viewed by National to be a material
change from the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the business plan of
the Yosemite/Ahwahnee I Program. Rather than being focused on a single property
for resort development and management purposes, the company will be focused on
the management of at least seven properties. Thus, the poor performance of a
particular property may affect the company's operations as a whole regardless of
the performance of the Yosemite/Ahwahnee I Property. Further, there will be no
particular time when an Investor can expect its interest to be automatically
liquidated;
- the fact that with the exception of the recent sale of the golf course
and certain residential lots to the Oceanside investors, it has been difficult
to find buyer or joint venture or financial partners for the entire project;
- Yosemite/Ahwahnee I investors will not be able to vote on changes to
or dispositions of Yosemite/Ahwahnee I property or borrowing secured by that
property. Those decisions will be made by the Board of Directors or management
of the Company. Further, as investors in a larger entity, relative voting power
will be diluted;
14
<PAGE>
- future cash distributions will be based on the company's earnings and
the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Yosemite/Ahwahnee I property;
- investors voting against the acquisition will have no alternative but
to accept shares in the company if the acquisition is approved by holders of a
majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a change
in management which is not favored by the Board of Directors of the company; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the shares in
the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection with
the acquisition and compared it with what you might receive if (i) the
Yosemite/Ahwahnee I property was operated "as is" ($1,355 per $10,000 of
Adjusted Outstanding Investment), (ii) the Yosemite/Ahwahnee I property was sold
in a quick sale in three months or less ($1,355 per $10,000 of Adjusted
Outstanding Investment), or (iii) the Yosemite/Ahwahnee I property was sold at
the appraised value used to determine the Yosemite/Ahwahnee I exchange value
($2,239 per $10,000 of Adjusted Outstanding Investment). Based on that review,
and even acknowledging that, initially, the company's shares included in the
units issued in the acquisition would likely trade substantially below the
arbitrary $20 issuance value for the units, National believes that there is a
higher probability of realizing value from the Yosemite/Ahwahnee I property
through the acquisition than through the other alternatives. This belief is
based on the expectation that some financing opportunities will become available
based on the form of the entity and the time pressure associated with forced
sales or liquidation will be relieved. See "Background and Reasons for the
Acquisition -- Comparison to Alternatives" and "Recommendation of National and
Fairness Determination" at pages __ and __ of the Prospectus. Based on this
comparison, National concluded that the acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Yosemite/Ahwahnee I Program (as well as each of
the other 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 units of the
Company (in the case of the Yosemite/Ahwahnee I Program, [110,502] units)
multiplied by an arbitrary $20 per unit value.
In calculating the Exchange Value for the Yosemite/Ahwahnee I Program,
National had to reconcile the differences between the March 1998 appraisal by
Arnold Associates and the October 1996 appraisal by The Mentor Group. See
"Appraisals and Fairness Opinion --
15
<PAGE>
Reconciliation of Yosemite/Ahwahnee Properties' Appraisals" at page [__] of
the Prospectus. After determining the appraised value of the Program, the
Exchange Value was calculate by adding to the appraised value the book value
of the Program's other assets at June 30, 1998, deducting the Program's
liabilities at June 30, 1998.
The following table summarizes the calculation of the Exchange Value of the
Yosemite/Ahwahnee I Program and the value assigned on $10,000 of Adjusted
Outstanding Investment:
<TABLE>
<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>
$ 1,782,950 $[ 427,086] $ 2,210,036] $ [2,435](3)
</TABLE>
- ----------
(1) Reflects independent appraisal as of March 1998, adjusted for
inconsistencies with the October 1996 appraisal
(2) The following table quantifies the adjustments to appraised values made in
determining Yosemite/Ahwahnee I property's Exchange Value as of June 30,1998.
<TABLE>
<CAPTION>
Book Assets Book Liabilities Net Other Assets
(6/30/98)* - (6/30/98)* = and Liabilities
------------------- ------------------------- --------------------------
<S> <C> <C>
$ 1,536,802 $ (1,109,716) $ (427,086)
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no third party mortgage debt on the
Yosemite/Ahwahnee I Property.
(3) Equals [122] Company shares arbitrarily valued at $20 per unit.
ALLOCATION OF SHARES
The [1,403,321] shares of Company common stock being offered to Investors
in the Acquisition represent over 80% of the Company's shares (94% if all
warrants are exercised) 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 Programs pro rata in
accordance with Exchange Values. The Yosemite/Ahwahnee I Program will be
allocated [110,502] shares.
The shares allocated to the Yosemite/Ahwahnee I Program will be allocated
among Investors in the Program based on their respective pro rata investments in
the Program (taking into account assessments paid and unpaid, as well as
interest accrued to each Investor through the date beneficial ownership of the
Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Yosemite/Ahwahnee I Program with an adjusted
investment amount of $10,000 will receive [122] shares of units in the Company
arbitrarily valued at $20 per unit.
Neither National nor the Company's founders have any interest in the
Yosemite/ Ahwahnee I Program except for National's contractual right to asset
management fees and the
16
<PAGE>
$2,373 of tenancy-in-common interests purchased by National for which
interests National will receive units in the Acquisition pro rata with the
other Yosemite/Ahwahnee I Investors. National will undertake not to exercise
the warrants in the units.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Yosemite/Ahwahnee I Program (including accrued but
unpaid interest) plus the amount of assessments and advances paid by
Investors at June 30, 1998, 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
Outstanding
After the
Amount Real Estate Acquisition if
Owed plus Appraised Exchange No. of Shares All Programs
Name of Program Assessments Value Value(1) Allocated(1)(2) Participate
- --------------------- ------------------ ----------------- ------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee I $ 9,063,163 $ 1,782,036 $ 2,210,036 110,502 [6.40]%
</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 [323,676] Company shares after the
Acquisition (18.74% of the outstanding shares post-Acquisition, 5.45% if
all warrants are exercised) which, if valued at $20 per share, would have
an aggregate value of $[6.473,520]. The Company was formed, and shares
were purchased by the founders for $.01 per share, prior to making the
Acquisition proposal. 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:
17
<PAGE>
<TABLE>
<CAPTION>
Previously
Name of Program Cancelled
-------------
<S> <C>
Sacramento/Delta Greens $500,000
Oceanside -0-
Yosemite/Ahwahnee I 72,158
Yosemite/Ahwahnee II 1,157,867
Mori Point 461,589
Cypress Lakes 1,120,000
Palmdale (Joshua Ranch) -0-
Esperanza 102,134
Stacey Rose A 64,293
Stacey Rose B 17,267
----------
TOTAL $3,495,308
----------
----------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [2.06]% ([2.18]% if only the
seven "Trudy Pat" programs participate) of the total shares to be owned
by the Company's founders after the Acquisition ([6,682] shares if all
programs participate and 7,053 shares if only the seven "Trudy Pat"
programs participate) 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, and for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Incurred
Incurred Actually Incurred Actually Incurred Actually for Six Actually Paid
for Year Paid for for Year Paid for for Year Paid for Months in Six
Ended Year Ended Ended Year Ended Ended Year Ended Ended Months Ended
Name of Program 12/31/95(1) 12/31/95(2) 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2) 6/30/98 6/30/98
- --------------------- ------------ ----------- ----------- ----------- ------------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee I $84,051(3) $-0- $150,800(3) $101,626 $148,439 (3) $60,700 $75,333 $30,392
</TABLE>
- ----------------
(1) These amounts represent servicing fees and salaries for officers and
employees of Ahwahnee Golf Course and Resort, Inc. for property management
services.
(2) These amounts represent asset management fees only.
(3) Approximately $81,752 per year if the Acquisition had been completed during
the above periods including $42,511 of estimated salaries to be paid by the
Company to its officers and other employees which were allocated to the
Yosemite/Ahwahnee I Program based on Exchange Values. No cash would have
been available to pay officers' bonuses or dividends to shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/
EFFECT OF THE ACQUISITION
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995, 1996 and
1997:
18
<PAGE>
<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 $ ,903,306 $920,794 $335,557 $ 4,756 $ 0 $ 0 $ 0 $ 3,164,413
</TABLE>
There have been no recent distributions to Investors. The Acquisition is
not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Yosemite/Ahwahnee I Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
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 units of its securities in exchange for the
assets (including cash reserves), certain liabilities and business activities
owned by Investors in seven former "Trudy Pat" programs and three other
programs managed by National Investors Financial, Inc. ("National"). For
this proposed Acquisition, the Company will issue an aggregate of
$[28,066,419] of units arbitrarily valued at $20 per unit. A unit consists
of one share of common stock plus warrants to purchase three additional
shares. The [units][shares and units] 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, eliminate the
assessment process, focus on revenue-generating potential, improve efficiency
of operations in order to reduce costs and increase profit potential, and
provide the investors with liquidity for their investments.
Of the [1,403,321] units ([1,380,175] units if only the "Trudy Pat"
programs participate) the Company in the Acquisition, Investors in the
Yosemite/Ahwahnee II Program will receive a total of [229,504] shares or [117]
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 units 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 SEVEN "TRUDY PAT" PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO
TAKE PLACE.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - If the acquisition is approved, your investment will be subject to the
risks associated with resort development and management plus new risks
associated with a business which also plans to construct and sell residential
properties, and which plans to pursue the development of a hotel/conference
center.
- - If a trading market develops, the initial trading price for the stock
will likely be substantially below the arbitrary value of $20 per unit
assigned for purposes of the acquisition. Thus, the value of the units 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 16.42% of the Company's stock (4.78% if all warrants
are exercised) for which they paid $0.01 per share and will receive annual
cash compensation aggregating $560,000 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 $950,000
annually. However, the Company will still owe National over $1,800,000 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 certain of its properties
or the exercise of the warrants included i the units, it will be no more
successful than the programs have been individually in completing the
development of some or all of the properties.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE ACQUISITION.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found
on pages [__] through [__] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
THERE WILL BE A FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If
the acquisition is completed, there will be a change in the nature of the
investment of each investor from holding a tenancy-in-common interest in real
estate to holding shares in an on-going company, the assets of which may be
changed from time to time without approval of investors. If the acquisition
is completed, investors will be able to liquidate their investments only by
selling their [units][shares] on the _____ or in private transactions, and
they will not receive a return of their investment in the form of liquidation
proceeds through property sales. If the acquisition is completed, investors
will have an investment in an entity that is larger than each of the programs
and will thus lose relative voting power. Investors will have an investment
in a business which also plans to construct and sell residential properties,
and which plans to pursue the development of a hotel/conference center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL
SALES PRICE. Investors are subject to the risk that the exchange value of a
program does not reflect the price a program's assets might bring in a sale.
If the property of a program were to be sold, the net proceeds of the sale
and the amount finally distributed to an investor in that program may be more
or less than the exchange value. There is no assurance that the future value
of the shares and warrants received in the acquisition will be greater than
the most recent appraised value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may
trade at prices substantially below the arbitrarily determined exchange value
of $20 per unit or the 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 $20 due to a potentially large number of shares that investors
may sell immediately after the acquisition.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of
interest. The principal shareholders and employees of National and the
company, will hold approximately [16.42]% of the company's outstanding stock
(4.78% if all warrants are exercised) for which they paid $0.01 per share.
Other founders of the company will hold approximately [2.3]% 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 $560,000 as
officers and employees of the company. National will be relieved of its
servicing and asset management obligations and will no longer earn asset
1
<PAGE>
management or servicing related fees. However, the company will still owe
National over $1,800,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote, and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF
THE INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject
to arm's-length negotiation. Had an independent party negotiated on behalf
of each program, the terms of the acquisition may have been more favorable to
certain or all of the programs and fewer shares and less favorable employment
contracts may have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to
opine conclusively on the tax consequences of the acquisition to investors.
The acquisition may be taxable, if at all, only with respect to the
investors' receipt of warrants. Alternatively, if the acquisition is a fully
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
$20 per unit. If the acquisition is treated as fully taxable, National
believes most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, none of the properties will be subject to any liens other than
for property taxes. The board of directors could authorize borrowing by the
company the debt service for which may adversely affect the company's ability
to make distributions to shareholders. The company may incur full recourse
debt which exposes all of the assets of the company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING
INVESTORS. If you vote against the acquisition, and it is approved, you will
not be able to object to the acquisition and receive the appraised value of
your tenancy-in-common interest in your program's assets. You will have no
choice other than to accept units for your interests.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long
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time. This means that shares in the company are much riskier than ownership
of shares of established companies. If the company had been operating as if
it owned the properties which it desires to acquire, it would have
experienced losses to date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE
ACQUISITION TAKES PLACE. Rather than being focused on a single property, the
company will be an infinite life entity focused on the management of at least
seven properties of the former "Trudy Pat" programs. 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. Prior to the
dates that title to the properties securing the original program loans was
taken, National was entitled to an annual loan servicing fee equal to one
percent of the original loan amounts. When title to the properties was taken
on behalf of the programs, even though the loans no longer existed, National
continued to charge the same rate as the servicing fee for the asset
management services it provided to investors. The investors in each of the
programs had become the beneficial tenant-in-common owners of real estate,
most of which was undeveloped. While it had no obligation to do so, in order
to assist the beneficial owners in protecting their real estate assets and
readying them for sale or development, National assumed the duties of an
asset manager after title was taken to the properties. In this capacity,
National obtained information from investors about their preferences in
regard to development or sale of the properties, acted as assessing agent to
raise funds necessary to pay property taxes, insurance and other costs of
property ownership.
The annual fees payable to National are currently $50,000 for
Sacramento/Delta Greens; $300,000 for Oceanside; $65,000 for
Yosemite/Ahwahnee I; $135,000 for Yosemite/Ahwahnee II; $100,000 for Mori
Point; $140,000 for Cypress Lakes; $150,000 for Palmdale/Joshua Ranch; $5,000
for Esperanza; $3,153 for Stacey Rose A; and $850 for Stacey Rose B.
In addition to the one percent fee, compensation has been earned for
property management services provided to the Oceanside program ($896,000
accrued since the date of
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ownership (November 1993) through June 30, 1998; $876,000 actually paid) and
Yosemite/Ahwahnee properties ($594,535 accrued since the date of ownership
(September 1995); $-0- actually paid) by officers and employees of National
in their capacities as officers and employees of Oceanside Development, Inc.
and Ahwahnee Golf Course & Resort, Inc. Those property management services
included, without limitation, solicitation, engagement, coordination and
supervision of: entitlement and permit processing, environmental,
engineering, planning, architectural, construction, marketing, appraisal,
legal, accounting and other experts as needed for each project; due diligence
on potential service providers; assistance in presentations and applications
for approvals to governmental agencies; packaging and documenting the status
of a project for potential financing, sale or joint venture; supervising and
managing the operational activities for construction projects on the
Oceanside and Yosemite/Ahwahnee projects; and contract negotiations and
documentation. To the extent similar property specific services were
provided to the other programs, they were provided without extra charge
because the necessary activities were less regular and less operationally
intense.
In the future, compensation will be paid to officers of the company in
the form of salaries (aggregating $[560,000] annually plus contractual bonus
opportunities and salary increases), stock options and other benefits. See
"Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for details of stock options and other benefits.
These salaries and other forms of compensation will be payable to management
of the company even if one or more of the properties acquired in the
acquisition is subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE DIFFERENCES IN YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THE EXCHANGE VALUES FOR THESE
PROPERTIES MAY BE TOO LOW OR TOO HIGH. National reviewed the updated March
1998 appraisal of the Yosemite/Ahwahnee properties which reflected an
aggregate "as is" appraised value of $20,246,000 and the October 1996
appraisal which reflected an "as is" aggregate appraised value of $4,000,000.
The results of those appraisals clearly differed from each other, and, in
management's judgment, the difference could not be accounted for by improving
market conditions. Some of the parcels, including the golf course, were
subsequently sold, on June 5, 1998, to the Oceanside Program investors to
obtain working capital. Based on its review of all appraisals, National
concluded that the properties currently owned by the Yosemite/Ahwahnee I and
II Programs have values of $5,486,000 ($1,782,950 and $3,703,050,
respectively), and the parcels currently owned by the Oceanside Program have
a value of $5,080,000. National believes its approach is reasonable and has
received an opinion from Houlihan Valuation Advisors that the allocation of
the shares among the programs is fair.
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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 June 30, 1998: Sacramento/Delta
Greens approximately $27,000; Yosemite/Ahwahnee (combined) - approximately
$500,000; Mori Point - approximately $165,000; Cypress lakes - approximately
$204,000; Palmdale (Joshua Ranch) - approximately $63,000; Esperanza -
approximately $20,000; and Stacey Rose - approximately $30,000. Annual
payments required for all the properties for current taxes (including amounts
currently due on five-year payment plans) total approximately $549,000. In
the case of Sacramento/Delta Greens, Yosemite/Ahwahnee, Mori Point,
Palmdale/Joshua Ranch and Stacey Rose properties, National has entered into
statutorily authorized 5-year payment plans with the applicable taxing
authorities.
CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a minimum
of approximately $[4,715,000] from sale certain assets of the programs or
from the exercise of warrants become available, the company will not be able
to proceed with its entire business plan. The company will also need
financing from other sources to complete its plan. Financing sources are not
predictable and interest rates or other costs of financing may be
prohibitive. Neither the programs nor the company have received any
commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay assessments for
streets, schools and parks which increase the cost of development. Increased
costs can have a negative affect on the company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. 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
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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 $[1,818,684] BY THE COMPANY. This represents accrued fees and expenses
from the programs which National has not cancelled. This amount is due and
payable and the company intends to start paying it after the Acquisition, but
only from operating revenues 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 approval of a new tentative
map, 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. Since some were identified, changes to the tentative development
plans have been made that will reduce or eliminate any damage to the habitat.
A new tentative map needs to be approved by the City. The longer this
process takes, the longer it will be until the company can make money from
the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays
in construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged
approximately $10,000 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 5% of the assets of the company. Although there can be no
assurances and net revenues from Sacramento/Delta Greens may equal or exceed
$3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to finance engineering and endangered species studies (estimated
by management to cost approximately $175,000). Another risk is whether the
lots to be developed will appeal to
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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 YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE CONDOMINIUM-TYPE TIMESHARE ASPECT OF THE RESORT
HAVE NOT YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map
on 32 remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Planning is underway for vacation villa timeshare
units utilizing part of the allocated use permit space for recreational
vehicles. Additional planned usage such as traditional, attached timeshare
units 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 15% 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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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 $350,000) annually, and
(ii) complete the construction of additional recreational vehicle sites and
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 the City of Pacifica is expensive and time consuming. Mori
Point had a specific plan and tentative map to build a hotel/conference
center which expired in 1991. These approvals must be reinstated prior to
construction on the property.
HOTEL/CONFERENCE CENTER DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF
REASONS AND COULD RESULT IN LOSSES. In addition to normal real estate risks,
financing is hard to obtain, and the lodging industry can be unpredictable,
seasonal and very competitive. Without additional financing or capital, the
company will not be able to develop its hotel/conference center project as
part of its growth strategy. Economic conditions, changes in travel
patterns, extreme weather conditions, labor and other variable costs can all
affect revenues and profits. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues. At the hotel/conference center
property at Mori Point, we may be competing against well-known chains and
extended-stay inns.
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Mori Point represents approximately 20% of the assets of the company
and, assuming it is operated as a hotel/conference center, its revenues could
ultimately 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.
REAL ESTATE RISKS OF CYPRESS LAKES PROPERTY
THE VESTED TENTATIVE MAP NEEDS MODIFICATION AND BUILD OUT OF THE
PROPERTY WILL BE EXPENSIVE. Due to being located in a 100-year flood plain,
the property requires a levee to be constructed around its perimeter which is
very expensive to construct. It may be desirable to change the vesting
tentative map if the costs can be reduced significantly. However, any
changes in the existing plan could subject the project to public hearings
which might result in additional costs being placed on the project. This
would further increase the high front-end financial requirements.
Additionally, such modifications might not be approved.
Cypress Lakes is a proposed master-planned community and represents more
than 20% of the assets of the Company. Joint venture partners would have to
be brought in by the Company to help with the large capital requirements of
such a large project. It may be difficult to find substantial
builder/developers who have the financial ability to purchase or develop the
project. Changing market conditions may increase the difficulty in selling
lots.
Should the Company determine to build out the project, delays in
construction, reasonably priced mortgage and construction financing and the
local and general California economy could lengthen the holding period for
the lots. This would mean delays in realizing cash from the business
operations.
RISKS AFFECTING OPERATION OF A GOLF COURSE. When, and if, the golf
course is developed, it will face competition from the golf courses within a
25 mile radius. Seasonality, weather and course conditions will affect the
operations of the company. 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.
RISKS OF RESIDENTIAL DEVELOPMENT. Totaling 1,330 lots, a large supply
of lots would be available ,and due to the cyclical nature of the housing
industry, demand may not stay in sync with supply. This could result in
needing to sell properties at a loss. Due to the size of the project, it
could take between six and ten years to complete, which would subject it to
new competitors entering the marketplace during the sales period.
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REAL ESTATE RISKS OF PALMDALE/JOSHUA RANCH PROPERTY
A FINAL TRACT MAP MUST BE RECORDED. After several years of effort by
National, the vested tentative map was approved by the City of Palmdale at a
hearing before the planning commission in early July 1998. A final recorded
map must be secured by National or a buyer in order to build on the property.
Final engineering, soils, utility and various improvement studies will need
to be conducted in order to record the final map.
PERMITS TO DEVELOP THE PROPERTY NEED TO BE OBTAINED. A final recorded
map, which could take nine to twelve months after starting the process, will
be required prior to construction. Due to the size of this project which
encompasses some 739.6 acres and is currently planned for 539 lots,
additional grading studies, soils investigation and utility planning needs to
be done which could negatively impact the cost of this large-scale
development.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Finding
builder/developers that have the financial strength to handle this size
project can be difficult. Changing market conditions, the lack of
reasonably-priced construction or mortgage financing and the general or local
market conditions could lengthen the holding period for lots. This would
mean a delay in realizing cash from business operations. The average
carrying costs, including property taxes, predevelopment and asset management
services for this Property have averaged approximately $16,300 per month over
the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, the Property may be sold at a loss. The location of the lots, the
presence of other competition, customer acceptance and pricing are all
factors affecting success. Competitors may have better financial, managerial
and other resources affecting the Company's ability to successfully compete.
Palmdale/Joshua Ranch is a proposed residential development and
represents about 10% of the assets of the Company.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to pay for or finance (i) engineering, soils and utility studies
which is estimated to cost approximately $140,000, and (ii) another risk is
whether the lots to be developed may appeal to project builders.
REAL ESTATE RISKS OF ESPERANZA PROPERTY
RISKS OF COMMERCIAL DEVELOPMENT. The material risks associated with the
development of the Esperanza Property are (i) as of June 30, 1998,
approximately $23,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the
County of Riverside to avoid loss of the Property for delinquent property
taxes; and (ii) despite a strong economy, rents and values for many retail
properties are expected to remain soft in 1998. Pressure on rents brought
about by
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over building, weakness in demand for space and store closures
caused by lagging profits are the forces causing a soft market.
ADDITIONAL SPECIFIC RISKS. Within the City of Victorville there are
approximately 3,250 acres zoned for commercial use, of which 60% remains
available for development. Victorville is home to the largest enclosed
regional shopping center between San Bernardino and Las Vegas, which is known
as The Mall of Victor Valley. These commercial sites represent significant
competition to the Esperanza project. There are more than 5,400 acres within
the city limits of Victorville zoned for light and heavy industrial use.
Nearly nine percent of this 5,400 acres of land is vacant and is available in
parcels ranging in size from one-half to five hundred acres.
REAL ESTATE RISKS OF STACEY ROSE PROPERTIES
RISKS OF RESIDENTIAL DEVELOPMENT. The material risks associated with
the development of the Stacey Rose Properties are (i) as of June 30, 1998,
approximately $30,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the
County of Riverside to avoid loss of the Properties for delinquent property
taxes; (ii) it is estimated that it may cost about $50,000 to finalize a
tentative tract map on the parcels; (iii) a substantial, and potentially
expensive, sales and marketing effort will be necessary to sell homes
constructed on the properties if a bulk sale of the lots is not made; (iv)
the Properties are located in a lower income residential area; and (v)
increasing government fees and assessments for streets, schools, parks and
other infrastructure requirements could increase the cost of lots to the
company, thereby increasing the sales price of the lots which will delay
market absorption.
ADDITIONAL SPECIFIC RISKS. There is a risk that (i) adequate funds will
not be available to finalize a tentative tract map on the parcels
(approximately $50,000); (ii) the project will not appeal to project
builders; and (iii) home financing at reasonable costs may not be available.
There is also a risk that the development and sale of lots or home 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.
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STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability
to change control of the company, even if you believe such a change is in
your best interests.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% of the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of
incorporation which cover anti-takeover provisions require the approval of
two-thirds of the company's voting stock. This restriction also may deter
potential purchasers who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well
as the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements.
FAIRNESS TO INVESTORS IN THE YOSEMITE/AHWAHNEE II PROGRAM
From a financial point of view, the company and National believe the
terms of the acquisition are fair as a whole and to the investors in each of
the programs. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that
develops will be sustained;
- while the number of units to be issued to reflect the exchange
value of a program is arbitrary, the trading price of the shares included in
the units initially is likely to be substantially below the $20 value
arbitrarily assigned to the units. In our opinion, the exchange values
offered to investors for their assets allow for an equitable allocation of
the [1,403,321] units ([1,380,175] units if only the "Trudy Pat" programs
participate) 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. After the acquisition, a total of
[13.29]% of the outstanding stock of the Company will be held by
Yosemite/Ahwahnee II investors (13.47% if only the "Trudy Pat" programs
participate). After the acquisition, founders of the company (principals,
employees, and consultants of National) will hold less than 15%. Founders'
shares were purchased for $.01 per share. Among the properties, National and
its principals have forgiven over $3,495,000 of expenses and accrued fees of
which a total of approximately $2,800,000 was earned for asset management and
property management services after the loans defaulted and before the
Ownership Dates of the properties. The
12
<PAGE>
balance was earned after foreclosure for asset and property management
services and expenses. Of such amount, $1,157,867 is attributable to fees
owed by Yosemite/Ahwahnee II investors. National believes that the amount
paid for the property management services is no greater than the amount that
a third party would charge;
- the current appraised value of the Yosemite/Ahwahnee II real estate
assets ($3,703,050) (as well as the real estate assets of the other programs)
and the fact that substantial financing is needed to further the property's
development;
- the probability that the transaction will have minimal, if any,
negative tax affect on investors. National believes there will likely be no
out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have
independent representation in the structuring of the acquisition, we believe
they have been counterbalanced by your opportunity to vote on the transaction
and the Fairness Opinion;
- while the Yosemite/Ahwahnee II Program (as well as the other
programs) were originally formed to have a two to four year finite life which
should have ended between 1996 and 1997 and the investors expected to receive
a return of their investment from the original borrower, the company is an
infinite life entity which will not return the program investors' original
investment based on a sale or refinancing of the properties underlying the
original programs. However, after the borrowers defaulted on the "Trudy Pat"
loans, the investors became beneficial owners of the underlying properties
with the need to complete development, manage or otherwise ready the
properties for sale. Those endeavors had no fixed timetable and, thus, the
finite life aspect of their original investments was significantly changed.
Therefore, the infinite life aspect of the company is not viewed by National
to be a material change from the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the individual
business plan of the Yosemite/Ahwahnee II Program. Rather than being focused
on the development of a single property for resort development and management
purposes, the company will be focused on the management of at least seven
properties. Thus, the poor performance of a particular property may affect
the company's operations as a whole regardless of the performance of the
Yosemite/Ahwahnee II Property. Further, there will be no particular time
when an Investor can expect its interest to be automatically liquidated;
- the fact that, except for the recent sale of a portion of the
property to Oceanside investors, it has been difficult to find buyers or
joint venture or financial partners for the project;
- Yosemite/Ahwahnee II investors will not be able to vote on changes
to or dispositions of the Yosemite/Ahwahnee II Property or borrowing secured
by that property. Those decisions will be made by the Board of Directors or
management of the Company. Further, as investors in a larger entity,
relative voting power will be diluted;
13
<PAGE>
- future cash distributions will be based on the company's earnings
and the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Yosemite/Ahwahnee II Property;
- investors voting against the acquisition will have no alternative
but to accept shares in the company if the acquisition is approved by holders
of a majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a
change in management which is not favored by the Board of Directors of the
company; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the units
in the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection
with the acquisition and compared it with what you might receive if (i) the
Yosemite/Ahwahnee II property was operated "as is" ($1,304 per $10,000 of
Adjusted Outstanding Investment), (ii) the Yosemite/Ahwahnee II property was
sold in a quick sale in three months or less ($1,304 per $10,000 of Adjusted
Outstanding Investment), or (iii) the Yosemite/Ahwahnee II property was sold
at the appraised value, net of program debt, used to determine the
Yosemite/Ahwahnee II exchange value ($2,155 per $10,000 of Adjusted
Outstanding Investment). Based on that review, and even acknowledging that,
initially, the company's shares included in the units issued in the
acquisition would likely trade substantially below the arbitrary $20 issuance
value for the units, National believes that there is a higher probability of
realizing value from the Yosemite/Ahwahnee II property through the
acquisition than through the other alternatives. This belief is based on the
expectation that some financing opportunities will become available based on
the form of the entity and the time pressure associated with forced sales or
liquidation will be relieved. See "Background and Reasons for the
Acquisition -- Comparison to Alternatives" and "Recommendation of National
and Fairness Determination" at pages __ and __ of the Prospectus. Based on
this comparison, National concluded that the acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Yosemite/Ahwahnee II Program (as well as each
of the other 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 units of the
Company (in the case of the Yosemite/Ahwahnee II Program, [229,504] units)
multiplied by an arbitrary $20 per unit value.
In calculating the Exchange Value for the Yosemite/Ahwahnee II Program,
National had to reconcile the differences between the March 1998 appraisal by
Arnold Associates and the
14
<PAGE>
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 appraised value of the
Program, the Exchange Value was calculate by adding to the appraised value
the book value of the Program's other assets at June 30, 1998, deducting the
Program's liabilities as of June 30, 1998.
The following table summarizes the calculation of the Exchange Value of
the Yosemite/Ahwahnee II Program and the value assigned on $10,000 of
Adjusted Outstanding Investment:
<TABLE>
<CAPTION>
Value Assigned
Appraised Value Net Other to Program per
of + Assets and = $10,000 of Adjusted
Real Estate(1) Liabilities(2) Exchange Value Outstanding Investment
--------------- -------------- -------------- ----------------------
<S> <C> <C> <C>
$ 3,703,050 $ 887,026 $ 4,590,076 $ [2,344](3)
</TABLE>
- ---------------
(1) Reflects independent appraisal as of March 1998, adjusted for
inconsistencies with October 1996 appraisals.
(2) The following table quantifies the adjustments to appraised values made in
determining the Yosemite/Ahwahnee II property's Exchange Value as of
June 30, 1998.
<TABLE>
<CAPTION>
Book Assets Book Liabilities Net Other Assets and
(6/30/98)* - (6/30/98)* = Liabilities
----------- ---------------- ---------------------
<S> <C> <C>
$ 3,191,820 $ (2,304,794) $ [(887,026)]
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no third party mortgage debt on the
Yosemite/Ahwahnee II property.
(3) Equals [117] Company shares arbitrarily valued at $20 per unit.
ALLOCATION OF SHARES
The [1,403,321] shares of Company common stock being offered to
Investors in the Acquisition represent over 80% of the Company's shares (94%
if all warrants are exercised) 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 Programs
pro rata in accordance with Exchange Values. The Yosemite/Ahwahnee II
Program will be allocated [229,504] shares.
The shares allocated to the Yosemite/Ahwahnee II Program will be
allocated among Investors in the Program based on their respective pro rata
investments in the Program (taking into account assessments paid and unpaid,
as well as interest accrued to each Investor through the date beneficial
ownership of the Program's Property was taken for the Investors) as adjusted
for voluntary advances. An Investor in the Yosemite/Ahwahnee I Program with
an adjusted investment amount of $10,000 will receive [117] shares of units
in the Company arbitrarily valued at $20 per unit.
15
<PAGE>
Neither National nor the Company's founders have any interest in
the Yosemite/ Ahwahnee II Program except for National's contractual right to
asset management fees and the $[69,384] of tenancy-in-common interests
purchased by National for which interests National will receive units in the
Acquisition pro rata with the other Yosemite/Ahwahnee II Investors. National
will undertake not to exercise the warrants in the units.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Yosemite/Ahwahnee II Program (including accrued but
unpaid interest) plus the amount of assessments and advances paid by
Investors at June 30, 1998, 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
Outstanding
After the
Amount Real Estate Acquisition if
Owed plus Appraised Exchange No. of Shares All Programs
Name of Program Assessments Value Value(1) Allocated(1)(2) Participate
--------------- ----------- ------------ --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II $ 19,565,233 $ 3,703,050 $ [4,590,076] [229,504] [13.29]%
</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 [323,676] Company shares after
the Acquisition (18.74% of the outstanding shares post-Acquisition,
5.45% if all warrants are exercised) which, if valued at $20 per share,
would have an aggregate value of $[6,473,520]. The Company was formed,
and shares were purchased by the founders for $.01 per share, prior to
making the Acquisition proposal. 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 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:
16
<PAGE>
<TABLE>
<CAPTION>
Previously
Name of Program Cancelled
----------
<S> <C>
Sacramento/Delta Greens $500,000
Oceanside -0-
Yosemite/Ahwahnee I 72,158
Yosemite/Ahwahnee II 1,157,867
Mori Point 461,589
Cypress Lakes 1,120,000
Palmdale (Joshua Ranch) -0-
Esperanza 102,134
Stacey Rose A 64,293
Stacey Rose B 17,267
----------
TOTAL $3,495,308
----------
----------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [33.1]% ([35]% if only the
seven "Trudy Pat" programs participate) of the total shares to be owned
by the Company's founders after the Acquisition ([107,222] shares if all
programs participate and [113,170] shares if only the seven "Trudy Pat"
programs participate) 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, and for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Incurred
Actually Incurred Actually Actually for Actually Paid
Incurred for Paid for for Paid for Incurred for Paid for Six Months in Six Months
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Ended Ended
Name of Program 12/31/95(1) 12/31/95(2) 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2) 6/30/98 6/30/98
--------------- ------------ ----------- ----------- ------------ ------------ ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II $174,569(3) $-0- $313,200(3) $211,069 $248,157 (3) $123,998 $150,667 $55,667
</TABLE>
- -----------------
(1) These amounts represent asset management fees and salaries for officers
and employees of Ahwahnee Golf Course and Resort, Inc. for operations
and property management services.
(2) These amounts represent asset management fees.
(3) Approximately $169,792 per year if the Acquisition had been completed
during the above periods including $88,292 of estimated salaries to be
paid by the Company to its officers and other employees which were
allocated to the Yosemite/Ahwahnee II Program based on Exchange Values.
No cash would have been available to pay officers' bonuses or dividends
to shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/
EFFECT OF THE ACQUISITION
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995, 1996 and
1997:
17
<PAGE>
<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 $ 148,264
Interest $592,498 $ 1,153,352 $688,303 $ 10,273 $ 0 $ 0 $ 0 $ 2,444,426
</TABLE>
There have been no recent distributions to Investors. The Acquisition is
not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Yosemite/Ahwahnee II Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
18
<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 units of its securities in exchange for the assets
(including cash reserves), certain liabilities and business activities owned by
Investors in seven former "Trudy Pat" programs and three other programs managed
by National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[28,066,419] of unit
arbitrarily valued at $20 per unit. A unit consists of one share of common
stock plus warrants to purchase three additional shares. The [UNITS][SHARES AND
WARRANTS] 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, eliminate the assessment process, focus on revenue-generating
potential, improve efficiency of operations in order to reduce costs and
increase profit potential, and provide the investors with liquidity for their
investments.
Of the [1,403,321] units ([1,380,175] units if only the "Trudy Pat"
programs participate) to be issued by the Company in the Acquisition, Investors
in the Mori Point Program will receive a total of [270,652] shares or [219]
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 units 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
SEVEN "TRUDY PAT" PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE
PLACE.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a tenancy-in-common
interest in your program's property. Instead, you will hold shares in a
publicly-traded real estate company and will not receive liquidation proceeds
when, or if, your program's property is sold. As an investor in a
publicly-traded company with many stockholders, you will have relatively less
voting power.
- - If the acquisition is approved, your investment will be subject to the
risks associated with the development of a hotel/conference center plus new
risks associated with a business which also operates a golf course and a
recreational vehicle park, and which plans to pursue the development of
timeshare facilities, commercial facilities and residential lots.
- - If a trading market develops, the initial trading price for the stock will
likely be substantially below the arbitrary value of $20 per unit assigned for
purposes of the acquisition. Thus, the value of the units 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 16.42% of the Company's stock (4.78% if all warrants are
exercised) for which they paid $0.01 per share and will receive annual cash
compensation aggregating $560,000 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 $950,000 annually.
However, the Company will still owe National over $1,800,000 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 certain of its properties or the
exercise of the warrants included in the units, it will be no more successful
than the programs have been individually in completing the development of some
or all of the properties.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE ACQUISITION.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found on
pages [__] through [__] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If the
acquisition is completed, there will be a change in the nature of the investment
of each investor from holding a tenancy-in-common interest in real estate to
holding shares in an on-going company, the assets of which may be changed from
time to time without approval of investors. If the acquisition is completed,
investors will be able to liquidate their investments only by selling their
[UNITS][SHARES] on the _____ or in private transactions, and they will not
receive a return of their investment in the form of liquidation proceeds through
property sales. If the acquisition is completed, investors will have an
investment in an entity that is larger than each of the programs and will thus
lose relative voting power. Investors will have an investment in a business
which also operates a golf course and a recreational vehicle park, and which
plans to pursue the development of timeshare facilities and a hotel/conference
center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL SALES
PRICE. Investors are subject to the risk that the exchange value of a program
does not reflect the price a program's assets might bring in a sale. If the
property of a program were to be sold, the net proceeds of the sale and the
amount finally distributed to an investor in that program may be more or less
than the exchange value. There is no assurance that the future value of the
shares and warrants received in the acquisition will be greater than the most
recent appraised value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may trade
at prices substantially below the arbitrarily determined exchange value of $20
per unit or the 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
$20 due to a potentially large number of shares that investors may sell
immediately after the acquisition.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of interest.
The principal shareholders and employees of National and the company, will hold
approximately [16.42]% of the company's outstanding stock (4.78% if all warrants
are exercised) for which they paid $0.01 per share. Other founders of the
company will hold approximately [2.3]% 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 $560,000 as officers and employees of the company.
National will be relieved of its servicing and asset management obligations and
will no longer earn asset
<PAGE>
management or servicing related fees. However, the company will still owe
National over $1,800,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not favored
by the board of directors. These provisions include a board of directors with
three classes serving staggered three year terms, the inability to remove a
particular director before the expiration of his or her term without a
two-thirds supermajority vote , and the inability to amend the anti-takeover
provisions of the charter documents without a similar vote. Thus, if investors
are unhappy with management's performance, it will be more difficult to remove
directors not favored by the investors.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF THE
INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of each
program, the terms of the acquisition may have been more favorable to certain or
all of the programs and fewer shares and less favorable employment contracts may
have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to opine
conclusively on the tax consequences of the acquisition to investors. The
acquisition may be taxable, if at all, only with respect to the investors'
receipt of warrants. Alternatively, if the acquisition is a fully 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 $20 per
unit. If the acquisition is treated as fully taxable, National believes most
investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the acquisition,
none of the properties will be subject to any liens other than for property
taxes. The board of directors could authorize borrowing by the company the debt
service for which may adversely affect the company's ability to make
distributions to shareholders. The company may incur full recourse debt which
exposes all of the assets of the company to repayment instead of limited
recourse debt which generally exposes specific properties for the repayment of
debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS.
If you vote against the acquisition, and it is approved, you will not be able to
object to the acquisition and receive the appraised value of your
tenancy-in-common interest in your program's assets. You will have no choice
other than to accept units for your interests.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long
2
<PAGE>
time. This means that shares in the company are much riskier than ownership
of shares of established companies. If the company had been operating as if
it owned the properties which it desires to acquire, it would have
experienced losses to date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE ACQUISITION
TAKES PLACE. Rather than being focused on a single property, the company will
be an infinite life entity focused on the management of at least seven
properties of the former "Trudy Pat" programs. 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. Prior to the dates
that title to the properties securing the original program loans was taken,
National was entitled to an annual loan servicing fee equal to one percent of
the original loan amounts. When title to the properties was taken on behalf of
the programs, even though the loans no longer existed, National continued to
charge the same rate as the servicing fee for the asset management services it
provided to investors. The investors in each of the programs had become the
beneficial tenant-in-common owners of real estate, most of which was
undeveloped. While it had no obligation to do so, in order to assist the
beneficial owners in protecting their real estate assets and readying them for
sale or development, National assumed the duties of an asset manager after title
was taken to the properties. In this capacity, National obtained information
from investors about their preferences in regard to development or sale of the
properties, acted as assessing agent to raise funds necessary to pay property
taxes, insurance and other costs of property ownership.
The annual fees payable to National are currently $50,000 for
Sacramento/Delta Greens; $300,000 for Oceanside; $65,000 for Yosemite/Ahwahnee
I; $135,000 for Yosemite/Ahwahnee II; $100,000 for Mori Point; $140,000 for
Cypress Lakes; $150,000 for Palmdale/Joshua Ranch; $5,000 for Esperanza; $3,153
for Stacey Rose A; and $850 for Stacey Rose B.
In addition to the one percent fee, compensation has been earned for
property management services provided to the Oceanside program ($896,000 accrued
since the date of
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ownership (November 1993) through June 30, 1998; $876,000 actually paid) and
Yosemite/Ahwahnee properties ($594,535 accrued since the date of ownership
(September 1995); $-0- actually paid) by officers and employees of National in
their capacities as officers and employees of Oceanside Development, Inc. and
Ahwahnee Golf Course & Resort, Inc. Those property management services
included, without limitation, solicitation, engagement, coordination and
supervision of: entitlement and permit processing, environmental, engineering,
planning, architectural, construction, marketing, appraisal, legal, accounting
and other experts as needed for each project; due diligence on potential service
providers; assistance in presentations and applications for approvals to
governmental agencies; packaging and documenting the status of a project for
potential financing, sale or joint venture; supervising and managing the
operational activities for construction projects on the Oceanside and
Yosemite/Ahwahnee projects; and contract negotiations and documentation. To the
extent similar property specific services were provided to the other programs,
they were provided without extra charge because the necessary activities were
less regular and less operationally intense.
In the future, compensation will be paid to officers of the company in the
form of salaries (aggregating $560,000 annually plus contractual bonus
opportunities and salary increases), stock options and other benefits. See
"Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for details of stock options and other benefits.
These salaries and other forms of compensation will be payable to management of
the company even if one or more of the properties acquired in the acquisition is
subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE DIFFERENCES IN YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THE EXCHANGE VALUES FOR THESE PROPERTIES
MAY BE TOO LOW OR TOO HIGH. National reviewed the updated March 1998 appraisal
of the Yosemite/Ahwahnee properties which reflected an aggregate "as is"
appraised value of $20,246,000 and the October 1996 appraisal which reflected an
"as is" aggregate appraised value of $4,000,000. The results of those
appraisals clearly differed from each other, and, in management's judgment, the
difference could not be accounted for by improving market conditions. Some of
the parcels, including the golf course, were subsequently sold, on June 5, 1998,
to the Oceanside Program investors to obtain working capital. Based on its
review of all appraisals, National concluded that the properties currently owned
by the Yosemite/Ahwahnee I and II Programs have values of $5,486,000 ($1,782,950
and $3,703,050, respectively), and the parcels currently owned by the Oceanside
Program have a value of $5,080,000. National believes its approach is
reasonable and has received an opinion from Houlihan Valuation Advisors that the
allocation of the shares among the programs is fair.
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
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programs' properties is subject to the following delinquent property taxes as of
June 30, 1998: Sacramento/Delta Greens - approximately $27,000;
Yosemite/Ahwahnee (combined) - approximately $500,000; Mori Point -
approximately $165,000; Cypress lakes - approximately $204,000; Palmdale (Joshua
Ranch) - approximately $63,000; Esperanza - approximately $20,000; and Stacey
Rose - approximately $30,000. Annual payments required for all the properties
for current taxes (including amounts currently due on five-year payment plans)
total approximately $549,000. In the case of Sacramento/Delta Greens,
Yosemite/Ahwahnee, Mori Point, Palmdale/Joshua Ranch and Stacey Rose properties,
National has entered into statutorily authorized 5-year payment plans with the
applicable taxing authorities.
CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a minimum of
approximately $[4,715,000] from sale of certain assets of the programs or from
the exercise of warrants become available, the company will not be able to
proceed with its entire business plan. The company will also need financing
from other sources to complete its plan. Financing sources are not predictable
and interest rates or other costs of financing may be prohibitive. Neither the
programs nor the company have received any commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE EXPENSIVE
HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the properties.
As a result, there may be environmental liability. Local governments have
required residential developers to pay assessments for streets, schools and
parks which increase the cost of development. Increased costs can have a
negative affect on the company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as earthquakes
and floods may be uninsurable or too expensive to insure. The company does not
plan to carry earthquake or flood insurance. If an uninsured loss occurs, the
company would lose capital as well as revenues, and would still owe other debts
related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do so.
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.
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WHEN THE ACQUISITION IS COMPLETED, NATIONAL AND ITS PRINCIPALS WILL BE OWED
$[1,818,684] BY THE COMPANY. This represents accrued fees and expenses from the
programs which National has not cancelled. This amount is due and payable and
the company intends to start paying it after the Acquisition, but only from
operating revenues 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 approval of a new tentative map,
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.
Since some were identified, changes to the tentative development plans have been
made that will reduce or eliminate any damage to the habitat. A new tentative
map needs to be approved by the City. The longer this process takes, the longer
it will be until the company can make money from the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays in
construction, the lack of reasonably priced construction or mortgage financing,
and the general California economy could lengthen the holding period for the
lots. This would mean a delay in realizing cash from the business operations.
The average carrying costs, including property taxes, management and servicing
related fees, for this property has averaged approximately $10,000 per month
over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real estate
is cyclical and the residential lot development industry is highly competitive.
If the demand for new lots does not keep pace with competitive supply, our
properties may be sold at a loss. The location of the company's lots, the
presence of other competition, customer acceptance and pricing are all factors
affecting success. Competitors may have better financial, managerial and other
resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 5% of the assets of the company. Although there can be no
assurances and net revenues from Sacramento/Delta Greens may equal or exceed
$3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to (i) finance engineering and endangered species studies (estimated
by management to cost approximately $175,000). 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.
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REAL ESTATE RISKS OF YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE CONDOMINIUM-TYPE TIMESHARE ASPECT OF THE RESORT HAVE
NOT YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map on 32
remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Planning is underway for vacation villa timeshare
units utilizing part of the allocated use permit space for recreational
vehicles. Additional planned usage such as traditional, attached timeshare
units 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 15% of the assets of the company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard to
obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not be
able to develop its resort projects as part of its growth strategy. Economic
conditions, changes in travel patterns, extreme weather conditions, labor and
other variable costs can all affect revenues and profits. For example, Spring
through Fall at the Yosemite/Ahwahnee property are the periods of highest
occupancy. Seasonality can be expected to cause quarterly fluctuations in the
company's revenues.
The recreational vehicle park at Yosemite/Ahwahnee may generate as much as
ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or eliminate
profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers
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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 $350,000) annually and complete
the construction of additional recreational vehicle sites and 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
the City of Pacifica is expensive and time consuming. Mori Point had a specific
plan and tentative map to build a hotel/conference center which expired in 1991.
These approvals must be reinstated prior to construction on the property.
HOTEL/CONFERENCE CENTER DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF
REASONS AND COULD RESULT IN LOSSES. In addition to normal real estate risks,
financing is hard to obtain, and the lodging industry can be unpredictable,
seasonal and very competitive. Without additional financing or capital, the
company will not be able to develop its hotel/conference center project as part
of its growth strategy. Economic conditions, changes in travel patterns,
extreme weather conditions, labor and other variable costs can all affect
revenues and profits. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues. At the hotel/conference center property
at Mori Point, we may be competing against well-known chains and extended-stay
inns.
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Mori Point represents approximately 20% of the assets of the company and,
assuming it is operated as a hotel/conference center, its revenues could
ultimately 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.
REAL ESTATE RISKS OF CYPRESS LAKES PROPERTY
THE VESTED TENTATIVE MAP NEEDS MODIFICATION AND BUILD OUT OF THE PROPERTY
WILL BE EXPENSIVE. Due to being located in a 100-year flood plain, the property
requires a levee to be constructed around its perimeter which is very expensive
to construct. It may be desirable to change the vesting tentative map if the
costs can be reduced significantly. However, any changes in the existing plan
could subject the project to public hearings which might result in additional
costs being placed on the project. This would further increase the high
front-end financial requirements. Additionally, such modifications might not be
approved.
Cypress Lakes is a proposed master-planned community and represents more
than 20% of the assets of the Company. Joint venture partners would have to be
brought in by the Company to help with the large capital requirements of such a
large project. It may be difficult to find substantial builder/developers who
have the financial ability to purchase or develop the project. Changing market
conditions may increase the difficulty in selling lots.
Should the Company determine to build out the project, delays in
construction, reasonably priced mortgage and construction financing and the
local and general California economy could lengthen the holding period for the
lots. This would mean delays in realizing cash from the business operations.
RISKS AFFECTING OPERATION OF A GOLF COURSE. When, and if, the golf course
is developed, it will face competition from the golf courses within a 25 mile
radius. Seasonality, weather and course conditions will affect the operations
of the company. 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.
RISKS OF RESIDENTIAL DEVELOPMENT. Totaling 1,330 lots, a large supply of
lots would be available ,and due to the cyclical nature of the housing industry,
demand may not stay in sync with supply. This could result in needing to sell
properties at a loss. Due to the size of the project, it could take between six
and ten years to complete, which would subject it to new competitors entering
the marketplace during the sales period.
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REAL ESTATE RISKS OF PALMDALE/JOSHUA RANCH PROPERTY
A FINAL TRACT MAP MUST BE RECORDED. After several years of effort by
National, the vested tentative map was approved by the City of Palmdale at a
hearing before the planning commission in early July 1998. A final recorded map
must be secured by National or a buyer in order to build on the property. Final
engineering, soils, utility and various improvement studies will need to be
conducted in order to record the final map.
PERMITS TO DEVELOP THE PROPERTY NEED TO BE OBTAINED. A final recorded map,
which could take nine to twelve months after starting the process, will be
required prior to construction. Due to the size of this project which
encompasses some 739.6 acres and is currently planned for 539 lots, additional
grading studies, soils investigation and utility planning needs to be done which
could negatively impact the cost of this large-scale development.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Finding
builder/developers that have the financial strength to handle this size project
can be difficult. Changing market conditions, the lack of reasonably-priced
construction or mortgage financing and the general or local market conditions
could lengthen the holding period for lots. This would mean a delay in
realizing cash from business operations. The average carrying costs, including
property taxes, predevelopment and asset management services for this Property
have averaged approximately $16,300 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real estate
is cyclical and the residential lot development industry is highly competitive.
If the demand for new lots does not keep pace with competitive supply, the
Property may be sold at a loss. The location of the lots, the presence of other
competition, customer acceptance and pricing are all factors affecting success.
Competitors may have better financial, managerial and other resources affecting
the Company's ability to successfully compete.
Palmdale/Joshua Ranch is a proposed residential development and represents
about 10% of the assets of the Company.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not be
available to pay for or finance (i) engineering, soils and utility studies which
is estimated to cost approximately $140,000, and (ii) another risk is whether
the lots to be developed may appeal to project builders.
REAL ESTATE RISKS OF ESPERANZA PROPERTY
RISKS OF COMMERCIAL DEVELOPMENT. The material risks associated with the
development of the Esperanza Property are (i) as of June 30, 1998, approximately
$23,000 of property taxes are delinquent and must be brought current or a
statutory five-year payment plan must be arranged with the County of Riverside
to avoid loss of the Property for delinquent property taxes; and (ii) despite a
strong economy, rents and values for many retail properties are expected to
remain soft in 1998. Pressure on rents brought about by
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over building, weakness in demand for space and store closures caused by lagging
profits are the forces causing a soft market.
ADDITIONAL SPECIFIC RISKS. Within the City of Victorville there are
approximately 3,250 acres zoned for commercial use, of which 60% remains
available for development. Victorville is home to the largest enclosed regional
shopping center between San Bernardino and Las Vegas, which is known as The Mall
of Victor Valley. These commercial sites represent significant competition to
the Esperanza project. There are more than 5,400 acres within the city limits
of Victorville zoned for light and heavy industrial use. Nearly nine percent of
this 5,400 acres of land is vacant and is available in parcels ranging in size
from one-half to five hundred acres.
REAL ESTATE RISKS OF STACEY ROSE PROPERTIES
RISKS OF RESIDENTIAL DEVELOPMENT. The material risks associated with the
development of the Stacey Rose Properties are (i) as of June 30, 1998,
approximately $30,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the County
of Riverside to avoid loss of the Properties for delinquent property taxes; (ii)
it is estimated that it may cost about $50,000 to finalize a tentative tract map
on the parcels; (iii) a substantial, and potentially expensive, sales and
marketing effort will be necessary to sell homes constructed on the properties
if a bulk sale of the lots is not made; (iv) the Properties are located in a
lower income residential area; and (v) increasing government fees and
assessments for streets, schools, parks and other infrastructure requirements
could increase the cost of lots to the company, thereby increasing the sales
price of the lots which will delay market absorption.
ADDITIONAL SPECIFIC RISKS. There is a risk that (i) adequate funds will
not be available to finalize a tentative tract map on the parcels (approximately
$50,000); (ii) the project will not appeal to project builders; and (iii) home
financing at reasonable costs may not be available. There is also a risk that
the development and sale of lots or home 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.
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STAGGERED BOARD. The Board of Directors is divided into three classes
serving staggered three year terms. This arrangement may affect your ability to
change control of the company, even if you believe such a change is in your best
interests.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's certificate
of incorporation, as well as Delaware law, prohibits certain business
combinations with owners of more than 15% of the outstanding voting stock of the
company ("interested stockholders") within the three year period immediately
prior to the date on which the interested stockholder became an interested
stockholder. These restrictions on certain business combinations may deter
potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of incorporation
which cover anti-takeover provisions require the approval of two-thirds of the
company's voting stock. This restriction also may deter potential purchasers
who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well as
the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections National
enjoys under the programs' servicing agreements.
FAIRNESS TO INVESTORS IN THE MORI POINT PROGRAM
From a financial point of view, the company and National believe the terms
of the acquisition are fair as a whole and to the investors in each of the
programs. This determination is based on consideration of the following
positive and negative factors:
- the shares offer an opportunity for individual investor liquidity
while the tenancy-in-common interests do not, however, there is no assurance
that the shares will have any liquidity, or that any liquid market that develops
will be sustained;
- while the number of units to be issued to reflect the exchange value
of a program is arbitrary, the trading price of the shares included in the units
initially is likely to be substantially below the $20 value arbitrarily assigned
to the units. In our opinion, the exchange values offered to investors for
their assets allow for an equitable allocation of the [1,403,321] units
([1,380,175] units if only the "Trudy Pat" programs participate) 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. After the acquisition, a total of
[15.67]% of the outstanding stock of the Company will be held by Mori Point
investors (15.88% if only the "Trudy Pat" programs participate). After the
acquisition, founders of the company (principals, employees, and consultants of
National) will hold less than 15%. Founders' shares were purchased for $.01 per
share. Among the properties, National and its principals have forgiven over
$3,495,000 of expenses and accrued fees of which a total of approximately
$2,800,000 was earned for asset management and property management services
after the loans defaulted and before the Ownership Dates of the properties. The
balance was earned
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after foreclosure for asset and property management services and expenses. Of
such amount, $461,589 is attributable to fees owed by Mori Point investors.
National believes that the amount paid for the property management services is
no greater than the amount that a third party would charge;
- the current appraised value of the Mori Point real estate assets
($6,000,000) (as well as the real estate assets of the other programs) and the
fact that substantial financing is needed to further the property's development;
- the probability that the transaction will have minimal, if any,
negative tax affect on investors. National believes there will likely be no
out-of-pocket tax cost to all, or the vast majority, of you;
- while conflicts of interest exist in the structuring of the
acquisition, the issuance of shares to the founders of the company and the
determination of management compensation and while you did not have independent
representation in the structuring of the acquisition, we believe they have been
counterbalanced by your opportunity to vote on the transaction and the Fairness
Opinion;
- while the Mori Point Program (as well as the other programs) were
originally formed to have a two to four year finite life which should have ended
between 1993 and 1994 and the investors expected to receive a return of their
investment from the original borrower, the company is an infinite life entity
which will not return the program investors' original investment based on a sale
or refinancing of the properties underlying the original programs. However,
after the borrowers defaulted on the "Trudy Pat" loans, the investors became
beneficial owners of the underlying properties with the need to complete
development, manage or otherwise ready the properties for sale. Those endeavors
had no fixed timetable and, thus, the finite life aspect of their original
investments was significantly changed. Therefore, the infinite life aspect of
the company is not viewed by National to be a material change from the
investors' CURRENT situation;
- the acquisition will cause fundamental changes in the business plans
of the Mori Point Program. Rather than being focused on the development of a
single property for hotel/conference center purposes, the company will be
focused on the management of at least seven properties. Thus, the poor
performance of a particular property may affect the company's operations as a
whole regardless of the performance of the Mori Point property. Further, there
will be no particular time when an Investor can expect its interest to be
automatically liquidated;
- the facts that Mori Point investors have rejected an offer to acquire
the property due to the terms of the proposed transaction and it has been
difficult to find buyers or joint venture or financial partners for the project;
- Mori Point investors will not be able to vote on changes to or
dispositions of the Mori Point property or borrowing secured by that property.
Those decisions will be made by the Board of Directors or management of the
Company. Further, as investors in a larger entity, relative voting power will
be diluted;
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- future cash distributions will be based on the company's earnings and
the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Mori Point property;
- investors voting against the acquisition will have no alternative but
to accept shares in the company if the acquisition is approved by holders of a
majority of the tenancy-in-common interests in each of the programs;
- the anti-takeover provisions of the company's charter documents
contain provisions that may have the effect of delaying or discouraging a change
in management which is not favored by the Board of Directors of the company; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm which addresses only the allocation of the units in
the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection with
the acquisition and compared it with what you might receive if (i) the Mori
Point property was operated "as is" ($1,711 per $10,000 of Adjusted Outstanding
Investment), (ii) the Mori Point property was sold in a quick sale in three
months or less ($1,711 per $10,000 of Adjusted Outstanding Investment), or (iii)
the Mori Point property was sold at the appraised value used to determine the
Mori Point exchange value ($3,898 per $10,000 of Adjusted Outstanding
Investment). Based on that review, and even acknowledging that, initially, the
company's shares included in the units issued in the acquisition would likely
trade substantially below the arbitrary $20 issuance value for the units,
National believes that there is a higher probability of realizing value from the
Mori Point property through the acquisition than through the other alternatives.
This belief is based on the expectation that some financing opportunities will
become available based on the form of the entity and the time pressure
associated with forced sales or liquidation will be relieved. See "Background
and Reasons for the Acquisition -- Comparison to Alternatives" and
"Recommendation of National and Fairness Determination" at pages __ and __ of
the Prospectus. Based on this comparison, National concluded that the
acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Mori Point Program (as well as each of the other
Programs) is essentially the consideration at which the Company is offering in
exchange for the real estate assets, cash reserves, certain liabilities and
business of the Program. The value is reflected as a number of units of the
Company (in the case of the Mori Point Program, [270,652] units) multiplied by
an arbitrary $20 per unit value.
The Exchange Value for the Mori Point Program was calculated as follows:
appraised value of the Mori Point Program's property at March 1998, plus book
value of other Mori Point Program assets at June 30, 1998, less Mori Point
Program liabilities at June 30, 1998.
14
<PAGE>
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>
$ 6,000,000 $[ (586,964)] $[ 5,413,036] $ [ 4,384](3)
</TABLE>
- ----------------
(1) Reflects independent appraisal as of March 1998.
(2) The following table quantifies the adjustments to appraised values made in
determining the Mori Point property's Exchange Value as of June 30, 1998.
<TABLE>
<CAPTION>
Book Assets Book Liabilities Net Other Assets
(6/30/98)* - (6/30/98)* = and Liabilities
--------- --------- ---------------
<S> <C> <C>
$ 261,140 $ (848,104) $ [ (586,964)]
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no mortgage debt on the Mori Point Property.
(3) Equals [219] Company shares arbitrarily valued at $20 per unit.
ALLOCATION OF SHARES
The [1,403,321] shares of Company common stock being offered to Investors
in the Acquisition represent over 80% of the Company's shares (94% if all
warrants are exercised) 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 Programs pro rata in
accordance with Exchange Values. The Mori Point Program will be allocated
[_______] shares
The shares allocated to the Mori Point Program will be allocated among
Investors in the Program based on their respective pro rata investments in the
Program (taking into account assessments paid and unpaid, as well as interest
accrued to each Investor through the date beneficial ownership of the Program's
Property was taken for the Investors) as adjusted for voluntary advances. An
Investor in the Mori Point Program with an adjusted investment amount of $10,000
will receive [219] units in the Company arbitrarily valued at $20 per unit.
Neither National nor the Company's founders have any economic interest
in the Mori Point Program except for National's contractual right to asset
management fees and the $5,279 of tenancy-in-common interests purchased by
National for which interests National will receive units in the Acquisition pro
rata with the other Mori Point Investors. National will undertake not to
exercise the warrants in the units.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Mori Point Program (including accrued but unpaid
interest) plus the amount of assessments and advances paid by Investors at June
30, 1998, appraised real estate value, Exchange Value of the Program, the number
and percentage of shares allocated to the Program,
15
<PAGE>
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
Outstanding
After the
Amount Real Estate Acquisition if
Owed plus Appraised Exchange No. of Shares All Programs
Name of Program Assessments Value Value(1) Allocated(1)(2) Participate
--------------- ----------- ----- -------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Mori Point $ 12,342,259 $ 6,000,000 $ [270,652] [15.67]%
[ 5,413,036]
</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 [323,676] Company shares after the
Acquisition (18.74% of the outstanding shares post-Acquisition, 5.45% if
all warrants are exercised) which, if valued at $20 per share, would have
an aggregate value of $[6,473,520]. The Company was formed, and shares
were purchased by the founders for $.01 per share, prior to making the
Acquisition proposal. 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 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>
Previously
Name of Program Cancelled
---------
<S> <C>
Sacramento/Delta Greens $ 500,000
Oceanside -0-
Yosemite/Ahwahnee I 72,158
Yosemite/Ahwahnee II 1,157,867
Mori Point 461,589
Cypress Lakes 1,120,000
Palmdale (Joshua Ranch) -0-
Esperanza 102,134
Stacey Rose A 64,293
Stacey Rose B 17,267
-----------
TOTAL $ 3,495,308
-----------
-----------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [13.2]% ([13.9]% if only the
seven "Trudy Pat" programs participate) of the total shares to be owned by
the Company's founders after the Acquisition ([42,745] shares if all
programs participate and 45,116 shares if only the seven "Trudy Pat"
programs participate) would have been deemed allocated from this Program.
16
<PAGE>
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1997,
1996 and 1995, and for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Incurred
Incurred Actually Incurred Actually Incurred Actually for Actually Paid
for Year Paid for for Year Paid for for Year Paid for Six Months in Six Months
Ended Year Ended Ended Year Ended Ended Year Ended Ended Ended
Name of Program 12/31/95(1) 12/31/95(2) 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2) 6/30/98 6/30/98
--------------- -------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mori Point $100,000(2) $-0- $100,000(2) $-0- $100,000(2) $27,333 $50,000 $10,000
</TABLE>
- ---------------
(1) These amounts represent accrued asset management fees.
(2) Approximately $125,772 per year if the Acquisition had been completed
during the above periods including $65,401 of estimated salaries to be paid
by the Company to its officers and which were allocated to the Mori Point
Program based on Exchange Values. No cash would have been available to pay
officers' bonuses or dividends to shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/
EFFECT OF THE ACQUISITION
No cash distributions made to Investors in any of the years ended December
31, 1992, 1993, 1994, 1995, 1996 or 1997. Prior to 1992, $1,354,708 in interest
was distributed to Investors. The Acquisition is not expected to alter this
distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Mori Point Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
17
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
CYPRESS LAKES "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 Cypress
Lakes 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 units of its securities in exchange for the
assets (including cash reserves), certain liabilities and business activities
owned by Investors in seven former "Trudy Pat" programs and three other
programs managed by National Investors Financial, Inc. ("National"). For
this proposed Acquisition, the Company will issue an aggregate of
$[28,066,419] of units arbitrarily valued at $20 per unit. A unit consists
of one share of common stock plus warrants to purchase three additional
shares. The [UNITS][SHARES AND WARRANTS] 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, eliminate the
assessment process, focus on revenue-generating potential, improve efficient
of operations in order to reduce costs and increase profit potential, and
provide the investors with liquidity for their investments.
Of the [1,403,321] units to be issued by the Company in the Acquisition,
Investors in the Cypress Lakes Program will receive a total of [291,296]
shares or [153 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 Cypress Lakes Program
an amount that is higher than the value of the Company units 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 SEVEN "TRUDY PAT" PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION
FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a tenancy-in-common
interest in your program's property. Instead, you will hold shares in a
publicly-traded real estate company and will not receive liquidation proceeds
when, or if, your program's property is sold. As an investor in a
publicly-traded company with many stockholders, you will have relatively less
voting power.
- - If the acquisition is approved, your investment will be
subject to the risks associated with residential development plus new risks
associated with a business which also operates a golf course and a
recreational vehicle park, and which plans to pursue the development of
timeshare facilities, commercial 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 $20 per unit assigned
for purposes of the acquisition. Thus, the value of the units 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 16.42% of the Company's stock (4.78% if all warrants
are exercised) for which they paid $0.01 per share and will receive annual
cash compensation aggregating $560,000 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 $950,000
annually. However, the Company will still owe National over $1,800,000 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 certain of its properties or
the exercise of the warrants included in the units, 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 [__] through [__] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If
the acquisition is completed, there will be a change in the nature of the
investment of each investor from holding a tenancy-in-common interest in real
estate to holding shares in an on-going company, the assets of which may be
changed from time to time without approval of investors. If the acquisition
is completed, investors will be able to liquidate their investments only by
selling their [UNITS][SHARES] on the _____ or in private transactions, and
they will not receive a return of their investment in the form of liquidation
proceeds through property sales. If the acquisition is completed, investors
will have an investment in an entity that is larger than each of the programs
and will thus lose relative voting power. Investors will have an investment
in a business which also operates a golf course and a recreational vehicle
park, and which plans to pursue the development of timeshare facilities and
a hotel/conference center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL
SALES PRICE. Investors are subject to the risk that the exchange value of a
program does not reflect the price a program's assets might bring in a sale.
If the property of a program were to be sold, the net proceeds of the sale
and the amount finally distributed to an investor in that program may be more
or less than the exchange value. There is no assurance that the future value
of the shares and warrants received in the acquisition will be greater than
the most recent appraised value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may
trade at prices substantially below the arbitrarily determined exchange value
of $20 per unit or the 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 $20 due to a potentially large number of shares that investors
may sell immediately after the acquisition.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of
interest. The principal shareholders and employees of National and the
company will hold approximately [16.42]% of the company's outstanding stock
(4.78% if all warrants are exercised) for which they paid $0.01 per share.
Other founders of the company will hold approximately [2.3]% 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 $560,000 as
officers and employees of the company. National will be relieved of its
servicing and asset management obligations and will no longer earn asset
2
<PAGE>
management or servicing related fees. However, the company will still owe
National over $1,800,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote, and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF
THE INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject
to arm's-length negotiation. Had an independent party negotiated on behalf
of each program, the terms of the acquisition may have been more favorable to
certain or all of the programs and fewer shares and less favorable employment
contracts may have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to
opine conclusively on the taxability of the acquisition to investors. If the
acquisition is a taxable transaction, an investor would recognize gain or
loss in 1998 equal to the difference between the investor's tax basis in his
interest in a program property, and the number of shares of the company
received valued at $20 per unit. If the acquisition is treated as taxable,
National believes most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, none of the properties will be subject to any liens other than
for property taxes. The board of directors could authorize borrowing by the
company the debt service for which may adversely affect the company's ability
to make distributions to shareholders. The company may incur full recourse
debt which exposes all of the assets of the company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING
INVESTORS. If you vote against the acquisition, and it is approved, you will
not be able to object to the acquisition and receive the appraised value of
your tenancy-in-common interest in your program's assets. You will have no
choice other than to accept units for your interests.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long time. This means that shares in the
company are much riskier than ownership of shares of
3
<PAGE>
established companies. If the company had been operating as if it owned the
properties which it desires to acquire, it would have experienced losses to
date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE
ACQUISITION TAKES PLACE. Rather than being focused on a single property, the
company will be an infinite life entity focused on the management of at least
the seven properties of the former "Trudy Pat" programs. 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. Prior to the
dates that title to the properties securing the original program loans was
taken, National was entitled to an annual loan servicing fee equal to one
percent of the original loan amounts. When title to the properties was taken
on behalf of the programs, even though the loans no longer existed, National
continued to charge the same rate as the servicing fee for the asset
management services it provided to investors. The investors in each of the
programs had become the beneficial tenant-in-common owners of real estate,
most of which was undeveloped. While it had no obligation to do so, in order
to assist the beneficial owners in protecting their real estate assets and
readying them for sale or development, National assumed the duties of an
asset manager after title was taken to the properties. In this capacity,
National obtained information from investors about their preferences in
regard to development or sale of the properties, acted as assessing agent to
raise funds necessary to pay property taxes, insurance and other costs of
property ownership.
The annual fees payable to National are currently $50,000 for
Sacramento/Delta Greens; $300,000 for Oceanside; $65,000 for
Yosemite/Ahwahnee I; $135,000 for Yosemite/Ahwahnee II; $100,000 for Mori
Point; $140,000 for Cypress Lakes; $150,000 for Palmdale/Joshua Ranch; $5,000
for Esperanza; $3,153 for Stacey Rose A; and $850 for Stacey Rose B.
In addition to the one percent fee, compensation has been earned for
property management services provided to the Oceanside program ($896,000
accrued since the date of ownership (November 1993) through June 30, 1998;
$876,000 actually paid) and Yosemite/Ahwahnee properties ($594,535 accrued
since the date of ownership (September 1995); $-0- actually paid) by officers
and employees of National in their capacities as officers
4
<PAGE>
and employees of Oceanside Development, Inc. and Ahwahnee Golf Course &
Resort, Inc. Those property management services included, without
limitation, solicitation, engagement, coordination and supervision of:
entitlement and permit processing, environmental, engineering, planning,
architectural, construction, marketing, appraisal, legal, accounting and
other experts as needed for each project; due diligence on potential service
providers; assistance in presentations and applications for approvals to
governmental agencies; packaging and documenting the status of a project for
potential financing, sale or joint venture; supervising and managing the
operational activities for construction projects on the Oceanside and
Yosemite/Ahwahnee projects; and contract negotiations and documentation. To
the extent similar property specific services were provided to the other
programs, they were provided without extra charge because the necessary
activities were less regular and less operationally intense.
In the future, compensation will be paid to officers of the company in
the form of salaries (aggregating $560,000 annually plus contractual bonus
opportunities and salary increases), stock options and other benefits. See
"Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for details of stock options and other benefits.
These salaries and other forms of compensation will be payable to management
of the company even if one or more of the properties acquired in the
acquisition is subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE DIFFERENCES IN YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THE EXCHANGE VALUES FOR THESE
PROPERTIES MAY BE TOO LOW OR TOO HIGH. National reviewed the updated March
1998 appraisal of the Yosemite/Ahwahnee properties which reflected an
aggregate "as is" appraised value of $20,246,000 and the October 1996
appraisal which reflected an "as is" aggregate appraised value of $4,000,000.
The results of those appraisals clearly differed from each other, and, in
management's judgment, the difference could not be accounted for by improving
market conditions. Some of the parcels, including the golf course, were
subsequently sold, on June 5, 1998, to the Oceanside Program investors to
obtain working capital. Based on its review of all appraisals, National
concluded that the properties currently owned by the Yosemite/Ahwahnee I and
II Programs have values of $5,486,000 ($1,782,950 and $3,703,050,
respectively), and the parcels currently owned by the Oceanside Program have
a value of $5,080,000. National believes its approach is reasonable and has
received an opinion from Houlihan Valuation Advisors that the allocation of
the shares among the programs is fair.
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 June 30, 1998: Sacramento/Delta
Greens -approximately $27,000; Yosemite/Ahwahnee (combined) - approximately
$500,000; Mori Point - approximately $165,000; Cypress lakes - approximately
$204,000; Palmdale (Joshua Ranch) - approximately $63,000; Esperanza -
approximately $20,000; and Stacey Rose - approximately $30,000. Annual
payments required for all the
5
<PAGE>
properties for current taxes (including amounts currently due on five-year
payment plans) total approximately $549,000. In the case of Sacramento/Delta
Greens, Yosemite/Ahwahnee, Mori Point, Palmdale/Joshua Ranch and Stacey Rose
properties, National has entered into statutorily authorized 5-year payment
plans with the applicable taxing authorities.
CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a minimum
of approximately $[4,715,000] from sale of certain assets of the programs or
from the exercise of warrants become available, the company will not be able
to proceed with its entire business plan. The company will also need
financing from other sources to complete its plan. Financing sources are not
predictable and interest rates or other costs of financing may be
prohibitive. Neither the programs nor the company have received any
commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay assessments for
streets, schools and parks which increase the cost of development. Increased
costs can have a negative affect on the company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. 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 $[1,818,684] BY THE COMPANY. This represents accrued fees and expenses
from the programs which National has not cancelled. This amount is due and
payable and the company intends to start paying it after the Acquisition, but
only from operating revenues or proceeds from the sale of assets, but not
from working capital generated by the proceeds of unit sales.
6
<PAGE>
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 approval of a new tentative
map, 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. Since some were identified, changes to the tentative development
plans have been made that will reduce or eliminate any damage to the habitat.
A new tentative map needs to be approved by the City. The longer this
process takes, the longer it will be until the company can make money from
the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays
in construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged
approximately $10,000 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 5% of the assets of the company. Although there can be no
assurances and net revenues from Sacramento/Delta Greens may equal or exceed
$3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) finance engineering and endangered species studies
(estimated by management to cost approximately $175,000). 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 YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE CONDOMINIUM-TYPE TIMESHARE ASPECT OF THE RESORT
HAVE NOT YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map
on 32 remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Planning is underway for vacation villa timeshare
units utilizing part of the allocated use permit space for recreational
vehicles. Additional planned usage such as traditional, attached timeshare
units will require
7
<PAGE>
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 15% of the assets of the
company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits. For
example, Spring through Fall at the Yosemite/Ahwahnee property are the
periods of highest occupancy. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues.
The recreational vehicle park at Yosemite/Ahwahnee may generate as much
as ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers who borrow to buy a home. If a buyer
defaults, we would incur costs in remarketing the timeshare.
We do not have an exchange network to enhance marketing appeal. If we
cannot offer such a network in the future, we may be at a competitive
disadvantage.
The timeshare industry is extremely competitive and we may not be able
to secure development financing on acceptable terms.
8
<PAGE>
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 $350,000) annually and
complete the construction of additional recreational vehicle sites and 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 the City of Pacifica is expensive and time consuming. Mori
Point had a specific plan and tentative map to build a hotel/conference
center which expired in 1991. These approvals must be reinstated prior to
construction on the property.
HOTEL/CONFERENCE CENTER DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF
REASONS AND COULD RESULT IN LOSSES. In addition to normal real estate risks,
financing is hard to obtain, and the lodging industry can be unpredictable,
seasonal and very competitive. Without additional financing or capital, the
company will not be able to develop its hotel/conference center project as
part of its growth strategy. Economic conditions, changes in travel
patterns, extreme weather conditions, labor and other variable costs can all
affect revenues and profits. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues. At the hotel/conference center
property at Mori Point, we may be competing against well-known chains and
extended-stay inns.
Mori Point represents approximately 20% of the assets of the company
and, assuming it is operated as a hotel/conference center, its revenues could
ultimately 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.
9
<PAGE>
REAL ESTATE RISKS OF CYPRESS LAKES PROPERTY
THE VESTED TENTATIVE MAP NEEDS MODIFICATION AND BUILD OUT OF THE
PROPERTY WILL BE EXPENSIVE. Due to being located in a 100-year flood plain,
the property requires a levee to be constructed around its perimeter which is
very expensive to construct. It may be desirable to change the vesting
tentative map if the costs can be reduced significantly. However, any
changes in the existing plan could subject the project to public hearings
which might result in additional costs being placed on the project. This
would further increase the high front-end financial requirements.
Additionally, such modifications might not be approved.
Cypress Lakes is a proposed master-planned community and represents more
than 20% of the assets of the Company. Joint venture partners would have to
be brought in by the Company to help with the large capital requirements of
such a large project. It may be difficult to find substantial
builder/developers who have the financial ability to purchase or develop the
project. Changing market conditions may increase the difficulty in selling
lots.
Should the Company determine to build out the project, delays in
construction, reasonably priced mortgage and construction financing and the
local and general California economy could lengthen the holding period for
the lots. This would mean delays in realizing cash from the business
operations.
RISKS AFFECTING OPERATION OF A GOLF COURSE. When, and if, the golf
course is developed, it will face competition from the golf courses within a
25 mile radius. Seasonality, weather and course conditions will affect the
operations of the company. 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.
RISKS OF RESIDENTIAL DEVELOPMENT. Totaling 1,330 lots, a large supply
of lots would be available, and due to the cyclical nature of the housing
industry, demand may not stay in sync with supply. This could result in
needing to sell properties at a loss. Due to the size of the project, it
could take between six and ten years to complete, which would subject it to
new competitors entering the marketplace during the sales period.
REAL ESTATE RISKS OF PALMDALE/JOSHUA RANCH PROPERTY
A FINAL TRACT MAP MUST BE RECORDED. After several years of effort by
National, the vested tentative map was approved by the City of Palmdale at a
hearing before the planning commission in early July 1998. A final recorded
map must be secured by National or a buyer in order to build on the property.
Final engineering, soils, utility and various improvement studies will need
to be conducted in order to record the final map.
PERMITS TO DEVELOP THE PROPERTY NEED TO BE OBTAINED. A final recorded
map, which could take nine to twelve months after starting the process, will
be required prior to construction. Due to the size of this project which
encompasses some 739.6 acres and is currently planned for 539
10
<PAGE>
lots, additional grading studies, soils investigation and utility planning
needs to be done which could negatively impact the cost of this large-scale
development.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Finding
builder/developers that have the financial strength to handle this size
project can be difficult. Changing market conditions, the lack of
reasonably-priced construction or mortgage financing and the general or local
market conditions could lengthen the holding period for lots. This would
mean a delay in realizing cash from business operations. The average
carrying costs, including property taxes, predevelopment and asset management
services for this Property have averaged approximately $16,300 per month over
the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, the Property may be sold at a loss. The location of the lots, the
presence of other competition, customer acceptance and pricing are all
factors affecting success. Competitors may have better financial, managerial
and other resources affecting the Company's ability to successfully compete.
Palmdale/Joshua Ranch is a proposed residential development and
represents about 10% of the assets of the Company.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to pay for or finance (i) engineering, soils and utility studies
which is estimated to cost approximately $140,000, and (ii) another risk is
whether the lots to be developed may appeal to project builders.
REAL ESTATE RISKS OF ESPERANZA PROPERTY
RISKS OF COMMERCIAL DEVELOPMENT. The material risks associated with the
development of the Esperanza Property are (i) as of June 30, 1998,
approximately $23,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the
County of Riverside to avoid loss of the Property for delinquent property
taxes; and (ii) despite a strong economy, rents and values for many retail
properties are expected to remain soft in 1998. Pressure on rents brought
about by over building, weakness in demand for space and store closures
caused by lagging profits are the forces causing a soft market.
ADDITIONAL SPECIFIC RISKS. Within the City of Victorville there are
approximately 3,250 acres zoned for commercial use, of which 60% remains
available for development. Victorville is home to the largest enclosed
regional shopping center between San Bernardino and Las Vegas, which is known
as The Mall of Victor Valley. These commercial sites represent significant
competition to the Esperanza project. There are more than 5,400 acres within
the city limits of Victorville zoned for light and heavy industrial use.
Nearly nine percent of this 5,400 acres of land is vacant and is available in
parcels ranging in size from one-half to five hundred acres.
REAL ESTATE RISKS OF STACEY ROSE PROPERTIES
RISKS OF RESIDENTIAL DEVELOPMENT. The material risks associated with
the development of the Stacey Rose Properties are (i) as of June 30, 1998,
approximately $30,000 of property taxes
11
<PAGE>
are delinquent and must be brought current or a statutory five-year payment
plan must be arranged with the County of Riverside to avoid loss of the
Properties for delinquent property taxes; (ii) it is estimated that it may
cost about $50,000 to finalize a tentative tract map on the parcels; (iii) a
substantial, and potentially expensive, sales and marketing effort will be
necessary to sell homes constructed on the properties if a bulk sale of the
lots is not made; (iv) the Properties are located in a lower income
residential area; and (v) increasing government fees and assessments for
streets, schools, parks and other infrastructure requirements could increase
the cost of lots to the company, thereby increasing the sales price of the
lots which will delay market absorption.
ADDITIONAL SPECIFIC RISKS. There is a risk that (i) adequate funds will
not be available to finalize a tentative tract map on the parcels
(approximately $50,000); (ii) the project will not appeal to project
builders; and (iii) home financing at reasonable costs may not be available.
There is also a risk that the development and sale of lots or home 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.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% of the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of
incorporation which cover anti-takeover provisions require the approval of
two-thirds of the company's voting stock. This restriction also may deter
potential purchasers who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well
as the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements.
12
<PAGE>
FAIRNESS TO INVESTORS IN THE CYPRESS LAKES 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 units to be issued to reflect the exchange
value of a program is arbitrary, the trading price of the shares included in
the units initially is likely to be substantially below the $20 value
arbitrarily assigned to the units. In our opinion, the exchange values
offered to investors for their assets allow for an equitable allocation of
the [1,403,321] units ([1,380,175] units if only the "Trudy Pat" programs
participate) 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 85%
of the outstanding stock of the company. After the acquisition, a total of
[16.86]% of the outstanding stock of the Company will be held by Cypress
Lakes investors (17.09% if only the "Trudy Pat" programs participate). After
the acquisition, founders of the company (principals, employees, and
consultants of National) will hold less than 15%. Founders' shares were
purchased for $.01 per share. Among the Properties, National and its
principals have forgiven over $3,495,000 of expenses and accrued fees of
which a total of approximately $2,800,000 was earned for asset management and
property management services after the loans defaulted and before the
Ownership Dates for the properties. The balance was earned after foreclosure
for asset and property management services and expenses. Of such amount,
$1,120,000 is attributable to fees owed by Cypress Lakes investors. National
believes that the amount paid for the property management services is no
greater than the amount that a third party would charge;
- the current appraised value of the Cypress Lakes real estate assets
($6,000,000) (as well as the real estate assets of the other programs) and
the fact that substantial financing is needed to further the property's
development;
- the probability that the transaction will have minimal, if any,
negative tax affect on investors. 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;
13
<PAGE>
- while the Cypress Lakes Program (as well as the other programs)
were originally formed to have a two to four year finite life which should
have ended between 1995 and 1997 and the investors expected to receive a
return of their investment from the original borrower, the company is an
infinite life entity which will not return the program investors' original
investment based on a sale or refinancing of the properties underlying the
original programs. However, after the borrowers defaulted on the "Trudy Pat"
loans, the investors became beneficial owners of the underlying properties
with the need to complete development, manage or otherwise ready the
properties for sale. Those endeavors had no fixed timetable and, thus, the
finite life aspect of their original investments was significantly changed.
Therefore, the infinite life aspect of the company is not viewed by National
to be a material change from the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the business plan
of the Cypress Lakes program. Rather than being focused on the development
of a single property for residential purposes, the company will be focused on
the management of at least seven properties. Thus, the poor performance of a
particular property may affect the Company's operations as a whole regardless
of the performance of the Cypress Lakes property. Further, there will be no
particular time when an Investor can expect its interest to be automatically
liquidated;
- the fact that the Cypress Lakes property has been reviewed by
several potential buyers or developers without the receipt of any purchase
offers;
- investors will not be able to vote on changes to or dispositions of
the Cypress Lakes property or borrowing secured by that property. Those
decisions will be made by the Board of Directors or management of the
Company. Further, as investors in a larger entity, relative voting power will
be diluted;
- future cash distributions will be based on the company's earnings
and the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Cypress Lakes 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 units
in the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection
with the acquisition and compared it with what you might receive if (i) the
Cypress Lakes property were operated "as is" ($1,327 per $10,000 of Adjusted
Outstanding Investment), (ii) the Cypress Lakes property was sold in a quick
sale in three months or less ($1,327 per $10,000 of Adjusted Outstanding
14
<PAGE>
Investment), or (iii) the Cypress Lakes property was sold at the appraised
value, net of program debt, used to determine the Cypress Lakes exchange
value ($2,746 per $10,000 of Adjusted Outstanding Investment). Based on that
review, and even acknowledging that, initially, the company's shares included
in the units issued in the acquisition would likely trade substantially below
the arbitrary $20 issuance value for the units, National believes that there
is a higher probability of realizing value from the Cypress Lakes property
through the acquisition than through the other alternatives. This belief is
based on the expectation that some financing opportunities will become
available based on the form of the entity and the time pressure associated
with forced sales or liquidation will be relieved. See "Background and
Reasons for the Acquisition -- Comparison to Alternatives" and
"Recommendation of National and Fairness Determination" at pages __ and __ of
the Prospectus. Based on this comparison, National concluded that the
acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Cypress Lakes Program (as well as each of the
other Programs) is essentially the consideration at which the Company is
offering in exchange for the real estate assets, cash reserves, certain
liabilities and business of the Program. The value is reflected as a number
of units of the Company (in the case of the Cypress Lakes Program, 291,246
units) multiplied by an arbitrary $20 per share unit.
The Exchange Value for the Cypress Lakes Program was calculated as
follows: appraised value of the Cypress Lakes Program property at March 31,
1998, plus book value of other Cypress Lakes Program assets at June 30,1998,
less Cypress Lakes Program liabilities at June 30,1998.
The following table summarizes the calculation of the Exchange Value of
the Cypress Lakes 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>
$ 6,000,000 $[ (175,072] $ [5,824,928] $ [3,062](3)
</TABLE>
- ------------
(1) Reflects independent appraisal as of March 1998.
(2) The following table quantifies the adjustments to appraised values made in
determining Cypress Lakes property's Exchange Value as of June 30,1998.
<TABLE>
<CAPTION>
Book Assets Book Liabilities Net Other Assets
(6/30/98)* - (6/30/98)* = and Liabilities
----------- ---------------- ----------------
<S> <C> <C>
$ 195,878 $ 370,950 $ (175,072)
</TABLE>
15
<PAGE>
* 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 Cypress Lakes property.
(3) Equals [153] Company shares arbitrarily valued at $20 per unit.
ALLOCATION OF SHARES
The [1,403,321] shares of Company common stock being offered to
Investors in the Acquisition represent over 80% of the Company's shares (94%
if all warrants are exercised) 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 Programs
pro rata in accordance with Exchange Values. The Cypress Lakes Program will
be allocated [291,246] shares.
The shares allocated to the Cypress Lakes Program will be allocated
among Investors in the Program based on their respective pro rata investments
in the Program (taking into account assessments paid and unpaid, as well as
interest accrued to each Investor through the date beneficial ownership of
the Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Cypress Lakes Program with an adjusted
investment amount of $10,000 will receive [153] units in the Company
arbitrarily valued at $20 per unit.
Neither National nor the Company's founders have any economic
interest in the Cypress Lakes Program except for National's contractual right
to asset management fees and the $3,200 of tenancy-in-common interests
purchased by National at the inception of the Program for which interests
National will receive units in the Acquisition pro rata with the other
Cypress Lakes Investors. National will undertake not to exercise the
warrants in the units
The following table and its footnotes sets forth the amount owed by the
original borrower to the Cypress Lakes Program (including accrued but unpaid
interest) plus the amount of assessments and advances paid by Investors at
June 30, 1998, 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
Outstanding
After the
Amount Real Estate Acquisition if
Owed plus Appraised Exchange No. of Shares All Programs
Name of Program Assessments Value Value(1) Allocated(1)(2) Participate
--------------- ------------ ------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Cypress Lakes $ 18,971,767 $ 6,000,000 $ [5,824,928] [291,246] [16.86]%
</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 [323,676] Company shares after the
Acquisition (18.74% of the outstanding shares post-Acquisition, 5.45% if
all warrants are exercised) which, if valued at $20 per share, would have
an aggregate value of $[6,473,520]. The Company was formed, and shares
were
16
<PAGE>
purchased by the founders for $.01 per share, prior to making the
Acquisition proposal. 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 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>
Previously
Name of Program Cancelled
-------------
<S> <C>
Sacramento/Delta Greens $ 500,000
Oceanside -0-
Yosemite/Ahwahnee I 72,158
Yosemite/Ahwahnee II 1,157,867
Mori Point 461,589
Cypress Lakes 1,120,000
Palmdale (Joshua Ranch) -0-
Esperanza 102,134
Stacey Rose A 64,293
Stacey Rose B 17,267
------------
TOTAL $ 3,495,308
------------
------------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [32]% ([33.8]% if only the seven
"Trudy Pat" programs participate) of the total shares to be owned by the
Company's founders after the Acquisition ([103,715] shares if all programs
participate and 109,469 shares if only the seven "Trudy Pat" programs
participate) 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, and for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Incurred
Actually Incurred Actually Actually for Six
Incurred for Paid for for Year Paid for Incurred for Paid for Months Actually Paid
Year Ended Year Ended Ended Year Ended Year Ended Year Ended Ended in Six Months
Name of Program 12/31/95(1) 12/31/95(2) 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2) 6/30/98 Ended 6/30/98
--------------- ------------ ----------- ----------- ----------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cypress Lakes $140,000(2) $140,000 $140,000(2) $140,000 $140,000(2) $140,000 $70,000 $70,000
</TABLE>
- -------------
(1) These amounts represent accrued asset management fees.
(2) Approximately $176,080 per year if the Acquisition had been completed
during the above periods including $91,562 of estimated salaries to be paid
by the Company to its officers and which were allocated to the Cypress
Lakes Program based on Exchange Values. No cash would have been available
to pay officers' bonuses or dividends to shareholders.
17
<PAGE>
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
1992 1992 1993 1994 1995 1996 1997 Total
---------- --------- ---------- ---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cypress Lakes
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $ 621,198 $ 1,781,251 $1,337,101 $ 62,706 $ 0 $ 0 $ 0 $ 3,802,256
</TABLE>
There have been no recent distributions to Investors. The Acquisition
is not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Cypress Lakes 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.
18
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
PALMDALE/JOSHUA RANCH "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
Palmdale/Joshua Ranch 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 units of its securities in exchange for the
assets (including cash reserves), certain liabilities and business activities
owned by Investors in seven former "Trudy Pat" programs and three other
programs managed by National Investors Financial, Inc. ("National"). For
this proposed Acquisition, the Company will issue an aggregate of
$[28,066,419] of units arbitrarily valued at $20 per unit. A unit consists
of one share of common stock plus warrants to purchase three additional
shares. The [UNITS][SHARES AND WARRANTS] 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, eliminate the
assessment process, focus on revenue-generating potential, improve efficiency
of operation in order to reduce costs and increase profit potential, and
provide the investors with liquidity for their investments.
Of the [1,403,321] units to be issued by the Company in the Acquisition,
Investors in the Palmdale/Joshua Ranch Program will receive a total of
[131,094]shares or [72] 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
Palmdale/Joshua Ranch Program an amount that is higher than the value of the
Company units 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 SEVEN "TRUDY PAT" PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT
TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - If the acquisition is approved, your investment will be subject to the
risks associated with residential development plus new risks associated with
a business which also operates a golf course and a recreational vehicle park,
and which plans to pursue the development of timeshare facilities, commercial
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 $20 per unit
assigned for purposes of the acquisition. Thus, the value of the units 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 16.42% of the Company's stock (4.78____% if all
warrants are exercised) for which they paid $0.01 per share and will receive
annual cash compensation aggregating $560,000 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
$950,000 annually. However, the Company will still owe National over
$1,800,000 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 certain of its properties
or the exercise of the warrants included in the units, 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 [__] through [__] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If
the acquisition is completed, there will be a change in the nature of the
investment of each investor from holding a tenancy-in-common interest in real
estate to holding shares in an on-going company, the assets of which may be
changed from time to time without approval of investors. If the acquisition
is completed, investors will be able to liquidate their investments only by
selling their [UNITS][SHARES] on the _____ or in private transactions, and
they will not receive a return of their investment in the form of liquidation
proceeds through property sales. If the acquisition is completed, investors
will have an investment in an entity that is larger than each of the programs
and will thus lose relative voting power. Investors will have an investment
in a business which also operates a golf course and a recreational vehicle
park, and which plans to pursue the development of timeshare facilities and
a hotel/conference center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL
SALES PRICE. Investors are subject to the risk that the exchange value of a
program does not reflect the price a program's assets might bring in a sale.
If the property of a program were to be sold, the net proceeds of the sale
and the amount finally distributed to an investor in that program may be more
or less than the exchange value. There is no assurance that the future value
of the shares and warrants received in the acquisition will be greater than
the most recent appraised value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may
trade at prices substantially below the arbitrarily determined exchange value
of $20 per unit or the 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 $20 due to a potentially large number of shares that investors
may sell immediately after the acquisition.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of
interest. The principal shareholders and employees of National and the
company will hold approximately [16.42]% of the company's outstanding stock
(4.78____% if all warrants are exercised) for which they paid $0.01 per
share. Other founders of the company will hold approximately [2.3]% 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 $560,000 as
officers and employees of the company. National will be relieved of its
servicing and asset management obligations and will no longer earn asset
2
<PAGE>
management or servicing related fees. However, the company will still owe
National over $1,800,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote, and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF
THE INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject
to arm's-length negotiation. Had an independent party negotiated on behalf
of each program, the terms of the acquisition may have been more favorable to
certain or all of the programs and fewer shares and less favorable employment
contracts may have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to
opine conclusively on the tax consequences of the acquisition to investors.
The acquisition may be taxable, if at all, only with respect to the
investors' receipt of warrants. Alternatively, if the acquisition is a fully
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
$20 per unit. If the acquisition is treated as fully taxable, National
believes most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, none of the properties will be subject to any liens other than
for property taxes. The board of directors could authorize borrowing by the
company the debt service for which may adversely affect the company's ability
to make distributions to shareholders. The company may incur full recourse
debt which exposes all of the assets of the company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING
INVESTORS. If you vote against the acquisition, and it is approved, you will
not be able to object to the acquisition and receive the appraised value of
your tenancy-in-common interest in your program's assets. You will have no
choice other than to accept units for your interests.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long
3
<PAGE>
time. This means that shares in the company are much riskier than ownership
of shares of established companies. If the company had been operating as if
it owned the properties which it desires to acquire, it would have
experienced losses to date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE
ACQUISITION TAKES PLACE. Rather than being focused on a single property, the
company will be an infinite life entity focused on the management of at least
the seven properties of the former "Trudy Pat" programs. 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. Prior to the
dates that title to the properties securing the original program loans was
taken, National was entitled to an annual loan servicing fee equal to one
percent of the original loan amounts. When title to the properties was taken
on behalf of the programs, even though the loans no longer existed, National
continued to charge the same rate as the servicing fee for the asset
management services it provided to investors. The investors in each of the
programs had become the beneficial tenant-in-common owners of real estate,
most of which was undeveloped. While it had no obligation to do so, in order
to assist the beneficial owners in protecting their real estate assets and
readying them for sale or development, National assumed the duties of an
asset manager after title was taken to the properties. In this capacity,
National obtained information from investors about their preferences in
regard to development or sale of the properties, acted as assessing agent to
raise funds necessary to pay property taxes, insurance and other costs of
property ownership.
The annual fees payable to National are currently $50,000 for
Sacramento/Delta Greens; $300,000 for Oceanside; $65,000 for
Yosemite/Ahwahnee I; $135,000 for Yosemite/Ahwahnee II; $100,000 for Mori
Point; $140,000 for Cypress Lakes; $150,000 for Palmdale/Joshua Ranch; $5,000
for Esperanza; $3,153 for Stacey Rose A; and $850 for Stacey Rose B.
In addition to the one percent fee, compensation has been earned for
property management services provided to the Oceanside program ($896,000
accrued since the date of ownership (November 1993) through June 30, 1998;
$876,000 actually paid) and Yosemite/Ahwahnee properties ($594,535 accrued
since the date of ownership (September
4
<PAGE>
1995); $-0- actually paid) by officers and employees of National in their
capacities as officers and employees of Oceanside Development, Inc. and
Ahwahnee Golf Course & Resort, Inc. Those property management services
included, without limitation, solicitation, engagement, coordination and
supervision of: entitlement and permit processing, environmental,
engineering, planning, architectural, construction, marketing, appraisal,
legal, accounting and other experts as needed for each project; due diligence
on potential service providers; assistance in presentations and applications
for approvals to governmental agencies; packaging and documenting the status
of a project for potential financing, sale or joint venture; supervising and
managing the operational activities for construction projects on the
Oceanside and Yosemite/Ahwahnee projects; and contract negotiations and
documentation. To the extent similar property specific services were
provided to the other programs, they were provided without extra charge
because the necessary activities were less regular and less operationally
intense.
In the future, compensation will be paid to officers of the company in
the form of salaries (aggregating $[560,000] annually plus contractual bonus
opportunities and salary increases), stock options and other benefits. See
"Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for details of stock options and other benefits.
These salaries and other forms of compensation will be payable to management
of the company even if one or more of the properties acquired in the
acquisition is subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE DIFFERENCES IN YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THE EXCHANGE VALUES FOR THESE
PROPERTIES MAY BE TOO LOW OR TOO HIGH. National reviewed the updated March
1998 appraisal of the Yosemite/Ahwahnee properties which reflected an
aggregate "as is" appraised value of $20,246,000 and the October 1996
appraisal which reflected an "as is" aggregate appraised value of $4,000,000.
The results of those appraisals clearly differed from each other, and, in
management's judgment, the difference could not be accounted for by improving
market conditions. Some of the parcels, including the golf course, were
subsequently sold, on June 5, 1998, to the Oceanside Program investors to
obtain working capital. Based on its review of all appraisals, National
concluded that the properties currently owned by the Yosemite/Ahwahnee I and
II Programs have values of $5,486,000 ($1,782,950 and $3,703,050,
respectively), and the parcels currently owned by the Oceanside Program have
a value of $5,080,000. National believes its approach is reasonable and has
received an opinion from Houlihan Valuation Advisors that the allocation of
the shares among the programs is fair.
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 June 30, 1998: Sacramento/Delta
Greens -approximately $27,000; Yosemite/Ahwahnee (combined) - approximately
$500,000; Mori Point - approximately $165,000; Cypress lakes - approximately
$204,000; Palmdale (Joshua Ranch) - approximately $63,000; Esperanza -
approximately
5
<PAGE>
$20,000; and Stacey Rose - approximately $30,000. Annual payments required
for all the properties for current taxes (including amounts currently due on
five-year payment plans) total approximately $549,000. In the case of
Sacramento/Delta Greens, Yosemite/Ahwahnee, Mori Point, Palmdale/Joshua Ranch
and Stacey Rose properties, National has entered into statutorily authorized
5-year payment plans with the applicable taxing authorities.
CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a minimum
of approximately $[4,715,000] from sale certain assets of the programs or
from the exercise of warrants become available, the company will not be able
to proceed with its entire business plan. The company will also need
financing from other sources to complete its plan. Financing sources are not
predictable and interest rates or other costs of financing may be
prohibitive. Neither the programs nor the company have received any
commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay assessments for
streets, schools and parks which increase the cost of development. Increased
costs can have a negative affect on the company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. 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 $[1,818,684] BY THE COMPANY. This represents accrued fees and expenses
from the programs which National has not cancelled. This amount is due and
payable and the company intends to start paying it after the Acquisition, but
only from operating revenues or proceeds from the sale of assets, but not
from working capital generated by the proceeds of unit sales.
6
<PAGE>
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 approval of a new tentative
map, 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. Since some were identified, changes to the tentative development
plans have been made that will reduce or eliminate any damage to the habitat.
A new tentative map needs to be approved by the City. The longer this
process takes, the longer it will be until the company can make money from
the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays
in construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged
approximately $10,000 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 5% of the assets of the company. Although there can be no
assurances and net revenues from Sacramento/Delta Greens may equal or exceed
$3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) finance engineering and endangered species studies
(estimated by management to cost approximately $175,000). 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 YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE CONDOMINIUM-TYPE TIMESHARE ASPECT OF THE RESORT
HAVE NOT YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map
on 32 remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Planning is underway for vacation villa timeshare
units utilizing part of the allocated use permit space for recreational
vehicles. Additional planned usage such as traditional, attached timeshare
units will require
7
<PAGE>
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 15% of the assets of the
company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits. For
example, Spring through Fall at the Yosemite/Ahwahnee property are the
periods of highest occupancy. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues.
The recreational vehicle park at Yosemite/Ahwahnee may generate as much
as ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers who borrow to buy a home. If a buyer
defaults, we would incur costs in remarketing the timeshare.
We do not have an exchange network to enhance marketing appeal. If we
cannot offer such a network in the future, we may be at a competitive
disadvantage.
The timeshare industry is extremely competitive and we may not be able
to secure development financing on acceptable terms.
8
<PAGE>
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 $350,000) annually and
complete the construction of additional recreational vehicle sites and 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 the City of Pacifica is expensive and time consuming. Mori
Point had a specific plan and tentative map to build a hotel/conference
center which expired in 1991. These approvals must be reinstated prior to
construction on the property.
HOTEL/CONFERENCE CENTER DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF
REASONS AND COULD RESULT IN LOSSES. In addition to normal real estate risks,
financing is hard to obtain, and the lodging industry can be unpredictable,
seasonal and very competitive. Without additional financing or capital, the
company will not be able to develop its hotel/conference center project as
part of its growth strategy. Economic conditions, changes in travel
patterns, extreme weather conditions, labor and other variable costs can all
affect revenues and profits. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues. At the hotel/conference center
property at Mori Point, we may be competing against well-known chains and
extended-stay inns.
Mori Point represents approximately 20% of the assets of the company
and, assuming it is operated as a hotel/conference center, its revenues could
ultimately 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.
9
<PAGE>
REAL ESTATE RISKS OF CYPRESS LAKES PROPERTY
THE VESTED TENTATIVE MAP NEEDS MODIFICATION AND BUILD OUT OF THE
PROPERTY WILL BE EXPENSIVE. Due to being located in a 100-year flood plain,
the property requires a levee to be constructed around its perimeter which is
very expensive to construct. It may be desirable to change the vesting
tentative map if the costs can be reduced significantly. However, any
changes in the existing plan could subject the project to public hearings
which might result in additional costs being placed on the project. This
would further increase the high front-end financial requirements.
Additionally, such modifications might not be approved.
Cypress Lakes is a proposed master-planned community and represents more
than 20% of the assets of the Company. Joint venture partners would have to
be brought in by the Company to help with the large capital requirements of
such a large project. It may be difficult to find substantial
builder/developers who have the financial ability to purchase or develop the
project. Changing market conditions may increase the difficulty in selling
lots.
Should the Company determine to build out the project, delays in
construction, reasonably priced mortgage and construction financing and the
local and general California economy could lengthen the holding period for
the lots. This would mean delays in realizing cash from the business
operations.
RISKS AFFECTING OPERATION OF A GOLF COURSE. When, and if, the golf
course is developed, it will face competition from the golf courses within a
25 mile radius. Seasonality, weather and course conditions will affect the
operations of the company. 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.
RISKS OF RESIDENTIAL DEVELOPMENT. Totaling 1,330 lots, a large supply
of lots would be available, and due to the cyclical nature of the housing
industry, demand may not stay in sync with supply. This could result in
needing to sell properties at a loss. Due to the size of the project, it
could take between six and ten years to complete, which would subject it to
new competitors entering the marketplace during the sales period.
REAL ESTATE RISKS OF PALMDALE/JOSHUA RANCH PROPERTY
A FINAL TRACT MAP MUST BE RECORDED. After several years of effort by
National, the vested tentative map was approved by the City of Palmdale at a
hearing before the planning commission in early July 1998. A final recorded
map must be secured by National or a buyer in order to build on the property.
Final engineering, soils, utility and various improvement studies will need
to be conducted in order to record the final map.
PERMITS TO DEVELOP THE PROPERTY NEED TO BE OBTAINED. A final recorded
map, which could take nine to twelve months after starting the process, will
be required prior to construction. Due to the size of this project which
encompasses some 739.6 acres and is currently planned for 539
10
<PAGE>
lots, additional grading studies, soils investigation and utility planning
needs to be done which could negatively impact the cost of this large-scale
development.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Finding
builder/developers that have the financial strength to handle this size
project can be difficult. Changing market conditions, the lack of
reasonably-priced construction or mortgage financing and the general or local
market conditions could lengthen the holding period for lots. This would
mean a delay in realizing cash from business operations. The average
carrying costs, including property taxes, predevelopment and asset management
services for this Property have averaged approximately $16,300 per month over
the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, the Property may be sold at a loss. The location of the lots, the
presence of other competition, customer acceptance and pricing are all
factors affecting success. Competitors may have better financial, managerial
and other resources affecting the Company's ability to successfully compete.
Palmdale/Joshua Ranch is a proposed residential development and
represents about 10% of the assets of the Company.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to pay for or finance (i) engineering, soils and utility studies
which is estimated to cost approximately $140,000, and (ii) another risk is
whether the lots to be developed may appeal to project builders.
REAL ESTATE RISKS OF ESPERANZA PROPERTY
RISKS OF COMMERCIAL DEVELOPMENT. The material risks associated with the
development of the Esperanza Property are (i) as of June 30, 1998,
approximately $23,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the
County of Riverside to avoid loss of the Property for delinquent property
taxes; and (ii) despite a strong economy, rents and values for many retail
properties are expected to remain soft in 1998. Pressure on rents brought
about by over building, weakness in demand for space and store closures
caused by lagging profits are the forces causing a soft market.
ADDITIONAL SPECIFIC RISKS. Within the City of Victorville there are
approximately 3,250 acres zoned for commercial use, of which 60% remains
available for development. Victorville is home to the largest enclosed
regional shopping center between San Bernardino and Las Vegas, which is known
as The Mall of Victor Valley. These commercial sites represent significant
competition to the Esperanza project. There are more than 5,400 acres within
the city limits of Victorville zoned for light and heavy industrial use.
Nearly nine percent of this 5,400 acres of land is vacant and is available in
parcels ranging in size from one-half to five hundred acres.
REAL ESTATE RISKS OF STACEY ROSE PROPERTIES
RISKS OF RESIDENTIAL DEVELOPMENT. The material risks associated with
the development of the Stacey Rose Properties are (i) as of June 30, 1998,
approximately $30,000 of property taxes
11
<PAGE>
are delinquent and must be brought current or a statutory five-year payment
plan must be arranged with the County of Riverside to avoid loss of the
Properties for delinquent property taxes; (ii) it is estimated that it may
cost about $50,000 to finalize a tentative tract map on the parcels; (iii) a
substantial, and potentially expensive, sales and marketing effort will be
necessary to sell homes constructed on the properties if a bulk sale of the
lots is not made; (iv) the Properties are located in a lower income
residential area; and (v) increasing government fees and assessments for
streets, schools, parks and other infrastructure requirements could increase
the cost of lots to the company, thereby increasing the sales price of the
lots which will delay market absorption.
ADDITIONAL SPECIFIC RISKS. There is a risk that (i) adequate funds will
not be available to finalize a tentative tract map on the parcels
(approximately $50,000); (ii) the project will not appeal to project
builders; and (iii) home financing at reasonable costs may not be available.
There is also a risk that the development and sale of lots or home 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.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% of the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of
incorporation which cover anti-takeover provisions require the approval of
two-thirds of the company's voting stock. This restriction also may deter
potential purchasers who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well
as the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements.
12
<PAGE>
FAIRNESS TO INVESTORS IN THE PALMDALE/JOSHUA RANCH 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 units to be issued to reflect the exchange
value of a program is arbitrary, the trading price of the shares included in
the units initially is likely to be substantially below the $20 value
arbitrarily assigned to the units. In our opinion, the exchange values
offered to investors for their assets allow for an equitable allocation of
the [1,403,321] units ([1,380,175] units if only the "Trudy Pat" programs
participate) 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. After the acquisition, a total of
[7.59]% of the outstanding stock of the Company will be held by
Palmdale/Joshua Ranch investors (7.69% if only the "Trudy Pat" programs
participate). After the acquisition, founders of the company (principals,
employees, and consultants of National) will hold less than 15%. Founders'
shares were purchased for $.01 per share. Among the properties, National and
its principals have forgiven over $3,495,000 of expenses and accrued fees of
which a total of approximately $2,800,000 was earned for asset management and
property management services after the loans defaulted and before the
Ownership Dates of the properties. The balance was earned after foreclosure
for asset and property management services and expenses. Of such amount,
none is attributable to fees owed by Sacramento/Delta Greens investors.
National believes that the amount paid for the property management services
is no greater than the amount that a third party would charge;
- the current appraised value of the Palmdale/Joshua Ranch real
estate assets ($2,700,000) (as well as the real estate assets of the other
programs) and the fact that substantial financing is needed to further the
property's development;
- the probability that the transaction will have minimal, if any,
negative tax affect on investors. 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;
13
<PAGE>
- while the Palmdale/Joshua Ranch Program (as well as the other
programs) were originally formed to have a two to four year finite life which
should have ended between 1993 and 1995 and the investors expected to receive
a return of their investment from the original borrower, the company is an
infinite life entity which will not return the program investors' original
investment based on a sale or refinancing of the properties underlying the
original programs. However, after the borrowers defaulted on the "Trudy Pat"
loans, the investors became beneficial owners of the underlying properties
with the need to complete development, manage or otherwise ready the
properties for sale. Those endeavors had no fixed timetable and, thus, the
finite life aspect of their original investments was significantly changed.
Therefore, the infinite life aspect of the company is not viewed by National
to be a material change from the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the business plan
of the Palmdale/Joshua Ranch program. Rather than being focused on the
development of a single property for residential purposes, the company will
be focused on the management of at least five properties. Thus, the poor
performance of a particular property may affect the Company's operations as a
whole regardless of the performance of the Palmdale/Joshua Ranch property.
Further, there will be no particular time when an Investor can expect its
interest to be automatically liquidated;
- the fact that the Palmdale/Joshua Ranch property has been exposed
for sale or development without receiving any offers that would approximate a
return of the original investment;
- investors will not be able to vote on changes to or dispositions of
the Palmdale/Joshua Ranch property or borrowing secured by that property.
Those decisions will be made by the Board of Directors or management of the
Company. Further, as investors in a larger entity, relative voting power will
be diluted;
- future cash distributions will be based on the company's earnings
and the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Palmdale/Joshua Ranch 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 units
in the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection
with the acquisition and compared it with what you might receive if (i) the
Palmdale/Joshua Ranch property were
14
<PAGE>
operated "as is" ($627 per $10,000 of Adjusted Outstanding Investment), (ii)
the Palmdale/Joshua Ranch property was sold in a quick sale in three months
or less ($627 per $10,000 of Adjusted Outstanding Investment), or (iii) the
Palmdale/Joshua Ranch property was sold at the appraised value, net of
program debt, used to determine the Palmdale/Joshua Ranch exchange value
($1,297 per $10,000 of Adjusted Outstanding Investment). Based on that
review, and even acknowledging that, initially, the company's shares included
in the units issued in the acquisition would likely trade substantially below
the arbitrary $20 issuance value for the units, National believes that there
is a higher probability of realizing value from the Palmdale/Joshua Ranch
property through the acquisition than through the other alternatives. This
belief is based on the expectation that some financing opportunities will
become available based on the form of the entity and the time pressure
associated with forced sales or liquidation will be relieved. See
"Background and Reasons for the Acquisition -- Comparison to Alternatives"
and "Recommendation of National and Fairness Determination" at pages __ and
__ of the Prospectus. Based on this comparison, National concluded that the
acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Palmdale/Joshua Ranch Program (as well as each
of the other Programs) is essentially the consideration at which the Company
is offering in exchange for the real estate assets, cash reserves, certain
liabilities and business of the Program. The value is reflected as a number
of units of the Company (in the case of the Palmdale/Joshua Ranch Program,
131,094 units) multiplied by an arbitrary $20 per unit value.
The Exchange Value for the Palmdale/Joshua Ranch Program was calculated
as follows: appraised value of the Palmdale/Joshua Ranch Program property at
March 31, 1998, plus book value of other Palmdale/Joshua Ranch Program assets
at June 30, 1998, less Palmdale/Joshua Ranch Program liabilities at June 30,
1998.
The following table summarizes the calculation of the Exchange Value of
the Palmdale/Joshua Ranch 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>
$ 2,700,000 $[ (78,118)] $ [2,621,882] $ [1,446](3)
- -----------
</TABLE>
(1) Reflects independent appraisal as of March 1998.
(2) The following table quantifies the adjustments to appraised values
made in determining Palmdale/Joshua Ranch property's Exchange Value as
of June 30, 1998.
<TABLE>
<CAPTION>
Book Assets Book Liabilities Net Other Assets
<S> <C> <C>
</TABLE>
15
<PAGE>
<TABLE>
(6/30/98)* - (6/30/98)* = and Liabilities
----------- ------------ -----------------
<S> <C> <C>
$ 132,572 $ 210,690 $ (78,118)
</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 Palmdale/Joshua
Ranch property.
(3) Equals [72] Company shares arbitrarily valued at $20 per unit.
ALLOCATION OF SHARES
The [1,403,321] shares of Company common stock being offered to
Investors in the Acquisition represent over 80% of the Company's shares (94%
if all warrants are exercised) 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 Programs
pro rata in accordance with Exchange Values. The Palmdale/Joshua Ranch
Program will be allocated [131,094] shares.
The shares allocated to the Palmdale/Joshua Ranch Program will be
allocated among Investors in the Program based on their respective pro rata
investments in the Program (taking into account assessments paid and unpaid,
as well as interest accrued to each Investor through the date beneficial
ownership of the Program's Property was taken for the Investors) as adjusted
for voluntary advances. An Investor in the Palmdale/Joshua Ranch Program
with an adjusted investment amount of $10,000 will receive [72] units in the
Company arbitrarily valued at $20 per unit.
Neither National nor the Company's founders have any economic
interest in the Palmdale/Joshua Ranch Program except for National's
contractual right to asset management fees and the $2,395 of
tenancy-in-common interests purchased by National at the inception of the
Program for which interests National will receive units in the Acquisition
pro rata with the other Palmdale/Joshua Ranch Investors. National will
undertake not to exercise the warrants in the units.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Palmdale/Joshua Ranch Program (including accrued but
unpaid interest) plus the amount of assessments and advances paid by
Investors at June 30, 1998, 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
Outstanding
After the
Amount Real Estate Acquisition if
Owed plus Appraised Exchange No. of Shares All Programs
Name of Program Assessments Value Value(1) Allocated(1)(2) Participate
--------------- ------------- ------------ -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Palmdale/Joshua Ranch $ 18,107,814 $ 2,700,000 $ [2,621,882] [131.094] [7.59]%
</TABLE>
- -------------
16
<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 [323,676] Company shares after the
Acquisition (18.74% of the outstanding shares post-Acquisition, 5.45% if
all warrants are exercised) which, if valued at $20 per share, would have
an aggregate value of $[6,473,520]. The Company was formed, and shares
were purchased by the founders for $.01 per share, prior to making the
Acquisition proposal. 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 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>
Previously
Name of Program Cancelled
--------------
<S> <C>
Sacramento/Delta Greens $ 500,000
Oceanside -0-
Yosemite/Ahwahnee I 72,158
Yosemite/Ahwahnee II 1,157,867
Mori Point 461,589
Cypress Lakes 1,120,000
Palmdale (Joshua Ranch) -0-
Esperanza 102,134
Stacey Rose A 64,293
Stacey Rose B 17,267
------------
TOTAL $ 3,495,308
------------
------------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, none of the total shares to be
owned by the Company's founders after the Acquisition 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, and for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Actually
Actually Incurred Actually Actually Incurred for Paid in Six
Incurred for Paid for for Year Paid for Incurred for Paid for Six Months Months
Year Ended Year Ended Ended Year Ended Year Ended Year Ended Ended Ended
Name of Program 12/31/95(1) 12/31/95(2) 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2) 6/30/98 6/30/98
--------------- ------------ ----------- ----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Palmdale/Joshua Ranch $150,000(2) $248,750 $150,000(2) $150,000 $150,000(2) $150,000 $75,000 $75,000
</TABLE>
- ------------
(1) These amounts represent accrued asset management fees.
(2) Approximately $188,658 per year if the Acquisition had been completed
during the above periods including $98,102 of estimated salaries to be paid
by the Company to its officers and which were allocated to the
Palmdale/Joshua Ranch Program based on Exchange Values. No cash would have
been available to pay officers' bonuses or dividends to shareholders.
17
<PAGE>
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
1992 1992 1993 1994 1995 1996 1997 Total
----------- ----------- ---------- ---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Palmdale/Joshua Ranch
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $ 1,523,775 $ 1,885,526 $ 478,127 $ 0 $ 0 $ 0 $ 0 $ 3,887,428
</TABLE>
There have been no recent distributions to Investors. The Acquisition
is not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Sacramento/Delta Greens Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
18
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
ESPERANZA 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 Esperanza
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 units of its securities in exchange for the
assets (including cash reserves), certain liabilities and business activities
owned by Investors in seven former "Trudy Pat" programs and three other
programs managed by National Investors Financial, Inc. ("National"). For
this proposed Acquisition, the Company will issue an aggregate of
$[28,066,419] of units arbitrarily valued at $20 per unit. A unit consists
of one share of common stock plus warrants to purchase three additional
shares. The [UNITS][SHARES AND WARRANTS] 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, eliminate the
assessment process, focus on revenue-generating potential, improve efficiency
of operations in order to reduce costs and increase profit potential, and
provide the investors with liquidity for their investments.
Of the [1,403,321] units to be issued by the Company in the Acquisition,
Investors in the Esperanza Program will receive a total of [10,818] shares or
[185] 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 Esperanza Program an amount that
is higher than the value of the Company units 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 SEVEN "TRUDY PAT" PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO
TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - If the acquisition is approved, your investment will be subject to the
risks associated with residential development plus new risks associated with
a business which also operates a golf course and a recreational vehicle park,
and which plans to pursue the development of timeshare facilities, commercial
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 $20 per unit for
purposes of the acquisition. Thus, the value of the units 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 16.42% of the Company's stock (4.78% if all warrants
are exercised) for which they paid $0.01 per share and will receive annual
cash compensation aggregating $560,000 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 $950,000
annually. However, the Company will still owe National over $1,800,000 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 certain of its properties
or the exercise of the warrants included in the units, 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 [__] through [__] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If
the acquisition is completed, there will be a change in the nature of the
investment of each investor from holding a tenancy-in-common interest in real
estate to holding shares in an on-going company, the assets of which may be
changed from time to time without approval of investors. If the acquisition
is completed, investors will be able to liquidate their investments only by
selling their [UNITS][SHARES] on the _____ or in private transactions, and
they will not receive a return of their investment in the form of liquidation
proceeds through property sales. If the acquisition is completed, investors
will have an investment in an entity that is larger than each of the programs
and will thus lose relative voting power. Investors will have an investment
in a business which also operates a golf course and a recreational vehicle
park, and which plans to pursue the development of timeshare facilities and
a hotel/conference center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL
SALES PRICE. Investors are subject to the risk that the exchange value of a
program does not reflect the price a program's assets might bring in a sale.
If the property of a program were to be sold, the net proceeds of the sale
and the amount finally distributed to an investor in that program may be more
or less than the exchange value. There is no assurance that the future value
of the shares and warrants received in the acquisition will be greater than
the most recent appraised value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may
trade at prices substantially below the arbitrarily determined exchange value
of $20 per unit or the 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 $20 due to a potentially large number of shares that investors
may sell immediately after the acquisition.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of
interest. The principal shareholders and employees of National and the
company will hold approximately [16.42]% of the company's outstanding stock
(4.78% if all warrants are exercised) for which they paid $0.01 per share.
Other founders of the company will hold approximately [2.3]% 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 $560,000 as
officers and employees of the company. National will be relieved of its
servicing and asset management obligations and will no longer earn asset
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management or servicing related fees. However, the company will still owe
National over $1,800,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote, and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF
THE INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject
to arm's-length negotiation. Had an independent party negotiated on behalf
of each program, the terms of the acquisition may have been more favorable to
certain or all of the programs and fewer shares and less favorable employment
contracts may have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to
opine conclusively on the tax consequences of the acquisition to investors.
The acquisition may be taxable, if at all, only with respect to the
investors' receipt of warrants. Alternatively, if the acquisition is a fully
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
$20 per unit. If the acquisition is treated as fully taxable, National
believes most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, none of the properties will be subject to any liens other than
for property taxes. The board of directors could authorize borrowing by the
company the debt service for which may adversely affect the company's ability
to make distributions to shareholders. The company may incur full recourse
debt which exposes all of the assets of the company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING
INVESTORS. If you vote against the acquisition, and it is approved, you will
not be able to object to the acquisition and receive the appraised value of
your tenancy-in-common interest in your program's assets. You will have no
choice other than to accept units for your interests.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long
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time. This means that shares in the company are much riskier than ownership
of shares of established companies. If the company had been operating as if
it owned the properties which it desires to acquire, it would have
experienced losses to date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE
ACQUISITION TAKES PLACE. Rather than being focused on a single property, the
company will be an infinite life entity focused on the management of at least
the seven properties of the former "Trudy Pat" programs. 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. Prior to the
dates that title to the properties securing the original program loans was
taken, National was entitled to an annual loan servicing fee equal to one
percent of the original loan amounts. When title to the properties was taken
on behalf of the programs, even though the loans no longer existed, National
continued to charge the same rate as the servicing fee for the asset
management services it provided to investors. The investors in each of the
programs had become the beneficial tenant-in-common owners of real estate,
most of which was undeveloped. While it had no obligation to do so, in order
to assist the beneficial owners in protecting their real estate assets and
readying them for sale or development, National assumed the duties of an
asset manager after title was taken to the properties. In this capacity,
National obtained information from investors about their preferences in
regard to development or sale of the properties, acted as assessing agent to
raise funds necessary to pay property taxes, insurance and other costs of
property ownership.
The annual fees payable to National are currently $50,000 for
Sacramento/Delta Greens; $300,000 for Oceanside; $65,000 for
Yosemite/Ahwahnee I; $135,000 for Yosemite/Ahwahnee II; $100,000 for Mori
Point; $140,000 for Cypress Lakes; $150,000 for Palmdale/Joshua Ranch; $5,000
for Esperanza; $3,153 for Stacey Rose A; and $850 for Stacey Rose B.
In addition to the one percent fee, compensation has been earned for
property management services provided to the Oceanside program ($896,000
accrued since the date of ownership (November 1993) through June 30, 1998;
$876,000 actually paid) and Yosemite/Ahwahnee properties ($594,535 accrued
since the date of ownership (September
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1995); $-0- actually paid) by officers and employees of National in their
capacities as officers and employees of Oceanside Development, Inc. and
Ahwahnee Golf Course & Resort, Inc. Those property management services
included, without limitation, solicitation, engagement, coordination and
supervision of: entitlement and permit processing, environmental,
engineering, planning, architectural, construction, marketing, appraisal,
legal, accounting and other experts as needed for each project; due diligence
on potential service providers; assistance in presentations and applications
for approvals to governmental agencies; packaging and documenting the status
of a project for potential financing, sale or joint venture; supervising and
managing the operational activities for construction projects on the
Oceanside and Yosemite/Ahwahnee projects; and contract negotiations and
documentation. To the extent similar property specific services were
provided to the other programs, they were provided without extra charge
because the necessary activities were less regular and less operationally
intense.
In the future, compensation will be paid to officers of the company in
the form of salaries (aggregating $560,000 annually plus contractual bonus
opportunities and salary increases), stock options and other benefits. See
"Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for details of stock options and other benefits.
These salaries and other forms of compensation will be payable to management
of the company even if one or more of the properties acquired in the
acquisition is subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE DIFFERENCES IN YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THE EXCHANGE VALUES FOR THESE
PROPERTIES MAY BE TOO LOW OR TOO HIGH. National reviewed the updated March
1998 appraisal of the Yosemite/Ahwahnee properties which reflected an
aggregate "as is" appraised value of $20,246,000 and the October 1996
appraisal which reflected an "as is" aggregate appraised value of $4,000,000.
The results of those appraisals clearly differed from each other, and, in
management's judgment, the difference could not be accounted for by improving
market conditions. Some of the parcels, including the golf course, were
subsequently sold, on June 5, 1998, to the Oceanside Program investors to
obtain working capital. Based on its review of all appraisals, National
concluded that the properties currently owned by the Yosemite/Ahwahnee I and
II Programs have values of $5,486,000 ($1,782,950 and $3,703,050,
respectively), and the parcels currently owned by the Oceanside Program have
a value of $5,080,000. National believes its approach is reasonable and has
received an opinion from Houlihan Valuation Advisors that the allocation of
the shares among the programs is fair.
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 June 30, 1998: Sacramento/Delta
Greens -approximately $27,000; Yosemite/Ahwahnee (combined) - approximately
$500,000; Mori Point - approximately $165,000; Cypress lakes - approximately
$204,000; Palmdale (Joshua Ranch) - approximately $63,000; Esperanza -
approximately
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$20,000; and Stacey Rose - approximately $30,000. Annual payments required
for all the properties for current taxes (including amounts currently due on
five-year payment plans) total approximately $549,000. In the case of
Sacramento/Delta Greens, Yosemite/Ahwahnee, Mori Point, Palmdale/Joshua Ranch
and Stacey Rose properties, National has entered into statutorily authorized
5-year payment plans with the applicable taxing authorities.
CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a minimum
of approximately $[4,715,000] from sale of certain assets of the programs or
from the exercise of warrants become available, the company will not be able
to proceed with its entire business plan. The company will also need
financing from other sources to complete its plan. Financing sources are not
predictable and interest rates or other costs of financing may be
prohibitive. Neither the programs nor the company have received any
commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay assessments for
streets, schools and parks which increase the cost of development. Increased
costs can have a negative affect on the company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. 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 $[1,818,684] BY THE COMPANY. This represents accrued fees and expenses
from the programs which National has not cancelled. This amount is due and
payable and the company intends to start paying it after the Acquisition, but
only from operating revenues or proceeds from the sale of assets, but not
from working capital generated by the proceeds of unit sales.
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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 approval of a new tentative
map, 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. Since some were identified, changes to the tentative development
plans have been made that will reduce or eliminate any damage to the habitat.
A new tentative map needs to be approved by the City. The longer this
process takes, the longer it will be until the company can make money from
the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays
in construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged
approximately $10,000 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 5% of the assets of the company. Although there can be no
assurances and net revenues from Sacramento/Delta Greens may equal or exceed
$3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) finance engineering and endangered species studies
(estimated by management to cost approximately $175,000). 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 YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE CONDOMINIUM-TYPE TIMESHARE ASPECT OF THE RESORT
HAVE NOT YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map
on 32 remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Planning is underway for vacation villa timeshare
units utilizing part of the allocated use permit space for recreational
vehicles. Additional planned usage such as traditional, attached timeshare
units will require
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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 15% of the assets of the
company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits. For
example, Spring through Fall at the Yosemite/Ahwahnee property are the
periods of highest occupancy. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues.
The recreational vehicle park at Yosemite/Ahwahnee may generate as much
as ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers who borrow to buy a home. If a buyer
defaults, we would incur costs in remarketing the timeshare.
We do not have an exchange network to enhance marketing appeal. If we
cannot offer such a network in the future, we may be at a competitive
disadvantage.
The timeshare industry is extremely competitive and we may not be able
to secure development financing on acceptable terms.
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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 $350,000) annually and
complete the construction of additional recreational vehicle sites and 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 the City of Pacifica is expensive and time consuming. Mori
Point had a specific plan and tentative map to build a hotel/conference
center which expired in 1991. These approvals must be reinstated prior to
construction on the property.
HOTEL/CONFERENCE CENTER DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF
REASONS AND COULD RESULT IN LOSSES. In addition to normal real estate risks,
financing is hard to obtain, and the lodging industry can be unpredictable,
seasonal and very competitive. Without additional financing or capital, the
company will not be able to develop its hotel/conference center project as
part of its growth strategy. Economic conditions, changes in travel
patterns, extreme weather conditions, labor and other variable costs can all
affect revenues and profits. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues. At the hotel/conference center
property at Mori Point, we may be competing against well-known chains and
extended-stay inns.
Mori Point represents approximately 20% of the assets of the company
and, assuming it is operated as a hotel/conference center, its revenues could
ultimately 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.
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REAL ESTATE RISKS OF CYPRESS LAKES PROPERTY
THE VESTED TENTATIVE MAP NEEDS MODIFICATION AND BUILD OUT OF THE
PROPERTY WILL BE EXPENSIVE. Due to being located in a 100-year flood plain,
the property requires a levee to be constructed around its perimeter which is
very expensive to construct. It may be desirable to change the vesting
tentative map if the costs can be reduced significantly. However, any
changes in the existing plan could subject the project to public hearings
which might result in additional costs being placed on the project. This
would further increase the high front-end financial requirements.
Additionally, such modifications might not be approved.
Cypress Lakes is a proposed master-planned community and represents more
than 20% of the assets of the Company. Joint venture partners would have to
be brought in by the Company to help with the large capital requirements of
such a large project. It may be difficult to find substantial
builder/developers who have the financial ability to purchase or develop the
project. Changing market conditions may increase the difficulty in selling
lots.
Should the Company determine to build out the project, delays in
construction, reasonably priced mortgage and construction financing and the
local and general California economy could lengthen the holding period for
the lots. This would mean delays in realizing cash from the business
operations.
RISKS AFFECTING OPERATION OF A GOLF COURSE. When, and if, the golf
course is developed, it will face competition from the golf courses within a
25 mile radius. Seasonality, weather and course conditions will affect the
operations of the company. 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.
RISKS OF RESIDENTIAL DEVELOPMENT. Totaling 1,330 lots, a large supply
of lots would be available, and due to the cyclical nature of the housing
industry, demand may not stay in sync with supply. This could result in
needing to sell properties at a loss. Due to the size of the project, it
could take between six and ten years to complete, which would subject it to
new competitors entering the marketplace during the sales period.
REAL ESTATE RISKS OF PALMDALE/JOSHUA RANCH PROPERTY
A FINAL TRACT MAP MUST BE RECORDED. After several years of effort by
National, the vested tentative map was approved by the City of Palmdale at a
hearing before the planning commission in early July 1998. A final recorded
map must be secured by National or a buyer in order to build on the property.
Final engineering, soils, utility and various improvement studies will need
to be conducted in order to record the final map.
PERMITS TO DEVELOP THE PROPERTY NEED TO BE OBTAINED. A final recorded
map, which could take nine to twelve months after starting the process, will
be required prior to construction. Due to the size of this project which
encompasses some 739.6 acres and is currently planned for 539
10
<PAGE>
lots, additional grading studies, soils investigation and utility planning
needs to be done which could negatively impact the cost of this large-scale
development.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Finding
builder/developers that have the financial strength to handle this size
project can be difficult. Changing market conditions, the lack of
reasonably-priced construction or mortgage financing and the general or local
market conditions could lengthen the holding period for lots. This would
mean a delay in realizing cash from business operations. The average
carrying costs, including property taxes, predevelopment and asset management
services for this Property have averaged approximately $16,300 per month over
the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, the Property may be sold at a loss. The location of the lots, the
presence of other competition, customer acceptance and pricing are all
factors affecting success. Competitors may have better financial, managerial
and other resources affecting the Company's ability to successfully compete.
Palmdale/Joshua Ranch is a proposed residential development and
represents about 10% of the assets of the Company.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to pay for or finance (i) engineering, soils and utility studies
which is estimated to cost approximately $140,000, and (ii) another risk is
whether the lots to be developed may appeal to project builders.
REAL ESTATE RISKS OF ESPERANZA PROPERTY
RISKS OF COMMERCIAL DEVELOPMENT. The material risks associated with the
development of the Esperanza Property are (i) as of June 30, 1998,
approximately $23,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the
County of Riverside to avoid loss of the Property for delinquent property
taxes; and (ii) despite a strong economy, rents and values for many retail
properties are expected to remain soft in 1998. Pressure on rents brought
about by over building, weakness in demand for space and store closures
caused by lagging profits are the forces causing a soft market.
ADDITIONAL SPECIFIC RISKS. Within the City of Victorville there are
approximately 3,250 acres zoned for commercial use, of which 60% remains
available for development. Victorville is home to the largest enclosed
regional shopping center between San Bernardino and Las Vegas, which is known
as The Mall of Victor Valley. These commercial sites represent significant
competition to the Esperanza project. There are more than 5,400 acres within
the city limits of Victorville zoned for light and heavy industrial use.
Nearly nine percent of this 5,400 acres of land is vacant and is available in
parcels ranging in size from one-half to five hundred acres.
REAL ESTATE RISKS OF STACEY ROSE PROPERTIES
RISKS OF RESIDENTIAL DEVELOPMENT. The material risks associated with
the development of the Stacey Rose Properties are (i) as of June 30, 1998,
approximately $30,000 of property taxes
11
<PAGE>
are delinquent and must be brought current or a statutory five-year payment
plan must be arranged with the County of Riverside to avoid loss of the
Properties for delinquent property taxes; (ii) it is estimated that it may
cost about $50,000 to finalize a tentative tract map on the parcels; (iii) a
substantial, and potentially expensive, sales and marketing effort will be
necessary to sell homes constructed on the properties if a bulk sale of the
lots is not made; (iv) the Properties are located in a lower income
residential area; and (v) increasing government fees and assessments for
streets, schools, parks and other infrastructure requirements could increase
the cost of lots to the company, thereby increasing the sales price of the
lots which will delay market absorption.
ADDITIONAL SPECIFIC RISKS. There is a risk that (i) adequate funds will
not be available to finalize a tentative tract map on the parcels
(approximately $50,000); (ii) the project will not appeal to project
builders; and (iii) home financing at reasonable costs may not be available.
There is also a risk that the development and sale of lots or home 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.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% of the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of
incorporation which cover anti-takeover provisions require the approval of
two-thirds of the company's voting stock. This restriction also may deter
potential purchasers who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well
as the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements.
12
<PAGE>
FAIRNESS TO INVESTORS IN THE ESPERANZA 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 units to be issued to reflect the exchange
value of a program is arbitrary, the trading price of the shares included in
the units initially is likely to be substantially below the $20 value
arbitrarily assigned to the units. In our opinion, the exchange values
offered to investors for their assets allow for an equitable allocation of
the [1,403,321] units ([1,380,175] units if only the "Trudy Pat" programs
participate) 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. After the acquisition, a total of
[0.63]% of the outstanding stock of the Company will be held by Esperanza
investors. After the acquisition, founders of the company (principals,
employees, and consultants of National) will hold less than 15%. Founders'
shares were purchased for $.01 per share. Among the properties, National and
its principals have forgiven over $3,495,000 of expenses and accrued fees of
which a total of approximately $2,800,000 was earned for asset management and
property management services after the loans defaulted and before the
Ownership Dates of the properties. The balance was earned after foreclosure
for asset and property management services and expenses. Of such amount,
$102,134 is attributable to fees owed by Esperanza investors. National
believes that the amount paid for the property management services is no
greater than the amount that a third party would charge;
- the current appraised value of the Esperanza real estate assets
($270,000) (as well as the real estate assets of the other programs) and the
fact that substantial financing is needed to further the property's
development;
- the probability that the transaction will have minimal, if any,
negative tax affect on investors. 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;
13
<PAGE>
- while the Esperanza Program (as well as the other programs) were
originally formed to have a two to four year finite life which should have
ended between 1990 and 1992 and the investors expected to receive a return of
their investment from the original borrower, the company is an infinite life
entity which will not return the program investors' original investment based
on a sale or refinancing of the properties underlying the original programs.
However, after the borrowers defaulted on the "Trudy Pat" loans, the
investors became beneficial owners of the underlying properties with the need
to complete development, manage or otherwise ready the properties for sale.
Those endeavors had no fixed timetable and, thus, the finite life aspect of
their original investments was significantly changed. Therefore, the
infinite life aspect of the company is not viewed by National to be a
material change from the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the business plan
of the Esperanza program. Rather than being focused on the development of a
single property for residential purposes, the company will be focused on the
management of at least seven 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 Esperanza property. Further, there will be
no particular time when an Investor can expect its interest to be
automatically liquidated;
- the fact that the Esperanza property has deteriorated in value
since the original loan was made, no offers have been received to purchase
the property, and the investors have rejected one purchase offer;
- investors will not be able to vote on changes to or dispositions of
the Esperanza property or borrowing secured by that property. Those
decisions will be made by the Board of Directors or management of the
Company. Further, as investors in a larger entity, relative voting power
will be diluted;
- future cash distributions will be based on the company's earnings
and the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Esperanza 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 units
in the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection
with the acquisition and compared it with what you might receive if (i) the
Esperanza property were operated "as is" ($1,161 per $10,000 of Adjusted
Outstanding Investment), (ii) the Esperanza property was sold
14
<PAGE>
in a quick sale in three months or less ($1,161 per $10,000 of Adjusted
Outstanding Investment), or (iii) the Esperanza property was sold at the
appraised value, net of program debt, used to determine the Esperanza
exchange value ($3,239 per $10,000 of Adjusted Outstanding Investment).
Based on that review, and even acknowledging that, initially, the company's
shares included in the units issued in the acquisition would likely trade
substantially below the arbitrary $20 issuance value for the units, National
believes that there is a higher probability of realizing value from the
Esperanza property through the acquisition than through the other
alternatives. This belief is based on the expectation that some financing
opportunities will become available based on the form of the entity and the
time pressure associated with forced sales or liquidation will be relieved.
See "Background and Reasons for the Acquisition -- Comparison to
Alternatives" and "Recommendation of National and Fairness Determination" at
pages __ and __ of the Prospectus. Based on this comparison, National
concluded that the acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Esperanza Program (as well as each of the
other Programs) is essentially the consideration at which the Company is
offering in exchange for the real estate assets, cash reserves, certain
liabilities and business of the Program. The value is reflected as a number
of units of the Company (in the case of the Esperanza Program, 10,818 units)
multiplied by an arbitrary $20 per unit value.
The Exchange Value for the Esperanza Program was calculated as follows:
appraised value of the Esperanza Program property at March 31, 1998, plus
book value of other Esperanza Program assets at June 30,1998, less Esperanza
Program liabilities at June 30, 1998.
The following table summarizes the calculation of the Exchange Value of
the Esperanza 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>
$ 270,000 $[ (53,644)] $ [216,356] $ [3,701](3)
</TABLE>
- -----------
(1) Reflects independent appraisal as of March 1998.
(2) The following table quantifies the adjustments to appraised values made in
determining Esperanza property's Exchange Value as of June 30, 1998.
<TABLE>
<CAPTION>
Book Assets Book Liabilities Net Other Assets
(6/30/98)* - (6/30/98)* = and Liabilities
----------- ---------------- ----------------
<S> <C> <C>
$ 28,523 $ (81,897) $ (53,644)
</TABLE>
15
<PAGE>
* 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 Esperanza property.
(3) Equals [185] Company shares arbitrarily valued at $20 per unit.
ALLOCATION OF SHARES
The [1,403,321] shares of Company common stock being offered to
Investors in the Acquisition represent over 80% of the Company's shares (94%
if all warrants are exercised) 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 Programs
pro rata in accordance with Exchange Values. The Esperanza Program will be
allocated [10,818] shares.
The shares allocated to the Esperanza Program will be allocated among
Investors in the Program based on their respective pro rata investments in
the Program (taking into account assessments paid and unpaid, as well as
interest accrued to each Investor through the date beneficial ownership of
the Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Esperanza Program with an adjusted investment
amount of $10,000 will receive [185] units in the Company arbitrarily valued
at $20 per unit.
Neither National nor the Company's founders have any economic
interest in the Esperanza Program except for National's contractual right to
asset management fees.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Esperanza Program (including accrued but unpaid
interest) plus the amount of assessments and advances paid by Investors at
June 30, 1998, 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
Outstanding
After the
Amount Real Estate Acquisition if
Owed plus Appraised Exchange No. of Shares All Programs
Name of Program Assessments Value Value(1) Allocated(1)(2) Participate
--------------- ----------- ----------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Esperanza $ 584,653 $ 270,000 $ [216,356] [10,818] [0.63]%
</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 [323,676] Company shares after the
Acquisition (18.74% of the outstanding shares post-Acquisition, 5.45% if
all warrants are exercised) which, if valued at $20 per share, would have
an aggregate value of $[6,473,520]. The Company was formed, and shares
were purchased by the founders for $.01 per share, prior to making the
Acquisition proposal. 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 less than 20% of the shares after the Acquisition.
See
16
<PAGE>
"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>
Previously
Name of Program Cancelled
-------------
<S> <C>
Sacramento/Delta Greens $ 500,000
Oceanside -0-
Yosemite/Ahwahnee I 72,158
Yosemite/Ahwahnee II 1,157,867
Mori Point 461,589
Cypress Lakes 1,120,000
Palmdale (Joshua Ranch) -0-
Esperanza 102,134
Stacey Rose A 64,293
Stacey Rose B 17,267
-------------
TOTAL $ 3,495,308
-------------
-------------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [2.9]% of the total shares to be
owned by the Company's founders after the Acquisition ([9,458] if all
programs participated) 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, and for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Incurred
Actually Incurred Actually Actually for Six
Incurred for Paid for for Year Paid for Incurred for Paid for Months Actually Paid
Year Ended Year Ended Ended Year Ended Year Ended Year Ended Ended in Six Months
Name of Program 12/31/95(1) 12/31/95(2) 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2) 6/30/98 Ended 6/30/98
----------------- ------------ ----------- ----------- ----------- ----------- ----------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Esperanza $5,000(2) $-0- $5,000(2) $-0- $5,000 (2) $-0- $2,500 $-0-
</TABLE>
(1) These amounts represent accrued asset management fees.
(2) Approximately $6,289 per year if the Acquisition had been completed during
the above periods including $3,270 of estimated salaries to be paid by the
Company to its officers and which were allocated to the Esperanza based on
Exchange Values. No cash would have been available to pay officers'
bonuses or dividends to shareholders.
17
<PAGE>
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
1992 1992 1993 1994 1995 1996 1997 Total
---------- --------- -------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Esperanza
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $ 130,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 130,000
</TABLE>
There have been no recent distributions to Investors. The Acquisition
is not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Sacramento/Delta Greens Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
18
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
STACEY ROSE A 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 Stacey Rose
A 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 units of its securities in exchange for the
assets (including cash reserves), certain liabilities and business activities
owned by Investors in seven former "Trudy Pat" programs and three other
programs managed by National Investors Financial, Inc. ("National"). For
this proposed Acquisition, the Company will issue an aggregate of
$[28,066,419] of units arbitrarily valued at $20 per unit. A unit consists
of one share of common stock plus warrants to purchase three additional
shares. The [UNITS][SHARES AND WARRANTS] 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, eliminate the
assessment process, focus on revenue-generating potential, improve efficient
of operation in order to reduce costs and increase profit potential, and
provide the investors with liquidity for their investments.
Of the [1,403,321] units to be issued by the Company in the Acquisition,
Investors in the Stacey Rose A Program will receive a total of [2,617] shares
or [229] 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 Stacey Rose A Program an
amount that is higher than the value of the Company units 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 SEVEN TRUDY PAT" PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO
TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - If the acquisition is approved, your investment will be subject to the
risks associated with residential development plus new risks associated with
a business which also operates a golf course and a recreational vehicle park,
and which plans to pursue the development of timeshare facilities, commercial
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 $20 per unit for
purposes of the acquisition. Thus, the value of the units 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 16.42% of the Company's stock (4.78% if all warrants
are exercised) for which they paid $0.01 per share and will receive annual
cash compensation aggregating $560,000 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 $950,000
annually. However, the Company will still owe National over $1,800,000 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 certain of its properties
or the exercise of the warrants included in the units, 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 [__] through [__] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If
the acquisition is completed, there will be a change in the nature of the
investment of each investor from holding a tenancy-in-common interest in real
estate to holding shares in an on-going company, the assets of which may be
changed from time to time without approval of investors. If the acquisition
is completed, investors will be able to liquidate their investments only by
selling their [UNITS][SHARES] on the _____ or in private transactions, and
they will not receive a return of their investment in the form of liquidation
proceeds through property sales. If the acquisition is completed, investors
will have an investment in an entity that is larger than each of the programs
and will thus lose relative voting power. Investors will have an investment
in a business which also operates a golf course and a recreational vehicle
park, and which plans to pursue the development of timeshare facilities and
a hotel/conference center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL
SALES PRICE. Investors are subject to the risk that the exchange value of a
program does not reflect the price a program's assets might bring in a sale.
If the property of a program were to be sold, the net proceeds of the sale
and the amount finally distributed to an investor in that program may be more
or less than the exchange value. There is no assurance that the future value
of the shares and warrants received in the acquisition will be greater than
the most recent appraised value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may
trade at prices substantially below the arbitrarily determined exchange value
of $20 per unit or the 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 $20 due to a potentially large number of shares that investors
may sell immediately after the acquisition.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of
interest. The principal shareholders and employees of National and the
company will hold approximately [16.42]% of the company's outstanding stock
(4.78% if all warrants are exercised) for which they paid $0.01 per share.
Other founders of the company will hold approximately [2.3]% 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 $560,000 as
officers and employees of the company. National will be relieved of its
servicing and asset management obligations and will no longer earn asset
2
<PAGE>
management or servicing related fees. However, the company will still owe
National over $1,800,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote, and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF
THE INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject
to arm's-length negotiation. Had an independent party negotiated on behalf
of each program, the terms of the acquisition may have been more favorable to
certain or all of the programs and fewer shares and less favorable employment
contracts may have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to
opine conclusively on the tax consequences of the acquisition to investors.
The acquisition may be taxable, if at all, only with respect to the
investors' receipt of warrants. Alternatively, if the acquisition is a fully
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
$20 per unit. If the acquisition is treated as fully taxable, National
believes most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, none of the properties will be subject to any liens other than
for property taxes. The board of directors could authorize borrowing by the
company the debt service for which may adversely affect the company's ability
to make distributions to shareholders. The company may incur full recourse
debt which exposes all of the assets of the company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING
INVESTORS. If you vote against the acquisition, and it is approved, you will
not be able to object to the acquisition and receive the appraised value of
your tenancy-in-common interest in your program's assets. You will have no
choice other than to accept units for your interests.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long
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time. This means that shares in the company are much riskier than ownership
of shares of established companies. If the company had been operating as if
it owned the properties which it desires to acquire, it would have
experienced losses to date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE
ACQUISITION TAKES PLACE. Rather than being focused on a single property, the
company will be an infinite life entity focused on the management of at least
the seven properties of the former "Trudy Pat" programs. 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. Prior to the
dates that title to the properties securing the original program loans was
taken, National was entitled to an annual loan servicing fee equal to one
percent of the original loan amounts. When title to the properties was taken
on behalf of the programs, even though the loans no longer existed, National
continued to charge the same rate as the servicing fee for the asset
management services it provided to investors. The investors in each of the
programs had become the beneficial tenant-in-common owners of real estate,
most of which was undeveloped. While it had no obligation to do so, in order
to assist the beneficial owners in protecting their real estate assets and
readying them for sale or development, National assumed the duties of an
asset manager after title was taken to the properties. In this capacity,
National obtained information from investors about their preferences in
regard to development or sale of the properties, acted as assessing agent to
raise funds necessary to pay property taxes, insurance and other costs of
property ownership.
The annual fees payable to National are currently $50,000 for
Sacramento/Delta Greens; $300,000 for Oceanside; $65,000 for
Yosemite/Ahwahnee I; $135,000 for Yosemite/Ahwahnee II; $100,000 for Mori
Point; $140,000 for Cypress Lakes; $150,000 for Palmdale/Joshua Ranch; $5,000
for Esperanza; $3,153 for Stacey Rose A; and $850 for Stacey Rose B.
In addition to the one percent fee, compensation has been earned for
property management services provided to the Oceanside program ($896,000
accrued since the date of ownership (November 1993) through June 30, 1998;
$876,000 actually paid) and Yosemite/Ahwahnee properties ($594,535 accrued
since the date of ownership (September
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1995); $-0- actually paid) by officers and employees of National in their
capacities as officers and employees of Oceanside Development, Inc. and
Ahwahnee Golf Course & Resort, Inc. Those property management services
included, without limitation, solicitation, engagement, coordination and
supervision of: entitlement and permit processing, environmental,
engineering, planning, architectural, construction, marketing, appraisal,
legal, accounting and other experts as needed for each project; due diligence
on potential service providers; assistance in presentations and applications
for approvals to governmental agencies; packaging and documenting the status
of a project for potential financing, sale or joint venture; supervising and
managing the operational activities for construction projects on the
Oceanside and Yosemite/Ahwahnee projects; and contract negotiations and
documentation. To the extent similar property specific services were
provided to the other programs, they were provided without extra charge
because the necessary activities were less regular and less operationally
intense.
In the future, compensation will be paid to officers of the company in
the form of salaries (aggregating $560,000 annually plus contractual bonus
opportunities and salary increases), stock options and other benefits. See
"Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for details of stock options and other benefits.
These salaries and other forms of compensation will be payable to management
of the company even if one or more of the properties acquired in the
acquisition is subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE DIFFERENCES IN YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THE EXCHANGE VALUES FOR THESE
PROPERTIES MAY BE TOO LOW OR TOO HIGH. National reviewed the updated March
1998 appraisal of the Yosemite/Ahwahnee properties which reflected an
aggregate "as is" appraised value of $20,246,000 and the October 1996
appraisal which reflected an "as is" aggregate appraised value of $4,000,000.
The results of those appraisals clearly differed from each other, and, in
management's judgment, the difference could not be accounted for by improving
market conditions. Some of the parcels, including the golf course, were
subsequently sold, on June 5, 1998, to the Oceanside Program investors to
obtain working capital. Based on its review of all appraisals, National
concluded that the properties currently owned by the Yosemite/Ahwahnee I and
II Programs have values of $5,486,000 ($1,782,950 and $3,703,050,
respectively), and the parcels currently owned by the Oceanside Program have
a value of $5,080,000. National believes its approach is reasonable and has
received an opinion from Houlihan Valuation Advisors that the allocation of
the shares among the programs is fair.
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 June 30, 1998: Sacramento/Delta
Greens -approximately $27,000; Yosemite/Ahwahnee (combined) - approximately
$500,000; Mori Point - approximately $165,000; Cypress lakes - approximately
$204,000; Palmdale (Joshua Ranch) - approximately $63,000; Esperanza -
approximately
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$20,000; and Stacey Rose - approximately $30,000. Annual payments required
for all the properties for current taxes (including amounts currently due on
five-year payment plans) total approximately $549,000. In the case of
Sacramento/Delta Greens, Yosemite/Ahwahnee, Mori Point, Palmdale/Joshua Ranch
and Stacey Rose properties, National has entered into statutorily authorized
5-year payment plans with the applicable taxing authorities.
CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a minimum
of approximately $[4,715,000] from sale of certain assets of the programs or
from the exercise of warrants become available, the company will not be able
to proceed with its entire business plan. The company will also need
financing from other sources to complete its plan. Financing sources are not
predictable and interest rates or other costs of financing may be
prohibitive. Neither the programs nor the company have received any
commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay assessments for
streets, schools and parks which increase the cost of development. Increased
costs can have a negative affect on the company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. 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 $[1,818,684] BY THE COMPANY. This represents accrued fees and expenses
from the programs which National has not cancelled. This amount is due and
payable and the company intends to start paying it after the Acquisition, but
only from operating revenues or proceeds from the sale of assets, but not
from working capital generated by the proceeds of unit sales.
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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 approval of a new tentative
map, 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. Since some were identified, changes to the tentative development
plans have been made that will reduce or eliminate any damage to the habitat.
A new tentative map needs to be approved by the City. The longer this
process takes, the longer it will be until the company can make money from
the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays
in construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged
approximately $10,000 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 5% of the assets of the company. Although there can be no
assurances and net revenues from Sacramento/Delta Greens may equal or exceed
$3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) finance engineering and endangered species studies
(estimated by management to cost approximately $175,000). 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 YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE CONDOMINIUM-TYPE TIMESHARE ASPECT OF THE RESORT
HAVE NOT YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map
on 32 remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Planning is underway for vacation villa timeshare
units utilizing part of the allocated use permit space for recreational
vehicles. Additional planned usage such as traditional, attached timeshare
units will require
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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 15% of the assets of the
company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits. For
example, Spring through Fall at the Yosemite/Ahwahnee property are the
periods of highest occupancy. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues.
The recreational vehicle park at Yosemite/Ahwahnee may generate as much
as ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers who borrow to buy a home. If a buyer
defaults, we would incur costs in remarketing the timeshare.
We do not have an exchange network to enhance marketing appeal. If we
cannot offer such a network in the future, we may be at a competitive
disadvantage.
The timeshare industry is extremely competitive and we may not be able
to secure development financing on acceptable terms.
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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 $350,000) annually and
complete the construction of additional recreational vehicle sites and 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 the City of Pacifica is expensive and time consuming. Mori
Point had a specific plan and tentative map to build a hotel/conference
center which expired in 1991. These approvals must be reinstated prior to
construction on the property.
HOTEL/CONFERENCE CENTER DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF
REASONS AND COULD RESULT IN LOSSES. In addition to normal real estate risks,
financing is hard to obtain, and the lodging industry can be unpredictable,
seasonal and very competitive. Without additional financing or capital, the
company will not be able to develop its hotel/conference center project as
part of its growth strategy. Economic conditions, changes in travel
patterns, extreme weather conditions, labor and other variable costs can all
affect revenues and profits. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues. At the hotel/conference center
property at Mori Point, we may be competing against well-known chains and
extended-stay inns.
Mori Point represents approximately 20% of the assets of the company
and, assuming it is operated as a hotel/conference center, its revenues could
ultimately 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.
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REAL ESTATE RISKS OF CYPRESS LAKES PROPERTY
THE VESTED TENTATIVE MAP NEEDS MODIFICATION AND BUILD OUT OF THE
PROPERTY WILL BE EXPENSIVE. Due to being located in a 100-year flood plain,
the property requires a levee to be constructed around its perimeter which is
very expensive to construct. It may be desirable to change the vesting
tentative map if the costs can be reduced significantly. However, any
changes in the existing plan could subject the project to public hearings
which might result in additional costs being placed on the project. This
would further increase the high front-end financial requirements.
Additionally, such modifications might not be approved.
Cypress Lakes is a proposed master-planned community and represents more
than 20% of the assets of the Company. Joint venture partners would have to
be brought in by the Company to help with the large capital requirements of
such a large project. It may be difficult to find substantial
builder/developers who have the financial ability to purchase or develop the
project. Changing market conditions may increase the difficulty in selling
lots.
Should the Company determine to build out the project, delays in
construction, reasonably priced mortgage and construction financing and the
local and general California economy could lengthen the holding period for
the lots. This would mean delays in realizing cash from the business
operations.
RISKS AFFECTING OPERATION OF A GOLF COURSE. When, and if, the golf
course is developed, it will face competition from the golf courses within a
25 mile radius. Seasonality, weather and course conditions will affect the
operations of the company. 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.
RISKS OF RESIDENTIAL DEVELOPMENT. Totaling 1,330 lots, a large supply
of lots would be available, and due to the cyclical nature of the housing
industry, demand may not stay in sync with supply. This could result in
needing to sell properties at a loss. Due to the size of the project, it
could take between six and ten years to complete, which would subject it to
new competitors entering the marketplace during the sales period.
REAL ESTATE RISKS OF PALMDALE/JOSHUA RANCH PROPERTY
A FINAL TRACT MAP MUST BE RECORDED. After several years of effort by
National, the vested tentative map was approved by the City of Palmdale at a
hearing before the planning commission in early July 1998. A final recorded
map must be secured by National or a buyer in order to build on the property.
Final engineering, soils, utility and various improvement studies will need
to be conducted in order to record the final map.
PERMITS TO DEVELOP THE PROPERTY NEED TO BE OBTAINED. A final recorded
map, which could take nine to twelve months after starting the process, will
be required prior to construction. Due to the size of this project which
encompasses some 739.6 acres and is currently planned for 539
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lots, additional grading studies, soils investigation and utility planning
needs to be done which could negatively impact the cost of this large-scale
development.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Finding
builder/developers that have the financial strength to handle this size
project can be difficult. Changing market conditions, the lack of
reasonably-priced construction or mortgage financing and the general or local
market conditions could lengthen the holding period for lots. This would
mean a delay in realizing cash from business operations. The average
carrying costs, including property taxes, predevelopment and asset management
services for this Property have averaged approximately $16,300 per month over
the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, the Property may be sold at a loss. The location of the lots, the
presence of other competition, customer acceptance and pricing are all
factors affecting success. Competitors may have better financial, managerial
and other resources affecting the Company's ability to successfully compete.
Palmdale/Joshua Ranch is a proposed residential development and
represents about 10% of the assets of the Company.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to pay for or finance (i) engineering, soils and utility studies
which is estimated to cost approximately $140,000, and (ii) another risk is
whether the lots to be developed may appeal to project builders.
REAL ESTATE RISKS OF ESPERANZA PROPERTY
RISKS OF COMMERCIAL DEVELOPMENT. The material risks associated with the
development of the Esperanza Property are (i) as of June 30, 1998,
approximately $23,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the
County of Riverside to avoid loss of the Property for delinquent property
taxes; and (ii) despite a strong economy, rents and values for many retail
properties are expected to remain soft in 1998. Pressure on rents brought
about by over building, weakness in demand for space and store closures
caused by lagging profits are the forces causing a soft market.
ADDITIONAL SPECIFIC RISKS. Within the City of Victorville there are
approximately 3,250 acres zoned for commercial use, of which 60% remains
available for development. Victorville is home to the largest enclosed
regional shopping center between San Bernardino and Las Vegas, which is known
as The Mall of Victor Valley. These commercial sites represent significant
competition to the Esperanza project. There are more than 5,400 acres within
the city limits of Victorville zoned for light and heavy industrial use.
Nearly nine percent of this 5,400 acres of land is vacant and is available in
parcels ranging in size from one-half to five hundred acres.
REAL ESTATE RISKS OF STACEY ROSE PROPERTIES
RISKS OF RESIDENTIAL DEVELOPMENT. The material risks associated with
the development of the Stacey Rose Properties are (i) as of June 30, 1998,
approximately $30,000 of property taxes
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are delinquent and must be brought current or a statutory five-year payment
plan must be arranged with the County of Riverside to avoid loss of the
Properties for delinquent property taxes; (ii) it is estimated that it may
cost about $50,000 to finalize a tentative tract map on the parcels; (iii) a
substantial, and potentially expensive, sales and marketing effort will be
necessary to sell homes constructed on the properties if a bulk sale of the
lots is not made; (iv) the Properties are located in a lower income
residential area; and (v) increasing government fees and assessments for
streets, schools, parks and other infrastructure requirements could increase
the cost of lots to the company, thereby increasing the sales price of the
lots which will delay market absorption.
ADDITIONAL SPECIFIC RISKS. There is a risk that (i) adequate funds will
not be available to finalize a tentative tract map on the parcels
(approximately $50,000); (ii) the project will not appeal to project
builders; and (iii) home financing at reasonable costs may not be available.
There is also a risk that the development and sale of lots or home 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.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% of the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of
incorporation which cover anti-takeover provisions require the approval of
two-thirds of the company's voting stock. This restriction also may deter
potential purchasers who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well
as the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements.
12
<PAGE>
FAIRNESS TO INVESTORS IN THE STACEY ROSE A 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 units to be issued to reflect the exchange
value of a program is arbitrary, the trading price of the shares included in
the units initially is likely to be substantially below the $20 value
arbitrarily assigned to the units. In our opinion, the exchange values
offered to investors for their assets allow for an equitable allocation of
the [1,403,321] units ([1,380,175] units if only the "Trudy Pat" programs
participate) 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. After the acquisition, a total of
[0.15]% of the outstanding stock of the Company will be held by Stacey Rose A
investors. After the acquisition, founders of the company (principals,
employees, and consultants of National) will hold less than 15%. Founders'
shares were purchased for $.01 per share. Among the properties, National and
its principals have forgiven over $3,495,000 of expenses and accrued fees of
which a total of approximately $2,800,000 was earned for asset management and
property management services after the loans defaulted and before the
Ownership Dates of the properties. The balance was earned after foreclosure
for asset and property management services and expenses. Of such amount,
$64,293 is attributable to fees owed by Stacey Rose A investors. National
believes that the amount paid for the property management services is no
greater than the amount that a third party would charge;
- the current appraised value of the Stacey Rose A real estate assets
($67,936) (as well as the real estate assets of the other programs) and the
fact that financing is needed to further the property's development;
- the probability that the transaction will have minimal, if any,
negative tax affect on investors. 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;
13
<PAGE>
- while the Stacey Rose A Program (as well as the other programs)
were originally formed to have a two to four year finite life which should
have ended between 1990 and 1992 and the investors expected to receive a
return of their investment from the original borrower, the company is an
infinite life entity which will not return the program investors' original
investment based on a sale or refinancing of the properties underlying the
original programs. However, after the borrowers defaulted on the "Trudy Pat"
loans, the investors became beneficial owners of the underlying properties
with the need to complete development, manage or otherwise ready the
properties for sale. Those endeavors had no fixed timetable and, thus, the
finite life aspect of their original investments was significantly changed.
Therefore, the infinite life aspect of the company is not viewed by National
to be a material change from the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the business plan
of the Stacey Rose A Program. Rather than being focused on the development
of a single property for residential purposes, the company will be focused on
the management of at least seven properties. Thus, the poor performance of a
particular property may affect the Company's operations as a whole regardless
of the performance of the Stacey Rose A property. Further, there will be no
particular time when an Investor can expect its interest to be automatically
liquidated;
- the fact that the Victorville market is not yet attractive to
residential home builders;
- investors will not be able to vote on changes to or dispositions of
the Stacey Rose A property or borrowing secured by that property. Those
decisions will be made by the Board of Directors or management of the
Company. Further, as investors in a larger entity, relative voting power will
be diluted;
- future cash distributions will be based on the company's earnings
and the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Stacey Rose A 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 units
in the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection
with the acquisition and compared it with what you might receive if (i) the
Stacey Rose A property were operated "as is" ($1,313 per $10,000 of Adjusted
Outstanding Investment), (ii) the Stacey Rose A property was sold in a quick
sale in three months or less ($1,313 per $10,000 of Adjusted Outstanding
14
<PAGE>
Investment), or (iii) the Stacey Rose A property was sold at the appraised
value, net of program debt, used to determine the Stacey Rose A exchange
value ($3,993 per $10,000 of Adjusted Outstanding Investment). Based on that
review, and even acknowledging that, initially, the company's shares included
in the units issued in the acquisition would likely trade substantially below
the arbitrary $20 issuance value for the units, National believes that there
is a higher probability of realizing value from the Stacey Rose A property
through the acquisition than through the other alternatives. This belief is
based on the expectation that some financing opportunities will become
available based on the form of the entity and the time pressure associated
with forced sales or liquidation will be relieved. See "Background and
Reasons for the Acquisition -- Comparison to Alternatives" and
"Recommendation of National and Fairness Determination" at pages __ and __ of
the Prospectus. Based on this comparison, National concluded that the
acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Stacey Rose A Program (as well as each of the
other Programs) is essentially the consideration at which the Company is
offering in exchange for the real estate assets, cash reserves, certain
liabilities and business of the Program. The value is reflected as a number
of units of the Company (in the case of the Stacey Rose A Program, 2,671
units) multiplied by an arbitrary $20 per unit value.
The Exchange Value for the Stacey Rose A Program was calculated as
follows: appraised value of the Stacey Rose A Program property at March 31,
1998, plus book value of other Stacey Rose A Program assets at June 30, 1998,
less Stacey Rose A Program liabilities at June 30, 1998.
The following table summarizes the calculation of the Exchange Value of
the Stacey Rose A 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>
$ 67,936 $[ (15,591)] $ [52,345] $ [4,589](3)
</TABLE>
- -------------
(1) Reflects independent appraisal as of March 1998.
(2) The following table quantifies the adjustments to appraised values made in
determining Stacey Rose A property's Exchange Value as of June 30,1998.
<TABLE>
<CAPTION>
Book Assets Book Liabilities Net Other Assets
(6/30/98)* - (6/30/98)* = and Liabilities
----------- ---------------- ----------------
<S> <C> <C>
$ 5,804 $ (21,395) $ (15,591)
</TABLE>
15
<PAGE>
* 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 Stacey Rose A property.
(3) Equals [229] Company shares arbitrarily valued at $20 per unit.
ALLOCATION OF SHARES
The [1,403,321] shares of Company common stock being offered to
Investors in the Acquisition represent over 80% of the Company's shares (94%
if all warrants are exercised) 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 Programs
pro rata in accordance with Exchange Values. The Stacey Rose A Program will
be allocated [2,617] shares.
The shares allocated to the Stacey Rose A Program will be allocated
among Investors in the Program based on their respective pro rata investments
in the Program (taking into account assessments paid and unpaid, as well as
interest accrued to each Investor through the date beneficial ownership of
the Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Stacey Rose A Program with an adjusted
investment amount of $10,000 will receive [229] units in the Company
arbitrarily valued at $20 per unit.
Neither National nor the Company's founders have any economic
interest in the Stacey Rose A Program except for National's contractual right
to asset management fees and the $4,247 of tenancy-in-common interests
purchased by National at the inception of the Program for which interests
National will receive units in the Acquisition pro rata with the other Stacey
Rose Investors. National will undertake not to exercise the warrants in the
units.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Stacey Rose A Program (including accrued but unpaid
interest) plus the amount of assessments and advances paid by Investors at
June 30,1998, 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
to be Shares
Outstanding
After the
Amount Real Estate Acquisition if
Owed plus Appraised Exchange No. of Shares All Programs
Name of Program Assessments Value Value(1) Allocated(1)(2) Participate
--------------- ----------- ----------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Stacey Rose A $ 114,098 $ 67,949 $ [52,345] [2,617] [0.15]%
</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 [323,676] Company shares after the
Acquisition (18.74% of the outstanding shares post-Acquisition, 5.45% if
all warrants are exercised) which, if valued at $20 per share, would have
an aggregate value of $[6,473,520]. The Company was formed, and shares
were
16
<PAGE>
purchased by the founders for $.01 per share, prior to making the
Acquisition proposal. 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 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>
Previously
Name of Program Cancelled
-------------
<S> <C>
Sacramento/Delta Greens $ 500,000
Oceanside -0-
Yosemite/Ahwahnee I 72,158
Yosemite/Ahwahnee II 1,157,867
Mori Point 461,589
Cypress Lakes 1,120,000
Palmdale (Joshua Ranch) -0-
Esperanza 102,134
Stacey Rose A 64,293
Stacey Rose B 17,267
------------
TOTAL $ 3,495,308
------------
------------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [1.8]% of the total shares to be
owned by the Company's founders after the Acquisition ([5,954] shares if
all programs participate) 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, and for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Incurred
Actually Incurred Actually Actually for Six
Incurred for Paid for for Year Paid for Incurred for Paid for Months Actually Paid
Year Ended Year Ended Ended Year Ended Year Ended Year Ended Ended in Six Months
Name of Program 12/31/95(1) 12/31/95(2) 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2) 6/30/98 Ended 6/30/98
--------------- ------------ ----------- ----------- ----------- ----------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stacey Rose A $850(2) $-0- $850(2) $-0- $850(2) $-0- $426 $-0-
</TABLE>
- -------------
(1) These amounts represent accrued asset management fees.
(2) Approximately $1,069 per year if the Acquisition had been completed during
the above periods including $556 of estimated salaries to be paid by the
Company to its officers and which were allocated to the Stacey Rose A
Program based on Exchange Values. No cash would have been available to pay
officers' bonuses or dividends to shareholders.
17
<PAGE>
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
1992 1992 1993 1994 1995 1996 1997 Total
----------- ---------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stacey Rose A
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $ 19,338 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 19,338
</TABLE>
There have been no recent distributions to Investors. The Acquisition
is not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Sacramento/Delta Greens Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
18
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
STACEY ROSE B 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 Stacey Rose
B 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 units of its securities in exchange for the
assets (including cash reserves), certain liabilities and business activities
owned by Investors in seven former "Trudy Pat" programs and three other
programs managed by National Investors Financial, Inc. ("National"). For
this proposed Acquisition, the Company will issue an aggregate of
$[28,066,419] of units arbitrarily valued at $20 per unit. A unit consists
of one share of common stock plus warrants to purchase three additional
shares. The [UNITS][SHARES AND WARRANTS] 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, eliminate the
assessment process, focus on revenue-generating potential, improve efficient
of operations in order to reduce costs and increase profit potential, and
provide the investors with liquidity for their investments.
Of the [1,403,321] units to be issued by the Company in the Acquisition,
Investors in the Stacey Rose B Program will receive a total of [9,711] shares
or [228] 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 Stacey Rose B Program an
amount that is higher than the value of the Company units 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 SEVEN TRUDY PAT" PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO
TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
MOST MATERIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, you will no longer have a
tenancy-in-common interest in your program's property. Instead, you will
hold shares in a publicly-traded real estate company and will not receive
liquidation proceeds when, or if, your program's property is sold. As an
investor in a publicly-traded company with many stockholders, you will have
relatively less voting power.
- - If the acquisition is approved, your investment will be subject to the
risks associated with residential development plus new risks associated with
a business which also operates a golf course and a recreational vehicle park,
and which plans to pursue the development of timeshare facilities, commercial
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 $20 per unit for
purposes of the acquisition. Thus, the value of the units 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 16.42% of the Company's stock (4.78% if all warrants
are exercised) for which they paid $0.01 per share and will receive annual
cash compensation aggregating $560,000 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 $950,000
annually. However, the Company will still owe National over $1,800,000 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 certain of its properties
or the exercise of the warrants included in the units, 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 [__] through [__] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
THERE WILL BE FUNDAMENTAL CHANGE IN THE NATURE OF YOUR INVESTMENT. If
the acquisition is completed, there will be a change in the nature of the
investment of each investor from holding a tenancy-in-common interest in real
estate to holding shares in an on-going company, the assets of which may be
changed from time to time without approval of investors. If the acquisition
is completed, investors will be able to liquidate their investments only by
selling their [UNITS][SHARES] on the _____ or in private transactions, and
they will not receive a return of their investment in the form of liquidation
proceeds through property sales. If the acquisition is completed, investors
will have an investment in an entity that is larger than each of the programs
and will thus lose relative voting power. Investors will have an investment
in a business which also operates a golf course and a recreational vehicle
park, and which plans to pursue the development of timeshare facilities and
a hotel/conference center.
THE EXCHANGE VALUES OF THE PROGRAMS ARE NOT THE SAME AS THE POTENTIAL
SALES PRICE. Investors are subject to the risk that the exchange value of a
program does not reflect the price a program's assets might bring in a sale.
If the property of a program were to be sold, the net proceeds of the sale
and the amount finally distributed to an investor in that program may be more
or less than the exchange value. There is no assurance that the future value
of the shares and warrants received in the acquisition will be greater than
the most recent appraised value of the property.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. Initially, shares may
trade at prices substantially below the arbitrarily determined exchange value
of $20 per unit or the 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 $20 due to a potentially large number of shares that investors
may sell immediately after the acquisition.
THERE WERE CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The
founders of the company, and specifically the principal shareholders of
National, as well as National itself, will be subject to conflicts of
interest. The principal shareholders and employees of National and the
company will hold approximately [16.42]% of the company's outstanding stock
(4.78% if all warrants are exercised) for which they paid $0.01 per share.
Other founders of the company will hold approximately [2.3]% 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 $560,000 as
officers and employees of the company. National will be relieved of its
servicing and asset management obligations and will no longer earn asset
2
<PAGE>
management or servicing related fees. However, the company will still owe
National over $1,800,000 of accrued but unpaid fees and expenses.
The charter documents contain a number of provisions that may have the
affect of delaying or discouraging a change in management which is not
favored by the board of directors. These provisions include a board of
directors with three classes serving staggered three year terms, the
inability to remove a particular director before the expiration of his or her
term without a two-thirds supermajority vote, and the inability to amend the
anti-takeover provisions of the charter documents without a similar vote.
Thus, if investors are unhappy with management's performance, it will be more
difficult to remove directors not favored by the investors.
NO INDEPENDENT PARTY WAS RETAINED BY NATIONAL TO NEGOTIATE ON BEHALF OF
THE INVESTORS. Therefore, terms of the acquisition may be less favorable to
investors and more favorable to founders of the company which included the
principal shareholders of National than if the acquisition had been subject
to arm's-length negotiation. Had an independent party negotiated on behalf
of each program, the terms of the acquisition may have been more favorable to
certain or all of the programs and fewer shares and less favorable employment
contracts may have been received by the founders of the company.
THE ACQUISITION MAY NOT BE A TAX-FREE TRANSACTION TO INVESTORS. Due to
uncertainties in the facts of this transaction, tax counsel is unable to
opine conclusively on the tax consequences of the acquisition to investors.
The acquisition may be taxable, if at all, only with respect to the
investors' receipt of warrants. Alternatively, if the acquisition is a fully
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
$20 per unit. If the acquisition is treated as fully taxable, National
believes most investors would recognize a tax loss.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, none of the properties will be subject to any liens other than
for property taxes. The board of directors could authorize borrowing by the
company the debt service for which may adversely affect the company's ability
to make distributions to shareholders. The company may incur full recourse
debt which exposes all of the assets of the company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
THE BOARD OF DIRECTORS MAY UNILATERALLY CHANGE INVESTMENT, FINANCING AND
CERTAIN OTHER POLICIES WITHOUT SHAREHOLDER APPROVAL. Although the board of
directors of the company intends to implement the business plan set forth
herein, the board will have the ability to change investment, financing and
other policies of the company without the consent of shareholders.
THERE WILL BE NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING
INVESTORS. If you vote against the acquisition, and it is approved, you will
not be able to object to the acquisition and receive the appraised value of
your tenancy-in-common interest in your program's assets. You will have no
choice other than to accept units for your interests.
THE COMPANY HAS NO OPERATING HISTORY. The company was formed within the
past year to take part in the acquisition of your property. It does not have
the benefit of operating for a long
3
<PAGE>
time. This means that shares in the company are much riskier than ownership
of shares of established companies. If the company had been operating as if
it owned the properties which it desires to acquire, it would have
experienced losses to date.
THERE WILL BE FUNDAMENTAL CHANGES IN THE BUSINESS PLAN IF THE
ACQUISITION TAKES PLACE. Rather than being focused on a single property, the
company will be an infinite life entity focused on the management of at least
the seven properties of the former "Trudy Pat" programs. 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. Prior to the
dates that title to the properties securing the original program loans was
taken, National was entitled to an annual loan servicing fee equal to one
percent of the original loan amounts. When title to the properties was taken
on behalf of the programs, even though the loans no longer existed, National
continued to charge the same rate as the servicing fee for the asset
management services it provided to investors. The investors in each of the
programs had become the beneficial tenant-in-common owners of real estate,
most of which was undeveloped. While it had no obligation to do so, in order
to assist the beneficial owners in protecting their real estate assets and
readying them for sale or development, National assumed the duties of an
asset manager after title was taken to the properties. In this capacity,
National obtained information from investors about their preferences in
regard to development or sale of the properties, acted as assessing agent to
raise funds necessary to pay property taxes, insurance and other costs of
property ownership.
The annual fees payable to National are currently $50,000 for
Sacramento/Delta Greens; $300,000 for Oceanside; $65,000 for
Yosemite/Ahwahnee I; $135,000 for Yosemite/Ahwahnee II; $100,000 for Mori
Point; $140,000 for Cypress Lakes; $150,000 for Palmdale/Joshua Ranch; $5,000
for Esperanza; $3,153 for Stacey Rose A; and $850 for Stacey Rose B.
In addition to the one percent fee, compensation has been earned for
property management services provided to the Oceanside program ($896,000
accrued since the date of ownership (November 1993) through June 30, 1998;
$876,000 actually paid) and Yosemite/Ahwahnee properties ($594,535 accrued
since the date of ownership (September
4
<PAGE>
1995); $-0- actually paid) by officers and employees of National in their
capacities as officers and employees of Oceanside Development, Inc. and
Ahwahnee Golf Course & Resort, Inc. Those property management services
included, without limitation, solicitation, engagement, coordination and
supervision of: entitlement and permit processing, environmental,
engineering, planning, architectural, construction, marketing, appraisal,
legal, accounting and other experts as needed for each project; due diligence
on potential service providers; assistance in presentations and applications
for approvals to governmental agencies; packaging and documenting the status
of a project for potential financing, sale or joint venture; supervising and
managing the operational activities for construction projects on the
Oceanside and Yosemite/Ahwahnee projects; and contract negotiations and
documentation. To the extent similar property specific services were
provided to the other programs, they were provided without extra charge
because the necessary activities were less regular and less operationally
intense.
In the future, compensation will be paid to officers of the company in
the form of salaries (aggregating $560,000 annually plus contractual bonus
opportunities and salary increases), stock options and other benefits. See
"Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for details of stock options and other benefits.
These salaries and other forms of compensation will be payable to management
of the company even if one or more of the properties acquired in the
acquisition is subsequently sold.
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
NATIONAL'S JUDGMENT REGARDING THE DIFFERENCES IN YOSEMITE/AHWAHNEE
APPRAISALS MAY BE INCORRECT WHICH MEANS THE EXCHANGE VALUES FOR THESE
PROPERTIES MAY BE TOO LOW OR TOO HIGH. National reviewed the updated March
1998 appraisal of the Yosemite/Ahwahnee properties which reflected an
aggregate "as is" appraised value of $20,246,000 and the October 1996
appraisal which reflected an "as is" aggregate appraised value of $4,000,000.
The results of those appraisals clearly differed from each other, and, in
management's judgment, the difference could not be accounted for by improving
market conditions. Some of the parcels, including the golf course, were
subsequently sold, on June 5, 1998, to the Oceanside Program investors to
obtain working capital. Based on its review of all appraisals, National
concluded that the properties currently owned by the Yosemite/Ahwahnee I and
II Programs have values of $5,486,000 ($1,782,950 and $3,703,050,
respectively), and the parcels currently owned by the Oceanside Program have
a value of $5,080,000. National believes its approach is reasonable and has
received an opinion from Houlihan Valuation Advisors that the allocation of
the shares among the programs is fair.
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 June 30, 1998: Sacramento/Delta
Greens -approximately $27,000; Yosemite/Ahwahnee (combined) - approximately
$500,000; Mori Point - approximately $165,000; Cypress lakes - approximately
$204,000; Palmdale (Joshua Ranch) - approximately $63,000; Esperanza -
approximately
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$20,000; and Stacey Rose - approximately $30,000. Annual payments required
for all the properties for current taxes (including amounts currently due on
five-year payment plans) total approximately $549,000. In the case of
Sacramento/Delta Greens, Yosemite/Ahwahnee, Mori Point, Palmdale/Joshua Ranch
and Stacey Rose properties, National has entered into statutorily authorized
5-year payment plans with the applicable taxing authorities.
CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless a minimum
of approximately $[4,715,000] from sale of certain assets of the programs or
from the exercise of warrants become available, the company will not be able
to proceed with its entire business plan. The company will also need
financing from other sources to complete its plan. Financing sources are not
predictable and interest rates or other costs of financing may be
prohibitive. Neither the programs nor the company have received any
commitment from other sources.
FEDERAL, STATE AND LOCAL ENVIRONMENTAL AND OTHER LAWS MAY REQUIRE
EXPENSIVE HAZARDOUS SUBSTANCE CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC
IMPROVEMENTS. We have not conducted any environmental audits on the
properties. As a result, there may be environmental liability. Local
governments have required residential developers to pay assessments for
streets, schools and parks which increase the cost of development. Increased
costs can have a negative affect on the company's sale of residential lots.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. The company will carry customary
insurance for its properties. Certain extraordinary losses such as
earthquakes and floods may be uninsurable or too expensive to insure. The
company does not plan to carry earthquake or flood insurance. If an
uninsured loss occurs, the company would lose capital as well as revenues,
and would still owe other debts related to the property affected, if any.
THE DEVELOPMENT OF ADDITIONAL PROJECTS MAY OCCUR. We may develop
additional projects in the future, although we have no immediate plans to do
so. 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 $[1,818,684] BY THE COMPANY. This represents accrued fees and expenses
from the programs which National has not cancelled. This amount is due and
payable and the company intends to start paying it after the Acquisition, but
only from operating revenues or proceeds from the sale of assets, but not
from working capital generated by the proceeds of unit sales.
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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 approval of a new tentative
map, 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. Since some were identified, changes to the tentative development
plans have been made that will reduce or eliminate any damage to the habitat.
A new tentative map needs to be approved by the City. The longer this
process takes, the longer it will be until the company can make money from
the property.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE SACRAMENTO/DELTA GREENS
PROPERTY MAY CAUSE THE COMPANY TO INCUR SUBSTANTIAL CARRYING COSTS UNTIL THE
LOTS CAN BE SOLD. Changing market conditions may increase the difficulty of
selling the lots. If the company chooses to build homes on the lots, delays
in construction, the lack of reasonably priced construction or mortgage
financing, and the general California economy could lengthen the holding
period for the lots. This would mean a delay in realizing cash from the
business operations. The average carrying costs, including property taxes,
management and servicing related fees, for this property has averaged
approximately $10,000 per month over the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, our properties may be sold at a loss. The location of the company's
lots, the presence of other competition, customer acceptance and pricing are
all factors affecting success. Competitors may have better financial,
managerial and other resources, affecting our ability to successfully compete.
Sacramento/Delta Greens is a proposed residential developments and
represent over 5% of the assets of the company. Although there can be no
assurances and net revenues from Sacramento/Delta Greens may equal or exceed
$3,600,000 over the following 36 months.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to (i) finance engineering and endangered species studies
(estimated by management to cost approximately $175,000). 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 YOSEMITE/AHWAHNEE PROPERTIES
PERMITS TO DEVELOP THE CONDOMINIUM-TYPE TIMESHARE ASPECT OF THE RESORT
HAVE NOT YET BEEN OBTAINED. The Yosemite/Ahwahnee property has a final map
on 32 remaining single family estate lots and a use permit for a 600 space
recreational vehicle park. Planning is underway for vacation villa timeshare
units utilizing part of the allocated use permit space for recreational
vehicles. Additional planned usage such as traditional, attached timeshare
units will require
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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 15% of the assets of the
company.
RESORT DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF REASONS AND COULD
RESULT IN LOSSES. In addition to normal real estate risks, financing is hard
to obtain, and the lodging industry can be unpredictable, seasonal and very
competitive. Without additional financing or capital, the company will not
be able to develop its resort projects as part of its growth strategy.
Economic conditions, changes in travel patterns, extreme weather conditions,
labor and other variable costs can all affect revenues and profits. For
example, Spring through Fall at the Yosemite/Ahwahnee property are the
periods of highest occupancy. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues.
The recreational vehicle park at Yosemite/Ahwahnee may generate as much
as ten percent of the revenue of the company, yet this portion of the project
represents less than five percent of the assets of the company.
RISKS RELATING TO TIMESHARE OPERATIONS. Certain factors affecting
timeshare operations could result in losses. Negative press surrounding the
remarketing of timeshares might negatively impact sales and operations. Also,
marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
In addition, according to the American Resort Development Association,
there is a tendency for timeshare owners to default more often on their
timeshare loans then homebuyers who borrow to buy a home. If a buyer
defaults, we would incur costs in remarketing the timeshare.
We do not have an exchange network to enhance marketing appeal. If we
cannot offer such a network in the future, we may be at a competitive
disadvantage.
The timeshare industry is extremely competitive and we may not be able
to secure development financing on acceptable terms.
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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 $350,000) annually and
complete the construction of additional recreational vehicle sites and 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 the City of Pacifica is expensive and time consuming. Mori
Point had a specific plan and tentative map to build a hotel/conference
center which expired in 1991. These approvals must be reinstated prior to
construction on the property.
HOTEL/CONFERENCE CENTER DEVELOPMENT IS UNPREDICTABLE FOR A VARIETY OF
REASONS AND COULD RESULT IN LOSSES. In addition to normal real estate risks,
financing is hard to obtain, and the lodging industry can be unpredictable,
seasonal and very competitive. Without additional financing or capital, the
company will not be able to develop its hotel/conference center project as
part of its growth strategy. Economic conditions, changes in travel
patterns, extreme weather conditions, labor and other variable costs can all
affect revenues and profits. Seasonality can be expected to cause quarterly
fluctuations in the company's revenues. At the hotel/conference center
property at Mori Point, we may be competing against well-known chains and
extended-stay inns.
Mori Point represents approximately 20% of the assets of the company
and, assuming it is operated as a hotel/conference center, its revenues could
ultimately 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.
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REAL ESTATE RISKS OF CYPRESS LAKES PROPERTY
THE VESTED TENTATIVE MAP NEEDS MODIFICATION AND BUILD OUT OF THE
PROPERTY WILL BE EXPENSIVE. Due to being located in a 100-year flood plain,
the property requires a levee to be constructed around its perimeter which is
very expensive to construct. It may be desirable to change the vesting
tentative map if the costs can be reduced significantly. However, any
changes in the existing plan could subject the project to public hearings
which might result in additional costs being placed on the project. This
would further increase the high front-end financial requirements.
Additionally, such modifications might not be approved.
Cypress Lakes is a proposed master-planned community and represents more
than 20% of the assets of the Company. Joint venture partners would have to
be brought in by the Company to help with the large capital requirements of
such a large project. It may be difficult to find substantial
builder/developers who have the financial ability to purchase or develop the
project. Changing market conditions may increase the difficulty in selling
lots.
Should the Company determine to build out the project, delays in
construction, reasonably priced mortgage and construction financing and the
local and general California economy could lengthen the holding period for
the lots. This would mean delays in realizing cash from the business
operations.
RISKS AFFECTING OPERATION OF A GOLF COURSE. When, and if, the golf
course is developed, it will face competition from the golf courses within a
25 mile radius. Seasonality, weather and course conditions will affect the
operations of the company. 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.
RISKS OF RESIDENTIAL DEVELOPMENT. Totaling 1,330 lots, a large supply
of lots would be available, and due to the cyclical nature of the housing
industry, demand may not stay in sync with supply. This could result in
needing to sell properties at a loss. Due to the size of the project, it
could take between six and ten years to complete, which would subject it to
new competitors entering the marketplace during the sales period.
REAL ESTATE RISKS OF PALMDALE/JOSHUA RANCH PROPERTY
A FINAL TRACT MAP MUST BE RECORDED. After several years of effort by
National, the vested tentative map was approved by the City of Palmdale at a
hearing before the planning commission in early July 1998. A final recorded
map must be secured by National or a buyer in order to build on the property.
Final engineering, soils, utility and various improvement studies will need
to be conducted in order to record the final map.
PERMITS TO DEVELOP THE PROPERTY NEED TO BE OBTAINED. A final recorded
map, which could take nine to twelve months after starting the process, will
be required prior to construction. Due to the size of this project which
encompasses some 739.6 acres and is currently planned for 539
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lots, additional grading studies, soils investigation and utility planning
needs to be done which could negatively impact the cost of this large-scale
development.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS MAY CAUSE THE COMPANY TO INCUR
SUBSTANTIAL CARRYING COSTS UNTIL THE LOTS CAN BE SOLD. Finding
builder/developers that have the financial strength to handle this size
project can be difficult. Changing market conditions, the lack of
reasonably-priced construction or mortgage financing and the general or local
market conditions could lengthen the holding period for lots. This would
mean a delay in realizing cash from business operations. The average
carrying costs, including property taxes, predevelopment and asset management
services for this Property have averaged approximately $16,300 per month over
the past three years.
RISKS OF RESIDENTIAL DEVELOPMENT. The market for residential real
estate is cyclical and the residential lot development industry is highly
competitive. If the demand for new lots does not keep pace with competitive
supply, the Property may be sold at a loss. The location of the lots, the
presence of other competition, customer acceptance and pricing are all
factors affecting success. Competitors may have better financial, managerial
and other resources affecting the Company's ability to successfully compete.
Palmdale/Joshua Ranch is a proposed residential development and
represents about 10% of the assets of the Company.
ADDITIONAL SPECIFIC RISKS. There is a risk that adequate funds will not
be available to pay for or finance (i) engineering, soils and utility studies
which is estimated to cost approximately $140,000, and (ii) another risk is
whether the lots to be developed may appeal to project builders.
REAL ESTATE RISKS OF ESPERANZA PROPERTY
RISKS OF COMMERCIAL DEVELOPMENT. The material risks associated with the
development of the Esperanza Property are (i) as of June 30, 1998,
approximately $23,000 of property taxes are delinquent and must be brought
current or a statutory five-year payment plan must be arranged with the
County of Riverside to avoid loss of the Property for delinquent property
taxes; and (ii) despite a strong economy, rents and values for many retail
properties are expected to remain soft in 1998. Pressure on rents brought
about by over building, weakness in demand for space and store closures
caused by lagging profits are the forces causing a soft market.
ADDITIONAL SPECIFIC RISKS. Within the City of Victorville there are
approximately 3,250 acres zoned for commercial use, of which 60% remains
available for development. Victorville is home to the largest enclosed
regional shopping center between San Bernardino and Las Vegas, which is known
as The Mall of Victor Valley. These commercial sites represent significant
competition to the Esperanza project. There are more than 5,400 acres within
the city limits of Victorville zoned for light and heavy industrial use.
Nearly nine percent of this 5,400 acres of land is vacant and is available in
parcels ranging in size from one-half to five hundred acres.
REAL ESTATE RISKS OF STACEY ROSE PROPERTIES
RISKS OF RESIDENTIAL DEVELOPMENT. The material risks associated with
the development of the Stacey Rose Properties are (i) as of June 30, 1998,
approximately $30,000 of property taxes
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are delinquent and must be brought current or a statutory five-year payment
plan must be arranged with the County of Riverside to avoid loss of the
Properties for delinquent property taxes; (ii) it is estimated that it may
cost about $50,000 to finalize a tentative tract map on the parcels; (iii) a
substantial, and potentially expensive, sales and marketing effort will be
necessary to sell homes constructed on the properties if a bulk sale of the
lots is not made; (iv) the Properties are located in a lower income
residential area; and (v) increasing government fees and assessments for
streets, schools, parks and other infrastructure requirements could increase
the cost of lots to the company, thereby increasing the sales price of the
lots which will delay market absorption.
ADDITIONAL SPECIFIC RISKS. There is a risk that (i) adequate funds will
not be available to finalize a tentative tract map on the parcels
(approximately $50,000); (ii) the project will not appeal to project
builders; and (iii) home financing at reasonable costs may not be available.
There is also a risk that the development and sale of lots or home 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.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The company's
certificate of incorporation, as well as Delaware law, prohibits certain
business combinations with owners of more than 15% of the outstanding voting
stock of the company ("interested stockholders") within the three year period
immediately prior to the date on which the interested stockholder became an
interested stockholder. These restrictions on certain business combinations
may deter potential purchasers who seek control of the company.
SUPERMAJORITY VOTES. Changes to the company's certificate of
incorporation which cover anti-takeover provisions require the approval of
two-thirds of the company's voting stock. This restriction also may deter
potential purchasers who seek control of the company.
In addition to the anti-takeover provisions, the Delaware law, as well
as the charter documents, limit the liability of directors and officers to
shareholders. This limitation of liability may exceed the protections
National enjoys under the programs' servicing agreements.
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FAIRNESS TO INVESTORS IN THE STACEY ROSE B 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 units to be issued to reflect the exchange
value of a program is arbitrary, the trading price of the shares included in
the units initially is likely to be substantially below the $20 value
arbitrarily assigned to the units. In our opinion, the exchange values
offered to investors for their assets allow for an equitable allocation of
the [1,403,321] units ([1,380,175] units if only the "Trudy Pat" programs
participate) 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. After the acquisition, a total of
[0.56]% of the outstanding stock of the Company will be held by Stacey Rose B
investors. After the acquisition, founders of the company (principals,
employees, and consultants of National) will hold less than 15%. Founders'
shares were purchased for $.01 per share. Among the properties, National and
its principals have forgiven over $3,495,000 of expenses and accrued fees of
which a total of approximately $2,800,000 was earned for asset management and
property management services after the loans defaulted and before the
Ownership Dates for the properties. The balance was earned after foreclosure
for asset and property management services and expenses. Of such amount,
$17,267 is attributable to fees owed by Stacey Rose B investors. National
believes that the amount paid for the property management services is no
greater than the amount that a third party would charge;
- the current appraised value of the Stacey Rose B real estate assets
($252,064) (as well as the real estate assets of the other programs) and the
fact that financing is needed to further the property's development;
- the probability that the transaction will have minimal, if any,
negative tax affect on investors. 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;
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- while the Stacey Rose B Program (as well as the other programs)
were originally formed to have a two to four year finite life which should
have ended between 1990 and 1992 and the investors expected to receive a
return of their investment from the original borrower, the company is an
infinite life entity which will not return the program investors' original
investment based on a sale or refinancing of the properties underlying the
original programs. However, after the borrowers defaulted on the "Trudy Pat"
loans, the investors became beneficial owners of the underlying properties
with the need to complete development, manage or otherwise ready the
properties for sale. Those endeavors had no fixed timetable and, thus, the
finite life aspect of their original investments was significantly changed.
Therefore, the infinite life aspect of the company is not viewed by National
to be a material change from the investors' CURRENT situation;
- the acquisition will cause fundamental changes in the business plan
of the Stacey Rose B Program. Rather than being focused on the development
of a single property for residential purposes, the company will be focused on
the management of at least seven properties. Thus, the poor performance of a
particular property may affect the Company's operations as a whole regardless
of the performance of the Stacey Rose B property. Further, there will be no
particular time when an Investor can expect its interest to be automatically
liquidated;
- the fact that the Victorville market is not yet attractive to
residential home builders;
- investors will not be able to vote on changes to or dispositions of
the Stacey Rose B property or borrowing secured by that property. Those
decisions will be made by the Board of Directors or management of the
Company. Further, as investors in a larger entity, relative voting power will
be diluted;
- future cash distributions will be based on the company's earnings
and the decision of the Board of Directors to pay dividends rather than the
performance or sale of the Stacey Rose B 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 units
in the acquisition and not the amount of the consideration paid to program
investors in the acquisition as a whole. See "Background and Reasons for the
Acquisition" at page __ of the Prospectus.
National reviewed the arbitrary value you will receive in connection
with the acquisition and compared it with what you might receive if (i) the
Stacey Rose B property were operated "as is" ($1,307 per $10,000 of Adjusted
Outstanding Investment), (ii) the Stacey Rose B property was sold in a quick
sale in three months or less ($1,307 per $10,000 of Adjusted Outstanding
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Investment), or (iii) the Stacey Rose B property was sold at the appraised
value used to determine the Stacey Rose B exchange value ($3,975 per $10,000
of Adjusted Outstanding Investment). Based on that review, and even
acknowledging that, initially, the company's shares included in the units
issued in the acquisition would likely trade substantially below the
arbitrary $20 issuance value for the units, National believes that there is a
higher probability of realizing value from the Stacey Rose property through
the acquisition than through the other alternatives. This belief is based on
the expectation that some financing opportunities will become available based
on the form of the entity and the time pressure associated with forced sales
or liquidation will be relieved. See "Background and Reasons for the
Acquisition -- Comparison to Alternatives" and "Recommendation of National
and Fairness Determination" at pages __ and __ of the Prospectus. Based on
this comparison, National concluded that the acquisition is financially fair.
THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE FAIRNESS ANALYSIS FOR THIS
PROGRAM AND FOR ANY OF THE OTHER FOUR PROGRAMS PROPOSED TO BE INCLUDED IN THE
ACQUISITION.
CALCULATION OF EXCHANGE VALUE
The Exchange Value of the Stacey Rose B Program (as well as each of the
other Programs) is essentially the consideration at which the Company is
offering in exchange for the real estate assets, cash reserves, certain
liabilities and business of the Program. The value is reflected as a number
of units of the Company (in the case of the Stacey Rose B Program, 9,711
units) multiplied by an arbitrary $20 per unit value.
The Exchange Value for the Stacey Rose B Program was calculated as
follows: appraised value of the Stacey Rose B Program property at March 31,
1998, plus book value of other Stacey Rose B Program assets at June 30, 1998,
less Stacey Rose B Program liabilities at June 30, 1998.
The following table summarizes the calculation of the Exchange Value of
the Stacey Rose B 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>
$ 252,064 $[ (57,847)] $ [194,217] $ [4,568](3)
</TABLE>
- ------------
(1) Reflects independent appraisal as of March 1998.
(2) The following table quantifies the adjustments to appraised values made in
determining Stacey Rose B property's Exchange Value as of June 30,1998.
<TABLE>
<CAPTION>
Book Assets - Book Liabilities = Net Other Assets
(6/30/98)* (6/30/98)* and Liabilities
------------ ---------------- ----------------
<S> <C> <C>
$ 21,535 $ (79,382) $ (57,847)
</TABLE>
15
<PAGE>
* 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 Stacey Rose B property.
(3) Equals [228] Company shares arbitrarily valued at $20 per unit.
ALLOCATION OF SHARES
The [1,403,321] shares of Company common stock being offered to
Investors in the Acquisition represent over 80% of the Company's shares (94%
if all warrants are exercised) 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 Programs
pro rata in accordance with Exchange Values. The Stacey Rose B Program will
be allocated [9,711] shares.
The shares allocated to the Stacey Rose B Program will be allocated
among Investors in the Program based on their respective pro rata investments
in the Program (taking into account assessments paid and unpaid, as well as
interest accrued to each Investor through the date beneficial ownership of
the Program's Property was taken for the Investors) as adjusted for voluntary
advances. An Investor in the Stacey Rose B Program with an adjusted
investment amount of $10,000 will receive [228] units in the Company
arbitrarily valued at $20 per unit.
Neither National nor the Company's founders have any economic
interest in the Stacey Rose B Program except for National's contractual right
to asset management fees and the $15,753 of tenancy-in-common interests
purchased by National at the inception of the Program for which interests
National will receive units in the Acquisition pro rata with the other Stacey
Rose Investors. National will undertake not to exercise the warrants in the
units.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Stacey Rose B Program (including accrued but unpaid
interest) plus the amount of assessments and advances paid by Investors at
June 30,1998, 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
Outstanding
After the
Amount Real Estate Acquisition if
Owed plus Appraised Exchange No. of Shares All Programs
Name of Program Assessments Value Value(1) Allocated(1)(2) Participate
--------------- ----------- ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Stacey Rose B $ 425,188 $ 252,064 $ [194,217] [9,711] [0.56]%
</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 [323,676] Company shares after the
Acquisition (18.74% of the outstanding shares post-Acquisition, 5.45% if
all warrants are exercised) which, if valued at $20 per share,
16
<PAGE>
would have an aggregate value of $[6,473,520]. The Company was formed,
and shares were purchased by the founders for $.01 per share, prior to
making the Acquisition proposal. 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 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>
Previously
Name of Program Cancelled
------------
<S> <C>
Sacramento/Delta Greens $ 500,000
Oceanside -0-
Yosemite/Ahwahnee I 72,158
Yosemite/Ahwahnee II 1,157,867
Mori Point 461,589
Cypress Lakes 1,120,000
Palmdale (Joshua Ranch) -0-
Esperanza 102,134
Stacey Rose A 64,293
Stacey Rose B 17,267
-----------
TOTAL $ 3,495,308
-----------
-----------
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees, [0.49]% of the total shares to
be owned by the Company's founders after the Acquisition ([1,599] shares if
all programs participate) 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, and for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Incurred
Actually Incurred Actually Actually for Six
Incurred for Paid for for Year Paid for Incurred for Paid for Months Actually Paid
Year Ended Year Ended Ended Year Ended Year Ended Year Ended Ended in Six Months
Name of Program 12/31/95(1) 12/31/95(2) 12/31/96(1) 12/31/96(2) 12/31/97(1) 12/31/97(2) 6/30/98 Ended 6/30/98
--------------- ------------ ----------- ----------- ----------- ------------ ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stacey Rose B $3,153(2) $-0- $3,153(2) $-0- $3,153(2) $-0- $1,576 $-0-
</TABLE>
17
<PAGE>
- -------------
(1) These amounts represent accrued asset management fees.
(2) Approximately $3,953 per year if the Acquisition had been completed during
the above periods including $2,056 of estimated salaries to be paid by the
Company to its officers and which were allocated to the Sacramento/Delta
Greens Program based on Exchange Values. No cash would have been available
to pay officers' bonuses or dividends to shareholders.
HISTORICAL CASH DISTRIBUTIONS TO INVESTORS/
EFFECT OF THE ACQUISITION
The following table sets forth the cash distributions made to Investors
during each of the years ended December 31, 1992, 1993, 1994, 1995, 1996 and
1997:
<TABLE>
<CAPTION>
Prior to
1992 1992 1993 1994 1995 1996 1997 Total
--------- --------- --------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stacey Rose B
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $ 64,899 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 64,899
</TABLE>
There have been no recent distributions to Investors. The Acquisition
is not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about the Sacramento/Delta Greens Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
<PAGE>
OFFICIAL INVESTOR BALLOT
[attach mailing label here The Primary Investor named on this
for each distinct investor] label is listed as a participant in one
or more of the Programs involved in the
Acquisition and is eligible to vote and
subscribe.
THE SOLICITATION OF VOTES EXPIRES AT 11:59 PM,
PACIFIC TIME, ON ___________, 1998, UNLESS EXTENDED (THE "EXPIRATION TIME").
Pursuant to the Prospectus dated _________, 1998 (the AProspectus"), which
accompanied the original mailing of this Official Investor Ballot, American
Family Holdings, Inc. (the ACompany") is proposing to acquire the assets,
(including, without limitation, real estate and cash reserves), certain
liabilities and business activities of the Programs (the AAcquisition") in
exchange for shares of the Company's common stock (the AShares"). 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.
<TABLE>
Item 21 Exhibits and Financial Statement Schedules
<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*
2.5 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Cypress Lakes Property
2.6 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Esperanza Property
2.7 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Stacey Rose at Victorville Property
2.8 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Joshua Ranch 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*
5.2 Opinion of Arter & Hadden LLP regarding legality of Units
8.1 Form of Arter & Hadden LLP tax opinion*
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
8.2 Revised form of Arter & Hadden LLP tax opinion*
10.1 Signed Employment Agreement of David Lasker*
10.2 Signed Employment Agreement of James Orth*
10.3 Signed Employment Agreement of L.C. "Bob" Albertson, Jr.*
10.4 1997 Stock Option and Incentive Plan for Officers, Independent
Directors and Employees of American Family Holdings, Inc. and
Affiliates*
10.5 Form of Employment Agreement of Mark Kawanami*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Arter & Hadden LLP as counsel contained in Exhibit
5.1*
23.2 Consent of BDO Seidman, LLP as independent accountants*
23.3 Consent of Houlihan Valuation Advisers*
23.4 Consent of David E. Lane, Inc. (re Delta Greens appraisal)*
23.5 Consent of Boznanski and Company (re Oceanside appraisal)*
23.6 Consent of Arnold Associates (re Yosemite/Ahwahnee
appraisals)*
23.7 Consent of PKF Consulting (re Mori Point appraisal)*
23.8 Consent of The Mentor Group, Inc. (re Yosemite/Ahwahnee
appraisal)*
23.9 Consent of BDO Seidman, LLP as independent accountants (re
Amendment No. 1)*
23.10 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 2)*
23.11 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 3)*
23.12 Consent of Houlihan Valuation Advisers (re Amendment No. 3)*
23.13 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 4)*
23.14 Consent of Houlihan Valuation Advisers (re Amendment No. 4)*
23.15 Consent of Likas & Associates (re Esperanza appraisal)
23.16 Consent of Likas & Associates (re Stacey Rose appraisals)
23.17 Consent of Likas & Associates (re Palmdale/Joshua Ranch
appraisal)
23.18 Consent of Sedway Group (re Cypress Lakes appraisal)
23.19 Consent of PKF Consulting (re updated Mori Point appraisal)
23.20 Consent of David E. Lane, Inc. (re updated Delta Greens
appraisal)
23.21 Consent of Arnold Associates (re updated Yosemite/Ahwahnee
appraisals)
23.22 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 5)
23.23 Consent of Houlihan Valuation Advisers (re Amendment No. 5)
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*
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
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
Pacifica, California, value dated as of May 1, 1997*
99.6 Appraisal of Ahwahnee Resort and Country Club, value dated
October 10, 1996*
99.7 Schedule E to Prior Performance Schedules*
99.8 Revised Schedule E to Prior Performance Schedules*
99.9 Updated Appraisal of Fee Simple Estate in 104.98 Acre Parcel
Designated for Hotel Development, Located at Mori Point in
Pacifica, California, value dated as of March 31, 1998
99.10 Complete, Self-Contained Appraisal of 539 Single-Family Lots
Situated within Joshua Ranch, Palmdale, California, value
dated as of March 31, 1998
99.11 Appraisal Report Cypress lakes -- A Proposed Residential
Community with Golf Course, Contra Costa County, California,
value dated as of March 31, 1998
99.12 Complete, Self-Contained Appraisal of Esperanza at
Victorville, 6.12 Acres of Commercially Zoned Land,
Victorville, California, value dated as of March 31, 1998
99.13 Complete, Self-Contained Appraisal of Stacey Rose at
Victorville, 32 Acres of Residentially Zoned Land,
Victorville, California, value dated as of March 31, 1998
99.14 Updated Appraisal of "Delta Greens" Residential Subdivision,
Sacramento, California, value dated as of March 31, 1998
99.15 Updated Appraisal Report of Ahwahnee Golf Course and Resort,
Madera County, California, value dated as of March 31, 1998
[99.16 Revised Schedule E to Prior Performance Schedules]
</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:
(1) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
II-3
<PAGE>
(2) to reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement; and
(3) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(B) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the official BONA
FIDE offer thereof.
(C) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(ii) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of competent jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) Other Part II, Form S-4, Undertakings.
(i) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the Prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first-class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the date of the request.
(ii) 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 August 3,
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 August 3, 1998
- --------------------------- Officer
David G. Lasker
Co-Chairman of the Board,
/s/ James N. Orth Chief Executive Officer and
- --------------------------- Secretary August 3, 1998
James N. Orth
L.C. "Bob" Albertson, Jr.* Executive Vice President and
- --------------------------- Director August 3, 1998
L.C. "Bob" Albertson, Jr.
Charles F. Hanson* August 3, 1998
- --------------------------- Director
Charles F. Hanson
Dudley Muth*
- --------------------------- Director August 3, 1998
Dudley Muth
John G. LeSieur, III*
- --------------------------- Director August 3, 1998
John G. LeSieur, III
*By /s/ David G. Lasker
------------------------------------------
David G. Lasker, Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
<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*
2.5 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Cypress Lakes Property
2.6 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Esperanza Property
2.7 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Stacey Rose at Victorville Property
2.8 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Joshua Ranch 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*
5.2 Opinion of Arter & Hadden LLP regarding legality of Units
8.1 Form of Arter & Hadden LLP tax opinion*
8.2 Revised form of Arter & Hadden LLP tax opinion*
10.1 Signed Employment Agreement of David Lasker*
10.2 Signed Employment Agreement of James Orth*
10.3 Signed Employment Agreement of L.C. "Bob" Albertson, Jr.*
10.4 1997 Stock Option and Incentive Plan for Officers, Independent
Directors and Employees of American Family Holdings, Inc. and
Affiliates*
10.5 Form of Employment Agreement of Mark Kawanami*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Arter & Hadden LLP as counsel contained in Exhibit 5.1*
23.2 Consent of BDO Seidman, LLP as independent accountants*
23.3 Consent of Houlihan Valuation Advisers*
23.4 Consent of David E. Lane, Inc. (re Delta Greens appraisal)*
23.5 Consent of Boznanski and Company (re Oceanside appraisal)*
23.6 Consent of Arnold Associates (re Yosemite/Ahwahnee appraisals)*
23.7 Consent of PKF Consulting (re Mori Point appraisal)*
23.8 Consent of The Mentor Group, Inc. (re Yosemite/Ahwahnee appraisal)*
</TABLE>
<PAGE>
<TABLE>
<S> <C>
23.9 Consent of BDO Seidman, LLP as independent accountants (re
Amendment No. 1)*
23.10 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 2)*
23.11 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 3)*
23.12 Consent of Houlihan Valuation Advisers (re Amendment No. 3)*
23.13 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 4)*
23.14 Consent of Houlihan Valuation Advisers (re Amendment No. 4)*
23.15 Consent of Likas & Associates (re Esperanza appraisal)
23.16 Consent of Likas & Associates (re Stacey Rose appraisals)
23.17 Consent of Likas & Associates (re Palmdale/Joshua Ranch appraisal)
23.18 Consent of PKF Consulting (re updated Mori Point appraisal)
23.19 Consent of David E. Lane, Inc. (re updated Delta Greens appraisal)
23.20 Consent of Arnold Associates (re updated Yosemite/Ahwahnee
appraisals)
23.21 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 5)
23.22 Consent of Houlihan Valuation Advisers (re Amendment No. 5)
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 Pacifica,
California, value dated as of May 1, 1997*
99.6 Appraisal of Ahwahnee Resort and Country Club, value dated October
10, 1996*
99.7 Schedule E to Prior Performance Schedules*
99.8 Revised Schedule E to Prior Performance Schedules*
99.9 Updated Appraisal of Fee Simple Estate in 104.98 Acre Parcel
Designated for Hotel Development, Located at Mori Point in
Pacifica, California, value dated as of March 31, 1998
99.10 Complete, Self-Contained Appraisal of 539 Single-Family Lots
Situated within Joshua Ranch, Palmdale, California, value dated as
of March 31, 1998
</TABLE>
<PAGE>
<TABLE>
<S> <C>
99.11 Complete, Self-Contained Appraisal of Stacey Rose at Victorville,
32 Acres of Residentially Zoned Land, Victorville, California,
value dated as of March 31, 1998
99.12 Complete, Self-Contained Appraisal of Esperanza at Victorville,
6.12 Acres of Commercially Zoned Land, Victorville, California,
value dated as of March 31, 1998
99.13 Updated Appraisal of "Delta Greens" Residential Subdivision,
Sacramento, California, value dated as of March 31, 1998
99.14 Updated Appraisal Report of Ahwahnee Golf Course and Resort, Madera
County, California, value dated as of March 31, 1998
[99.15 Revised Schedule E to Prior Performance Schedules]
</TABLE>
* Previously filed
** To be filed by amendment
<PAGE>
AGREEMENT OF PURCHASE AND SALE
AND JOINT ESCROW INSTRUCTIONS
BY AND BETWEEN
NATIONAL INVESTORS FINANCIAL, INC.,
a California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___,
AS SELLER,
AND
CYPRESS LAKES, INC.,
a California corporation,
AS BUYER
RELATING TO
PROPERTY LOCATED IN
Contra Costa County, California
known as
"CYPRESS LAKES AND COUNTRY CLUB "
DATED AS OF
__________________, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Substance of Transactions . . . . . . . . . . . . . . . . . . . . . . . 5
3. Exchange Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4. Escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5. Cancellation Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . 6
6. Deliveries to Escrow Holder . . . . . . . . . . . . . . . . . . . . . . . . 6
6.1 By Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.2 By Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.3 By Buyer and Seller . . . . . . . . . . . . . . . . . . . . . . . . . . 7
7. Condition of Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
7.1 Permitted Exceptions. . . . . . . . . . . . . . . . . . . . . . . . . . 7
7.2 Title Provided by Seller. . . . . . . . . . . . . . . . . . . . . . . . 7
8. Conditions to the Close of Escrow . . . . . . . . . . . . . . . . . . . . . 7
8.1 Conditions Precedent to Buyer's Obligations . . . . . . . . . . . . . . 7
8.2 Conditions Precedent to Seller's Obligations. . . . . . . . . . . . . . 8
9. Approval of Seller's Constituents . . . . . . . . . . . . . . . . . . . . . 8
10. Property "As-Is. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
10.1 No Side Agreements Or Representations; As-Is Purchase . . . . . . . . 9
10.2 Disclosures; Specific Acknowledgment Regarding Condition
of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
11. Title Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
12. Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
13. Disbursements and Other Actions. . . . . . . . . . . . . . . . . . . . . .13
13.1 Escrow Holder.. . . . . . . . . . . . . . . . . . . . . . . . . . . .13
13.2 By Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . .13
13.3 Possession.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
14. Joint Representations and Warranties . . . . . . . . . . . . . . . . . . .14
14.1 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
14.2 Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
14.3 Due Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
14.4 Valid and Binding . . . . . . . . . . . . . . . . . . . . . . . . . .14
14.5 Broker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
15. Seller's Warranties and Representations. . . . . . . . . . . . . . . . . .14
15.1 Non-Foreign Entity. . . . . . . . . . . . . . . . . . . . . . . . . .15
15.2 Hazardous Substances. . . . . . . . . . . . . . . . . . . . . . . . .15
15.3 Clean-up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
15.4 Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
16. Pre-Closing Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.1 No Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.2 No Alterations. . . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.3 Maintenance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.4 Obligations Under Contracts.. . . . . . . . . . . . . . . . . . . . .15
16.5 Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
17. Condemnation and Destruction . . . . . . . . . . . . . . . . . . . . . . .16
17.1 Eminent Domain or Taking. . . . . . . . . . . . . . . . . . . . . . .16
17.2 Damage or Destruction . . . . . . . . . . . . . . . . . . . . . . . .16
18 Utilities and Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . .17
18.1 Utilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
18.2 Refundable Deposits. . . . . . . . . . . . . . . . . . . . . . . . . .17
19. Mediation of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . .17
20. Arbitration of Disputes: . . . . . . . . . . . . . . . . . . . . . . . . .17
21. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
22. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.1 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.2 Partial Invalidity. . . . . . . . . . . . . . . . . . . . . . . . . .19
23.3 Possession of the Property. . . . . . . . . . . . . . . . . . . . . .19
23.4 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.5 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . .19
23.6 Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.7 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.8 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . .20
23.9 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
23.10 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . .20
23.11 Wear and Tear. . . . . . . . . . . . . . . . . . . . . . . . . . . .20
23.12 No Recordation . . . . . . . . . . . . . . . . . . . . . . . . . . .20
23.13 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
23.14 Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
23.15 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . .20
</TABLE>
EXHIBITS
- --------
EXHIBIT A - Legal Description
EXHIBIT B - Form of Grant Deed
EXHIBIT C - FIRPTA Affidavit
EXHIBIT D - Assignment and Assumption
EXHIBIT E - Bill of Sale and General Assignment of Intangibles
iv
<PAGE>
AGREEMENT OF PURCHASE AND SALE
AND JOINT ESCROW INSTRUCTIONS
THIS AGREEMENT OF PURCHASE AND SALE AND JOINT ESCROW INSTRUCTIONS
("AGREEMENT") is made and entered into as of ____________ __, 1998, by and
between NATIONAL INVESTORS FINANCIAL, INC., a California corporation, AS TRUSTEE
for NATIONAL INVESTORS LAND HOLDING TRUST ___ ("SELLER"), and CYPRESS LAKES,
INC., a California corporation ("BUYER").
R E C I T A L S
A. Seller is the owner of that certain unimproved real property commonly
known as "Cypress Lakes and Country Club", consisting of approximately 686
acres, located in the County of Contra Costa, State of California, as more
particularly described in Exhibit A attached hereto (the "Real Property").
B. Seller holds record title to the Real Property as agent of and for the
benefit of various investors who are the beneficiaries of National Investors
Land Holding Trust ____ (the "Trust").
C. Seller desires to sell to Buyer and Buyer desires to purchase from
Seller the Property (as hereinafter defined) on the terms and conditions set
forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing Recitals, which Recitals
are incorporated herein by this reference, and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, Buyer
and Seller agree as follows:
A G R E E M E N T
1. DEFINITIONS: For the purposes of this Agreement the following
terms will be defined as follows:
1.1 "ACTUAL KNOWLEDGE OF SELLER" means and is limited to the actual
knowledge of David Lasker and James N. Orth without having conducted any
independent inquiry or inspection, and shall not include the knowledge of any
other persons or firms, it being understood and agreed by Buyer that neither
David Lasker nor James N. Orth is charged with knowledge of all of the acts
and/or omissions of predecessors in title to the Property or management of the
Property before Seller's acquisition of the Property and the Actual Knowledge of
Seller shall not include information or material which may be in the possession
of Seller generally, but of which neither David Lasker nor James N. Orth is
actually aware.
1.2 "AFC" means American Family Communities, Inc., a California
corporation, which is a wholly-owned subsidiary of AFH.
1.
<PAGE>
1.3 "AFH" means American Family Holdings, Inc., a Delaware corporation.
Buyer is a wholly-owned subsidiary of AFC, which, in turn, is a wholly-owned
subsidiary of AFH.
1.4 "ASSIGNMENT" shall have the meaning given thereto in Section 6.1(d)
hereof.
1.5 "BILL OF SALE" shall have the meaning given thereto in
Section 6.1(e) hereof.
1.6 "CLOSING DATE" means ___________, 1998, unless an earlier date is
agreed to in a writing subsequent to this Agreement executed and delivered by
each of the parties hereto to the other, and is the last date on which the
Closing and Close of Escrow can occur, subject to extension as provided for in
this Agreement.
1.7 "CLOSING" and "CLOSE OF ESCROW" are terms used interchangeably in
this Agreement. The Closing or the Close of Escrow will be deemed to have
occurred when the Grant Deed is recorded in the official records of the county
in which the Property is located.
1.8 "EFFECTIVE DATE" means the date hereof.
1.9 "ENVIRONMENTAL AUDIT" means any environmental audit, review or
testing of the Property performed by Buyer or any third party or consultant
engaged by Buyer to conduct such study.
1.10 "ENVIRONMENTAL LAW" means any law, statute, ordinance or regulation
pertaining to health, industrial hygiene or the environment including, without
limitation, CERCLA (Comprehensive Environmental Response, Compensation and
Liability Act of 1980) and RCRA (Resources Conservation and Recovery Act of
1976), as amended.
1.11 "ESCROW" shall have the meaning given thereto in Section 4 hereof.
1.12 "ESCROW HOLDER" means _______________________________, whose
address is _______________________________________________________________,
Attn.: ___________________.
1.13 "EXCHANGE VALUE" is the adjusted appraised value of the Property
which takes into consideration various factors to balance the business value of
the Property within its present ownership structure.
1.14 "FIRPTA CERTIFICATE" shall have the meaning given thereto in
Section 6.1(b) hereof.
1.15 "GRANT DEED" shall have the meaning given thereto in Section 6.1(a)
hereof.
1.16 "HAZARDOUS SUBSTANCE" means any substance, material or waste which
is or becomes designated, classified or regulated as being "toxic" or
"hazardous" or a "pollutant" or
2.
<PAGE>
which is or becomes similarly designated, classified or regulated, under any
Environmental Law, including asbestos, petroleum and petroleum products.
1.17 "IMPROVEMENTS" means any and all improvements and fixtures situated
on the Real Property.
1.18 "INVESTORS" means the beneficiaries of the Trust.
1.19 "INTANGIBLES" means all of Seller's right, title and interest in
and to all intangible property used, owned or issued solely and strictly in
connection with the Real Property, Improvements and Personal Property,
including, but not limited to: (i) trade names and trademarks, contract rights,
accounts receivable and other intangible property used in connection with the
ownership and operation of the Property; (ii) all licenses, permits,
certificates of occupancy, approvals, dedications and entitlements issued,
approved or granted by any governmental authorities having jurisdiction over the
Property; and (iii) all development rights, conditional use permits, variances
and other intangible rights, titles, interests and privileges owned by Seller
and related to or issued in connection with the Land and/or Improvements, its
use, occupancy, operation and development, but in no way related to Seller's
financial data or other proprietary information or other property of Seller.
1.20 "NOTICES" will be sent as provided in Section 21 to:
Seller: National Investors Land Holding Trust
c/o National Investors Financial, Inc.
4675 MacArthur Court, Suite 1240
Newport Beach, CA 92660
Attn.: Mr. David Lasker
Telephone: (949) 833-8600
Facsimile: (949) 752-9753
with a copy to : Arter & Hadden LLP
725 South Figueroa Street, Suite 3400
Los Angeles, CA 90017
Attn.: Bruce H. Newman, Esq.
Telephone: (213) 430-3000
Facsimile: (213) 617-9255
3.
<PAGE>
Buyer: Cypress Lakes, Inc.
______________________
______________________
Attn.:__________________
Telephone: _____________
Facsimile: ______________
with a copy to: Arter & Hadden LLP
725 South Figueroa Street, Suite 3400
Los Angeles, CA 90017
Attn.: Bruce H. Newman, Esq.
Telephone: (213) 430-3000
Facsimile: (213) 617-9255
Escrow Holder: __________________________________
__________________________________
__________________________________
Attn.: ___________________
Telephone: ________________________
Facsimile: ________________________
1.21 "OPENING OF ESCROW" shall have the meaning given thereto in
Section 4 hereof.
1.22 "OTHER ASSETS" means cash, cash equivalent, notes and other
negotiable instruments and any and all other assets in the possession or control
of Seller, the value of which is determined by possession, and any other assets
other than the Real Property, Personal Property or Intangibles relating to the
Real Property.
1.23 "PERMITTED EXCEPTIONS" shall have the meaning given thereto in
Section 7.1 hereof.
1.24 "PERSONAL PROPERTY" means the equipment, furniture and fixtures,
books and records and other personal property, if any, owned by Seller and
located on the Property as of the Effective Date, including without limitation,
those items listed on SCHEDULE 1 to the Bill of Sale.
1.25 "PROPERTY" means collectively, (i) the Real Property, (ii) the
Improvements , (iii) the Intangibles, (iv) the Personal Property and (v) the
Other Assets.
1.26 "PROSPECTUS" means the Consent Solicitation Statement/Prospectus of
Buyer.
1.27 "REAL PROPERTY" means that certain real property located in the
County of Contra Costa, State of California and commonly known as "Cypress Lakes
and Country Club" and more particularly described in EXHIBIT A attached hereto.
The Real Property also is described in the Recitals hereof.
4.
<PAGE>
1.28 "TITLE COMPANY" means ________________________________________.
1.29 "TITLE POLICY" shall have the meaning given thereto in Section 11
hereof.
1.30 "TRANSFER AGENT" means __________________, who address is
__________________, Attn.: ___________, Facsimile No. ___________..
2. PURCHASE AND SALE:
2.1 PURCHASE AND SALE. Upon and subject to the terms and conditions
set forth in this Agreement, Seller agrees to sell to Buyer and Buyer agrees to
buy from Seller the Property, together with all easements, hereditaments,
entitlements (to the extent transferable) and appurtenances thereto. In
consideration of Seller's sale of the Property to Buyer, Buyer will (a) cause to
be delivered to the investors of Seller the Exchange Value in accordance with
Section 3, and (b) perform all of Buyer's other obligations hereunder.
2.2 SUBSTANCE OF TRANSACTIONS. Notwithstanding any other provision of
this Agreement, the transfer of the Property directly from Seller to Buyer is
for convenience purposes only to effect expeditiously the culmination of the
transfers set forth in this Section 2.2, and for all purposes hereunder it is
the intent of the parties that such transfer reflects the following transfers,
which shall occur in the following order: (i) all of the Investors, through
their approval of the transactions contemplated under this Agreement, contribute
all of their interests in the Property to AFH in exchange for shares of common
stock of AFH, such shares to be distributed to them pursuant to Sections 3 and
13.2 hereof; (ii) AFH contributes the Property to AFC as a contribution to the
capital of AFC; and (iii) AFC contributes the Property to Buyer as a
contribution to the capital of Buyer. Seller's transfer of the Property
directly to Buyer reflects Seller's transfer of the Property from the Investors
to AFH, from AFH to AFC, and from AFC to the Buyer, in each instance in Seller's
capacity as the agent of and on behalf of such transferors.
3. EXCHANGE VALUE: In consideration for the sale of the Property to
Buyer, Buyer will deliver to Seller an amount equal to the Exchange Value for
the Property. The Exchange Value for the Property is $______________, which
shall be paid in the form of, and by issuance and delivery of, _____ shares of
common stock in AFH to the investors of Seller, to be distributed by the
Transfer Agent at the Closing outside of Escrow in accordance with Section 13.2
hereof. Upon the request of any party hereto, whether made before or after the
Closing, the parties hereto will allocate the Exchange Value to the Real
Property, Improvements, Personal Property, Other Assets and the Intangibles.
5.
<PAGE>
4. ESCROW: Immediately upon execution of this Agreement, Buyer and
Seller will open an escrow (the "ESCROW") with the Escrow Holder by delivering
to Escrow Holder a fully executed copy of this Agreement (the "OPENING OF
ESCROW"). The purchase and sale of the Property will be completed through the
Escrow. Buyer and Seller agree to execute any additional instructions
consistent with this Agreement which are reasonably required by the Escrow
Holder. If there is a conflict between any printed escrow instructions and this
Agreement, the terms of this Agreement will govern.
5. CANCELLATION FEES AND EXPENSES: If the Closing does not occur at
the time and in the manner provided in this Agreement because of the default of
one of the parties, the non-defaulting party has the right to cancel the Escrow
by written notice to the defaulting party and to the Escrow Holder. All costs
of cancellation, if any, will be paid by the defaulting party.
6. DELIVERIES TO ESCROW HOLDER:
6.1 BY SELLER. On or prior to the Closing Date, Seller will deliver or
cause to be delivered to Escrow Holder the following items:
(a) A Grant Deed ("GRANT DEED"), in the form attached to this
Agreement as EXHIBIT B, duly executed and acknowledged by Seller and in
recordable form, conveying the Property to Buyer.
(b) A Transferor's Certificate of Non-Foreign Status attached to
this Agreement as EXHIBIT C ("FIRPTA CERTIFICATE"), duly executed by or on
behalf of Seller.
(c) A properly executed California Form RE 590 or other evidence
sufficient to establish that Buyer is not required to withhold any portion
of the Exchange Value pursuant to Sections 18805 and 26131 of the
California Revenue and Taxation Code ("FORM 590").
(d) An Assignment and Assumption of Agreements ("ASSIGNMENT")
duly executed by Seller in favor of Buyer in the form attached to this
Agreement as EXHIBIT D.
(e) A Bill of Sale and General Assignment of Intangibles in the
form attached to this Agreement as EXHIBIT E ("BILL OF SALE"), duly
executed by Seller and conveying all right, title and interest of Seller in
the Personal Property and the Intangibles to Buyer.
(f) Such corporate resolutions, certificates of good standing
and/or other corporate or partnership documents relating to Seller as are
reasonably required by Buyer or Escrow Holder or both in connection with
this transaction.
6.
<PAGE>
6.2 BY BUYER. On or prior to the Closing Date, Buyer will deliver or
cause to be delivered to Escrow Holder the following items:
(a) Such corporate resolutions, certificates of good standing
and/or other corporate or partnership documents relating to Buyer as are
reasonably required by Seller or Escrow Holder or both in connection with
this transaction.
(b) Amounts due to pay costs and expenses as set forth in
Section 12 hereof.
6.3 BY BUYER AND SELLER. Buyer and Seller will each deposit such other
instruments consistent with this Agreement as are reasonably required by Escrow
Holder or otherwise required to close escrow. In addition Seller and Buyer
hereby designate Escrow Holder as the "REPORTING PERSON" for the transaction
pursuant to Section 6045(e) of the Internal Revenue Code.
7. CONDITION OF TITLE:
7.1 PERMITTED EXCEPTIONS. At the Close of Escrow, fee simple title to
the Property will be conveyed to Buyer by Seller by Grant Deed, subject only to
the following title matters ("PERMITTED EXCEPTIONS"):
(a) all property tax liens (whether or not payment of property
taxes are delinquent) and all other matters shown in that certain
Commitment for Title Insurance effective _______________, issued by the
Title Company, bearing Order No.________; and
(b) matters affecting the condition of title to the Property
created by, at the request of or with the written consent of Buyer.
7.2 TITLE PROVIDED BY SELLER. The parties agree that (a) except as
specifically provided in the Grant Deed or implied by law, Seller makes no
express or implied warranties regarding the condition of title to the Property,
and (b) Buyer shall rely solely on the Title Policy for protection against any
title defects.
8. CONDITIONS TO THE CLOSE OF ESCROW:
8.1 CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. The following
conditions must be satisfied not later the earlier of the Closing Date or such
other period of time as may be specified below:
8.1.1 TITLE. As of the Closing, the Title Company will issue or
have committed to issue to Buyer the Title Policy described in Section 11.
8.1.2 REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER. Seller
will have duly performed each and every agreement to be performed by Seller
hereunder and, subject to
7.
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the provisions of Section 10, Seller's express representations and
warranties set forth in this Agreement will be true and correct in all
material respects as of the Closing Date. However, notwithstanding
anything to the contrary stated or implied in this Section 8.1.2, Seller
shall have no liability for the breach of any representations, warranties
or covenants set forth in this Agreement, whether express or implied,
absent a finding by a court of competent jurisdiction that either David
Lasker or James N. Orth or both of them withheld information with respect
thereto from Buyer or falsified information delivered to and relied upon by
Buyer and that such action amounted to a violation of a representation or
warranty set forth herein.
8.1.3 SELLER'S DELIVERIES. Seller will have delivered the items
described in Section 6.1.
The conditions set forth in this Section 8.1 are solely for the benefit of
Buyer and may be waived only by Buyer. At all times Buyer has the right to
waive any condition. Such waiver or waivers must be in writing to Seller. If
any conditions are not satisfied on or before the Closing Date, and Buyer has
not waived the unsatisfied conditions, Seller will not be deemed to be in
default (unless Seller has breached Sections 8.1.2 or 8.1.3 above) and Buyer's
sole remedy will be to terminate this Agreement.
8.2 CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS. The Close of Escrow
and Seller's obligations with respect to this transaction are subject to the
following conditions precedent: (a) Buyer's delivery to Escrow Holder on or
before the Closing Date, of the items described in Section 6.2; (b) the approval
of such of Seller's constituents as Seller shall deem necessary or advisable in
its sole and absolute discretion as set forth in Section 9 hereof; (c) Buyer
having duly performed each and every agreement to be performed by Buyer
hereunder; and (d) Buyer's representations, warranties and covenants set forth
in this Agreement, will be true and correct in all material respects as of the
Closing Date. The conditions set forth in this Section 8.2 are solely for the
benefit of Seller and may be waived only by Seller, with such waiver or waivers
to be in writing to Buyer. If any conditions are not satisfied on or before the
Closing Date, and Seller has not waived the unsatisfied conditions, Buyer will
not be deemed to be in default (unless Buyer has breached Sections 8.2(a), (c)
or (d) above) and Seller's sole remedy will be to terminate the Agreement.
9. APPROVAL OF SELLER'S CONSTITUENTS: Seller shall exercise
reasonable diligence to obtain the approval of this transaction by such of the
constituents of Seller as Seller shall deem necessary or advisable, in its sole
and absolute discretion, and shall notify Buyer and Escrow Holder when such
approvals have been obtained. If Seller is not able to obtain such approvals
from such constituents on or before the date which is ____ days after the
Effective Date, or such later date as is mutually agreed to by Buyer and Seller,
then Seller may cancel this Agreement by notice to Buyer and Escrow Holder given
prior to the end of that time period, and in that event Seller shall pay all
title and escrow cancellation costs. Seller shall indemnify and hold Buyer
harmless from any claim, damage, loss, liability, action, settlement, including
Buyer's reasonable attorneys' fees suffered by Buyer and which results from or
relates to the Seller's securing approval of this transaction and transferring
the Property to Buyer pursuant to such approval.
8.
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10. PROPERTY "AS-IS":
10.1 NO SIDE AGREEMENTS OR REPRESENTATIONS; AS-IS PURCHASE. BUYER
REPRESENTS, WARRANTS AND COVENANTS TO SELLER THAT BUYER HAD THE OPPORTUNITY TO
INDEPENDENTLY AND PERSONALLY INSPECT THE PROPERTY AND IMPROVEMENTS, IF ANY, AND
THAT BUYER HAS ENTERED INTO THIS AGREEMENT AFTER HAVING MADE SUCH PERSONAL
EXAMINATION AND INSPECTION. BUYER AGREES THAT BUYER WILL ACCEPT THE PROPERTY,
IN ITS THEN CONDITION AS-IS AND WITH ALL ITS FAULTS, INCLUDING WITHOUT
LIMITATION, ANY FAULTS AND CONDITIONS SPECIFICALLY REFERENCED IN THIS AGREEMENT,
SUBJECT TO THE EXPRESS COVENANTS, INDEMNITIES, REPRESENTATIONS AND WARRANTIES
MADE BY SELLER ELSEWHERE HEREIN. NO PERSON ACTING ON BEHALF OF SELLER IS
AUTHORIZED TO MAKE, AND BY EXECUTION HEREOF, BUYER ACKNOWLEDGES AND AGREES THAT,
EXCEPT FOR THOSE REPRESENTATIONS, WARRANTIES, COVENANTS, INDEMNITIES AND
AGREEMENTS EXPRESSLY MADE BY SELLER IN THIS AGREEMENT, SELLER HAS NOT MADE, DOES
NOT MAKE AND SPECIFICALLY NEGATES AND DISCLAIMS ANY REPRESENTATIONS, WARRANTIES,
PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER
WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR
FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO:
(A) THE VALUE OF THE PROPERTY OR THE INCOME TO BE DERIVED
THEREFROM;
(B) THE SUITABILITY OF THE PROPERTY FOR ANY AND ALL ACTIVITIES
AND USES WHICH BUYER MAY CONDUCT THEREON, INCLUDING ANY DEVELOPMENT
OF THE PROPERTY;
(C) THE HABITABILITY, MERCHANTABILITY, MARKETABILITY,
PROFITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PROPERTY;
(D) THE MANNER, QUALITY, STATE OF REPAIR OR LACK OF REPAIR OF
THE PROPERTY;
(E) THE NATURE, QUALITY OR CONDITION OF THE PROPERTY,
INCLUDING WITHOUT LIMITATION, THE WATER, SOIL AND GEOLOGY;
(F) THE TYPE, AVAILABILITY OR COST OF ANY ENTITLEMENTS
REQUIRED TO DEVELOP THE PROPERTY;
9.
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(G) THE COMPLIANCE OF OR BY THE PROPERTY OR ITS OPERATION WITH
ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY APPLICABLE
GOVERNMENTAL AUTHORITY OR BODY;
(H) THE MANNER, CONDITION OR QUALITY OF THE CONSTRUCTION OR
MATERIALS, IF ANY, INCORPORATED INTO THE PROPERTY;
(I) COMPLIANCE WITH ANY ENVIRONMENTAL PROTECTION, POLLUTION OR
LAND USE LAWS, RULES, REGULATION, ORDERS OR REQUIREMENTS, INCLUDING
BUT NOT LIMITED TO, THE ENDANGERED SPECIES ACT, TITLE III OF THE
AMERICANS WITH DISABILITIES ACT OF 1990 OR ANY OTHER LAW, RULE OR
REGULATION GOVERNING ACCESS BY DISABLED PERSONS, CALIFORNIA HEALTH
& SAFETY CODE, THE FEDERAL WATER POLLUTION CONTROL ACT, THE FEDERAL
RESOURCE CONSERVATION AND RECOVERY ACT, THE U.S. ENVIRONMENTAL
PROTECTION AGENCY REGULATIONS AT 40 C.F.R., PART 261, THE
COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY ACT
OF 1980, AS AMENDED, THE RESOURCES CONSERVATION AND RECOVERY ACT OF
1976, THE CLEAN WATER ACT, THE SAFE DRINKING WATER ACT, THE
HAZARDOUS MATERIALS TRANSPORTATION ACT, THE TOXIC SUBSTANCE CONTROL
ACT, AND REGULATIONS PROMULGATED UNDER ANY OF THE FOREGOING;
(J) THE PRESENCE OR ABSENCE OF HAZARDOUS MATERIALS AT, ON,
UNDER, OR ADJACENT TO THE PROPERTY;
(K) THE CONTENT, COMPLETENESS OR ACCURACY OF ANY MATERIALS,
INCLUDING ANY INFORMATIONAL PACKAGE, COST TO COMPLETE ESTIMATE OR
OTHER MATERIALS PREPARED BY OR ON BEHALF OF SELLER;
(L) THE CONFORMITY OF THE IMPROVEMENTS TO ANY PLANS OR
SPECIFICATIONS FOR THE PROPERTY, INCLUDING ANY PLANS AND
SPECIFICATIONS THAT MAY HAVE BEEN OR MAY BE PROVIDED TO BUYER;
(M) THE CONFORMITY OF THE PROPERTY TO PAST, CURRENT OR FUTURE
APPLICABLE ZONING OR BUILDING REQUIREMENTS;
(N) DEFICIENCY OF ANY UNDERSHORING;
10.
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(O) DEFICIENCY OF ANY DRAINAGE;
(P) THE FACT THAT ALL OR A PORTION OF THE PROPERTY MAY BE
LOCATED ON OR NEAR AN EARTHQUAKE FAULT LINE OR LOCATED IN AN
ALQUIST-PRIOLO SPECIAL STUDY ZONE;
(Q) THE EXISTENCE OF VESTED LAND USE, ZONING OR BUILDING
ENTITLEMENTS AFFECTING THE PROPERTY;
(R) ANY AND ALL REQUIREMENTS OR CONDITIONS OF APPROVAL OF
STATE AND LOCAL GOVERNMENTAL AGENCIES FOR DEVELOPMENT OF THE
PROPERTY INCLUDING, WITHOUT LIMITATION, THE CONSTRUCTION OF OFFSITE
AND ONSITE ROADS, UTILITIES AND OTHER IMPROVEMENTS; OR
(S) WITH RESPECT TO ANY OTHER MATTER CONCERNING THE PROPERTY
EXCEPT AS MAY BE OTHERWISE EXPRESSLY STATED HEREIN, INCLUDING ANY
AND ALL SUCH MATTERS REFERENCED, DISCUSSED OR DISCLOSED IN ANY
DOCUMENTS DELIVERED BY SELLER TO BUYER, IN ANY PUBLIC RECORDS OF
ANY GOVERNMENTAL AGENCY OR ENTITY OR UTILITY COMPANY, OR IN ANY
OTHER DOCUMENTS AVAILABLE TO BUYER.
(T) BUYER FURTHER ACKNOWLEDGES AND AGREES THAT BUYER IS
RELYING SOLELY ON ITS OWN INVESTIGATION OF THE PROPERTY AND ITS OWN
REVIEW OF ALL INFORMATION AND DOCUMENTATION CONCERNING THE
PROPERTY, AND NOT ON ANY INFORMATION PROVIDED OR TO BE PROVIDED BY
SELLER. BUYER FURTHER ACKNOWLEDGES AND AGREES THAT ANY INFORMATION
MADE AVAILABLE TO BUYER OR PROVIDED OR TO BE PROVIDED BY OR ON
BEHALF OF SELLER WITH RESPECT TO THE PROPERTY WAS OBTAINED FROM A
VARIETY OF SOURCES AND THAT SELLER HAS NOT MADE ANY INDEPENDENT
INVESTIGATION OR VERIFICATION OF SUCH INFORMATION AND MAKES NO
REPRESENTATIONS AS TO THE ACCURACY OR COMPLETENESS OF SUCH
INFORMATION EXCEPT AS MAY OTHERWISE BE PROVIDED HEREIN. BUYER
AGREES TO FULLY AND IRREVOCABLY RELEASE ALL SUCH SOURCES OF
INFORMATION AND PREPARERS OF INFORMATION AND DOCUMENTATION TO THE
EXTENT SUCH SOURCES OR PREPARERS ARE SELLER, OR ITS EMPLOYEES,
OFFICERS, DIRECTORS, REPRESENTATIVES, BENEFICIARIES, INVESTORS,
AGENTS, SERVANTS, ATTORNEYS, AFFILIATES, PARENT COMPANIES,
SUBSIDIARIES, SUCCESSORS OR ASSIGNS FROM ANY AND ALL CLAIMS,
DAMAGES AND LIABILITIES ARISING FROM SUCH INFORMATION OR
DOCUMENTATION, EXCEPT IF
11.
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AND TO THE EXTENT THAT BUYER EMPLOYS SUCH SOURCES OR PREPARERS OF
INFORMATION TO ACT ON BEHALF OF BUYER, IN WHICH EVENT THE LIABILITY
OF SUCH SOURCES OR PREPARERS OF INFORMATION TO BUYER SHALL BE
DETERMINED BY THEIR OWN INDEPENDENT AGREEMENTS WITH BUYER, AND
SELLER SHALL NOT BE LIABLE FOR SUCH AGREEMENTS OR OBLIGATIONS.
SELLER IS NOT LIABLE OR BOUND IN ANY MANNER BY ANY ORAL OR WRITTEN
STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE
PROPERTY, OR THE OPERATION THEREOF, FURNISHED BY ANY OF THE
FOREGOING ENTITIES AND INDIVIDUALS OR ANY OTHER INDIVIDUAL OR
ENTITY.
10.2 DISCLOSURES; SPECIFIC ACKNOWLEDGMENT REGARDING CONDITION OF
PROPERTY. Buyer acknowledges the disclosures expressly made by Seller in this
Agreement, the Prospectus and in correspondence from Seller, its attorneys
and/or its agents to Buyer, its attorneys and/or its agents. Without limiting
the generality of the foregoing, Buyer acknowledges that (a) the County of
Contra Costa has approved a vesting tentative map no. 7562 (the "Vesting
Tentative Map"), which allows for construction of 1,330 single family
residences, an 18-hole golf course, clubhouse, tennis courts, swimming pools,
lakes and channels, parks, wetlands, a school and a fire station on the
Property; and (b) such Vesting Tentative Map expires on April 15, 1999. Seller
makes no representation and warranty as to whether such Vesting Tentative Map
can be extended.
11. TITLE INSURANCE: At the Close of Escrow, the Title Company will
issue to Buyer at Buyer's sole cost and expense an ALTA Standard Coverage Policy
(1990) with coverage in an amount equal to the appraised value of the Real
Property as determined by Buyer in its sole discretion, showing title to the
Real Property vested in Buyer, subject only to the Permitted Exceptions and the
standard printed exceptions and conditions in the policy of title insurance
("TITLE POLICY"). If Buyer elects to obtain any additional endorsements or an
extended coverage policy, the additional premium and costs of survey for the
extended coverage policy and the cost of any endorsements will be at Buyer's
sole cost and expense; however, Buyer's election to obtain an extended coverage
policy will not delay the Closing and Buyer's inability to obtain an extended
coverage policy or any such endorsements will not be deemed to be a failure of
any condition to Closing.
12.
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12. COSTS AND EXPENSES: Buyer will pay the costs of Closing the
transaction as follows:
(a) all premiums for the Title Policy;
(b) all escrow fees and costs;
(c) all city and county documentary transfer taxes;
(d) all document recording charges;
(e) all sales taxes;
(f) one half of all escrow fees and costs;
(g) the entire additional cost of any ALTA extended coverage
title policy, the cost of any required survey and, the cost of any
endorsements required by Buyer; and
(h) All other costs and expenses necessarily incurred to close
the transaction.
13. DISBURSEMENTS AND OTHER ACTIONS:
13.1 ESCROW HOLDER. At the Close of Escrow, Escrow Holder will promptly
undertake all of the following:
(a) Cause the Grant Deed (with documentary transfer tax
information to be affixed AFTER recording) to be recorded with the County
Recorder and obtain conformed copies thereof for distribution to Buyer and
Seller.
(b) Direct the Title Company to issue the Title Policy to Buyer
within 15 BUSINESS DAYS after Closing.
(c) Deliver to Buyer the FIRPTA Certificate, the Form 590 and
any other documents (or copies thereof) deposited into Escrow by Seller.
Deliver to Seller any other documents (or copies thereof) deposited into
Escrow by Buyer.
(d) Notify the Transfer Agent by telephone and facsimile that
the Close of Escrow has occurred.
13.2 BY TRANSFER AGENT. Promptly after the Close of Escrow, Transfer
Agent shall deliver all shares of common stock of AFH in payment of the Exchange
Value for the Property to the persons, at the addresses and in the amounts
designated by Seller.
13.
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13.3 POSSESSION. Possession of the Other Assets in Seller's possession
or control and all other Property shall be delivered by Seller to Buyer at the
Close of Escrow.
14. JOINT REPRESENTATIONS AND WARRANTIES: In addition to any express
agreements of the parties contained herein, the following constitute
representations and warranties of the parties each to the other, provided that
liability for any breach is subject to Sections 8.1.2 and 23.13 hereof:
14.1 AUTHORITY. Each party has the legal power, right and authority to
enter into this Agreement and the instruments referenced herein, and to
consummate this transaction.
14.2 ACTIONS. All requisite action (corporate, trust, partnership or
otherwise) has been taken by each party in connection with the entering into of
this Agreement, the instruments referenced herein, and the consummation of this
transaction. Except as provided in Section 9, no further consent of any
partner, shareholder, creditor, investor, judicial or administrative body,
governmental authority or other party is required.
14.3 DUE EXECUTION. The individuals executing this Agreement and the
instruments referenced herein on behalf of each party and the partners, officers
or trustees of each party, if any, have the legal power, right, and actual
authority to bind each party to the terms and conditions of those documents.
14.4 VALID AND BINDING. This Agreement and all other documents required
to close this transaction are and will be valid, legally binding obligations of
and enforceable against each party in accordance with their terms, subject only
to applicable bankruptcy, insolvency, reorganization, moratorium laws or similar
laws or equitable principles affecting or limiting the rights of contracting
parties generally.
14.5 BROKER. Seller represents and warrants to Buyer, and Buyer
represents and warrants to Seller, that no broker or finder has been engaged by
them, respectively, in connection with any of the transactions contemplated by
this Agreement, or to its knowledge is in any way connected with any of such
transactions. Buyer will indemnify, save harmless and defend Seller from any
liability, cost, or expense arising out of or connected with any claim for any
commission or compensation made by any person or entity claiming to have been
retained or contacted by Buyer in connection with this transaction. Seller will
indemnify, save harmless and defend Buyer from any liability, cost, or expense
arising out of or connected with any claim for any commission or compensation
made by any person or entity claiming to have been retained or contacted by
Seller in connection with this transaction. This indemnity provision will
survive the Closing or any earlier termination of this Agreement.
15. SELLER'S WARRANTIES AND REPRESENTATIONS: Seller makes the
following representations, and warranties and acknowledges that Buyer will rely
on such representations and warranties in acquiring the Property; provided that
liability for any breach is subject to to Sections 8.1.2 and 23.13 hereof:
14.
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15.1 NON-FOREIGN ENTITY. Seller is not a "foreign person" within the
meaning of Section 1445(f)(3) of the Internal Revenue Code.
15.2 HAZARDOUS SUBSTANCES. To Seller's Actual Knowledge, since the date
of Seller's acquisition of the Property, no Hazardous Substances are now or have
been used, stored, generated or disposed of on or within the Property except in
the normal course of use and operation of the Property and in compliance with
all applicable Environmental Laws.
15.3 CLEAN-UP. To Seller's Actual Knowledge, since the date of Seller's
acquisition of the Property, there are and have been no federal, state or local
enforcement, clean-up, removal, remedial or other governmental or regulatory
actions instituted or completed affecting the Property, other than such other
matters as may otherwise be disclosed in any Environmental Audit or in any other
documents provided or made available to Buyer.
15.4 CLAIMS. To Seller's Actual Knowledge, there are no outstanding
claims that have been made by any third party against Seller relating to any
Hazardous Substances on or within the Property.
The provisions of this Section 15 shall no longer bind Seller if
this Agreement expires or is terminated for any reason, or if the Closing
contemplated hereunder does not occur.
16. PRE-CLOSING COVENANTS. So long as this Agreement remains in full
force and effect:
16.1 NO TRANSFERS. Without the prior written consent of Buyer, Seller
will not convey any interest in the Property and will not subject the Property
to any additional liens, encumbrances, covenants, conditions, easements, rights
of way or similar matters after the date of this Agreement, except as may be
otherwise provided for in this Agreement, which will not be eliminated prior to
the Close of Escrow.
16.2 NO ALTERATIONS. Seller will not make any material alterations to
the Property without Buyer's consent, which will not be unreasonably withheld or
delayed.
16.3 MAINTENANCE. Seller will maintain the Property in substantially
the same condition as it is in, as of the date of this Agreement, and manage the
Property in accordance with Seller's established practices.
16.4 OBLIGATIONS UNDER CONTRACTS. Seller will keep and perform all of
the obligations to be performed by Seller under any contracts affecting the
Property. Without prior written consent of Buyer, which will not be
unreasonably withheld or delayed, Seller will not enter into any contract or
agreement providing for the provision of goods or services to or with respect to
the Property or the operation thereof unless such contracts or agreements can be
terminated without penalty by the Closing Date. Seller will not enter into any
leases for any portion of the Property.
15.
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16.5 EXPENDITURES. Seller will incur only expenditures necessary for
the day-to-day operation and maintenance of the Property, and will not incur
capital expenditures or liabilities not in the ordinary course of business.
Seller shall retain all Other Assets in Seller's possession on or after the date
hereof except for payment of such permitted liabilities and expenditures.
17. CONDEMNATION AND DESTRUCTION:
17.1 EMINENT DOMAIN OR TAKING. If proceedings under a power of eminent
domain relating to the Property or any part thereof are commenced prior to Close
of Escrow, Seller will promptly inform Buyer in writing.
(a) If such proceedings involve the taking of title to all or a
material interest in the Property, Buyer may elect to terminate this
Agreement by notice in writing sent within 10 DAYS of Seller's written
notice to Buyer, in which case neither party will have any further
obligation to or rights against the other except any rights or obligations
of either party which are expressly stated to survive termination of this
Agreement.
(b) If the proceedings do not involve the taking of title to all
or a material interest in the Property, or if Buyer does not elect to
terminate this Agreement, this transaction will be consummated as described
herein and any award or settlement payable with respect to such proceeding
will be paid or assigned to Buyer upon Close of Escrow.
(c) If this sale is not consummated for any reason, any
condemnation award or settlement will belong to Seller.
17.2 DAMAGE OR DESTRUCTION. Except as provided in this Section, prior
to the Close of Escrow the entire risk of loss of damage by earthquake, flood,
landslide, fire or other casualty is borne and assumed by Seller. If, prior to
the Close of Escrow, any part of the Improvements is damaged or destroyed by
earthquake, flood, landslide, fire or other casualty, Seller will promptly
inform Buyer of such fact in writing and advise Buyer as to the extent of the
damage and whether it is, in Seller's reasonable opinion, "MATERIAL" or not
"MATERIAL".
(a) If such damage or destruction is "MATERIAL", Buyer has the
option to terminate this Agreement upon written notice to the Seller given
not later than 10 DAYS after receipt of Seller's written notice to Buyer
advising of such damage or destruction.
(b) For purposes hereof, "MATERIAL" is deemed to be any damage
or destruction to the Improvements where the cost of repair or replacement
is estimated to be more than 25% of the Exchange Value of the Property and
will take more than 60 DAYS to repair.
(c) If this Agreement is so terminated, the provisions of
Section 5 will govern.
(d) If Buyer does not elect to terminate this Agreement, or if
the casualty is not material, Seller will reduce the Exchange Value by the
value reasonably estimated by Seller to repair or restore the damaged
portion of the Improvements, less any sums expended by
16.
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Seller to make emergency repairs to the Improvements or the Property or
otherwise protect the physical condition of the Improvements or the
Property, and this transaction will close pursuant to the terms of this
Agreement.
(e) If the damage is not material, Seller's notice to Buyer of
the damage or destruction will also set forth Seller's reduced Exchange
Value and Seller's allocation of value to the damaged portion of the
Improvements. If Buyer does not accept Seller's reduced Exchange Value,
Buyer's sole remedy will be to terminate this Agreement.
(f) Whether or not the sale of the Property is consummated
hereunder, all rights to insurance claims or proceeds in respect of damage
or destruction to the Improvements occurring prior to the Close of Escrow
will belong to Seller.
18. UTILITIES AND DEPOSITS:
18.1 UTILITIES . Seller will notify all utility companies servicing the
Property of the sale of the Property to Buyer and will notify the utility
companies that all utility bills henceforth are to be sent to Buyer. Buyer
shall be entitled to receive any and all refunds of all utility deposits held by
utility companies and Seller will assign to Buyer all of Seller's right, title
and interest in any such utility deposits.
18.2 REFUNDABLE DEPOSITS. To the extent there exists any refundable
deposits made in connection with the development of the Property prior to the
Closing ("Refundable Deposits"), Seller shall assign to Buyer all of Seller's
right, title and interest in and to such Refundable Deposits.
19. MEDIATION OF DISPUTES: No party to this Agreement shall initiate
any litigation against any other party to this Agreement concerning any
controversy or claim arising out of or relating to this Agreement or any
agreements or instruments relating hereto or delivered in connection herewith,
including, but not limited to, any claim based on or arising from an alleged
tort, unless and until (i) at least 60 days before the same shall be filed, a
complete copy of each of the summons and complaint (and/or any other
documentation required to initiate such litigation) to be filed by the
complaining party shall have been delivered to the other party or parties to any
such dispute, and (ii) the complaining party has made itself available to meet
in Los Angeles, California with the other party or parties for no more than 3
business days of non-binding mediation. Until and unless such mediation has
taken place, the complaining party must give notice to the non-complaining party
that it will, and then it must, make itself available for such mediation during
at least 20 business days during the 60 days before the date on which such
summons and complaint will be filed.
20. ARBITRATION OF DISPUTES: ANY CONTROVERSY OR CLAIM ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR ANY AGREEMENTS OR INSTRUMENTS RELATING HERETO
OR DELIVERED IN CONNECTION HEREWITH, INCLUDING, BUT NOT LIMITED TO A CLAIM BASED
ON OR ARISING FROM AN ALLEGED TORT WILL, AT THE REQUEST OF ANY PARTY, BE
DETERMINED BY ARBITRATION IN
17.
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ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (9 U.S.C. SECTION 1 ET SEQ.) UNDER
THE AUSPICES AND RULES OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA"). THE AAA
WILL BE INSTRUCTED BY EITHER OR BOTH PARTIES TO PREPARE A LIST OF THREE (3)
JUDGES WHO HAVE RETIRED FROM THE SUPERIOR COURT OF THE STATE OF CALIFORNIA, A
HIGHER CALIFORNIA COURT OR ANY FEDERAL COURT. WITHIN 10 DAYS OF RECEIPT OF THE
LIST, EACH PARTY MAY STRIKE 1 NAME FROM THE LIST. THE AAA WILL THEN APPOINT THE
ARBITRATOR FROM THE NAME(S) REMAINING ON THE LIST. THE ARBITRATION WILL BE
CONDUCTED IN SAN FRANCISCO, LOS ANGELES OR SAN DIEGO, WHICHEVER IS THE CLOSEST
CITY TO THE NEXUS OF THE DISPUTE. ANY CONTROVERSY IN INTERPRETATION OR
ENFORCEMENT OF THIS PROVISION OR WHETHER A DISPUTE IS ARBITRABLE, WILL BE
DETERMINED BY THE ARBITRATOR. JUDGMENT UPON THE AWARD RENDERED BY THE
ARBITRATOR MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. THE INSTITUTION AND
MAINTENANCE OF AN ACTION FOR JUDICIAL RELIEF OR IN PURSUIT OF AN ANCILLARY
REMEDY DOES NOT CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE
PLAINTIFF, TO SUBMIT THE CONTROVERSY OR CLAIM TO ARBITRATION.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION
DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING
UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR BY
JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL
RIGHTS TO DISCOVERY AND APPEAL UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN
THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION TO
NEUTRAL ARBITRATION.
Buyer's Initials ________ Seller's Initials _________
18.
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21. NOTICES: All notices or other communications required or permitted
hereunder must be in writing, and must be personally delivered (including by
means of professional messenger service) or sent by overnight courier, or sent
by registered or certified mail, postage prepaid, return receipt requested to
the addresses set forth in Section 1 hereof. All notices sent by mail will be
deemed received 2 DAYS after the date of mailing and all notices sent by other
means permitted herein shall be deemed received on the earlier of the date
delivered or the date on which delivery is refused.
22. ASSIGNMENT: Neither party shall have the right to assign this
Agreement without the other party's prior written consent.
23. MISCELLANEOUS:
23.1 COUNTERPARTS. This Agreement may be executed in counterparts.
23.2 PARTIAL INVALIDITY. If any term or provision of this Agreement
will be deemed to be invalid or unenforceable to any extent, the remainder of
this Agreement will not be affected thereby, and each remaining term and
provision of this Agreement will be valid and be enforced to the fullest extent
permitted by law.
23.3 POSSESSION OF THE PROPERTY. Seller will deliver possession of the
Property to Buyer upon the Close of Escrow.
23.4 WAIVERS. No waiver of any breach of any covenant or provision
contained herein will be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision contained herein. No extension
of time for performance of any obligation or act will be deemed an extension of
the time for performance of any other obligation or act except those of the
waiving party, which will be extended by a period of time equal to the period of
the delay.
23.5 SUCCESSORS AND ASSIGNS. This Agreement is binding upon and inures
to the benefit of the permitted successors and assigns of the parties hereto.
23.6 PROFESSIONAL FEES. In the event of the bringing of any action,
arbitration or suit by a party hereto against another party hereunder by reason
of any breach of any of the covenants, agreements or provisions on the part of
the other party arising out of this Agreement, then in that event the prevailing
party will be entitled to have the recovery of and from the other party all
costs and expenses of the action, mediation or suit, actual attorneys' fees,
witness fees and any other professional fees resulting therefrom.
23.7 ENTIRE AGREEMENT. This Agreement (including all Exhibits attached
hereto) constitutes the entire contract between the parties hereto with respect
to the subject matter hereof and may not be modified except by an instrument in
writing signed by the party to be charged.
19.
<PAGE>
23.8 TIME OF ESSENCE. Seller and Buyer hereby acknowledge and agree
that time is strictly of the essence with respect to each and every term,
condition, obligation and provision hereof.
23.9 CONSTRUCTION. Seller and Buyer and their respective advisors
believe that this Agreement is the product of all of their efforts, that it
expresses their agreement and that it should not be interpreted in favor of or
against either Buyer or Seller. The parties further agree that this Agreement
will be construed to effectuate the normal and reasonable expectations of a
sophisticated seller and buyer.
23.10 GOVERNING LAW. The parties hereto expressly agree that this
Agreement will be governed by, interpreted under, and construed and enforced in
accordance with the laws of the State of California.
23.11 WEAR AND TEAR. Buyer specifically acknowledges that Seller will
continue to use the Property in the course of its business and accepts the fact
that reasonable wear and tear will occur after the date of this Agreement.
Buyer specifically agrees that Seller is not responsible for repairing such
reasonable wear and tear and that Buyer is prohibited from raising such wear and
tear as a reason for not consummating this transaction or for requesting a
reduction in the Exchange Value.
23.12 NO RECORDATION. No memorandum or other document relating to this
Agreement will be recorded without the prior written consent of Seller, and any
such consent or approval will be conditioned upon Buyer providing Seller with a
quitclaim deed fully executed and acknowledged by Buyer, quitclaiming any and
all interests that it may have in the Property to Seller, which quitclaim deed
Seller may record in the event that this Agreement is terminated or the
transaction contemplated herein is not consummated.
23.13 SURVIVAL. All obligations of the parties contained herein which by
their terms do not arise until after the Close of Escrow and any other
provisions of this Agreement which by their terms survives the Close of Escrow,
shall survive the Close of Escrow. Notwithstanding anything to the contrary
contained in this Agreement, the representations and warranties contained in
this Agreement shall survive the Closing for a period of 1 year; provided that
any claims by one party hereto must be made in writing to the other party within
the 1 year period.
23.14 DISCLAIMER. Nothing herein creates any right or remedy for the
benefit of any person not a party hereto, nor creates a fiduciary relationship,
an agency or a partnership.
23.15 WAIVER OF JURY TRIAL. EACH PARTY, ACTING WITH KNOWLEDGE OF ITS
RIGHTS AFTER A FULL OPPORTUNITY TO CONSULT WITH COUNSEL, VOLUNTARILY WAIVES ALL
RIGHTS TO TRIAL BY JURY IN ALL PROCEEDINGS FOR WHICH A TRIAL BY JURY WOULD
OTHERWISE BE AVAILABLE OR REQUIRED, AND WHICH INVOLVE ANY MATTER ARISING OUT OF
OR CONNECTED WITH RIGHTS OR DUTIES UNDER, OR ENFORCEMENT OR INTERPRETATION OF,
THIS AGREEMENT.
20.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year hereinabove written.
"SELLER": "BUYER":
NATIONAL INVESTORS FINANCIAL, CYPRESS LAKES, INC.,
INC., a California corporation, as Trustee a California corporation
for NATIONAL INVESTORS LAND
HOLDING TRUST ___
By: By:
---------------------------------- -----------------------------
Its: Its:
---------------------------------- -----------------------------
and and
By: By:
---------------------------------- -----------------------------
Its: Its:
---------------------------------- -----------------------------
Agreed to and accepted
by Escrow Holder:
By:
----------------------------------
Its:
----------------------------------
21.
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
<PAGE>
EXHIBIT B
FORM OF DEED
RECORDING REQUESTED BY:
WHEN RECORDED MAIL TO:
Arter & Hadden LLP
725 South Figueroa Street, Suite 3400
Los Angeles, California 90017
Attn.: Bruce H. Newman, Esq.
- --------------------------------------------------------------------------------
(Above Space For Recorder's Use Only)
GRANT DEED
In accordance with Section 11932 of the California Revenue and Taxation
Code, Grantor has declared the amount of transfer tax which is due by a separate
statement which is not being recorded with this Grant Deed.
FOR A VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED,
NATIONAL INVESTORS FINANCIAL, INC., a CALIFORNIA corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ("Grantor"), hereby grants to CYPRESS
LAKES, INC., a California corporation ("Grantee"), the real property in the
County of Contra Costa, State of California, and described in EXHIBIT A attached
hereto and made a part hereof.
DATED: __________________, 1998
NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST __
By:
-------------------------
Its:
-------------------------
By:
-------------------------
Its:
-------------------------
- ------------
MAIL TAX STATEMENTS TO:
<PAGE>
ACKNOWLEDGMENT
STATE OF CALIFORNIA )
) ss.
COUNTY OF ________________ )
On ____________________, before me, _____________________________________,
personally appeared ______________________________, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
- ------------------------------------
Notary Public in and for said
County and State [SEAL]
<PAGE>
Document No. ____________________ Date Recorded_________________
STATEMENT OF TAX DUE AND REQUEST THAT TAX DECLARATION
NOT BE MADE A PART OF THE PERMANENT RECORD
IN THE OFFICE OF THE COUNTY RECORDER
(Pursuant to Section 11932 R&T Code)
To: Registrar-Recorder
County of __________________
Request is hereby made in accordance with the provisions of the Documentary
Transfer Tax Act that the amount of tax due not be shown on the original
document which names:
- ---------------------------------------------
(as grantor)
and
- ---------------------------------------------
(as grantee)
Property described in the accompanying document is located in
( ) unincorporated area or (x) City of __________________________.
The amount of tax due on the accompanying document is $________________.
_______ Computed on full value of property conveyed, or
_______ Computed on full value less liens and encumbrances remaining at
time of sale.
- ---------------------------------------------
- ---------------------------------------------
By:
--------------------------
Its:
--------------------------
<PAGE>
EXHIBIT C
Seller's FIRPTA Affidavit
CERTIFICATION OF NON-FOREIGN STATUS
Section 1445 of the Internal Revenue Code provides that a
transferee of a U.S. real property interest must withhold tax if the transferor
is a foreign person. To inform the transferee that withholding of tax is not
required upon the disposition of a U.S. real property interest by NATIONAL
INVESTORS FINANCIAL, INC., a California corporation, AS TRUSTEE for NATIONAL
INVESTORS LAND HOLDING TRUST ____ ("TRANSFEROR"), each of the undersigned hereby
certifies the following on behalf of Transferor:
1. Transferor is not a foreign corporation, foreign partnership,
foreign trust and foreign estate (as those terms are defined in the Internal
Revenue Code and Income Tax Regulations);
2. Transferor's U.S. employer identification number is
_____________; and
3. Transferor's office address is ____________________________,
___________________.
Transferor understands that this certification may be disclosed to
the Internal Revenue Service by transferee and that any false statement
contained herein could be punished by fine, imprisonment or both.
Under penalties of perjury each of the undersigned declares that he
has examined this certification and to the best of his knowledge and belief it
is true, correct and complete, and he further declares that he has authority to
sign the document on behalf of the Transferor.
NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___
By:
--------------------------
Its:
--------------------------
By:
--------------------------
Its:
--------------------------
<PAGE>
EXHIBIT D
ASSIGNMENT AND ASSUMPTION
OF
AGREEMENTS
THIS ASSIGNMENT AND ASSUMPTION OF AGREEMENTS (this "Assignment") is
executed as of ______________, but effective as of the Effective Date (as
hereinafter defined), by and between NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for NATIONAL INVESTORS LAND HOLDING TRUST ___
("Assignor"), and CYPRESS LAKES, INC., a California corporation ("Assignee"),
with reference to the following facts:
RECITALS:
A. Assignor, as the agent of and for the benefit of various
investors, holds title to that certain real property commonly known as "Cypress
Lakes and Country Club", located in the County of Contra Costa, State of
California, as more particularly described on Exhibit "A" attached hereto and
incorporated herein by reference (the "Property").
B. Concurrently herewith, Assignor has executed that certain
Grant Deed conveying and granting to Assignee the Property.
C. As part of the transfer and conveyance of the Property to
Assignee, Assignor has agreed to transfer, assign, grant and convey to Assignee
all of its right, title and interest in and to all agreements relating to the
Property, on the terms and conditions herein contained.
NOW, THEREFORE, in consideration of the foregoing Recitals, which
Recitals are by this reference incorporated herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. ASSIGNMENT. Assignor hereby grants, assigns, transfers, sets
over, sells, conveys and delivers to Assignee all of Assignor's right, title,
interest, benefits and privileges under the agreements relating to the Property
which are set forth in Exhibit "B" attached hereto and made a part hereof
(collectively, the "Agreements"). The assignment provided for in this Section 1
is effective concurrently with the transfer of the Property from Assignor to
Assignee (the "Effective Date").
i.
<PAGE>
2. ASSIGNEE'S ASSUMPTION. Assignee hereby accepts the assignment
from Assignor, assumes and agrees to perform all duties and obligations of
Assignor under the terms of the Agreements which are required to be performed on
or after the Effective Date.
3. DELIVERIES; REPORTS. On or before the Effective Date,
Assignor shall deliver to Assignee the original Agreements or if such original
Agreements are not in Assignor's possession, certified copies of such
Agreements. Assignor shall furnish and deliver to Assignee, promptly after
receipt thereof, duplicates or copies of all reports, notices, requests,
demands, declarations, certificates or other instruments hereafter received by
Assignor and relating to the Agreements. Assignee's address for receipt of the
foregoing is _______________________
______________________________________________________________.
4. FURTHER ASSURANCES. Assignor and Assignee shall execute,
acknowledge and deliver all such instruments and take all such action as may be
necessary to further assure to Assignee the rights assigned hereby and the full
benefits hereof and to preserve and protect this Assignment and all of the
rights, powers and remedies of Assignee provided for herein.
5. SUCCESSORS AND ASSIGNS. This Assignment shall be binding
upon and inure to the benefit of the successors and assigns of the respective
parties hereto.
6. GOVERNING LAW. This Assignment shall be governed by, and
construed in accordance with, the laws of the State of California.
7. COUNTERPARTS. This Assignment may be executed in several
counterparts, each of which shall be an original, but all of which taken
together shall constitute one and the same instrument.
ii.
<PAGE>
IN WITNESS WHEREOF, Assignor and Assignee have executed this
Assignment as of the date first above written but effective as of the Effective
Date.
ASSIGNOR: NATIONAL INVESTORS FINANCIAL, INC., a California
corporation, AS TRUSTEE for NATIONAL INVESTORS
LAND HOLDING TRUST ___
By:
---------------------------------
Its:
---------------------------------
By:
---------------------------------
Its:
---------------------------------
ASSIGNEE: CYPRESS LAKES, INC.,
a California corporation
By:
---------------------------------
Its:
---------------------------------
By:
---------------------------------
Its:
---------------------------------
iii.
<PAGE>
EXHIBIT E
BILL OF SALE AND GENERAL ASSIGNMENT OF INTANGIBLES
This Bill of Sale and General Assignment of Intangibles is made as
of the ____ day of ___________________________, 1998 (this "Assignment"), by
NATIONAL INVESTORS FINANCIAL, INC., a California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___ ("Assignor") to CYPRESS LAKES, INC., a
California corporation ("Assignee").
R E C I T A L
Assignee and Assignor have entered into an Agreement of Purchase
and Sale and Joint Escrow Instructions dated ________, 1998 ("Agreement of
Purchase and Sale") under which Assignee has agreed to purchase from Assignor,
that certain real property and any and all buildings, structures and
improvements on said real property commonly identified as "Cypress Lakes and
Country Club", located in the County of Contra Costa, State of California and
legally described on EXHIBIT A attached hereto (the "Property").
TERMS AND CONDITIONS
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Assignor hereby assigns, transfers and sets over unto
Assignee, its successors and assigns, all personal property of Seller, if any,
located on and used in connection with the operation of the improvements on the
Property (the "Personal Property"). Buyer accepts such Personal Property in its
"AS-IS" condition and "WITH ALL FAULTS". Seller specifically disclaims all
express or implied warranties regarding the existence or condition of, or title
to, such Personal Property, including without limitation the implied warranties
of merchantability and suitability for a particular purpose.
2. Assignor hereby assigns, transfers and sets over unto
Assignee, its successors and assigns, all of its right, title and interest in
and to the following ("General Intangibles") if, and only to the extent, that
the General Intangibles exist and Assignor has the right to so transfer them:
(A) All of Assignor's right, title and interest in and to
all intangible property used, owned or issued solely in connection with the
Property, including but not limited to, all licenses, permits, certificates of
occupancy, approvals, maps, dedications, subdivision maps and entitlements
issued, approved or granted by any governmental agencies or instrumentalities
having any jurisdiction over the Property (the "Authorities") or otherwise in
i.
<PAGE>
connection with the Property; all development rights, conditional use permits,
variances, "floor area ratio" development rights and other intangible rights,
titles, interests, privileges and appurtenances owned by Assignor and related to
or issued in connection with the Property and/or its use, occupancy, operation
and/or development; all licenses, consents, easements, rights of way, and
approvals required from private parties to make use of utilities and to insure
vehicular and pedestrian ingress and egress to the Property; and any pending
applications or requests as to any of the foregoing;
(B) All building plans, specifications and drawings,
engineering, and other documents prepared in connection with the construction,
reconstruction, maintenance, repair, or operation any improvements on the
Property (the "Improvements");
(C) All warranties and guarantees relating to the
workmanship, construction, installation materials, and design of the
Improvements and the personal property situated on the Property, including but
not limited to those made by or received from any third party with respect to
any building, building component, structure, fixture, machinery, equipment or
material situated on, contained in any building or other improvement situated
on, or comprising a part of any building or other improvement situated on any
part of the Property;
(D) All rights, claims or awards benefiting the Property;
(E) All prepaid fees and fee credits, and all of Seller's
right, title and interest in and to refundable deposits, bonds and other
collateral furnished in connection with development of the Property; and
(F) All rights and general intangibles now owned by
Assignor solely in connection with the Property and any improvement and/or
fixture located on the Property, including, without limitation, the rights to
hold, use, sell and transfer the Property and Improvements and general
intangibles.
3. Assignor hereby covenants that it will, at any time and from
time to time upon written request therefor, execute and deliver to Assignee, its
successors and assigns any new or confirmatory instruments and take such further
acts as Assignee may reasonably request to fully evidence the assignment
contained herein and to enable Assignee, its successors and assigns to fully
realize and enjoy the rights and interests assigned hereby.
ii.
<PAGE>
4. Assignee hereby accepts the foregoing assignment.
5. Assignor hereby represents and warrants to Assignee that it
has not previously assigned or hypothecated its interest in the foregoing
described General Intangibles; however, Assignee shall have no claims or rights
against Assignor, and Assignor shall have no obligation or liability to Assignee
for any General Intangibles described herein which do not exist, or which
Assignor does not have the right to transfer to Assignee.
6. This Assignment shall be binding upon and inure to the
benefit of the legal representatives, assigns, or successors in interest of the
Assignor and Assignee.
IN WITNESS WHEREOF, the Assignor has executed this Assignment as of
_________, 1998.
NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, as Trustee for
NATIONAL INVESTORS LAND HOLDING
TRUST ___
By:
------------------------------
Its:
-----------------------------
By:
------------------------------
Its:
-----------------------------
iii.
<PAGE>
AGREEMENT OF PURCHASE AND SALE
AND JOINT ESCROW INSTRUCTIONS
BY AND BETWEEN
NATIONAL INVESTORS FINANCIAL, INC.,
a California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___,
AS SELLER,
AND
ESPERANZA, INC.,
a California corporation,
AS BUYER
RELATING TO
PROPERTY LOCATED IN
Victorville, California
known as
"ESPERANZA AT VICTORVILLE"
DATED AS OF
__________________, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2. Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.1 Purchase and Sale. . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.2 Substance of Transactions. . . . . . . . . . . . . . . . . . . . . . .5
3. Exchange Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
4. Escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
5. Cancellation Fees and Expenses. . . . . . . . . . . . . . . . . . . . . .6
6. Deliveries to Escrow Holder . . . . . . . . . . . . . . . . . . . . . . .6
6.1 By Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
6.2 By Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
6.3 By Buyer and Seller. . . . . . . . . . . . . . . . . . . . . . . . . .7
7. Condition of Title. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
7.1 Permitted Exceptions . . . . . . . . . . . . . . . . . . . . . . . . .7
7.2 Title Provided by Seller . . . . . . . . . . . . . . . . . . . . . . .7
8. Conditions to the Close of Escrow . . . . . . . . . . . . . . . . . . . .7
8.1 Conditions Precedent to Buyer's Obligations. . . . . . . . . . . . . .7
8.2 Conditions Precedent to Seller's Obligations . . . . . . . . . . . . .8
9. Approval of Seller's Constituents.. . . . . . . . . . . . . . . . . . . .8
10. Property "As-Is".. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
10.1 No Side Agreements Or Representations; As-Is Purchase . . . . . . . .9
10.2 Disclosures; Specific Acknowledgment Regarding
Condition of Property . . . . . . . . . . . . . . . . . . . . . . 12
11. Title Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
i.
<PAGE>
<TABLE>
<S> <C>
12. Costs and Expenses.. . . . . . . . . . . . . . . . . . . . . . . . . . 12
13. Disbursements and Other Actions: . . . . . . . . . . . . . . . . . . . 13
13.1 Escrow Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
13.2 By Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . 13
13.3 Possession. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
14. Joint Representations and Warranties . . . . . . . . . . . . . . . . . 13
14.1 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
14.2 Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
14.3 Due Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
14.4 Valid and Binding . . . . . . . . . . . . . . . . . . . . . . . . . 14
14.5 Broker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
15. Seller's Warranties and Representations. . . . . . . . . . . . . . . . 14
15.1 Non-Foreign Entity. . . . . . . . . . . . . . . . . . . . . . . . . 14
15.2 Hazardous Substances. . . . . . . . . . . . . . . . . . . . . . . . 14
15.3 Clean-up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
15.4 Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
16. Pre-Closing Covenants. . . . . . . . . . . . . . . . . . . . . . . . . 15
16.1 No Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
16.2 No Alterations. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
16.3 Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
16.4 Obligations Under Contracts . . . . . . . . . . . . . . . . . . . . 15
16.5 Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
17. Condemnation and Destruction . . . . . . . . . . . . . . . . . . . . . 15
17.1 Eminent Domain or Taking. . . . . . . . . . . . . . . . . . . . . . 15
17.2 Damage or Destruction . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
ii.
<PAGE>
<TABLE>
<S> <C>
18. Utilities and Deposits . . . . . . . . . . . . . . . . . . . . . . . . 17
18.1 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
18.2 Refundable Deposits . . . . . . . . . . . . . . . . . . . . . . . . 17
19. Mediation of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . 17
20. Arbitration of Disputes. . . . . . . . . . . . . . . . . . . . . . . . 17
21. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
22. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
23. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
23.1 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
23.2 Partial Invalidity. . . . . . . . . . . . . . . . . . . . . . . . . 18
23.3 Possession of the Property. . . . . . . . . . . . . . . . . . . . . 19
23.4 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
23.5 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . 19
23.6 Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . 19
23.7 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . 19
23.8 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . 19
23.9 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
23.10 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
23.11 Wear and Tear. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
23.12 No Recordation . . . . . . . . . . . . . . . . . . . . . . . . . . 20
23.13 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
23.14 Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
23.15 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
iii.
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
EXHIBIT A - Legal Description
EXHIBIT B - Form of Grant Deed
EXHIBIT C - FIRPTA Affidavit
EXHIBIT D - Assignment and Assumption
EXHIBIT E - Bill of Sale and General Assignment of Intangibles
</TABLE>
iv.
<PAGE>
AGREEMENT OF PURCHASE AND SALE
AND JOINT ESCROW INSTRUCTIONS
THIS AGREEMENT OF PURCHASE AND SALE AND JOINT ESCROW INSTRUCTIONS
("AGREEMENT") is made and entered into as of ____________ __, 1998, by and
between NATIONAL INVESTORS FINANCIAL, INC., a California corporation, AS TRUSTEE
for NATIONAL INVESTORS LAND HOLDING TRUST ___ ("SELLER"), and ESPERANZA, INC., a
California corporation ("BUYER").
R E C I T A L S
A. Seller is the owner of that certain unimproved real property
commonly known as "Esperanza at Victorville", consisting of approximately 6.12
acres, located in the City of Victorville, County of San Bernardino, State of
California, as more particularly described in Exhibit A attached hereto (the
"Real Property").
B. Seller holds record title to the Real Property as agent of and
for the benefit of various investors who are the beneficiaries of National
Investors Land Holding Trust ____ (the "Trust").
C. Seller desires to sell to Buyer and Buyer desires to purchase
from Seller the Property (as hereinafter defined) on the terms and conditions
set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing Recitals, which
Recitals are incorporated herein by this reference, and for other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, Buyer and Seller agree as follows:
A G R E E M E N T
1. DEFINITIONS: For the purposes of this Agreement the following
terms will be defined as follows:
1.1 "ACTUAL KNOWLEDGE OF SELLER" means and is limited to the actual
knowledge of David Lasker and James N. Orth without having conducted any
independent inquiry or inspection, and shall not include the knowledge of any
other persons or firms, it being understood and agreed by Buyer that neither
David Lasker nor James N. Orth is charged with knowledge of all of the acts
and/or omissions of predecessors in title to the Property or management of the
Property before Seller's acquisition of the Property and the Actual Knowledge of
Seller shall not include information or material which may be in the possession
of Seller generally, but of which neither David Lasker nor James N. Orth is
actually aware.
1.2 "AFC" means American Family Communities, Inc., a California
corporation, which is a wholly-owned subsidiary of AFH.
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1.3 "AFH" means American Family Holdings, Inc., a Delaware
corporation. Buyer is a wholly-owned subsidiary of AFC, which, in turn, is a
wholly-owned subsidiary of AFH.
1.4 "ASSIGNMENT" shall have the meaning given thereto in
Section 6.1(d) hereof.
1.5 "BILL OF SALE" shall have the meaning given thereto in
Section 6.1(e) hereof.
1.6 "CLOSING DATE" means ___________, 1998, unless an earlier date is
agreed to in a writing subsequent to this Agreement executed and delivered by
each of the parties hereto to the other, and is the last date on which the
Closing and Close of Escrow can occur, subject to extension as provided for in
this Agreement.
1.7 "CLOSING" and "CLOSE OF ESCROW" are terms used interchangeably in
this Agreement. The Closing or the Close of Escrow will be deemed to have
occurred when the Grant Deed is recorded in the official records of the county
in which the Property is located.
1.8 "EFFECTIVE DATE" means the date hereof.
1.9 "ENVIRONMENTAL AUDIT" means any environmental audit, review or
testing of the Property performed by Buyer or any third party or consultant
engaged by Buyer to conduct such study.
1.10 "ENVIRONMENTAL LAW" means any law, statute, ordinance or
regulation pertaining to health, industrial hygiene or the environment
including, without limitation, CERCLA (Comprehensive Environmental Response,
Compensation and Liability Act of 1980) and RCRA (Resources Conservation and
Recovery Act of 1976), as amended.
1.11 "ESCROW" shall have the meaning given thereto in Section 4
hereof.
1.12 "ESCROW HOLDER" means _______________________________, whose
address is _______________________________________________________________,
Attn.: ___________________.
1.13 "EXCHANGE VALUE" is the adjusted appraised value of the Property
which takes into consideration various factors to balance the business value of
the Property within its present ownership structure.
1.14 "FIRPTA CERTIFICATE" shall have the meaning given thereto in
Section 6.1(b) hereof.
1.15 "GRANT DEED" shall have the meaning given thereto in
Section 6.1(a) hereof.
1.16 "HAZARDOUS SUBSTANCE" means any substance, material or waste
which is or becomes designated, classified or regulated as being "toxic" or
"hazardous" or a "pollutant" or
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which is or becomes similarly designated, classified or regulated, under any
Environmental Law, including asbestos, petroleum and petroleum products.
1.17 "IMPROVEMENTS" means any and all improvements and fixtures
situated on the Real Property.
1.18 "INVESTORS" means the beneficiaries of the Trust.
1.19 "INTANGIBLES" means all of Seller's right, title and interest in
and to all intangible property used, owned or issued solely and strictly in
connection with the Real Property, Improvements and Personal Property,
including, but not limited to: (i) trade names and trademarks, contract rights,
accounts receivable and other intangible property used in connection with the
ownership and operation of the Property; (ii) all licenses, permits,
certificates of occupancy, approvals, dedications and entitlements issued,
approved or granted by any governmental authorities having jurisdiction over the
Property; and (iii) all development rights, conditional use permits, variances
and other intangible rights, titles, interests and privileges owned by Seller
and related to or issued in connection with the Land and/or Improvements, its
use, occupancy, operation and development, but in no way related to Seller's
financial data or other proprietary information or other property of Seller.
1.20 "NOTICES" will be sent as provided in Section 21 to:
Seller: National Investors Land Holding Trust
c/o National Investors Financial, Inc.
4675 MacArthur Court, Suite 1240
Newport Beach, CA 92660
Attn.: Mr. David Lasker
Telephone: (949) 833-8600
Facsimile: (949) 752-9753
with a copy to: Arter & Hadden LLP
725 South Figueroa Street, Suite 3400
Los Angeles, CA 90017
Attn.: Bruce H. Newman, Esq.
Telephone: (213) 430-3000
Facsimile: (213) 617-9255
3.
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Buyer: Esperanza, Inc.
___________________________
___________________________
Attn.:_____________________
Telephone:_________________
Facsimile:_________________
with a copy to: Arter & Hadden LLP
725 South Figueroa Street, Suite 3400
Los Angeles, CA 90017
Attn.: Bruce H. Newman, Esq.
Telephone: (213) 430-3000
Facsimile: (213) 617-9255
Escrow Holder: ___________________________
___________________________
___________________________
Attn.:_____________________
Telephone:_________________
Facsimile:_________________
1.21 "OPENING OF ESCROW" shall have the meaning given thereto in
Section 4 hereof.
1.22 "OTHER ASSETS" means cash, cash equivalent, notes and other
negotiable instruments and any and all other assets in the possession or control
of Seller, the value of which is determined by possession, and any other assets
other than the Real Property, Personal Property or Intangibles relating to the
Real Property.
1.23 "PERMITTED EXCEPTIONS" shall have the meaning given thereto in
Section 7.1 hereof.
1.24 "PERSONAL PROPERTY" means the equipment, furniture and fixtures,
books and records and other personal property, if any, owned by Seller and
located on the Property as of the Effective Date, including without limitation,
those items listed on SCHEDULE 1 to the Bill of Sale.
1.25 "PROPERTY" means collectively, (i) the Real Property, (ii) the
Improvements, (iii) the Intangibles, (iv) the Personal Property and (v) the
Other Assets.
1.26 "PROSPECTUS" means the Consent Solicitation Statement/Prospectus
of Buyer.
1.27 "REAL PROPERTY" means that certain real property located in the
City of Victorville, County of San Bernardino, State of California and commonly
known as "Esperanza at Victorville" and more particularly described in EXHIBIT A
attached hereto. The Real Property also is described in the Recitals hereof.
4.
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1.28 "TITLE COMPANY" means ________________________________________.
1.29 "TITLE POLICY" shall have the meaning given thereto in Section 11
hereof.
1.30 "TRANSFER AGENT" means _________________________, who address is
__________________, Attn.: ___________, Facsimile No. ___________..
2. PURCHASE AND SALE
2.1 PURCHASE AND SALE. Upon and subject to the terms and conditions
set forth in this Agreement, Seller agrees to sell to Buyer and Buyer agrees to
buy from Seller the Property, together with all easements, hereditaments,
entitlements (to the extent transferable) and appurtenances thereto. In
consideration of Seller's sale of the Property to Buyer, Buyer will (a) cause to
be delivered to the investors of Seller the Exchange Value in accordance with
Section 3, and (b) perform all of Buyer's other obligations hereunder.
2.2 SUBSTANCE OF TRANSACTIONS. Notwithstanding any other provision
of this Agreement, the transfer of the Property directly from Seller to Buyer is
for convenience purposes only to effect expeditiously the culmination of the
transfers set forth in this Section 2.2, and for all purposes hereunder it is
the intent of the parties that such transfer reflects the following transfers,
which shall occur in the following order: (i) all of the Investors, through
their approval of the transactions contemplated under this Agreement, contribute
all of their interests in the Property to AFH in exchange for shares of common
stock of AFH, such shares to be distributed to them pursuant to Sections 3 and
13.2 hereof; (ii) AFH contributes the Property to AFC as a contribution to the
capital of AFC; and (iii) AFC contributes the Property to Buyer as a
contribution to the capital of Buyer. Seller's transfer of the Property
directly to Buyer reflects Seller's transfer of the Property from the Investors
to AFH, from AFH to AFC, and from AFC to the Buyer, in each instance in Seller's
capacity as the agent of and on behalf of such transferors.
3. EXCHANGE VALUE: In consideration for the sale of the Property to
Buyer, Buyer will deliver to Seller an amount equal to the Exchange Value for
the Property. The Exchange Value for the Property is $______________, which
shall be paid in the form of, and by issuance and delivery of, _____ shares of
common stock in AFH to the investors of Seller, to be distributed by the
Transfer Agent at the Closing outside of Escrow in accordance with Section 13.2
hereof. Upon the request of any party hereto, whether made before or after the
Closing, the parties hereto will allocate the Exchange Value to the Real
Property, Improvements, Personal Property, Other Assets and the Intangibles.
5.
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4. ESCROW: Immediately upon execution of this Agreement, Buyer and
Seller will open an escrow (the "ESCROW") with the Escrow Holder by delivering
to Escrow Holder a fully executed copy of this Agreement (the "OPENING OF
ESCROW"). The purchase and sale of the Property will be completed through the
Escrow. Buyer and Seller agree to execute any additional instructions
consistent with this Agreement which are reasonably required by the Escrow
Holder. If there is a conflict between any printed escrow instructions and this
Agreement, the terms of this Agreement will govern.
5. CANCELLATION FEES AND EXPENSES: If the Closing does not occur at
the time and in the manner provided in this Agreement because of the default of
one of the parties, the non-defaulting party has the right to cancel the Escrow
by written notice to the defaulting party and to the Escrow Holder. All costs
of cancellation, if any, will be paid by the defaulting party.
6. DELIVERIES TO ESCROW HOLDER:
6.1 BY SELLER. On or prior to the Closing Date, Seller will deliver
or cause to be delivered to Escrow Holder the following items:
(a) A Grant Deed ("GRANT DEED"), in the form attached to this
Agreement as EXHIBIT B, duly executed and acknowledged by Seller and in
recordable form, conveying the Property to Buyer.
(b) A Transferor's Certificate of Non-Foreign Status attached
to this Agreement as EXHIBIT C ("FIRPTA CERTIFICATE"), duly executed by
or on behalf of Seller.
(c) A properly executed California Form RE 590 or other
evidence sufficient to establish that Buyer is not required to withhold
any portion of the Exchange Value pursuant to Sections 18805 and 26131
of the California Revenue and Taxation Code ("FORM 590").
(d) An Assignment and Assumption of Agreements ("ASSIGNMENT")
duly executed by Seller in favor of Buyer in the form attached to this
Agreement as EXHIBIT D.
(e) A Bill of Sale and General Assignment of Intangibles in
the form attached to this Agreement as EXHIBIT E ("BILL OF SALE"), duly
executed by Seller and conveying all right, title and interest of Seller
in the Personal Property and the Intangibles to Buyer.
(f) Such corporate resolutions, certificates of good standing
and/or other corporate or partnership documents relating to Seller as
are reasonably required by Buyer or Escrow Holder or both in connection
with this transaction.
6.2 BY BUYER. On or prior to the Closing Date, Buyer will deliver or
cause to be delivered to Escrow Holder the following items:
6.
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(a) Such corporate resolutions, certificates of good standing
and/or other corporate or partnership documents relating to Buyer as are
reasonably required by Seller or Escrow Holder or both in connection
with this transaction.
(b) Amounts due to pay costs and expenses as set forth in
Section 12 hereof.
6.3 BY BUYER AND SELLER. Buyer and Seller will each deposit such
other instruments consistent with this Agreement as are reasonably required by
Escrow Holder or otherwise required to close escrow. In addition Seller and
Buyer hereby designate Escrow Holder as the "REPORTING PERSON" for the
transaction pursuant to Section 6045(e) of the Internal Revenue Code.
7. CONDITION OF TITLE:
7.1 PERMITTED EXCEPTIONS. At the Close of Escrow, fee simple title
to the Property will be conveyed to Buyer by Seller by Grant Deed, subject only
to the following title matters ("PERMITTED EXCEPTIONS"):
(a) all property tax liens (whether or not payment of
property taxes are delinquent) and all other matters shown in that
certain Commitment for Title Insurance effective _______________, issued
by the Title Company, bearing Order No.________; and
(b) matters affecting the condition of title to the Property
created by, at the request of or with the written consent of Buyer.
7.2 TITLE PROVIDED BY SELLER. The parties agree that (a) except as
specifically provided in the Grant Deed or implied by law, Seller makes no
express or implied warranties regarding the condition of title to the Property,
and (b) Buyer shall rely solely on the Title Policy for protection against any
title defects.
8. CONDITIONS TO THE CLOSE OF ESCROW:
8.1 CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. The following
conditions must be satisfied not later the earlier of the Closing Date or such
other period of time as may be specified below:
8.1.1 TITLE. As of the Closing, the Title Company will issue
or have committed to issue to Buyer the Title Policy described in
Section 11.
8.1.2 REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER.
Seller will have duly performed each and every agreement to be performed
by Seller hereunder and, subject to the provisions of Section 10,
Seller's express representations and warranties set forth in this
Agreement will be true and correct in all material respects as of the
Closing Date. However, notwithstanding anything to the contrary stated
or implied in this Section 8.1.2, Seller shall have no liability for the
breach of any representations, warranties or covenants
7.
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set forth in this Agreement, whether express or implied, absent a
finding by a court of competent jurisdiction that either David Lasker or
James N. Orth or both of them withheld information with respect thereto
from Buyer or falsified information delivered to and relied upon by
Buyer and that such action amounted to a violation of a representation
or warranty set forth herein.
8.1.3 SELLER'S DELIVERIES. Seller will have delivered the
items described in Section 6.1.
The conditions set forth in this Section 8.1 are solely for the benefit
of Buyer and may be waived only by Buyer. At all times Buyer has the right to
waive any condition. Such waiver or waivers must be in writing to Seller. If
any conditions are not satisfied on or before the Closing Date, and Buyer has
not waived the unsatisfied conditions, Seller will not be deemed to be in
default (unless Seller has breached Sections 8.1.2 or 8.1.3 above) and Buyer's
sole remedy will be to terminate this Agreement.
8.2 CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS. The Close of
Escrow and Seller's obligations with respect to this transaction are subject to
the following conditions precedent: (a) Buyer's delivery to Escrow Holder on or
before the Closing Date, of the items described in Section 6.2; (b) the approval
of such of Seller's constituents as Seller shall deem necessary or advisable in
its sole and absolute discretion as set forth in Section 9 hereof; (c) Buyer
having duly performed each and every agreement to be performed by Buyer
hereunder; and (d) Buyer's representations, warranties and covenants set forth
in this Agreement, will be true and correct in all material respects as of the
Closing Date. The conditions set forth in this Section 8.2 are solely for the
benefit of Seller and may be waived only by Seller, with such waiver or waivers
to be in writing to Buyer. If any conditions are not satisfied on or before the
Closing Date, and Seller has not waived the unsatisfied conditions, Buyer will
not be deemed to be in default (unless Buyer has breached Sections 8.2(a), (c)
or (d) above) and Seller's sole remedy will be to terminate the Agreement.
9. APPROVAL OF SELLER'S CONSTITUENTS: Seller shall exercise
reasonable diligence to obtain the approval of this transaction by such of the
constituents of Seller as Seller shall deem necessary or advisable, in its sole
and absolute discretion, and shall notify Buyer and Escrow Holder when such
approvals have been obtained. If Seller is not able to obtain such approvals
from such constituents on or before the date which is ____ days after the
Effective Date, or such later date as is mutually agreed to by Buyer and Seller,
then Seller may cancel this Agreement by notice to Buyer and Escrow Holder given
prior to the end of that time period, and in that event Seller shall pay all
title and escrow cancellation costs. Seller shall indemnify and hold Buyer
harmless from any claim, damage, loss, liability, action, settlement, including
Buyer's reasonable attorneys' fees suffered by Buyer and which results from or
relates to the Seller's securing approval of this transaction and transferring
the Property to Buyer pursuant to such approval.
8.
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10. PROPERTY "AS-IS":
10.1 NO SIDE AGREEMENTS OR REPRESENTATIONS; AS-IS PURCHASE. BUYER
REPRESENTS, WARRANTS AND COVENANTS TO SELLER THAT BUYER HAD THE OPPORTUNITY TO
INDEPENDENTLY AND PERSONALLY INSPECT THE PROPERTY AND IMPROVEMENTS, IF ANY, AND
THAT BUYER HAS ENTERED INTO THIS AGREEMENT AFTER HAVING MADE SUCH PERSONAL
EXAMINATION AND INSPECTION. BUYER AGREES THAT BUYER WILL ACCEPT THE PROPERTY,
IN ITS THEN CONDITION AS-IS AND WITH ALL ITS FAULTS, INCLUDING WITHOUT
LIMITATION, ANY FAULTS AND CONDITIONS SPECIFICALLY REFERENCED IN THIS AGREEMENT,
SUBJECT TO THE EXPRESS COVENANTS, INDEMNITIES, REPRESENTATIONS AND WARRANTIES
MADE BY SELLER ELSEWHERE HEREIN. NO PERSON ACTING ON BEHALF OF SELLER IS
AUTHORIZED TO MAKE, AND BY EXECUTION HEREOF, BUYER ACKNOWLEDGES AND AGREES THAT,
EXCEPT FOR THOSE REPRESENTATIONS, WARRANTIES, COVENANTS, INDEMNITIES AND
AGREEMENTS EXPRESSLY MADE BY SELLER IN THIS AGREEMENT, SELLER HAS NOT MADE, DOES
NOT MAKE AND SPECIFICALLY NEGATES AND DISCLAIMS ANY REPRESENTATIONS, WARRANTIES,
PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER
WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR
FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO:
(A) THE VALUE OF THE PROPERTY OR THE INCOME TO BE DERIVED
THEREFROM;
(B) THE SUITABILITY OF THE PROPERTY FOR ANY AND ALL
ACTIVITIES AND USES WHICH BUYER MAY CONDUCT THEREON, INCLUDING
ANY DEVELOPMENT OF THE PROPERTY;
(C) THE HABITABILITY, MERCHANTABILITY, MARKETABILITY,
PROFITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE
PROPERTY;
(D) THE MANNER, QUALITY, STATE OF REPAIR OR LACK OF REPAIR
OF THE PROPERTY;
(E) THE NATURE, QUALITY OR CONDITION OF THE PROPERTY,
INCLUDING WITHOUT LIMITATION, THE WATER, SOIL AND GEOLOGY;
(F) THE TYPE, AVAILABILITY OR COST OF ANY ENTITLEMENTS
REQUIRED TO DEVELOP THE PROPERTY;
9.
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(G) THE COMPLIANCE OF OR BY THE PROPERTY OR ITS OPERATION
WITH ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY APPLICABLE
GOVERNMENTAL AUTHORITY OR BODY;
(H) THE MANNER, CONDITION OR QUALITY OF THE CONSTRUCTION OR
MATERIALS, IF ANY, INCORPORATED INTO THE PROPERTY;
(I) COMPLIANCE WITH ANY ENVIRONMENTAL PROTECTION, POLLUTION
OR LAND USE LAWS, RULES, REGULATION, ORDERS OR REQUIREMENTS,
INCLUDING BUT NOT LIMITED TO, THE ENDANGERED SPECIES ACT, TITLE
III OF THE AMERICANS WITH DISABILITIES ACT OF 1990 OR ANY OTHER
LAW, RULE OR REGULATION GOVERNING ACCESS BY DISABLED PERSONS,
CALIFORNIA HEALTH & SAFETY CODE, THE FEDERAL WATER POLLUTION
CONTROL ACT, THE FEDERAL RESOURCE CONSERVATION AND RECOVERY ACT,
THE U.S. ENVIRONMENTAL PROTECTION AGENCY REGULATIONS AT 40
C.F.R., PART 261, THE COMPREHENSIVE ENVIRONMENTAL RESPONSE
COMPENSATION AND LIABILITY ACT OF 1980, AS AMENDED, THE RESOURCES
CONSERVATION AND RECOVERY ACT OF 1976, THE CLEAN WATER ACT, THE
SAFE DRINKING WATER ACT, THE HAZARDOUS MATERIALS TRANSPORTATION
ACT, THE TOXIC SUBSTANCE CONTROL ACT, AND REGULATIONS PROMULGATED
UNDER ANY OF THE FOREGOING;
(J) THE PRESENCE OR ABSENCE OF HAZARDOUS MATERIALS AT, ON,
UNDER, OR ADJACENT TO THE PROPERTY;
(K) THE CONTENT, COMPLETENESS OR ACCURACY OF ANY MATERIALS,
INCLUDING ANY INFORMATIONAL PACKAGE, COST TO COMPLETE ESTIMATE OR
OTHER MATERIALS PREPARED BY OR ON BEHALF OF SELLER;
(L) THE CONFORMITY OF THE IMPROVEMENTS TO ANY PLANS OR
SPECIFICATIONS FOR THE PROPERTY, INCLUDING ANY PLANS AND
SPECIFICATIONS THAT MAY HAVE BEEN OR MAY BE PROVIDED TO BUYER;
(M) THE CONFORMITY OF THE PROPERTY TO PAST, CURRENT OR
FUTURE APPLICABLE ZONING OR BUILDING REQUIREMENTS;
(N) DEFICIENCY OF ANY UNDERSHORING;
10.
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(O) DEFICIENCY OF ANY DRAINAGE;
(P) THE FACT THAT ALL OR A PORTION OF THE PROPERTY MAY BE
LOCATED ON OR NEAR AN EARTHQUAKE FAULT LINE OR LOCATED IN AN
ALQUIST-PRIOLO SPECIAL STUDY ZONE;
(Q) THE EXISTENCE OF VESTED LAND USE, ZONING OR BUILDING
ENTITLEMENTS AFFECTING THE PROPERTY;
(R) ANY AND ALL REQUIREMENTS OR CONDITIONS OF APPROVAL OF
STATE AND LOCAL GOVERNMENTAL AGENCIES FOR DEVELOPMENT OF THE
PROPERTY INCLUDING, WITHOUT LIMITATION, THE CONSTRUCTION OF
OFFSITE AND ONSITE ROADS, UTILITIES AND OTHER IMPROVEMENTS; OR
(S) WITH RESPECT TO ANY OTHER MATTER CONCERNING THE
PROPERTY EXCEPT AS MAY BE OTHERWISE EXPRESSLY STATED HEREIN,
INCLUDING ANY AND ALL SUCH MATTERS REFERENCED, DISCUSSED OR
DISCLOSED IN ANY DOCUMENTS DELIVERED BY SELLER TO BUYER, IN ANY
PUBLIC RECORDS OF ANY GOVERNMENTAL AGENCY OR ENTITY OR UTILITY
COMPANY, OR IN ANY OTHER DOCUMENTS AVAILABLE TO BUYER.
(T) BUYER FURTHER ACKNOWLEDGES AND AGREES THAT BUYER IS
RELYING SOLELY ON ITS OWN INVESTIGATION OF THE PROPERTY AND ITS
OWN REVIEW OF ALL INFORMATION AND DOCUMENTATION CONCERNING THE
PROPERTY, AND NOT ON ANY INFORMATION PROVIDED OR TO BE PROVIDED
BY SELLER. BUYER FURTHER ACKNOWLEDGES AND AGREES THAT ANY
INFORMATION MADE AVAILABLE TO BUYER OR PROVIDED OR TO BE PROVIDED
BY OR ON BEHALF OF SELLER WITH RESPECT TO THE PROPERTY WAS
OBTAINED FROM A VARIETY OF SOURCES AND THAT SELLER HAS NOT MADE
ANY INDEPENDENT INVESTIGATION OR VERIFICATION OF SUCH INFORMATION
AND MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR COMPLETENESS
OF SUCH INFORMATION EXCEPT AS MAY OTHERWISE BE PROVIDED HEREIN.
BUYER AGREES TO FULLY AND IRREVOCABLY RELEASE ALL SUCH SOURCES OF
INFORMATION AND PREPARERS OF INFORMATION AND DOCUMENTATION TO THE
EXTENT SUCH SOURCES OR PREPARERS ARE SELLER, OR ITS EMPLOYEES,
OFFICERS, DIRECTORS, REPRESENTATIVES, BENEFICIARIES, INVESTORS,
AGENTS, SERVANTS, ATTORNEYS, AFFILIATES, PARENT COMPANIES,
SUBSIDIARIES, SUCCESSORS OR ASSIGNS FROM ANY AND ALL CLAIMS,
DAMAGES AND LIABILITIES ARISING FROM SUCH INFORMATION OR
DOCUMENTATION, EXCEPT IF
11.
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AND TO THE EXTENT THAT BUYER EMPLOYS SUCH SOURCES OR PREPARERS OF
INFORMATION TO ACT ON BEHALF OF BUYER, IN WHICH EVENT THE
LIABILITY OF SUCH SOURCES OR PREPARERS OF INFORMATION TO BUYER
SHALL BE DETERMINED BY THEIR OWN INDEPENDENT AGREEMENTS WITH
BUYER, AND SELLER SHALL NOT BE LIABLE FOR SUCH AGREEMENTS OR
OBLIGATIONS. SELLER IS NOT LIABLE OR BOUND IN ANY MANNER BY ANY
ORAL OR WRITTEN STATEMENTS, REPRESENTATIONS OR INFORMATION
PERTAINING TO THE PROPERTY, OR THE OPERATION THEREOF, FURNISHED
BY ANY OF THE FOREGOING ENTITIES AND INDIVIDUALS OR ANY OTHER
INDIVIDUAL OR ENTITY.
10.2 DISCLOSURES; SPECIFIC ACKNOWLEDGMENT REGARDING CONDITION OF
PROPERTY. Buyer acknowledges the disclosures expressly made by Seller in this
Agreement, the Prospectus and in correspondence from Seller, its attorneys
and/or its agents to Buyer, its attorneys and/or its agents.
11. TITLE INSURANCE: At the Close of Escrow, the Title Company will
issue to Buyer at Buyer's sole cost and expense an ALTA Standard Coverage Policy
(1990) with coverage in an amount equal to the appraised value of the Real
Property as determined by Buyer in its sole discretion, showing title to the
Real Property vested in Buyer, subject only to the Permitted Exceptions and the
standard printed exceptions and conditions in the policy of title insurance
("TITLE POLICY"). If Buyer elects to obtain any additional endorsements or an
extended coverage policy, the additional premium and costs of survey for the
extended coverage policy and the cost of any endorsements will be at Buyer's
sole cost and expense; however, Buyer's election to obtain an extended coverage
policy will not delay the Closing and Buyer's inability to obtain an extended
coverage policy or any such endorsements will not be deemed to be a failure of
any condition to Closing.
12. COSTS AND EXPENSES: Buyer will pay the costs of Closing the
transaction as follows:
(a) all premiums for the Title Policy;
(b) all escrow fees and costs;
(c) all city and county documentary transfer taxes;
(d) all document recording charges;
(e) all sales taxes;
(f) one half of all escrow fees and costs;
(g) the entire additional cost of any ALTA extended coverage
title policy, the cost of any required survey and, the cost of any
endorsements required by Buyer; and
12.
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(h) All other costs and expenses necessarily incurred to
close the transaction.
13. DISBURSEMENTS AND OTHER ACTIONS:
13.1 ESCROW HOLDER. At the Close of Escrow, Escrow Holder will
promptly undertake all of the following:
(a) Cause the Grant Deed (with documentary transfer tax
information to be affixed AFTER recording) to be recorded with the
County Recorder and obtain conformed copies thereof for distribution to
Buyer and Seller.
(b) Direct the Title Company to issue the Title Policy to
Buyer within 15 BUSINESS DAYS after Closing.
(c) Deliver to Buyer the FIRPTA Certificate, the Form 590 and
any other documents (or copies thereof) deposited into Escrow by Seller.
Deliver to Seller any other documents (or copies thereof) deposited into
Escrow by Buyer.
(d) Notify the Transfer Agent by telephone and facsimile that
the Close of Escrow has occurred.
13.2 BY TRANSFER AGENT. Promptly after the Close of Escrow,
Transfer Agent shall deliver all shares of common stock of AFH in payment of the
Exchange Value for the Property to the persons, at the addresses and in the
amounts designated by Seller.
13.3 POSSESSION. Possession of the Other Assets in Seller's
possession or control and all other Property shall be delivered by Seller to
Buyer at the Close of Escrow.
14. JOINT REPRESENTATIONS AND WARRANTIES: In addition to any express
agreements of the parties contained herein, the following constitute
representations and warranties of the parties each to the other, provided that
liability for any breach is subject to Sections 8.1.2 and 23.13 hereof:
14.1 AUTHORITY. Each party has the legal power, right and authority
to enter into this Agreement and the instruments referenced herein, and to
consummate this transaction.
14.2 ACTIONS. All requisite action (corporate, trust, partnership or
otherwise) has been taken by each party in connection with the entering into of
this Agreement, the instruments referenced herein, and the consummation of this
transaction. Except as provided in Section 9, no further consent of any
partner, shareholder, creditor, investor, judicial or administrative body,
governmental authority or other party is required.
14.3 DUE EXECUTION. The individuals executing this Agreement and the
instruments referenced herein on behalf of each party and the partners, officers
or trustees of each party, if any,
13.
<PAGE>
have the legal power, right, and actual authority to bind each party to the
terms and conditions of those documents.
14.4 VALID AND BINDING. This Agreement and all other documents
required to close this transaction are and will be valid, legally binding
obligations of and enforceable against each party in accordance with their
terms, subject only to applicable bankruptcy, insolvency, reorganization,
moratorium laws or similar laws or equitable principles affecting or limiting
the rights of contracting parties generally.
14.5 BROKER. Seller represents and warrants to Buyer, and Buyer
represents and warrants to Seller, that no broker or finder has been engaged by
them, respectively, in connection with any of the transactions contemplated by
this Agreement, or to its knowledge is in any way connected with any of such
transactions. Buyer will indemnify, save harmless and defend Seller from any
liability, cost, or expense arising out of or connected with any claim for any
commission or compensation made by any person or entity claiming to have been
retained or contacted by Buyer in connection with this transaction. Seller will
indemnify, save harmless and defend Buyer from any liability, cost, or expense
arising out of or connected with any claim for any commission or compensation
made by any person or entity claiming to have been retained or contacted by
Seller in connection with this transaction. This indemnity provision will
survive the Closing or any earlier termination of this Agreement.
15. SELLER'S WARRANTIES AND REPRESENTATIONS: Seller makes the
following representations, and warranties and acknowledges that Buyer will rely
on such representations and warranties in acquiring the Property; provided that
liability for any breach is subject to Sections 8.1.2 and 23.13 hereof:
15.1 NON-FOREIGN ENTITY. Seller is not a "foreign person" within the
meaning of Section 1445(f)(3) of the Internal Revenue Code.
15.2 HAZARDOUS SUBSTANCES. To Seller's Actual Knowledge, since the
date of Seller's acquisition of the Property, no Hazardous Substances are now or
have been used, stored, generated or disposed of on or within the Property
except in the normal course of use and operation of the Property and in
compliance with all applicable Environmental Laws.
15.3 CLEAN-UP. To Seller's Actual Knowledge, since the date of
Seller's acquisition of the Property, there are and have been no federal, state
or local enforcement, clean-up, removal, remedial or other governmental or
regulatory actions instituted or completed affecting the Property, other than
such other matters as may otherwise be disclosed in any Environmental Audit or
in any other documents provided or made available to Buyer.
15.4 CLAIMS. To Seller's Actual Knowledge, there are no outstanding
claims that have been made by any third party against Seller relating to any
Hazardous Substances on or within the Property.
14.
<PAGE>
The provisions of this Section 15 shall no longer bind Seller if
this Agreement expires or is terminated for any reason, or if the Closing
contemplated hereunder does not occur.
16. PRE-CLOSING COVENANTS. So long as this Agreement remains in full
force and effect:
16.1 NO TRANSFERS. Without the prior written consent of Buyer, Seller
will not convey any interest in the Property and will not subject the Property
to any additional liens, encumbrances, covenants, conditions, easements, rights
of way or similar matters after the date of this Agreement, except as may be
otherwise provided for in this Agreement, which will not be eliminated prior to
the Close of Escrow.
16.2 NO ALTERATIONS. Seller will not make any material alterations to
the Property without Buyer's consent, which will not be unreasonably withheld or
delayed.
16.3 MAINTENANCE. Seller will maintain the Property in substantially
the same condition as it is in, as of the date of this Agreement, and manage the
Property in accordance with Seller's established practices.
16.4 OBLIGATIONS UNDER CONTRACTS. Seller will keep and perform all of
the obligations to be performed by Seller under any contracts affecting the
Property. Without prior written consent of Buyer, which will not be
unreasonably withheld or delayed, Seller will not enter into any contract or
agreement providing for the provision of goods or services to or with respect to
the Property or the operation thereof unless such contracts or agreements can be
terminated without penalty by the Closing Date. Seller will not enter into any
leases for any portion of the Property.
16.5 EXPENDITURES. Seller will incur only expenditures necessary for
the day-to-day operation and maintenance of the Property, and will not incur
capital expenditures or liabilities not in the ordinary course of business.
Seller shall retain all Other Assets in Seller's possession on or after the date
hereof except for payment of such permitted liabilities and expenditures.
17. CONDEMNATION AND DESTRUCTION:
17.1 EMINENT DOMAIN OR TAKING. If proceedings under a power of
eminent domain relating to the Property or any part thereof are commenced prior
to Close of Escrow, Seller will promptly inform Buyer in writing.
(a) If such proceedings involve the taking of title to all or
a material interest in the Property, Buyer may elect to terminate this
Agreement by notice in writing sent within 10 DAYS of Seller's written
notice to Buyer, in which case neither party will have any further
obligation to or rights against the other except any rights or
obligations of either party which are expressly stated to survive
termination of this Agreement.
15.
<PAGE>
(b) If the proceedings do not involve the taking of title to
all or a material interest in the Property, or if Buyer does not elect
to terminate this Agreement, this transaction will be consummated as
described herein and any award or settlement payable with respect to
such proceeding will be paid or assigned to Buyer upon Close of Escrow.
(c) If this sale is not consummated for any reason, any
condemnation award or settlement will belong to Seller.
17.2 DAMAGE OR DESTRUCTION. Except as provided in this Section, prior
to the Close of Escrow the entire risk of loss of damage by earthquake, flood,
landslide, fire or other casualty is borne and assumed by Seller. If, prior to
the Close of Escrow, any part of the Improvements is damaged or destroyed by
earthquake, flood, landslide, fire or other casualty, Seller will promptly
inform Buyer of such fact in writing and advise Buyer as to the extent of the
damage and whether it is, in Seller's reasonable opinion, "MATERIAL" or not
"MATERIAL".
(a) If such damage or destruction is "MATERIAL", Buyer has
the option to terminate this Agreement upon written notice to the Seller
given not later than 10 DAYS after receipt of Seller's written notice to
Buyer advising of such damage or destruction.
(b) For purposes hereof, "MATERIAL" is deemed to be any
damage or destruction to the Improvements where the cost of repair or
replacement is estimated to be more than 25% of the Exchange Value of
the Property and will take more than 60 DAYS to repair.
(c) If this Agreement is so terminated, the provisions of
Section 5 will govern.
(d) If Buyer does not elect to terminate this Agreement, or
if the casualty is not material, Seller will reduce the Exchange Value
by the value reasonably estimated by Seller to repair or restore the
damaged portion of the Improvements, less any sums expended by Seller to
make emergency repairs to the Improvements or the Property or otherwise
protect the physical condition of the Improvements or the Property, and
this transaction will close pursuant to the terms of this Agreement.
(e) If the damage is not material, Seller's notice to Buyer
of the damage or destruction will also set forth Seller's reduced
Exchange Value and Seller's allocation of value to the damaged portion
of the Improvements. If Buyer does not accept Seller's reduced Exchange
Value, Buyer's sole remedy will be to terminate this Agreement.
(f) Whether or not the sale of the Property is consummated
hereunder, all rights to insurance claims or proceeds in respect of
damage or destruction to the Improvements occurring prior to the Close
of Escrow will belong to Seller.
16.
<PAGE>
18. UTILITIES AND DEPOSITS:
18.1 UTILITIES. Seller will notify all utility companies servicing
the Property of the sale of the Property to Buyer and will notify the utility
companies that all utility bills henceforth are to be sent to Buyer. Buyer
shall be entitled to receive any and all refunds of all utility deposits held by
utility companies and Seller will assign to Buyer all of Seller's right, title
and interest in any such utility deposits.
18.2 REFUNDABLE DEPOSITS. To the extent there exists any refundable
deposits made in connection with the development of the Property prior to the
Closing ("Refundable Deposits"), Seller shall assign to Buyer all of Seller's
right, title and interest in and to such Refundable Deposits.
19. MEDIATION OF DISPUTES: No party to this Agreement shall initiate
any litigation against any other party to this Agreement concerning any
controversy or claim arising out of or relating to this Agreement or any
agreements or instruments relating hereto or delivered in connection herewith,
including, but not limited to, any claim based on or arising from an alleged
tort, unless and until (i) at least 60 days before the same shall be filed, a
complete copy of each of the summons and complaint (and/or any other
documentation required to initiate such litigation) to be filed by the
complaining party shall have been delivered to the other party or parties to any
such dispute, and (ii) the complaining party has made itself available to meet
in Los Angeles, California with the other party or parties for no more than 3
business days of non-binding mediation. Until and unless such mediation has
taken place, the complaining party must give notice to the non-complaining party
that it will, and then it must, make itself available for such mediation during
at least 20 business days during the 60 days before the date on which such
summons and complaint will be filed.
20. ARBITRATION OF DISPUTES: ANY CONTROVERSY OR CLAIM ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR ANY AGREEMENTS OR INSTRUMENTS RELATING HERETO
OR DELIVERED IN CONNECTION HEREWITH, INCLUDING, BUT NOT LIMITED TO A CLAIM BASED
ON OR ARISING FROM AN ALLEGED TORT WILL, AT THE REQUEST OF ANY PARTY, BE
DETERMINED BY ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (9
U.S.C. SECTION 1 ET SEQ.) UNDER THE AUSPICES AND RULES OF THE AMERICAN
ARBITRATION ASSOCIATION ("AAA"). THE AAA WILL BE INSTRUCTED BY EITHER OR BOTH
PARTIES TO PREPARE A LIST OF THREE (3) JUDGES WHO HAVE RETIRED FROM THE SUPERIOR
COURT OF THE STATE OF CALIFORNIA, A HIGHER CALIFORNIA COURT OR ANY FEDERAL
COURT. WITHIN 10 DAYS OF RECEIPT OF THE LIST, EACH PARTY MAY STRIKE 1 NAME FROM
THE LIST. THE AAA WILL THEN APPOINT THE ARBITRATOR FROM THE NAME(S) REMAINING
ON THE LIST. THE ARBITRATION WILL BE CONDUCTED IN SAN FRANCISCO, LOS ANGELES OR
SAN DIEGO, WHICHEVER IS THE CLOSEST CITY TO THE NEXUS OF THE DISPUTE. ANY
CONTROVERSY IN INTERPRETATION OR ENFORCEMENT OF THIS PROVISION OR WHETHER A
DISPUTE IS ARBITRABLE, WILL BE DETERMINED BY THE
17.
<PAGE>
ARBITRATOR. JUDGMENT UPON THE AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED
IN ANY COURT HAVING JURISDICTION. THE INSTITUTION AND MAINTENANCE OF AN ACTION
FOR JUDICIAL RELIEF OR IN PURSUIT OF AN ANCILLARY REMEDY DOES NOT CONSTITUTE A
WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE PLAINTIFF, TO SUBMIT THE
CONTROVERSY OR CLAIM TO ARBITRATION.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION
DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING
UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR BY
JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL
RIGHTS TO DISCOVERY AND APPEAL UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN
THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION TO
NEUTRAL ARBITRATION.
Buyer's Initials ________ Seller's Initials _________
21. NOTICES: All notices or other communications required or
permitted hereunder must be in writing, and must be personally delivered
(including by means of professional messenger service) or sent by overnight
courier, or sent by registered or certified mail, postage prepaid, return
receipt requested to the addresses set forth in Section 1 hereof. All notices
sent by mail will be deemed received 2 DAYS after the date of mailing and all
notices sent by other means permitted herein shall be deemed received on the
earlier of the date delivered or the date on which delivery is refused.
22. ASSIGNMENT: Neither party shall have the right to assign this
Agreement without the other party's prior written consent.
23. MISCELLANEOUS:
23.1 COUNTERPARTS. This Agreement may be executed in counterparts.
23.2 PARTIAL INVALIDITY. If any term or provision of this Agreement
will be deemed to be invalid or unenforceable to any extent, the remainder of
this Agreement will not be affected thereby, and each remaining term and
provision of this Agreement will be valid and be enforced to the fullest extent
permitted by law.
18.
<PAGE>
23.3 POSSESSION OF THE PROPERTY. Seller will deliver possession of
the Property to Buyer upon the Close of Escrow.
23.4 WAIVERS. No waiver of any breach of any covenant or provision
contained herein will be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision contained herein. No extension
of time for performance of any obligation or act will be deemed an extension of
the time for performance of any other obligation or act except those of the
waiving party, which will be extended by a period of time equal to the period of
the delay.
23.5 SUCCESSORS AND ASSIGNS. This Agreement is binding upon and
inures to the benefit of the permitted successors and assigns of the parties
hereto.
23.6 PROFESSIONAL FEES. In the event of the bringing of any action,
arbitration or suit by a party hereto against another party hereunder by reason
of any breach of any of the covenants, agreements or provisions on the part of
the other party arising out of this Agreement, then in that event the prevailing
party will be entitled to have the recovery of and from the other party all
costs and expenses of the action, mediation or suit, actual attorneys' fees,
witness fees and any other professional fees resulting therefrom.
23.7 ENTIRE AGREEMENT. This Agreement (including all Exhibits
attached hereto) constitutes the entire contract between the parties hereto with
respect to the subject matter hereof and may not be modified except by an
instrument in writing signed by the party to be charged.
23.8 TIME OF ESSENCE. Seller and Buyer hereby acknowledge and agree
that time is strictly of the essence with respect to each and every term,
condition, obligation and provision hereof.
23.9 CONSTRUCTION. Seller and Buyer and their respective advisors
believe that this Agreement is the product of all of their efforts, that it
expresses their agreement and that it should not be interpreted in favor of or
against either Buyer or Seller. The parties further agree that this Agreement
will be construed to effectuate the normal and reasonable expectations of a
sophisticated seller and buyer.
23.10 GOVERNING LAW. The parties hereto expressly agree that this
Agreement will be governed by, interpreted under, and construed and enforced in
accordance with the laws of the State of California.
23.11 WEAR AND TEAR. Buyer specifically acknowledges that Seller will
continue to use the Property in the course of its business and accepts the fact
that reasonable wear and tear will occur after the date of this Agreement.
Buyer specifically agrees that Seller is not responsible for repairing such
reasonable wear and tear and that Buyer is prohibited from raising such wear and
tear as a reason for not consummating this transaction or for requesting a
reduction in the Exchange Value.
19.
<PAGE>
23.12 NO RECORDATION. No memorandum or other document relating to this
Agreement will be recorded without the prior written consent of Seller, and any
such consent or approval will be conditioned upon Buyer providing Seller with a
quitclaim deed fully executed and acknowledged by Buyer, quitclaiming any and
all interests that it may have in the Property to Seller, which quitclaim deed
Seller may record in the event that this Agreement is terminated or the
transaction contemplated herein is not consummated.
23.13 SURVIVAL. All obligations of the parties contained herein which
by their terms do not arise until after the Close of Escrow and any other
provisions of this Agreement which by their terms survives the Close of Escrow,
shall survive the Close of Escrow. Notwithstanding anything to the contrary
contained in this Agreement, the representations and warranties contained in
this Agreement shall survive the Closing for a period of 1 year; provided that
any claims by one party hereto must be made in writing to the other party within
the 1 year period.
23.14 DISCLAIMER. Nothing herein creates any right or remedy for the
benefit of any person not a party hereto, nor creates a fiduciary relationship,
an agency or a partnership.
23.15 WAIVER OF JURY TRIAL. EACH PARTY, ACTING WITH KNOWLEDGE OF
ITS RIGHTS AFTER A FULL OPPORTUNITY TO CONSULT WITH COUNSEL, VOLUNTARILY WAIVES
ALL RIGHTS TO TRIAL BY JURY IN ALL PROCEEDINGS FOR WHICH A TRIAL BY JURY WOULD
OTHERWISE BE AVAILABLE OR REQUIRED, AND WHICH INVOLVE ANY MATTER ARISING OUT OF
OR CONNECTED WITH RIGHTS OR DUTIES UNDER, OR ENFORCEMENT OR INTERPRETATION OF,
THIS AGREEMENT.
20.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year hereinabove written.
"SELLER": "BUYER":
NATIONAL INVESTORS FINANCIAL, ESPERANZA, INC.,
INC., a California corporation, a California corporation
AS TRUSTEE for NATIONAL INVESTORS
LAND HOLDING TRUST ___
By: _______________________________ By: _____________________________
Its:_______________________________ Its: _____________________________
and and
By:________________________________ By: ______________________________
Its:_______________________________ Its: _____________________________
Agreed to and accepted
by Escrow Holder:
By: ___________________________
Its:___________________________
21.
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
<PAGE>
EXHIBIT B
FORM OF DEED
RECORDING REQUESTED BY:
WHEN RECORDED MAIL TO:
Arter & Hadden LLP
725 South Figueroa Street, Suite 3400
Los Angeles, California 90017
Attn.: Bruce H. Newman, Esq.
________________________________________________________________________________
(Above Space For Recorder's Use Only)
GRANT DEED
In accordance with Section 11932 of the California Revenue and Taxation
Code, Grantor has declared the amount of transfer tax which is due by a separate
statement which is not being recorded with this Grant Deed.
FOR A VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED,
NATIONAL INVESTORS FINANCIAL, INC., a CALIFORNIA corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ("Grantor"), hereby grants to ESPERANZA,
INC., a California corporation ("Grantee"), the real property in the County of
San Bernardino, State of California, and described in EXHIBIT A attached hereto
and made a part hereof.
DATED: __________________, 1998
NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST __
By: ___________________________________
Its: ___________________________________
By: ___________________________________
Its: ___________________________________
MAIL TAX STATEMENTS TO:
<PAGE>
ACKNOWLEDGMENT
STATE OF CALIFORNIA )
) ss.
COUNTY OF ____________________)
On ____________________, before me, _____________________________________,
personally appeared ______________________________, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
______________________________
Notary Public in and for said
County and State [SEAL]
<PAGE>
Document No. ____________________ Date Recorded_________________
STATEMENT OF TAX DUE AND REQUEST THAT TAX DECLARATION
NOT BE MADE A PART OF THE PERMANENT RECORD
IN THE OFFICE OF THE COUNTY RECORDER
(Pursuant to Section 11932 R&T Code)
To: Registrar-Recorder
County of __________________
Request is hereby made in accordance with the provisions of the Documentary
Transfer Tax Act that the amount of tax due not be shown on the original
document which names:
__________________________________
(as grantor)
and
__________________________________
(as grantee)
Property described in the accompanying document is located in
( ) unincorporated area or (x) City of ___________________.
The amount of tax due on the accompanying document is $_______________.
_____ Computed on full value of property conveyed, or
_____ Computed on full value less liens and encumbrances remaining at time
of sale.
__________________________________
__________________________________
By: ___________________________
Its: ___________________________
<PAGE>
EXHIBIT C
Seller's FIRPTA Affidavit
CERTIFICATION OF NON-FOREIGN STATUS
Section 1445 of the Internal Revenue Code provides that a transferee
of a U.S. real property interest must withhold tax if the transferor is a
foreign person. To inform the transferee that withholding of tax is not
required upon the disposition of a U.S. real property interest by NATIONAL
INVESTORS FINANCIAL, INC., a California corporation, AS TRUSTEE for NATIONAL
INVESTORS LAND HOLDING TRUST ("TRANSFEROR"), each of the undersigned hereby
certifies the following on behalf of Transferor:
1. Transferor is not a foreign corporation, foreign partnership,
foreign trust and foreign estate (as those terms are defined in the Internal
Revenue Code and Income Tax Regulations);
2. Transferor's U.S. employer identification number is _________;
and
3. Transferor's office address is ________________________________,
___________________.
Transferor understands that this certification may be disclosed to the
Internal Revenue Service by transferee and that any false statement contained
herein could be punished by fine, imprisonment or both.
Under penalties of perjury each of the undersigned declares that he
has examined this certification and to the best of his knowledge and belief it
is true, correct and complete, and he further declares that he has authority to
sign the document on behalf of the Transferor.
NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___
By: _________________________________
Its:_________________________________
By: _________________________________
Its:_________________________________
<PAGE>
EXHIBIT D
ASSIGNMENT AND ASSUMPTION
OF
AGREEMENTS
THIS ASSIGNMENT AND ASSUMPTION OF AGREEMENTS (this "Assignment") is executed as
of ______________, but effective as of the Effective Date (as hereinafter
defined), by and between NATIONAL INVESTORS FINANCIAL, INC., a California
corporation, AS TRUSTEE for NATIONAL INVESTORS LAND HOLDING TRUST ___
("Assignor"), and ESPERANZA, INC., a California corporation ("Assignee"), with
reference to the following facts:
RECITALS:
A. Assignor, as the agent of and for the benefit of various
investors, holds title to that certain real property commonly known as
"Esperanza at Victorville", located in the County of San Bernardino, State of
California, as more particularly described on Exhibit "A" attached hereto and
incorporated herein by reference (the "Property").
B. Concurrently herewith, Assignor has executed that certain Grant
Deed conveying and granting to Assignee the Property.
C. As part of the transfer and conveyance of the Property to
Assignee, Assignor has agreed to transfer, assign, grant and convey to Assignee
all of its right, title and interest in and to all agreements relating to the
Property, on the terms and conditions herein contained.
NOW, THEREFORE, in consideration of the foregoing Recitals, which
Recitals are by this reference incorporated herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. ASSIGNMENT. Assignor hereby grants, assigns, transfers, sets
over, sells, conveys and delivers to Assignee all of Assignor's right, title,
interest, benefits and privileges under the agreements relating to the Property
which are set forth in Exhibit "B" attached hereto and made a part hereof
(collectively, the "Agreements"). The assignment provided for in this Section 1
is effective concurrently with the transfer of the Property from Assignor to
Assignee (the "Effective Date").
i.
<PAGE>
2. ASSIGNEE'S ASSUMPTION. Assignee hereby accepts the assignment
from Assignor, assumes and agrees to perform all duties and obligations of
Assignor under the terms of the Agreements which are required to be performed on
or after the Effective Date.
3. DELIVERIES; REPORTS. On or before the Effective Date, Assignor
shall deliver to Assignee the original Agreements or if such original Agreements
are not in Assignor's possession, certified copies of such Agreements. Assignor
shall furnish and deliver to Assignee, promptly after receipt thereof,
duplicates or copies of all reports, notices, requests, demands, declarations,
certificates or other instruments hereafter received by Assignor and relating to
the Agreements. Assignee's address for receipt of the foregoing is
____________________________________________________________________________.
4. FURTHER ASSURANCES. Assignor and Assignee shall execute,
acknowledge and deliver all such instruments and take all such action as may be
necessary to further assure to Assignee the rights assigned hereby and the full
benefits hereof and to preserve and protect this Assignment and all of the
rights, powers and remedies of Assignee provided for herein.
5. SUCCESSORS AND ASSIGNS. This Assignment shall be binding upon
and inure to the benefit of the successors and assigns of the respective parties
hereto.
6. GOVERNING LAW. This Assignment shall be governed by, and
construed in accordance with, the laws of the State of California.
7. COUNTERPARTS. This Assignment may be executed in several
counterparts, each of which shall be an original, but all of which taken
together shall constitute one and the same instrument.
ii.
<PAGE>
IN WITNESS WHEREOF, Assignor and Assignee have executed this
Assignment as of the date first above written but effective as of the Effective
Date.
ASSIGNOR: NATIONAL INVESTORS FINANCIAL, INC., a California
corporation, AS TRUSTEE for NATIONAL INVESTORS
LAND HOLDING TRUST ___
By: _________________________
Its: _________________________
By: _________________________
Its: _________________________
ASSIGNEE: ESPERANZA, INC.,
a California corporation
By: _________________________
Its: _________________________
By: _________________________
Its: _________________________
iii.
<PAGE>
EXHIBIT E
BILL OF SALE AND GENERAL ASSIGNMENT OF INTANGIBLES
This Bill of Sale and General Assignment of Intangibles is made as of
the ____ day of ___________________________, 1998 (this "Assignment"), by
NATIONAL INVESTORS FINANCIAL, INC., a California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___ ("Assignor") to ESPERANZA, INC., a
California corporation ("Assignee").
R E C I T A L
Assignee and Assignor have entered into an Agreement of Purchase and
Sale and Joint Escrow Instructions dated ________, 1998 ("Agreement of Purchase
and Sale") under which Assignee has agreed to purchase from Assignor, that
certain real property and any and all buildings, structures and improvements on
said real property commonly identified as "Esperanza at Victorville", located in
the County of San Bernardino, State of California and legally described on
EXHIBIT A attached hereto (the "Property").
TERMS AND CONDITIONS
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Assignor hereby assigns, transfers and sets over unto Assignee,
its successors and assigns, all personal property of Seller, if any, located on
and used in connection with the operation of the improvements on the Property
(the "Personal Property"). Buyer accepts such Personal Property in its "AS-IS"
condition and "WITH ALL FAULTS". Seller specifically disclaims all express or
implied warranties regarding the existence or condition of, or title to, such
Personal Property, including without limitation the implied warranties of
merchantability and suitability for a particular purpose.
2. Assignor hereby assigns, transfers and sets over unto Assignee,
its successors and assigns, all of its right, title and interest in and to the
following ("General Intangibles") if, and only to the extent, that the General
Intangibles exist and Assignor has the right to so transfer them:
(A) All of Assignor's right, title and interest in and to all
intangible property used, owned or issued solely in connection with the
Property, including but not limited to, all licenses, permits, certificates of
occupancy, approvals, maps, dedications, subdivision maps and entitlements
issued, approved or granted by any governmental agencies or instrumentalities
having any jurisdiction over the Property (the "Authorities") or otherwise in
i.
<PAGE>
connection with the Property; all development rights, conditional use permits,
variances, "floor area ratio" development rights and other intangible rights,
titles, interests, privileges and appurtenances owned by Assignor and related to
or issued in connection with the Property and/or its use, occupancy, operation
and/or development; all licenses, consents, easements, rights of way, and
approvals required from private parties to make use of utilities and to insure
vehicular and pedestrian ingress and egress to the Property; and any pending
applications or requests as to any of the foregoing;
(B) All building plans, specifications and drawings,
engineering, and other documents prepared in connection with the construction,
reconstruction, maintenance, repair, or operation any improvements on the
Property (the "Improvements");
(C) All warranties and guarantees relating to the workmanship,
construction, installation materials, and design of the Improvements and the
personal property situated on the Property, including but not limited to those
made by or received from any third party with respect to any building, building
component, structure, fixture, machinery, equipment or material situated on,
contained in any building or other improvement situated on, or comprising a part
of any building or other improvement situated on any part of the Property;
(D) All rights, claims or awards benefiting the Property;
(E) All prepaid fees and fee credits, and all of Seller's right,
title and interest in and to refundable deposits, bonds and other collateral
furnished in connection with development of the Property; and
(F) All rights and general intangibles now owned by Assignor
solely in connection with the Property and any improvement and/or fixture
located on the Property, including, without limitation, the rights to hold, use,
sell and transfer the Property and Improvements and general intangibles.
3. Assignor hereby covenants that it will, at any time and from time
to time upon written request therefor, execute and deliver to Assignee, its
successors and assigns any new or confirmatory instruments and take such further
acts as Assignee may reasonably request to fully evidence the assignment
contained herein and to enable Assignee, its successors and assigns to fully
realize and enjoy the rights and interests assigned hereby.
4. Assignee hereby accepts the foregoing assignment.
5. Assignor hereby represents and warrants to Assignee that it has
not previously assigned or hypothecated its interest in the foregoing described
General Intangibles; however, Assignee shall have no claims or rights against
Assignor, and Assignor shall have no obligation or liability to Assignee for any
General Intangibles described herein which do not exist, or which Assignor does
not have the right to transfer to Assignee.
ii.
<PAGE>
6. This Assignment shall be binding upon and inure to the benefit of
the legal representatives, assigns, or successors in interest of the Assignor
and Assignee.
IN WITNESS WHEREOF, the Assignor has executed this Assignment as of
_________, 1998.
NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST
___
By:___________________________________
Its:__________________________________
By:___________________________________
Its:__________________________________
iii.
<PAGE>
AGREEMENT OF PURCHASE AND SALE
AND JOINT ESCROW INSTRUCTIONS
BY AND BETWEEN
NATIONAL INVESTORS FINANCIAL, INC.,
a California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___,
AS SELLER,
AND
VICTORVILLE HOMES, INC.,
a California corporation,
AS BUYER
RELATING TO
PROPERTY LOCATED IN
Victorville, California
known as
"STACEY ROSE AT VICTORVILLE"
DATED AS OF
__________________, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Substance of Transactions . . . . . . . . . . . . . . . . . . . . . . . 5
3. Exchange Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4. Escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5. Cancellation Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . 5
6. Deliveries to Escrow Holder . . . . . . . . . . . . . . . . . . . . . . . . 6
6.1 By Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.2 By Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.3 By Buyer and Seller . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7. Condition of Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
7.1 Permitted Exceptions. . . . . . . . . . . . . . . . . . . . . . . . . . 7
7.2 Title Provided by Seller. . . . . . . . . . . . . . . . . . . . . . . . 7
8. Conditions to the Close of Escrow . . . . . . . . . . . . . . . . . . . . . 7
8.1 Conditions Precedent to Buyer's Obligations . . . . . . . . . . . . . . 7
8.2 Conditions Precedent to Seller's Obligations. . . . . . . . . . . . . . 8
9. Approval of Seller's Constituents . . . . . . . . . . . . . . . . . . . . . 8
10. Property "As-Is. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
10.1 No Side Agreements Or Representations; As-Is Purchase. . . . . . . . . 8
10.2 Disclosures; Specific Acknowledgment Regarding Condition of Property .11
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
11. Title Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
12. Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
13. Disbursements and Other Actions. . . . . . . . . . . . . . . . . . . . . .12
13.1 Escrow Holder. . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
13.2 By Transfer Agent. . . . . . . . . . . . . . . . . . . . . . . . . . .13
13.3 Possession. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
14. Joint Representations and Warranties . . . . . . . . . . . . . . . . . . .13
14.1 Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
14.2 Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
14.3 Due Execution. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
14.4 Valid and Binding. . . . . . . . . . . . . . . . . . . . . . . . . . .14
14.5 Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
15. Seller's Warranties and Representations. . . . . . . . . . . . . . . . . .14
15.1 Non-Foreign Entity . . . . . . . . . . . . . . . . . . . . . . . . . .14
15.2 Hazardous Substances.. . . . . . . . . . . . . . . . . . . . . . . . .14
15.3 Clean-up.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
15.4 Claims.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
16. Pre-Closing Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.1 No Transfers.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.2 No Alterations.. . . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.3 Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.4 Obligations Under Contracts. . . . . . . . . . . . . . . . . . . . . .15
16.5 Expenditures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
17. Condemnation and Destruction . . . . . . . . . . . . . . . . . . . . . . .15
17.1 Eminent Domain or Taking . . . . . . . . . . . . . . . . . . . . . . .15
17.2 Damage or Destruction. . . . . . . . . . . . . . . . . . . . . . . . .16
18 Utilities and Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . .16
18.1 Utilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
18.2 Refundable Deposits. . . . . . . . . . . . . . . . . . . . . . . . . .17
19. Mediation of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . .17
20. Arbitration of Disputes: . . . . . . . . . . . . . . . . . . . . . . . . .17
21. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
22. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
23. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
23.1 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
23.2 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . .18
23.3 Possession of the Property . . . . . . . . . . . . . . . . . . . . . .19
23.4 Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.5 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . .19
23.6 Professional Fees. . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.8 Time of Essence. . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.9 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.11 Wear and Tear . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.12 No Recordation. . . . . . . . . . . . . . . . . . . . . . . . . . . .20
23.13 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
23.14 Disclaimer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
23.15 Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . .20
</TABLE>
EXHIBITS
- --------
EXHIBIT A - Legal Description
EXHIBIT B - Form of Grant Deed
EXHIBIT C - FIRPTA Affidavit
EXHIBIT D - Assignment and Assumption
EXHIBIT E - Bill of Sale and General Assignment of Intangibles
iv
<PAGE>
AGREEMENT OF PURCHASE AND SALE
AND JOINT ESCROW INSTRUCTIONS
THIS AGREEMENT OF PURCHASE AND SALE AND JOINT ESCROW INSTRUCTIONS
("AGREEMENT") is made and entered into as of ____________ __, 1998, by and
between NATIONAL INVESTORS FINANCIAL, INC., a California corporation, AS TRUSTEE
for NATIONAL INVESTORS LAND HOLDING TRUST ___ ("Seller"), and VICTORVILLE HOMES,
INC., a California corporation ("BUYER").
R E C I T A L S
A. Seller is the owner of that certain unimproved real property commonly
known as "Stacey Rose at Victorville", consisting of approximately 32 acres,
located in the City of Victorville, County of San Bernardino, State of
California, as more particularly described in Exhibit A attached hereto (the
"Real Property").
B. Seller holds record title to the Real Property as agent of and for the
benefit of various investors who are the beneficiaries of National Investors
Land Holding Trust ____ (the "Trust").
C. Seller desires to sell to Buyer and Buyer desires to purchase from
Seller the Property (as hereinafter defined) on the terms and conditions set
forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing Recitals, which Recitals
are incorporated herein by this reference, and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, Buyer
and Seller agree as follows:
A G R E E M E N T
1. DEFINITIONS: For the purposes of this Agreement the following
terms will be defined as follows:
1.1 "ACTUAL KNOWLEDGE OF SELLER" means and is limited to the actual
knowledge of David Lasker and James N. Orth without having conducted any
independent inquiry or inspection, and shall not include the knowledge of any
other persons or firms, it being understood and agreed by Buyer that neither
David Lasker nor James N. Orth is charged with knowledge of all of the acts
and/or omissions of predecessors in title to the Property or management of the
Property before Seller's acquisition of the Property and the Actual Knowledge of
Seller shall not include information or material which may be in the possession
of Seller generally, but of which neither David Lasker nor James N. Orth is
actually aware.
1.2 "AFC" means American Family Communities, Inc., a California
corporation, which is a wholly-owned subsidiary of AFH.
1.
<PAGE>
1.3 "AFH" means American Family Holdings, Inc., a Delaware corporation.
Buyer is a wholly-owned subsidiary of AFC, which, in turn, is a wholly-owned
subsidiary of AFH.
1.4 "ASSIGNMENT" shall have the meaning given thereto in Section 6.1(d)
hereof.
1.5 "BILL OF SALE" shall have the meaning given thereto in
Section 6.1(e) hereof.
1.6 "CLOSING DATE" means ___________, 1998, unless an earlier date is
agreed to in a writing subsequent to this Agreement executed and delivered by
each of the parties hereto to the other, and is the last date on which the
Closing and Close of Escrow can occur, subject to extension as provided for in
this Agreement.
1.7 "CLOSING" and "CLOSE OF ESCROW" are terms used interchangeably in
this Agreement. The Closing or the Close of Escrow will be deemed to have
occurred when the Grant Deed is recorded in the official records of the county
in which the Property is located.
1.8 "EFFECTIVE DATE" means the date hereof.
1.9 "ENVIRONMENTAL AUDIT" means any environmental audit, review or
testing of the Property performed by Buyer or any third party or consultant
engaged by Buyer to conduct such study.
1.10 "ENVIRONMENTAL LAW" means any law, statute, ordinance or regulation
pertaining to health, industrial hygiene or the environment including, without
limitation, CERCLA (Comprehensive Environmental Response, Compensation and
Liability Act of 1980) and RCRA (Resources Conservation and Recovery Act of
1976), as amended.
1.11 "ESCROW" shall have the meaning given thereto in Section 4 hereof.
1.12 "ESCROW HOLDER" means _______________________________, whose
address is _______________________________________________________________,
Attn.: ___________________.
1.13 "EXCHANGE VALUE" is the adjusted appraised value of the Property
which takes into consideration various factors to balance the business value of
the Property within its present ownership structure.
1.14 "FIRPTA CERTIFICATE" shall have the meaning given thereto in
Section 6.1(b) hereof.
1.15 "GRANT DEED" shall have the meaning given thereto in Section 6.1(a)
hereof.
1.16 "HAZARDOUS SUBSTANCE" means any substance, material or waste which
is or becomes designated, classified or regulated as being "toxic" or
"hazardous" or a "pollutant" or
2.
<PAGE>
which is or becomes similarly designated, classified or regulated, under any
Environmental Law, including asbestos, petroleum and petroleum products.
1.17 "IMPROVEMENTS" means any and all improvements and fixtures situated
on the Real Property.
1.18 "INVESTORS" means the beneficiaries of the Trust.
1.19 "INTANGIBLES" means all of Seller's right, title and interest in
and to all intangible property used, owned or issued solely and strictly in
connection with the Real Property, Improvements and Personal Property,
including, but not limited to: (i) trade names and trademarks, contract rights,
accounts receivable and other intangible property used in connection with the
ownership and operation of the Property; (ii) all licenses, permits,
certificates of occupancy, approvals, dedications and entitlements issued,
approved or granted by any governmental authorities having jurisdiction over the
Property; and (iii) all development rights, conditional use permits, variances
and other intangible rights, titles, interests and privileges owned by Seller
and related to or issued in connection with the Land and/or Improvements, its
use, occupancy, operation and development, but in no way related to Seller's
financial data or other proprietary information or other property of Seller.
1.20 "NOTICES" will be sent as provided in Section 21 to:
Seller: National Investors Land Holding Trust
c/o National Investors Financial, Inc.
4675 MacArthur Court, Suite 1240
Newport Beach, CA 92660
Attn.: Mr. David Lasker
Telephone: (949) 833-8600
Facsimile: (949) 752-9753
with a copy to: Arter & Hadden LLP
725 South Figueroa Street, Suite 3400
Los Angeles, CA 90017
Attn.: Bruce H. Newman, Esq.
Telephone: (213) 430-3000
Facsimile: (213) 617-9255
Buyer: Victorville Homes, Inc.
______________________
______________________
Attn.:__________________
Telephone: _____________
Facsimile: ______________
3.
<PAGE>
with a copy to: Arter & Hadden LLP
725 South Figueroa Street, Suite 3400
Los Angeles, CA 90017
Attn.: Bruce H. Newman, Esq.
Telephone: (213) 430-3000
Facsimile: (213) 617-9255
Escrow Holder: __________________________________
__________________________________
__________________________________
Attn.: ___________________
Telephone: ________________________
Facsimile: ________________________
1.21 "OPENING OF ESCROW" shall have the meaning given thereto in
Section 4 hereof.
1.22 "OTHER ASSETS" means cash, cash equivalent, notes and other
negotiable instruments and any and all other assets in the possession or control
of Seller, the value of which is determined by possession, and any other assets
other than the Real Property, Personal Property or Intangibles relating to the
Real Property.
1.23 "PERMITTED EXCEPTIONS" shall have the meaning given thereto in
Section 7.1 hereof.
1.24 "PERSONAL PROPERTY" means the equipment, furniture and fixtures,
books and records and other personal property, if any, owned by Seller and
located on the Property as of the Effective Date, including without limitation,
those items listed on SCHEDULE 1 to the Bill of Sale.
1.25 "PROPERTY" means collectively, (i) the Real Property, (ii) the
Improvements, (iii) the Intangibles, (iv) the Personal Property and (v) the
Other Assets.
1.26 "PROSPECTUS" means the Consent Solicitation Statement/Prospectus of
Buyer.
1.27 "REAL PROPERTY" means that certain real property located in the
City of Victorville, County of San Bernardino, State of California and commonly
known as "Stacey Rose at Victorville" and more particularly described in EXHIBIT
A attached hereto. The Real Property also is described in the Recitals hereof.
1.28 "TITLE COMPANY" means ________________________________________.
1.29 "TITLE POLICY" shall have the meaning given thereto in Section 11
hereof.
1.30 "TRANSFER AGENT" means ___________________, who address is
__________________, Attn.: ___________, Facsimile No. ___________..
4.
<PAGE>
2. PURCHASE AND SALE:
2.1 PURCHASE AND SALE. Upon and subject to the terms and conditions
set forth in this Agreement, Seller agrees to sell to Buyer and Buyer agrees to
buy from Seller the Property, together with all easements, hereditaments,
entitlements (to the extent transferable) and appurtenances thereto. In
consideration of Seller's sale of the Property to Buyer, Buyer will (a) cause to
be delivered to the investors of Seller the Exchange Value in accordance with
Section 3, and (b) perform all of Buyer's other obligations hereunder.
2.2 SUBSTANCE OF TRANSACTIONS. Notwithstanding any other provision of
this Agreement, the transfer of the Property directly from Seller to Buyer is
for convenience purposes only to effect expeditiously the culmination of the
transfers set forth in this Section 2.2, and for all purposes hereunder it is
the intent of the parties that such transfer reflects the following transfers,
which shall occur in the following order: (i) all of the Investors, through
their approval of the transactions contemplated under this Agreement, contribute
all of their interests in the Property to AFH in exchange for shares of common
stock of AFH, such shares to be distributed to them pursuant to Sections 3 and
13.2 hereof; (ii) AFH contributes the Property to AFC as a contribution to the
capital of AFC; and (iii) AFC contributes the Property to Buyer as a
contribution to the capital of Buyer. Seller's transfer of the Property
directly to Buyer reflects Seller's transfer of the Property from the Investors
to AFH, from AFH to AFC, and from AFC to the Buyer, in each instance in Seller's
capacity as the agent of and on behalf of such transferors.
3. EXCHANGE VALUE: In consideration for the sale of the Property to
Buyer, Buyer will deliver to Seller an amount equal to the Exchange Value for
the Property. The Exchange Value for the Property is $______________, which
shall be paid in the form of, and by issuance and delivery of, _____ shares of
common stock in AFH to the investors of Seller, to be distributed by the
Transfer Agent at the Closing outside of Escrow in accordance with Section 13.2
hereof. Upon the request of any party hereto, whether made before or after the
Closing, the parties hereto will allocate the Exchange Value to the Real
Property, Improvements, Personal Property, Other Assets and the Intangibles.
4. ESCROW: Immediately upon execution of this Agreement, Buyer and
Seller will open an escrow (the "ESCROW") with the Escrow Holder by delivering
to Escrow Holder a fully executed copy of this Agreement (the "OPENING OF
ESCROW"). The purchase and sale of the Property will be completed through the
Escrow. Buyer and Seller agree to execute any additional instructions
consistent with this Agreement which are reasonably required by the Escrow
Holder. If there is a conflict between any printed escrow instructions and this
Agreement, the terms of this Agreement will govern.
5. CANCELLATION FEES AND EXPENSES: If the Closing does not occur at
the time and in the manner provided in this Agreement because of the default of
one of the parties, the non-defaulting party has the right to cancel the Escrow
by written notice to the defaulting party and to the Escrow Holder. All costs
of cancellation, if any, will be paid by the defaulting party.
5.
<PAGE>
6. DELIVERIES TO ESCROW HOLDER:
6.1 BY SELLER. On or prior to the Closing Date, Seller will deliver or
cause to be delivered to Escrow Holder the following items:
(a) A Grant Deed ("GRANT DEED"), in the form attached to this
Agreement as EXHIBIT B, duly executed and acknowledged by Seller and in
recordable form, conveying the Property to Buyer.
(b) A Transferor's Certificate of Non-Foreign Status attached to
this Agreement as EXHIBIT C ("FIRPTA CERTIFICATE"), duly executed by or on
behalf of Seller.
(c) A properly executed California Form RE 590 or other evidence
sufficient to establish that Buyer is not required to withhold any portion
of the Exchange Value pursuant to Sections 18805 and 26131 of the
California Revenue and Taxation Code ("FORM 590").
(d) An Assignment and Assumption of Agreements ("ASSIGNMENT")
duly executed by Seller in favor of Buyer in the form attached to this
Agreement as EXHIBIT D.
(e) A Bill of Sale and General Assignment of Intangibles in the
form attached to this Agreement as EXHIBIT E ("BILL OF SALE"), duly
executed by Seller and conveying all right, title and interest of Seller in
the Personal Property and the Intangibles to Buyer.
(f) Such corporate resolutions, certificates of good standing
and/or other corporate or partnership documents relating to Seller as are
reasonably required by Buyer or Escrow Holder or both in connection with
this transaction.
6.2 BY BUYER. On or prior to the Closing Date, Buyer will deliver or
cause to be delivered to Escrow Holder the following items:
(a) Such corporate resolutions, certificates of good standing
and/or other corporate or partnership documents relating to Buyer as are
reasonably required by Seller or Escrow Holder or both in connection with
this transaction.
(b) Amounts due to pay costs and expenses as set forth in
Section 12 hereof.
6.3 BY BUYER AND SELLER. Buyer and Seller will each deposit such other
instruments consistent with this Agreement as are reasonably required by Escrow
Holder or otherwise required to close escrow. In addition Seller and Buyer
hereby designate Escrow Holder as the "REPORTING PERSON" for the transaction
pursuant to Section 6045(e) of the Internal Revenue Code.
6.
<PAGE>
7. CONDITION OF TITLE:
7.1 PERMITTED EXCEPTIONS. At the Close of Escrow, fee simple title to
the Property will be conveyed to Buyer by Seller by Grant Deed, subject only to
the following title matters ("PERMITTED EXCEPTIONS"):
(a) all property tax liens (whether or not payment of property
taxes are delinquent) and all other matters shown in that certain
Commitment for Title Insurance effective _______________, issued by the
Title Company, bearing Order No.________; and
(b) matters affecting the condition of title to the Property
created by, at the request of or with the written consent of Buyer.
7.2 TITLE PROVIDED BY SELLER. The parties agree that (a) except as
specifically provided in the Grant Deed or implied by law, Seller makes no
express or implied warranties regarding the condition of title to the Property,
and (b) Buyer shall rely solely on the Title Policy for protection against any
title defects.
8. CONDITIONS TO THE CLOSE OF ESCROW:
8.1 CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. The following
conditions must be satisfied not later the earlier of the Closing Date or such
other period of time as may be specified below:
8.1.1 TITLE. As of the Closing, the Title Company will issue or
have committed to issue to Buyer the Title Policy described in Section 11.
8.1.2 REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER. Seller
will have duly performed each and every agreement to be performed by Seller
hereunder and, subject to the provisions of Section 10, Seller's express
representations and warranties set forth in this Agreement will be true and
correct in all material respects as of the Closing Date. However,
notwithstanding anything to the contrary stated or implied in this Section
8.1.2, Seller shall have no liability for the breach of any
representations, warranties or covenants set forth in this Agreement,
whether express or implied, absent a finding by a court of competent
jurisdiction that either David Lasker or James N. Orth or both of them
withheld information with respect thereto from Buyer or falsified
information delivered to and relied upon by Buyer and that such action
amounted to a violation of a representation or warranty set forth herein.
8.1.3 SELLER'S DELIVERIES. Seller will have delivered the items
described in Section 6.1.
The conditions set forth in this Section 8.1 are solely for the benefit of
Buyer and may be waived only by Buyer. At all times Buyer has the right to
waive any condition. Such waiver or
7.
<PAGE>
waivers must be in writing to Seller. If any conditions are not satisfied on or
before the Closing Date, and Buyer has not waived the unsatisfied conditions,
Seller will not be deemed to be in default (unless Seller has breached
Sections 8.1.2 or 8.1.3 above) and Buyer's sole remedy will be to terminate this
Agreement.
8.2 CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS. The Close of Escrow
and Seller's obligations with respect to this transaction are subject to the
following conditions precedent: (a) Buyer's delivery to Escrow Holder on or
before the Closing Date, of the items described in Section 6.2; (b) the approval
of such of Seller's constituents as Seller shall deem necessary or advisable in
its sole and absolute discretion as set forth in Section 9 hereof; (c) Buyer
having duly performed each and every agreement to be performed by Buyer
hereunder; and (d) Buyer's representations, warranties and covenants set forth
in this Agreement, will be true and correct in all material respects as of the
Closing Date. The conditions set forth in this Section 8.2 are solely for the
benefit of Seller and may be waived only by Seller, with such waiver or waivers
to be in writing to Buyer. If any conditions are not satisfied on or before the
Closing Date, and Seller has not waived the unsatisfied conditions, Buyer will
not be deemed to be in default (unless Buyer has breached Sections 8.2(a), (c)
or (d) above) and Seller's sole remedy will be to terminate the Agreement.
9. APPROVAL OF SELLER'S CONSTITUENTS: Seller shall exercise
reasonable diligence to obtain the approval of this transaction by such of the
constituents of Seller as Seller shall deem necessary or advisable, in its sole
and absolute discretion, and shall notify Buyer and Escrow Holder when such
approvals have been obtained. If Seller is not able to obtain such approvals
from such constituents on or before the date which is ____ days after the
Effective Date, or such later date as is mutually agreed to by Buyer and Seller,
then Seller may cancel this Agreement by notice to Buyer and Escrow Holder given
prior to the end of that time period, and in that event Seller shall pay all
title and escrow cancellation costs. Seller shall indemnify and hold Buyer
harmless from any claim, damage, loss, liability, action, settlement, including
Buyer's reasonable attorneys' fees suffered by Buyer and which results from or
relates to the Seller's securing approval of this transaction and transferring
the Property to Buyer pursuant to such approval.
10. PROPERTY "AS-IS":
10.1 NO SIDE AGREEMENTS OR REPRESENTATIONS; AS-IS PURCHASE. BUYER
REPRESENTS, WARRANTS AND COVENANTS TO SELLER THAT BUYER HAD THE OPPORTUNITY TO
INDEPENDENTLY AND PERSONALLY INSPECT THE PROPERTY AND IMPROVEMENTS, IF ANY, AND
THAT BUYER HAS ENTERED INTO THIS AGREEMENT AFTER HAVING MADE SUCH PERSONAL
EXAMINATION AND INSPECTION. BUYER AGREES THAT BUYER WILL ACCEPT THE PROPERTY,
IN ITS THEN CONDITION AS-IS AND WITH ALL ITS FAULTS, INCLUDING WITHOUT
LIMITATION, ANY FAULTS AND CONDITIONS SPECIFICALLY REFERENCED IN THIS AGREEMENT,
SUBJECT TO THE EXPRESS COVENANTS, INDEMNITIES, REPRESENTATIONS AND WARRANTIES
MADE BY SELLER ELSEWHERE HEREIN. NO PERSON ACTING ON BEHALF OF SELLER IS
AUTHORIZED TO MAKE, AND BY EXECUTION HEREOF, BUYER ACKNOWLEDGES AND AGREES THAT,
EXCEPT FOR
8.
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THOSE REPRESENTATIONS, WARRANTIES, COVENANTS, INDEMNITIES AND AGREEMENTS
EXPRESSLY MADE BY SELLER IN THIS AGREEMENT, SELLER HAS NOT MADE, DOES NOT MAKE
AND SPECIFICALLY NEGATES AND DISCLAIMS ANY REPRESENTATIONS, WARRANTIES,
PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER
WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR
FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO:
(A) THE VALUE OF THE PROPERTY OR THE INCOME TO BE DERIVED
THEREFROM;
(B) THE SUITABILITY OF THE PROPERTY FOR ANY AND ALL ACTIVITIES
AND USES WHICH BUYER MAY CONDUCT THEREON, INCLUDING ANY DEVELOPMENT
OF THE PROPERTY;
(C) THE HABITABILITY, MERCHANTABILITY, MARKETABILITY,
PROFITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PROPERTY;
(D) THE MANNER, QUALITY, STATE OF REPAIR OR LACK OF REPAIR OF
THE PROPERTY;
(E) THE NATURE, QUALITY OR CONDITION OF THE PROPERTY, INCLUDING
WITHOUT LIMITATION, THE WATER, SOIL AND GEOLOGY;
(F) THE TYPE, AVAILABILITY OR COST OF ANY ENTITLEMENTS REQUIRED
TO DEVELOP THE PROPERTY;
(G) THE COMPLIANCE OF OR BY THE PROPERTY OR ITS OPERATION WITH
ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY APPLICABLE
GOVERNMENTAL AUTHORITY OR BODY;
(H) THE MANNER, CONDITION OR QUALITY OF THE CONSTRUCTION OR
MATERIALS, IF ANY, INCORPORATED INTO THE PROPERTY;
(I) COMPLIANCE WITH ANY ENVIRONMENTAL PROTECTION, POLLUTION OR
LAND USE LAWS, RULES, REGULATION, ORDERS OR REQUIREMENTS, INCLUDING
BUT NOT LIMITED TO, THE ENDANGERED SPECIES ACT, TITLE III OF THE
AMERICANS WITH DISABILITIES ACT OF 1990 OR ANY OTHER LAW, RULE OR
REGULATION GOVERNING ACCESS BY DISABLED PERSONS, CALIFORNIA HEALTH
& SAFETY CODE, THE FEDERAL WATER
9.
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POLLUTION CONTROL ACT, THE FEDERAL RESOURCE CONSERVATION AND
RECOVERY ACT, THE U.S. ENVIRONMENTAL PROTECTION AGENCY REGULATIONS
AT 40 C.F.R., PART 261, THE COMPREHENSIVE ENVIRONMENTAL RESPONSE
COMPENSATION AND LIABILITY ACT OF 1980, AS AMENDED, THE RESOURCES
CONSERVATION AND RECOVERY ACT OF 1976, THE CLEAN WATER ACT, THE
SAFE DRINKING WATER ACT, THE HAZARDOUS MATERIALS TRANSPORTATION
ACT, THE TOXIC SUBSTANCE CONTROL ACT, AND REGULATIONS PROMULGATED
UNDER ANY OF THE FOREGOING;
(J) THE PRESENCE OR ABSENCE OF HAZARDOUS MATERIALS AT, ON,
UNDER, OR ADJACENT TO THE PROPERTY;
(K) THE CONTENT, COMPLETENESS OR ACCURACY OF ANY MATERIALS,
INCLUDING ANY INFORMATIONAL PACKAGE, COST TO COMPLETE ESTIMATE OR
OTHER MATERIALS PREPARED BY OR ON BEHALF OF SELLER;
(L) THE CONFORMITY OF THE IMPROVEMENTS TO ANY PLANS OR
SPECIFICATIONS FOR THE PROPERTY, INCLUDING ANY PLANS AND
SPECIFICATIONS THAT MAY HAVE BEEN OR MAY BE PROVIDED TO BUYER;
(M) THE CONFORMITY OF THE PROPERTY TO PAST, CURRENT OR FUTURE
APPLICABLE ZONING OR BUILDING REQUIREMENTS;
(N) DEFICIENCY OF ANY UNDERSHORING;
(O) DEFICIENCY OF ANY DRAINAGE;
(P) THE FACT THAT ALL OR A PORTION OF THE PROPERTY MAY BE
LOCATED ON OR NEAR AN EARTHQUAKE FAULT LINE OR LOCATED IN AN
ALQUIST-PRIOLO SPECIAL STUDY ZONE;
(Q) THE EXISTENCE OF VESTED LAND USE, ZONING OR BUILDING
ENTITLEMENTS AFFECTING THE PROPERTY;
(R) ANY AND ALL REQUIREMENTS OR CONDITIONS OF APPROVAL OF STATE
AND LOCAL GOVERNMENTAL AGENCIES FOR DEVELOPMENT OF THE PROPERTY
INCLUDING, WITHOUT LIMITATION, THE CONSTRUCTION OF OFFSITE AND
ONSITE ROADS, UTILITIES AND OTHER IMPROVEMENTS; OR
10.
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(S) WITH RESPECT TO ANY OTHER MATTER CONCERNING THE PROPERTY
EXCEPT AS MAY BE OTHERWISE EXPRESSLY STATED HEREIN, INCLUDING ANY
AND ALL SUCH MATTERS REFERENCED, DISCUSSED OR DISCLOSED IN ANY
DOCUMENTS DELIVERED BY SELLER TO BUYER, IN ANY PUBLIC RECORDS OF
ANY GOVERNMENTAL AGENCY OR ENTITY OR UTILITY COMPANY, OR IN ANY
OTHER DOCUMENTS AVAILABLE TO BUYER.
(T) BUYER FURTHER ACKNOWLEDGES AND AGREES THAT BUYER IS
RELYING SOLELY ON ITS OWN INVESTIGATION OF THE PROPERTY AND ITS OWN
REVIEW OF ALL INFORMATION AND DOCUMENTATION CONCERNING THE
PROPERTY, AND NOT ON ANY INFORMATION PROVIDED OR TO BE PROVIDED BY
SELLER. BUYER FURTHER ACKNOWLEDGES AND AGREES THAT ANY INFORMATION
MADE AVAILABLE TO BUYER OR PROVIDED OR TO BE PROVIDED BY OR ON
BEHALF OF SELLER WITH RESPECT TO THE PROPERTY WAS OBTAINED FROM A
VARIETY OF SOURCES AND THAT SELLER HAS NOT MADE ANY INDEPENDENT
INVESTIGATION OR VERIFICATION OF SUCH INFORMATION AND MAKES NO
REPRESENTATIONS AS TO THE ACCURACY OR COMPLETENESS OF SUCH
INFORMATION EXCEPT AS MAY OTHERWISE BE PROVIDED HEREIN. BUYER
AGREES TO FULLY AND IRREVOCABLY RELEASE ALL SUCH SOURCES OF
INFORMATION AND PREPARERS OF INFORMATION AND DOCUMENTATION TO THE
EXTENT SUCH SOURCES OR PREPARERS ARE SELLER, OR ITS EMPLOYEES,
OFFICERS, DIRECTORS, REPRESENTATIVES, BENEFICIARIES, INVESTORS,
AGENTS, SERVANTS, ATTORNEYS, AFFILIATES, PARENT COMPANIES,
SUBSIDIARIES, SUCCESSORS OR ASSIGNS FROM ANY AND ALL CLAIMS,
DAMAGES AND LIABILITIES ARISING FROM SUCH INFORMATION OR
DOCUMENTATION, EXCEPT IF AND TO THE EXTENT THAT BUYER EMPLOYS SUCH
SOURCES OR PREPARERS OF INFORMATION TO ACT ON BEHALF OF BUYER, IN
WHICH EVENT THE LIABILITY OF SUCH SOURCES OR PREPARERS OF
INFORMATION TO BUYER SHALL BE DETERMINED BY THEIR OWN INDEPENDENT
AGREEMENTS WITH BUYER, AND SELLER SHALL NOT BE LIABLE FOR SUCH
AGREEMENTS OR OBLIGATIONS. SELLER IS NOT LIABLE OR BOUND IN ANY
MANNER BY ANY ORAL OR WRITTEN STATEMENTS, REPRESENTATIONS OR
INFORMATION PERTAINING TO THE PROPERTY, OR THE OPERATION THEREOF,
FURNISHED BY ANY OF THE FOREGOING ENTITIES AND INDIVIDUALS OR ANY
OTHER INDIVIDUAL OR ENTITY.
10.2 DISCLOSURES; SPECIFIC ACKNOWLEDGMENT REGARDING CONDITION OF
PROPERTY. Buyer acknowledges the disclosures expressly made by Seller in this
Agreement, the Prospectus and in correspondence from Seller, its attorneys
and/or its agents to Buyer, its attorneys and/or its agents.
11.
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11. TITLE INSURANCE: At the Close of Escrow, the Title Company will
issue to Buyer at Buyer's sole cost and expense an ALTA Standard Coverage Policy
(1990) with coverage in an amount equal to the appraised value of the Real
Property as determined by Buyer in its sole discretion, showing title to the
Real Property vested in Buyer, subject only to the Permitted Exceptions and the
standard printed exceptions and conditions in the policy of title insurance
("TITLE POLICY"). If Buyer elects to obtain any additional endorsements or an
extended coverage policy, the additional premium and costs of survey for the
extended coverage policy and the cost of any endorsements will be at Buyer's
sole cost and expense; however, Buyer's election to obtain an extended coverage
policy will not delay the Closing and Buyer's inability to obtain an extended
coverage policy or any such endorsements will not be deemed to be a failure of
any condition to Closing.
12. COSTS AND EXPENSES: Buyer will pay the costs of Closing the
transaction as follows:
(a) all premiums for the Title Policy;
(b) all escrow fees and costs;
(c) all city and county documentary transfer taxes;
(d) all document recording charges;
(e) all sales taxes;
(f) one half of all escrow fees and costs;
(g) the entire additional cost of any ALTA extended coverage
title policy, the cost of any required survey and, the cost of any
endorsements required by Buyer; and
(h) All other costs and expenses necessarily incurred to close
the transaction.
13. DISBURSEMENTS AND OTHER ACTIONS:
13.1 ESCROW HOLDER. At the Close of Escrow, Escrow Holder will promptly
undertake all of the following:
(a) Cause the Grant Deed (with documentary transfer tax
information to be affixed AFTER recording) to be recorded with the County
Recorder and obtain conformed copies thereof for distribution to Buyer and
Seller.
(b) Direct the Title Company to issue the Title Policy to Buyer
within 15 BUSINESS DAYS after Closing.
12.
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(c) Deliver to Buyer the FIRPTA Certificate, the Form 590 and
any other documents (or copies thereof) deposited into Escrow by Seller.
Deliver to Seller any other documents (or copies thereof) deposited into
Escrow by Buyer.
(d) Notify the Transfer Agent by telephone and facsimile that
the Close of Escrow has occurred.
13.2 BY TRANSFER AGENT. Promptly after the Close of Escrow, Transfer
Agent shall deliver all shares of common stock of AFH in payment of the Exchange
Value for the Property to the persons, at the addresses and in the amounts
designated by Seller.
13.3 POSSESSION. Possession of the Other Assets in Seller's possession
or control and all other Property shall be delivered by Seller to Buyer at the
Close of Escrow.
14. JOINT REPRESENTATIONS AND WARRANTIES: In addition to any express
agreements of the parties contained herein, the following constitute
representations and warranties of the parties each to the other, provided that
liability for any breach is subject to Sections 8.1.2 and 23.13 hereof:
14.1 AUTHORITY. Each party has the legal power, right and authority to
enter into this Agreement and the instruments referenced herein, and to
consummate this transaction.
14.2 ACTIONS. All requisite action (corporate, trust, partnership or
otherwise) has been taken by each party in connection with the entering into of
this Agreement, the instruments referenced herein, and the consummation of this
transaction. Except as provided in Section 9, no further consent of any
partner, shareholder, creditor, investor, judicial or administrative body,
governmental authority or other party is required.
14.3 DUE EXECUTION. The individuals executing this Agreement and the
instruments referenced herein on behalf of each party and the partners, officers
or trustees of each party, if any, have the legal power, right, and actual
authority to bind each party to the terms and conditions of those documents.
14.4 VALID AND BINDING. This Agreement and all other documents required
to close this transaction are and will be valid, legally binding obligations of
and enforceable against each party in accordance with their terms, subject only
to applicable bankruptcy, insolvency, reorganization, moratorium laws or similar
laws or equitable principles affecting or limiting the rights of contracting
parties generally.
14.5 BROKER. Seller represents and warrants to Buyer, and Buyer
represents and warrants to Seller, that no broker or finder has been engaged by
them, respectively, in connection with any of the transactions contemplated by
this Agreement, or to its knowledge is in any way connected with any of such
transactions. Buyer will indemnify, save harmless and defend Seller from any
liability, cost, or expense arising out of or connected with any claim for any
commission or compensation made by any person or entity claiming to have been
retained or contacted by Buyer in connection with this transaction. Seller will
indemnify, save harmless and defend Buyer
13.
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from any liability, cost, or expense arising out of or connected with any claim
for any commission or compensation made by any person or entity claiming to have
been retained or contacted by Seller in connection with this transaction. This
indemnity provision will survive the Closing or any earlier termination of this
Agreement.
15. SELLER'S WARRANTIES AND REPRESENTATIONS: Seller makes the
following representations, and warranties and acknowledges that Buyer will rely
on such representations and warranties in acquiring the Property; provided that
liability for any breach is subject to Sections 8.1.2 and 23.13 hereof:
15.1 NON-FOREIGN ENTITY. Seller is not a "foreign person" within the
meaning of Section 1445(f)(3) of the Internal Revenue Code.
15.2 HAZARDOUS SUBSTANCES. To Seller's Actual Knowledge, since the date
of Seller's acquisition of the Property, no Hazardous Substances are now or have
been used, stored, generated or disposed of on or within the Property except in
the normal course of use and operation of the Property and in compliance with
all applicable Environmental Laws.
15.3 CLEAN-UP. To Seller's Actual Knowledge, since the date of Seller's
acquisition of the Property, there are and have been no federal, state or local
enforcement, clean-up, removal, remedial or other governmental or regulatory
actions instituted or completed affecting the Property, other than such other
matters as may otherwise be disclosed in any Environmental Audit or in any other
documents provided or made available to Buyer.
15.4 CLAIMS. To Seller's Actual Knowledge, there are no outstanding
claims that have been made by any third party against Seller relating to any
Hazardous Substances on or within the Property.
The provisions of this Section 15 shall no longer bind Seller if
this Agreement expires or is terminated for any reason, or if the Closing
contemplated hereunder does not occur.
16. PRE-CLOSING COVENANTS. So long as this Agreement remains in full
force and effect:
16.1 NO TRANSFERS. Without the prior written consent of Buyer, Seller
will not convey any interest in the Property and will not subject the Property
to any additional liens, encumbrances, covenants, conditions, easements, rights
of way or similar matters after the date of this Agreement, except as may be
otherwise provided for in this Agreement, which will not be eliminated prior to
the Close of Escrow.
16.2 NO ALTERATIONS. Seller will not make any material alterations to
the Property without Buyer's consent, which will not be unreasonably withheld or
delayed.
14.
<PAGE>
16.3 MAINTENANCE. Seller will maintain the Property in substantially
the same condition as it is in, as of the date of this Agreement, and manage the
Property in accordance with Seller's established practices.
16.4 OBLIGATIONS UNDER CONTRACTS. Seller will keep and perform all of
the obligations to be performed by Seller under any contracts affecting the
Property. Without prior written consent of Buyer, which will not be
unreasonably withheld or delayed, Seller will not enter into any contract or
agreement providing for the provision of goods or services to or with respect to
the Property or the operation thereof unless such contracts or agreements can be
terminated without penalty by the Closing Date. Seller will not enter into any
leases for any portion of the Property.
16.5 EXPENDITURES. Seller will incur only expenditures necessary for
the day-to-day operation and maintenance of the Property, and will not incur
capital expenditures or liabilities not in the ordinary course of business.
Seller shall retain all Other Assets in Seller's possession on or after the date
hereof except for payment of such permitted liabilities and expenditures.
17. CONDEMNATION AND DESTRUCTION:
17.1 EMINENT DOMAIN OR TAKING. If proceedings under a power of eminent
domain relating to the Property or any part thereof are commenced prior to Close
of Escrow, Seller will promptly inform Buyer in writing.
(a) If such proceedings involve the taking of title to all or a
material interest in the Property, Buyer may elect to terminate this
Agreement by notice in writing sent within 10 DAYS of Seller's written
notice to Buyer, in which case neither party will have any further
obligation to or rights against the other except any rights or obligations
of either party which are expressly stated to survive termination of this
Agreement.
(b) If the proceedings do not involve the taking of title to all
or a material interest in the Property, or if Buyer does not elect to
terminate this Agreement, this transaction will be consummated as described
herein and any award or settlement payable with respect to such proceeding
will be paid or assigned to Buyer upon Close of Escrow.
(c) If this sale is not consummated for any reason, any
condemnation award or settlement will belong to Seller.
17.2 DAMAGE OR DESTRUCTION. Except as provided in this Section, prior
to the Close of Escrow the entire risk of loss of damage by earthquake, flood,
landslide, fire or other casualty is borne and assumed by Seller. If, prior to
the Close of Escrow, any part of the Improvements is damaged or destroyed by
earthquake, flood, landslide, fire or other casualty, Seller will promptly
inform Buyer of such fact in writing and advise Buyer as to the extent of the
damage and whether it is, in Seller's reasonable opinion, "MATERIAL" or not
"MATERIAL".
15.
<PAGE>
(a) If such damage or destruction is "MATERIAL", Buyer has the
option to terminate this Agreement upon written notice to the Seller given
not later than 10 DAYS after receipt of Seller's written notice to Buyer
advising of such damage or destruction.
(b) For purposes hereof, "MATERIAL" is deemed to be any damage
or destruction to the Improvements where the cost of repair or replacement
is estimated to be more than 25% of the Exchange Value of the Property and
will take more than 60 DAYS to repair.
(c) If this Agreement is so terminated, the provisions of
Section 5 will govern.
(d) If Buyer does not elect to terminate this Agreement, or if
the casualty is not material, Seller will reduce the Exchange Value by the
value reasonably estimated by Seller to repair or restore the damaged
portion of the Improvements, less any sums expended by Seller to make
emergency repairs to the Improvements or the Property or otherwise protect
the physical condition of the Improvements or the Property, and this
transaction will close pursuant to the terms of this Agreement.
(e) If the damage is not material, Seller's notice to Buyer of
the damage or destruction will also set forth Seller's reduced Exchange
Value and Seller's allocation of value to the damaged portion of the
Improvements. If Buyer does not accept Seller's reduced Exchange Value,
Buyer's sole remedy will be to terminate this Agreement.
(f) Whether or not the sale of the Property is consummated
hereunder, all rights to insurance claims or proceeds in respect of damage
or destruction to the Improvements occurring prior to the Close of Escrow
will belong to Seller.
18. UTILITIES AND DEPOSITS:
18.1 UTILITIES. Seller will notify all utility companies servicing the
Property of the sale of the Property to Buyer and will notify the utility
companies that all utility bills henceforth are to be sent to Buyer. Buyer
shall be entitled to receive any and all refunds of all utility deposits held by
utility companies and Seller will assign to Buyer all of Seller's right, title
and interest in any such utility deposits.
18.2 REFUNDABLE DEPOSITS. To the extent there exists any refundable
deposits made in connection with the development of the Property prior to the
Closing ("Refundable Deposits"), Seller shall assign to Buyer all of Seller's
right, title and interest in and to such Refundable Deposits.
19. MEDIATION OF DISPUTES: No party to this Agreement shall initiate
any litigation against any other party to this Agreement concerning any
controversy or claim arising out of or relating to this Agreement or any
agreements or instruments relating hereto or delivered in connection herewith,
including, but not limited to, any claim based on or arising from an alleged
tort, unless and until (i) at least 60 days before the same shall be filed, a
complete copy of each of the summons and complaint (and/or any other
documentation required to initiate such litigation) to
16.
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be filed by the complaining party shall have been delivered to the other party
or parties to any such dispute, and (ii) the complaining party has made itself
available to meet in Los Angeles, California with the other party or parties for
no more than 3 business days of non-binding mediation. Until and unless such
mediation has taken place, the complaining party must give notice to the
non-complaining party that it will, and then it must, make itself available for
such mediation during at least 20 business days during the 60 days before the
date on which such summons and complaint will be filed.
20. ARBITRATION OF DISPUTES: ANY CONTROVERSY OR CLAIM ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR ANY AGREEMENTS OR INSTRUMENTS RELATING HERETO
OR DELIVERED IN CONNECTION HEREWITH, INCLUDING, BUT NOT LIMITED TO A CLAIM BASED
ON OR ARISING FROM AN ALLEGED TORT WILL, AT THE REQUEST OF ANY PARTY, BE
DETERMINED BY ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (9
U.S.C. SECTION 1 ET SEQ.) UNDER THE AUSPICES AND RULES OF THE AMERICAN
ARBITRATION ASSOCIATION ("AAA"). THE AAA WILL BE INSTRUCTED BY EITHER OR BOTH
PARTIES TO PREPARE A LIST OF THREE (3) JUDGES WHO HAVE RETIRED FROM THE SUPERIOR
COURT OF THE STATE OF CALIFORNIA, A HIGHER CALIFORNIA COURT OR ANY FEDERAL
COURT. WITHIN 10 DAYS OF RECEIPT OF THE LIST, EACH PARTY MAY STRIKE 1 NAME FROM
THE LIST. THE AAA WILL THEN APPOINT THE ARBITRATOR FROM THE NAME(S) REMAINING
ON THE LIST. THE ARBITRATION WILL BE CONDUCTED IN SAN FRANCISCO, LOS ANGELES OR
SAN DIEGO, WHICHEVER IS THE CLOSEST CITY TO THE NEXUS OF THE DISPUTE. ANY
CONTROVERSY IN INTERPRETATION OR ENFORCEMENT OF THIS PROVISION OR WHETHER A
DISPUTE IS ARBITRABLE, WILL BE DETERMINED BY THE ARBITRATOR. JUDGMENT UPON THE
AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED IN ANY COURT HAVING
JURISDICTION. THE INSTITUTION AND MAINTENANCE OF AN ACTION FOR JUDICIAL RELIEF
OR IN PURSUIT OF AN ANCILLARY REMEDY DOES NOT CONSTITUTE A WAIVER OF THE RIGHT
OF ANY PARTY, INCLUDING THE PLAINTIFF, TO SUBMIT THE CONTROVERSY OR CLAIM TO
ARBITRATION.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION
DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING
UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR BY
JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL
RIGHTS TO DISCOVERY AND APPEAL UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN
THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY.
17.
<PAGE>
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION TO
NEUTRAL ARBITRATION.
Buyer's Initials ________ Seller's Initials _________
21. NOTICES: All notices or other communications required or permitted
hereunder must be in writing, and must be personally delivered (including by
means of professional messenger service) or sent by overnight courier, or sent
by registered or certified mail, postage prepaid, return receipt requested to
the addresses set forth in Section 1 hereof. All notices sent by mail will be
deemed received 2 DAYS after the date of mailing and all notices sent by other
means permitted herein shall be deemed received on the earlier of the date
delivered or the date on which delivery is refused.
22. ASSIGNMENT: Neither party shall have the right to assign this
Agreement without the other party's prior written consent.
23. MISCELLANEOUS:
23.1 COUNTERPARTS. This Agreement may be executed in counterparts.
23.2 PARTIAL INVALIDITY. If any term or provision of this Agreement
will be deemed to be invalid or unenforceable to any extent, the remainder of
this Agreement will not be affected thereby, and each remaining term and
provision of this Agreement will be valid and be enforced to the fullest extent
permitted by law.
23.3 POSSESSION OF THE PROPERTY. Seller will deliver possession of the
Property to Buyer upon the Close of Escrow.
23.4 WAIVERS. No waiver of any breach of any covenant or provision
contained herein will be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision contained herein. No extension
of time for performance of any obligation or act will be deemed an extension of
the time for performance of any other obligation or act except those of the
waiving party, which will be extended by a period of time equal to the period of
the delay.
23.5 SUCCESSORS AND ASSIGNS. This Agreement is binding upon and inures
to the benefit of the permitted successors and assigns of the parties hereto.
23.6 PROFESSIONAL FEES. In the event of the bringing of any action,
arbitration or suit by a party hereto against another party hereunder by reason
of any breach of any of the covenants, agreements or provisions on the part of
the other party arising out of this Agreement, then in that event the prevailing
party will be entitled to have the recovery of and from the other party all
costs and expenses of the action, mediation or suit, actual attorneys' fees,
witness fees and any other professional fees resulting therefrom.
18.
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23.7 ENTIRE AGREEMENT. This Agreement (including all Exhibits attached
hereto) constitutes the entire contract between the parties hereto with respect
to the subject matter hereof and may not be modified except by an instrument in
writing signed by the party to be charged.
23.8 TIME OF ESSENCE. Seller and Buyer hereby acknowledge and agree
that time is strictly of the essence with respect to each and every term,
condition, obligation and provision hereof.
23.9 CONSTRUCTION. Seller and Buyer and their respective advisors
believe that this Agreement is the product of all of their efforts, that it
expresses their agreement and that it should not be interpreted in favor of or
against either Buyer or Seller. The parties further agree that this Agreement
will be construed to effectuate the normal and reasonable expectations of a
sophisticated seller and buyer.
23.10 GOVERNING LAW. The parties hereto expressly agree that this
Agreement will be governed by, interpreted under, and construed and enforced in
accordance with the laws of the State of California.
23.11 WEAR AND TEAR. Buyer specifically acknowledges that Seller will
continue to use the Property in the course of its business and accepts the fact
that reasonable wear and tear will occur after the date of this Agreement.
Buyer specifically agrees that Seller is not responsible for repairing such
reasonable wear and tear and that Buyer is prohibited from raising such wear and
tear as a reason for not consummating this transaction or for requesting a
reduction in the Exchange Value.
23.12 NO RECORDATION. No memorandum or other document relating to this
Agreement will be recorded without the prior written consent of Seller, and any
such consent or approval will be conditioned upon Buyer providing Seller with a
quitclaim deed fully executed and acknowledged by Buyer, quitclaiming any and
all interests that it may have in the Property to Seller, which quitclaim deed
Seller may record in the event that this Agreement is terminated or the
transaction contemplated herein is not consummated.
23.13 SURVIVAL. All obligations of the parties contained herein which by
their terms do not arise until after the Close of Escrow and any other
provisions of this Agreement which by their terms survives the Close of Escrow,
shall survive the Close of Escrow. Notwithstanding anything to the contrary
contained in this Agreement, the representations and warranties contained in
this Agreement shall survive the Closing for a period of 1 year; provided that
any claims by one party hereto must be made in writing to the other party within
the 1 year period.
23.14 DISCLAIMER. Nothing herein creates any right or remedy for the
benefit of any person not a party hereto, nor creates a fiduciary relationship,
an agency or a partnership.
23.15 WAIVER OF JURY TRIAL. EACH PARTY, ACTING WITH KNOWLEDGE OF ITS
RIGHTS AFTER A FULL OPPORTUNITY TO CONSULT WITH COUNSEL, VOLUNTARILY WAIVES ALL
RIGHTS TO TRIAL BY JURY IN ALL PROCEEDINGS FOR
19.
<PAGE>
WHICH A TRIAL BY JURY WOULD OTHERWISE BE AVAILABLE OR REQUIRED, AND WHICH
INVOLVE ANY MATTER ARISING OUT OF OR CONNECTED WITH RIGHTS OR DUTIES UNDER, OR
ENFORCEMENT OR INTERPRETATION OF, THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year hereinabove written.
"SELLER": "BUYER":
NATIONAL INVESTORS FINANCIAL, VICTORVILLE HOMES, INC.,
INC., a California corporation, AS TRUSTEE a California corporation
for NATIONAL INVESTORS LAND
HOLDING TRUST ___
By: By:
---------------------------------- -----------------------------
Its: Its:
---------------------------------- -----------------------------
and and
By: By:
---------------------------------- -----------------------------
Its: Its:
---------------------------------- -----------------------------
Agreed to and accepted
by Escrow Holder:
By:
------------------------------------
Its:
------------------------------------
20.
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
<PAGE>
EXHIBIT B
FORM OF DEED
RECORDING REQUESTED BY:
WHEN RECORDED MAIL TO:
Arter & Hadden LLP
725 South Figueroa Street, Suite 3400
Los Angeles, California 90017
Attn.: Bruce H. Newman, Esq.
- --------------------------------------------------------------------------------
(Above Space For Recorder's Use Only)
GRANT DEED
In accordance with Section 11932 of the California Revenue and Taxation
Code, Grantor has declared the amount of transfer tax which is due by a separate
statement which is not being recorded with this Grant Deed.
FOR A VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED,
NATIONAL INVESTORS FINANCIAL, INC., a CALIFORNIA corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ("Grantor"), hereby grants to VICTORVILLE
HOMES, INC., a California corporation ("Grantee"), the real property in the
County of San Bernardino, State of California, and described in EXHIBIT A
attached hereto and made a part hereof.
DATED: __________________, 1998
NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST __
By:
---------------------------
Its:
---------------------------
By:
---------------------------
Its:
---------------------------
- --------------
MAIL TAX STATEMENTS TO:
<PAGE>
ACKNOWLEDGMENT
STATE OF CALIFORNIA )
) ss.
COUNTY OF )
On ____________________, before me, _____________________________________,
personally appeared ______________________________, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
- ------------------------------------
Notary Public in and for said
County and State [SEAL]
<PAGE>
Document No. ____________________ Date Recorded_________________
STATEMENT OF TAX DUE AND REQUEST THAT TAX DECLARATION
NOT BE MADE A PART OF THE PERMANENT RECORD
IN THE OFFICE OF THE COUNTY RECORDER
(Pursuant to Section 11932 R&T Code)
To: Registrar-Recorder
County of ___________________
Request is hereby made in accordance with the provisions of the Documentary
Transfer Tax Act that the amount of tax due not be shown on the original
document which names:
- -------------------------------------
(as grantor)
and
- -------------------------------------
(as grantee)
Property described in the accompanying document is located in
( ) unincorporated area or (x) City of ___________________.
The amount of tax due on the accompanying document is $_______________.
______ Computed on full value of property conveyed, or
______ Computed on full value less liens and encumbrances remaining at
time of sale.
- ------------------------------------
- ------------------------------------
By:
-------------------------
Its:
-------------------------
<PAGE>
EXHIBIT C
Seller's FIRPTA Affidavit
CERTIFICATION OF NON-FOREIGN STATUS
Section 1445 of the Internal Revenue Code provides that a
transferee of a U.S. real property interest must withhold tax if the transferor
is a foreign person. To inform the transferee that withholding of tax is not
required upon the disposition of a U.S. real property interest by NATIONAL
INVESTORS FINANCIAL, INC., a California corporation, AS TRUSTEE for NATIONAL
INVESTORS LAND HOLDING TRUST ("TRANSFEROR"), each of the undersigned hereby
certifies the following on behalf of Transferor:
1. Transferor is not a foreign corporation, foreign partnership,
foreign trust and foreign estate (as those terms are defined in the Internal
Revenue Code and Income Tax Regulations);
2. Transferor's U.S. employer identification number is
___________; and
3. Transferor's office address is ___________________________,
___________________.
Transferor understands that this certification may be disclosed to
the Internal Revenue Service by transferee and that any false statement
contained herein could be punished by fine, imprisonment or both.
Under penalties of perjury each of the undersigned declares that he
has examined this certification and to the best of his knowledge and belief it
is true, correct and complete, and he further declares that he has authority to
sign the document on behalf of the Transferor.
NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___
By:
--------------------------
Its:
--------------------------
By:
--------------------------
Its:
--------------------------
<PAGE>
EXHIBIT D
ASSIGNMENT AND ASSUMPTION
OF
AGREEMENTS
THIS ASSIGNMENT AND ASSUMPTION OF AGREEMENTS (this "Assignment") is
executed as of ______________, but effective as of the Effective Date (as
hereinafter defined), by and between NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for NATIONAL INVESTORS LAND HOLDING TRUST ___
("Assignor") and VICTORVILLE HOMES, INC., a California corporation ("Assignee"),
with reference to the following facts:
RECITALS:
A. Assignor, as the agent of and for the benefit of various
investors, holds title to that certain real property commonly known as "Stacey
Rose at Victorville ", located in the County of San Bernardino, State of
California, as more particularly described on Exhibit "A" attached hereto and
incorporated herein by reference (the "Property").
B. Concurrently herewith, Assignor has executed that certain
Grant Deed conveying and granting to Assignee the Property.
C. As part of the transfer and conveyance of the Property to
Assignee, Assignor has agreed to transfer, assign, grant and convey to Assignee
all of its right, title and interest in and to all agreements relating to the
Property, on the terms and conditions herein contained.
NOW, THEREFORE, in consideration of the foregoing Recitals, which
Recitals are by this reference incorporated herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. ASSIGNMENT. Assignor hereby grants, assigns, transfers, sets
over, sells, conveys and delivers to Assignee all of Assignor's right, title,
interest, benefits and privileges under the agreements relating to the Property
which are set forth in Exhibit "B" attached hereto and made a part hereof
(collectively, the "Agreements"). The assignment provided for in this Section 1
is effective concurrently with the transfer of the Property from Assignor to
Assignee (the "Effective Date").
i.
<PAGE>
2. ASSIGNEE'S ASSUMPTION. Assignee hereby accepts the assignment
from Assignor, assumes and agrees to perform all duties and obligations of
Assignor under the terms of the Agreements which are required to be performed on
or after the Effective Date.
3. DELIVERIES; REPORTS. On or before the Effective Date,
Assignor shall deliver to Assignee the original Agreements or if such original
Agreements are not in Assignor's possession, certified copies of such
Agreements. Assignor shall furnish and deliver to Assignee, promptly after
receipt thereof, duplicates or copies of all reports, notices, requests,
demands, declarations, certificates or other instruments hereafter received by
Assignor and relating to the Agreements. Assignee's address for receipt of the
foregoing is _________________________________________________________________.
4. FURTHER ASSURANCES. Assignor and Assignee shall execute,
acknowledge and deliver all such instruments and take all such action as may be
necessary to further assure to Assignee the rights assigned hereby and the full
benefits hereof and to preserve and protect this Assignment and all of the
rights, powers and remedies of Assignee provided for herein.
5. SUCCESSORS AND ASSIGNS. This Assignment shall be binding
upon and inure to the benefit of the successors and assigns of the respective
parties hereto.
6. GOVERNING LAW. This Assignment shall be governed by, and
construed in accordance with, the laws of the State of California.
7. COUNTERPARTS. This Assignment may be executed in several
counterparts, each of which shall be an original, but all of which taken
together shall constitute one and the same instrument.
ii.
<PAGE>
IN WITNESS WHEREOF, Assignor and Assignee have executed this
Assignment as of the date first above written but effective as of the Effective
Date.
ASSIGNOR: NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___
By:
--------------------------
Its:
--------------------------
By:
--------------------------
Its:
--------------------------
ASSIGNEE: VICTORVILLE HOMES, INC.,
a California corporation
By:
--------------------------
Its:
--------------------------
By:
--------------------------
Its:
--------------------------
iii.
<PAGE>
EXHIBIT E
BILL OF SALE AND GENERAL ASSIGNMENT OF INTANGIBLES
This Bill of Sale and General Assignment of Intangibles is made as
of the ____ day of ___________________________, 1998 (this "Assignment"), by
NATIONAL INVESTORS FINANCIAL, INC., a California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___ ("Assignor") to VICTORVILLE HOMES,
INC., a California corporation ("Assignee").
R E C I T A L
Assignee and Assignor have entered into an Agreement of Purchase
and Sale and Joint Escrow Instructions dated ________, 1998 ("Agreement of
Purchase and Sale") under which Assignee has agreed to purchase from Assignor,
that certain real property and any and all buildings, structures and
improvements on said real property commonly identified as "Stacey Rose at
Victorville", located in the County of San Bernardino, State of California and
legally described on EXHIBIT A attached hereto (the "Property").
TERMS AND CONDITIONS
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Assignor hereby assigns, transfers and sets over unto
Assignee, its successors and assigns, all personal property of Seller, if any,
located on and used in connection with the operation of the improvements on the
Property (the "Personal Property"). Buyer accepts such Personal Property in its
"AS-IS" condition and "WITH ALL FAULTS". Seller specifically disclaims all
express or implied warranties regarding the existence or condition of, or title
to, such Personal Property, including without limitation the implied warranties
of merchantability and suitability for a particular purpose.
2. Assignor hereby assigns, transfers and sets over unto
Assignee, its successors and assigns, all of its right, title and interest in
and to the following ("General Intangibles") if, and only to the extent, that
the General Intangibles exist and Assignor has the right to so transfer them:
(A) All of Assignor's right, title and interest in and to
all intangible property used, owned or issued solely in connection with the
Property, including but not limited to, all licenses, permits, certificates of
occupancy, approvals, maps, dedications, subdivision maps and entitlements
issued, approved or granted by any governmental agencies or
i.
<PAGE>
instrumentalities having any jurisdiction over the Property (the "Authorities")
or otherwise in connection with the Property; all development rights,
conditional use permits, variances, "floor area ratio" development rights and
other intangible rights, titles, interests, privileges and appurtenances owned
by Assignor and related to or issued in connection with the Property and/or its
use, occupancy, operation and/or development; all licenses, consents, easements,
rights of way, and approvals required from private parties to make use of
utilities and to insure vehicular and pedestrian ingress and egress to the
Property; and any pending applications or requests as to any of the foregoing;
(B) All building plans, specifications and drawings,
engineering, and other documents prepared in connection with the construction,
reconstruction, maintenance, repair, or operation any improvements on the
Property (the "Improvements");
(C) All warranties and guarantees relating to the
workmanship, construction, installation materials, and design of the
Improvements and the personal property situated on the Property, including but
not limited to those made by or received from any third party with respect to
any building, building component, structure, fixture, machinery, equipment or
material situated on, contained in any building or other improvement situated
on, or comprising a part of any building or other improvement situated on any
part of the Property;
(D) All rights, claims or awards benefiting the Property;
(E) All prepaid fees and fee credits, and all of Seller's
right, title and interest in and to refundable deposits, bonds and other
collateral furnished in connection with development of the Property; and
(F) All rights and general intangibles now owned by
Assignor solely in connection with the Property and any improvement and/or
fixture located on the Property, including, without limitation, the rights to
hold, use, sell and transfer the Property and Improvements and general
intangibles.
3. Assignor hereby covenants that it will, at any time and from
time to time upon written request therefor, execute and deliver to Assignee, its
successors and assigns any new or confirmatory instruments and take such further
acts as Assignee may reasonably request to fully evidence the assignment
contained herein and to enable Assignee, its successors and assigns to fully
realize and enjoy the rights and interests assigned hereby.
4. Assignee hereby accepts the foregoing assignment.
5. Assignor hereby represents and warrants to Assignee that it
has not previously assigned or hypothecated its interest in the foregoing
described General Intangibles; however, Assignee shall have no claims or rights
against Assignor, and Assignor shall have no obligation or liability to Assignee
for any General Intangibles described herein which do not exist, or which
Assignor does not have the right to transfer to Assignee.
ii.
<PAGE>
6. This Assignment shall be binding upon and inure to the
benefit of the legal representatives, assigns, or successors in interest of the
Assignor and Assignee.
IN WITNESS WHEREOF, the Assignor has executed this Assignment as of
_________, 1998.
NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING
TRUST ___
By:
------------------------------
Its:
-----------------------------
By:
------------------------------
Its:
-----------------------------
iii.
<PAGE>
AGREEMENT OF PURCHASE AND SALE
AND JOINT ESCROW INSTRUCTIONS
BY AND BETWEEN
NATIONAL INVESTORS FINANCIAL, INC.,
a California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___,
AS SELLER,
AND
PALMDALE/JOSHUA RANCH, INC.,
a California corporation,
AS BUYER
RELATING TO
PROPERTY LOCATED IN
Palmdale, California
known as
"JOSHUA RANCH"
DATED AS OF
__________________, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Substance of Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3. Exchange Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4. Escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5. Cancellation Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6. Deliveries to Escrow Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.1 By Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.2 By Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.3 By Buyer and Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7. Condition of Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
7.1 Permitted Exceptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
7.2 Title Provided by Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8. Conditions to the Close of Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8.1 Conditions Precedent to Buyer's Obligations . . . . . . . . . . . . . . . . . . . . . . 7
8.2 Conditions Precedent to Seller's Obligations. . . . . . . . . . . . . . . . . . . . . . 8
9. Approval of Seller's Constituents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
10. Property "As-Is. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
10.1 No Side Agreements Or Representations; As-Is Purchase. . . . . . . . . . . . . . . . . 8
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
10.2 Disclosures; Specific Acknowledgment Regarding Condition of Property . . . . . . . . .12
11. Title Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
12. Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
13. Disbursements and Other Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
13.1 Escrow Holder. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
13.2 By Transfer Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
13.3 Possession. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
14. Joint Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
14.1 Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
14.2 Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
14.3 Due Execution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
14.4 Valid and Binding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
14.5 Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
15. Seller's Warranties and Representations. . . . . . . . . . . . . . . . . . . . . . . . . . .14
15.1 Non-Foreign Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
15.2 Hazardous Substances.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
15.3 Clean-up.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
15.4 Claims.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
16. Pre-Closing Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.1 No Transfers.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.2 No Alterations.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.3 Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.4 Obligations Under Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
16.5 Expenditures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
17. Condemnation and Destruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
17.1 Eminent Domain or Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
17.2 Damage or Destruction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
18 Utilities and Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
18.1 Utilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
18.2 Refundable Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
19. Mediation of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
20. Arbitration of Disputes: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
21. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
22. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
23. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
23.1 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
23.2 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
23.3 Possession of the Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.4 Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.5 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.6 Professional Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.8 Time of Essence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.9 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.11 Wear and Tear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
23.12 No Recordation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
23.13 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
23.14 Disclaimer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
23.15 Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
</TABLE>
EXHIBITS
EXHIBIT A - Legal Description
EXHIBIT B - Form of Grant Deed
EXHIBIT C - FIRPTA Affidavit
EXHIBIT D - Assignment and Assumption
EXHIBIT E - Bill of Sale and General Assignment of Intangibles
iv
<PAGE>
AGREEMENT OF PURCHASE AND SALE
AND JOINT ESCROW INSTRUCTIONS
THIS AGREEMENT OF PURCHASE AND SALE AND JOINT ESCROW INSTRUCTIONS
("AGREEMENT") is made and entered into as of ____________ __, 1998, by and
between NATIONAL INVESTORS FINANCIAL, INC., a California corporation, AS TRUSTEE
for NATIONAL INVESTORS LAND HOLDING TRUST ___ ("SELLER"), and PALMDALE/JOSHUA
RANCH, INC., a California corporation ("BUYER").
R E C I T A L S
A. Seller is the owner of that certain unimproved real property commonly
known as "Joshua Ranch", consisting of approximately 794 acres, including 472
acres of open space and proposed streets, located at the Northwest Quadrant of
Elizabeth Road and the California Aqueduct, in the City of Palmdale, County of
Los Angeles, State of California, as more particularly described in Exhibit A
attached hereto (the "Real Property"). The Real Property consists of 539
proposed single family lots pursuant to a vesting tentative tract map.
B. Seller holds record title to the Real Property as agent of and for the
benefit of various investors who are the beneficiaries of National Investors
Land Holding Trust ____ (the "Trust").
C. Seller desires to sell to Buyer and Buyer desires to purchase from
Seller the Property (as hereinafter defined) on the terms and conditions set
forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing Recitals, which Recitals
are incorporated herein by this reference, and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, Buyer
and Seller agree as follows:
A G R E E M E N T
1. DEFINITIONS: For the purposes of this Agreement the following
terms will be defined as follows:
1.1 "ACTUAL KNOWLEDGE OF SELLER" means and is limited to the actual
knowledge of David Lasker and James N. Orth without having conducted any
independent inquiry or inspection, and shall not include the knowledge of any
other persons or firms, it being understood and agreed by Buyer that neither
David Lasker nor James N. Orth is charged with knowledge of all of the acts
and/or omissions of predecessors in title to the Property or management of the
Property before Seller's acquisition of the Property and the Actual Knowledge of
Seller shall not include information or material which may be in the possession
of Seller generally, but of which neither David Lasker nor James N. Orth is
actually aware.
1.
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1.2 "AFC" means American Family Communities, Inc., a California
corporation, which is a wholly-owned subsidiary of AFH.
1.3 "AFH" means American Family Holdings, Inc., a Delaware
corporation. Buyer is a wholly-owned subsidiary of AFC, which, in turn, is a
wholly-owned subsidiary of AFH.
1.4 "ASSIGNMENT" shall have the meaning given thereto in
Section 6.1(d) hereof.
1.5 "BILL OF SALE" shall have the meaning given thereto in
Section 6.1(e) hereof.
1.6 "CLOSING DATE" means ___________, 1998, unless an earlier date is
agreed to in a writing subsequent to this Agreement executed and delivered by
each of the parties hereto to the other, and is the last date on which the
Closing and Close of Escrow can occur, subject to extension as provided for in
this Agreement.
1.7 "CLOSING" and "CLOSE OF ESCROW" are terms used interchangeably in
this Agreement. The Closing or the Close of Escrow will be deemed to have
occurred when the Grant Deed is recorded in the official records of the county
in which the Property is located.
1.8 "EFFECTIVE DATE" means the date hereof.
1.9 "ENVIRONMENTAL AUDIT" means any environmental audit, review or
testing of the Property performed by Buyer or any third party or consultant
engaged by Buyer to conduct such study.
1.10 "ENVIRONMENTAL LAW" means any law, statute, ordinance or
regulation pertaining to health, industrial hygiene or the environment
including, without limitation, CERCLA (Comprehensive Environmental Response,
Compensation and Liability Act of 1980) and RCRA (Resources Conservation and
Recovery Act of 1976), as amended.
1.11 "ESCROW" shall have the meaning given thereto in Section 4
hereof.
1.12 "ESCROW HOLDER" means _______________________________, whose
address is _______________________________________________________________,
Attn.: ___________________.
1.13 "EXCHANGE VALUE" is the adjusted appraised value of the Property
which takes into consideration various factors to balance the business value of
the Property within its present ownership structure.
1.14 "FIRPTA CERTIFICATE" shall have the meaning given thereto in
Section 6.1(b) hereof.
1.15 "GRANT DEED" shall have the meaning given thereto in
Section 6.1(a) hereof.
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1.16 "HAZARDOUS SUBSTANCE" means any substance, material or waste
which is or becomes designated, classified or regulated as being "toxic" or
"hazardous" or a "pollutant" or which is or becomes similarly designated,
classified or regulated, under any Environmental Law, including asbestos,
petroleum and petroleum products.
1.17 "IMPROVEMENTS" means any and all improvements and fixtures
situated on the Real Property.
1.18 "INVESTORS" means the beneficiaries of the Trust.
1.19 "INTANGIBLES" means all of Seller's right, title and interest in
and to all intangible property used, owned or issued solely and strictly in
connection with the Real Property, Improvements and Personal Property,
including, but not limited to: (i) trade names and trademarks, contract rights,
accounts receivable and other intangible property used in connection with the
ownership and operation of the Property; (ii) all licenses, permits,
certificates of occupancy, approvals, dedications and entitlements issued,
approved or granted by any governmental authorities having jurisdiction over the
Property; and (iii) all development rights, conditional use permits, variances
and other intangible rights, titles, interests and privileges owned by Seller
and related to or issued in connection with the Land and/or Improvements, its
use, occupancy, operation and development, but in no way related to Seller's
financial data or other proprietary information or other property of Seller.
1.20 "NOTICES" will be sent as provided in Section 21 to:
Seller: National Investors Land Holding Trust
c/o National Investors Financial, Inc.
4675 MacArthur Court, Suite 1240
Newport Beach, CA 92660
Attn.: Mr. David Lasker
Telephone: (949) 833-8600
Facsimile: (949) 752-9753
with a copy to: Arter & Hadden LLP
725 South Figueroa Street, Suite 3400
Los Angeles, CA 90017
Attn.: Bruce H. Newman, Esq.
Telephone: (213) 430-3000
Facsimile: (213) 617-9255
Buyer: Palmdale/Joshua Ranch, Inc.
____________________________
____________________________
Attn.:______________________
Telephone: ________________
Facsimile: ________________
3.
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with a copy to: Arter & Hadden LLP
725 South Figueroa Street, Suite 3400
Los Angeles, CA 90017
Attn.: Bruce H. Newman, Esq.
Telephone: (213) 430-3000
Facsimile: (213) 617-9255
Escrow Holder: ____________________________
____________________________
____________________________
Attn.:______________________
Telephone: ________________
Facsimile: ________________
1.21 "OPENING OF ESCROW" shall have the meaning given thereto in
Section 4 hereof.
1.22 "OTHER ASSETS" means cash, cash equivalent, notes and other
negotiable instruments and any and all other assets in the possession or control
of Seller, the value of which is determined by possession, and any other assets
other than the Real Property, Personal Property or Intangibles relating to the
Real Property.
1.23 "PERMITTED EXCEPTIONS" shall have the meaning given thereto in
Section 7.1 hereof.
1.24 "PERSONAL PROPERTY" means the equipment, furniture and fixtures,
books and records and other personal property, if any, owned by Seller and
located on the Property as of the Effective Date, including without limitation,
those items listed on SCHEDULE 1 to the Bill of Sale.
1.25 "PROPERTY" means collectively, (i) the Real Property, (ii) the
Improvements , (iii) the Intangibles, (iv) the Personal Property and (v) the
Other Assets.
1.26 "PROSPECTUS" means the Consent Solicitation Statement/Prospectus
of Buyer.
1.27 "REAL PROPERTY" means that certain real property located in the
City of Palmdale, County of Los Angeles, State of California and commonly known
as "Joshua Ranch" and more particularly described in EXHIBIT A attached hereto.
The Real Property also is described in the Recitals hereof.
1.28 "TITLE COMPANY" means ________________________________________.
1.29 "TITLE POLICY" shall have the meaning given thereto in Section 11
hereof.
1.30 "TRANSFER AGENT" means_____________________ , who address is
__________________, Attn.: ___________, Facsimile No. ___________..
4.
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2. PURCHASE AND SALE:
2.1 PURCHASE AND SALE. Upon and subject to the terms and conditions
set forth in this Agreement, Seller agrees to sell to Buyer and Buyer agrees to
buy from Seller the Property, together with all easements, hereditaments,
entitlements (to the extent transferable) and appurtenances thereto. In
consideration of Seller's sale of the Property to Buyer, Buyer will (a) cause to
be delivered to the investors of Seller the Exchange Value in accordance with
Section 3, and (b) perform all of Buyer's other obligations hereunder.
2.2 SUBSTANCE OF TRANSACTIONS. Notwithstanding any other provision
of this Agreement, the transfer of the Property directly from Seller to Buyer is
for convenience purposes only to effect expeditiously the culmination of the
transfers set forth in this Section 2.2, and for all purposes hereunder it is
the intent of the parties that such transfer reflects the following transfers,
which shall occur in the following order: (i) all of the Investors, through
their approval of the transactions contemplated under this Agreement, contribute
all of their interests in the Property to AFH in exchange for shares of common
stock of AFH, such shares to be distributed to them pursuant to Sections 3 and
13.2 hereof; (ii) AFH contributes the Property to AFC as a contribution to the
capital of AFC; and (iii) AFC contributes the Property to Buyer as a
contribution to the capital of Buyer. Seller's transfer of the Property
directly to Buyer reflects Seller's transfer of the Property from the Investors
to AFH, from AFH to AFC, and from AFC to the Buyer, in each instance in Seller's
capacity as the agent of and on behalf of such transferors.
3. EXCHANGE VALUE: In consideration for the sale of the Property to
Buyer, Buyer will deliver to Seller an amount equal to the Exchange Value for
the Property. The Exchange Value for the Property is $______________, which
shall be paid in the form of, and by issuance and delivery of, _____ shares of
common stock in AFH to the investors of Seller, to be distributed by the
Transfer Agent at the Closing outside of Escrow in accordance with Section 13.2
hereof. Upon the request of any party hereto, whether made before or after the
Closing, the parties hereto will allocate the Exchange Value to the Real
Property, Improvements, Personal Property, Other Assets and the Intangibles.
4. ESCROW: Immediately upon execution of this Agreement, Buyer and
Seller will open an escrow (the "ESCROW") with the Escrow Holder by delivering
to Escrow Holder a fully executed copy of this Agreement (the "OPENING OF
ESCROW"). The purchase and sale of the Property will be completed through the
Escrow. Buyer and Seller agree to execute any additional instructions
consistent with this Agreement which are reasonably required by the Escrow
Holder. If there is a conflict between any printed escrow instructions and this
Agreement, the terms of this Agreement will govern.
5. CANCELLATION FEES AND EXPENSES: If the Closing does not occur at
the time and in the manner provided in this Agreement because of the default of
one of the parties, the non-defaulting party has the right to cancel the Escrow
by written notice to the defaulting party and to the Escrow Holder. All costs
of cancellation, if any, will be paid by the defaulting party.
5.
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6. DELIVERIES TO ESCROW HOLDER:
6.1 BY SELLER. On or prior to the Closing Date, Seller will deliver
or cause to be delivered to Escrow Holder the following items:
(a) A Grant Deed ("GRANT DEED"), in the form attached to this
Agreement as EXHIBIT B, duly executed and acknowledged by Seller and in
recordable form, conveying the Property to Buyer.
(b) A Transferor's Certificate of Non-Foreign Status attached to
this Agreement as EXHIBIT C ("FIRPTA CERTIFICATE"), duly executed by or on
behalf of Seller.
(c) A properly executed California Form RE 590 or other evidence
sufficient to establish that Buyer is not required to withhold any portion
of the Exchange Value pursuant to Sections 18805 and 26131 of the
California Revenue and Taxation Code ("FORM 590").
(d) An Assignment and Assumption of Agreements ("ASSIGNMENT")
duly executed by Seller in favor of Buyer in the form attached to this
Agreement as EXHIBIT D.
(e) A Bill of Sale and General Assignment of Intangibles in the
form attached to this Agreement as EXHIBIT E ("BILL OF SALE"), duly
executed by Seller and conveying all right, title and interest of Seller in
the Personal Property and the Intangibles to Buyer.
(f) Such corporate resolutions, certificates of good standing
and/or other corporate or partnership documents relating to Seller as are
reasonably required by Buyer or Escrow Holder or both in connection with
this transaction.
6.2 BY BUYER. On or prior to the Closing Date, Buyer will deliver or
cause to be delivered to Escrow Holder the following items:
(a) Such corporate resolutions, certificates of good standing
and/or other corporate or partnership documents relating to Buyer as are
reasonably required by Seller or Escrow Holder or both in connection with
this transaction.
(b) Amounts due to pay costs and expenses as set forth in
Section 12 hereof.
6.3 BY BUYER AND SELLER. Buyer and Seller will each deposit such
other instruments consistent with this Agreement as are reasonably required by
Escrow Holder or otherwise required to close escrow. In addition Seller and
Buyer hereby designate Escrow Holder as the "REPORTING PERSON" for the
transaction pursuant to Section 6045(e) of the Internal Revenue Code.
6.
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7. CONDITION OF TITLE:
7.1 PERMITTED EXCEPTIONS. At the Close of Escrow, fee simple title
to the Property will be conveyed to Buyer by Seller by Grant Deed, subject only
to the following title matters ("PERMITTED EXCEPTIONS"):
(a) all property tax liens (whether or not payment of property
taxes are delinquent) and all other matters shown in that certain
Commitment for Title Insurance effective _______________, issued by the
Title Company, bearing Order No.________; and
(b) matters affecting the condition of title to the Property
created by, at the request of or with the written consent of Buyer.
7.2 TITLE PROVIDED BY SELLER. The parties agree that (a) except as
specifically provided in the Grant Deed or implied by law, Seller makes no
express or implied warranties regarding the condition of title to the Property,
and (b) Buyer shall rely solely on the Title Policy for protection against any
title defects.
8. CONDITIONS TO THE CLOSE OF ESCROW:
8.1 CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. The following
conditions must be satisfied not later the earlier of the Closing Date or such
other period of time as may be specified below:
8.1.1 TITLE. As of the Closing, the Title Company will issue or
have committed to issue to Buyer the Title Policy described in Section 11.
8.1.2 REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER. Seller
will have duly performed each and every agreement to be performed by Seller
hereunder and, subject to the provisions of Section 10, Seller's express
representations and warranties set forth in this Agreement will be true and
correct in all material respects as of the Closing Date. However,
notwithstanding anything to the contrary stated or implied in this Section
8.1.2, Seller shall have no liability for the breach of any
representations, warranties or covenants set forth in this Agreement,
whether express or implied, absent a finding by a court of competent
jurisdiction that either David Lasker or James N. Orth or both of them
withheld information with respect thereto from Buyer or falsified
information delivered to and relied upon by Buyer and that such action
amounted to a violation of a representation or warranty set forth herein.
8.1.3 SELLER'S DELIVERIES. Seller will have delivered the items
described in Section 6.1.
The conditions set forth in this Section 8.1 are solely for the benefit of
Buyer and may be waived only by Buyer. At all times Buyer has the right to
waive any condition. Such waiver or
7.
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waivers must be in writing to Seller. If any conditions are not satisfied on or
before the Closing Date, and Buyer has not waived the unsatisfied conditions,
Seller will not be deemed to be in default (unless Seller has breached
Sections 8.1.2 or 8.1.3 above) and Buyer's sole remedy will be to terminate this
Agreement.
8.2 CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS. The Close of
Escrow and Seller's obligations with respect to this transaction are subject to
the following conditions precedent: (a) Buyer's delivery to Escrow Holder on or
before the Closing Date, of the items described in Section 6.2; (b) the approval
of such of Seller's constituents as Seller shall deem necessary or advisable in
its sole and absolute discretion as set forth in Section 9 hereof; (c) Buyer
having duly performed each and every agreement to be performed by Buyer
hereunder; and (d) Buyer's representations, warranties and covenants set forth
in this Agreement, will be true and correct in all material respects as of the
Closing Date. The conditions set forth in this Section 8.2 are solely for the
benefit of Seller and may be waived only by Seller, with such waiver or waivers
to be in writing to Buyer. If any conditions are not satisfied on or before the
Closing Date, and Seller has not waived the unsatisfied conditions, Buyer will
not be deemed to be in default (unless Buyer has breached Sections 8.2(a), (c)
or (d) above) and Seller's sole remedy will be to terminate the Agreement.
9. APPROVAL OF SELLER'S CONSTITUENTS: Seller shall exercise
reasonable diligence to obtain the approval of this transaction by such of the
constituents of Seller as Seller shall deem necessary or advisable, in its sole
and absolute discretion, and shall notify Buyer and Escrow Holder when such
approvals have been obtained. If Seller is not able to obtain such approvals
from such constituents on or before the date which is ____ days after the
Effective Date, or such later date as is mutually agreed to by Buyer and Seller,
then Seller may cancel this Agreement by notice to Buyer and Escrow Holder given
prior to the end of that time period, and in that event Seller shall pay all
title and escrow cancellation costs. Seller shall indemnify and hold Buyer
harmless from any claim, damage, loss, liability, action, settlement, including
Buyer's reasonable attorneys' fees suffered by Buyer and which results from or
relates to the Seller's securing approval of this transaction and transferring
the Property to Buyer pursuant to such approval.
10. PROPERTY "AS-IS":
10.1 NO SIDE AGREEMENTS OR REPRESENTATIONS; AS-IS PURCHASE. BUYER
REPRESENTS, WARRANTS AND COVENANTS TO SELLER THAT BUYER HAD THE OPPORTUNITY TO
INDEPENDENTLY AND PERSONALLY INSPECT THE PROPERTY AND IMPROVEMENTS, IF ANY, AND
THAT BUYER HAS ENTERED INTO THIS AGREEMENT AFTER HAVING MADE SUCH PERSONAL
EXAMINATION AND INSPECTION. BUYER AGREES THAT BUYER WILL ACCEPT THE PROPERTY,
IN ITS THEN CONDITION AS-IS AND WITH ALL ITS FAULTS, INCLUDING WITHOUT
LIMITATION, ANY FAULTS AND CONDITIONS SPECIFICALLY REFERENCED IN THIS AGREEMENT,
SUBJECT TO THE EXPRESS COVENANTS, INDEMNITIES, REPRESENTATIONS AND WARRANTIES
MADE BY SELLER ELSEWHERE HEREIN. NO PERSON ACTING ON BEHALF OF SELLER IS
AUTHORIZED TO MAKE, AND BY EXECUTION HEREOF, BUYER ACKNOWLEDGES AND AGREES THAT,
EXCEPT FOR
8.
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THOSE REPRESENTATIONS, WARRANTIES, COVENANTS, INDEMNITIES AND AGREEMENTS
EXPRESSLY MADE BY SELLER IN THIS AGREEMENT, SELLER HAS NOT MADE, DOES NOT MAKE
AND SPECIFICALLY NEGATES AND DISCLAIMS ANY REPRESENTATIONS, WARRANTIES,
PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER
WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR
FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO:
(A) THE VALUE OF THE PROPERTY OR THE INCOME TO BE DERIVED
THEREFROM;
(B) THE SUITABILITY OF THE PROPERTY FOR ANY AND ALL ACTIVITIES
AND USES WHICH BUYER MAY CONDUCT THEREON, INCLUDING ANY DEVELOPMENT OF
THE PROPERTY;
(C) THE HABITABILITY, MERCHANTABILITY, MARKETABILITY,
PROFITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PROPERTY;
(D) THE MANNER, QUALITY, STATE OF REPAIR OR LACK OF REPAIR OF
THE PROPERTY;
(E) THE NATURE, QUALITY OR CONDITION OF THE PROPERTY,
INCLUDING WITHOUT LIMITATION, THE WATER, SOIL AND GEOLOGY;
(F) THE TYPE, AVAILABILITY OR COST OF ANY ENTITLEMENTS
REQUIRED TO DEVELOP THE PROPERTY;
(G) THE COMPLIANCE OF OR BY THE PROPERTY OR ITS OPERATION WITH
ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY APPLICABLE
GOVERNMENTAL AUTHORITY OR BODY;
(H) THE MANNER, CONDITION OR QUALITY OF THE CONSTRUCTION OR
MATERIALS, IF ANY, INCORPORATED INTO THE PROPERTY;
(I) COMPLIANCE WITH ANY ENVIRONMENTAL PROTECTION, POLLUTION OR
LAND USE LAWS, RULES, REGULATION, ORDERS OR REQUIREMENTS, INCLUDING
BUT NOT LIMITED TO, THE ENDANGERED SPECIES ACT, TITLE III OF THE
AMERICANS WITH DISABILITIES ACT OF 1990 OR ANY OTHER LAW, RULE OR
REGULATION GOVERNING ACCESS BY DISABLED PERSONS, CALIFORNIA HEALTH &
SAFETY CODE, THE FEDERAL WATER
9.
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POLLUTION CONTROL ACT, THE FEDERAL RESOURCE CONSERVATION AND RECOVERY
ACT, THE U.S. ENVIRONMENTAL PROTECTION AGENCY REGULATIONS AT 40
C.F.R., PART 261, THE COMPREHENSIVE ENVIRONMENTAL RESPONSE
COMPENSATION AND LIABILITY ACT OF 1980, AS AMENDED, THE RESOURCES
CONSERVATION AND RECOVERY ACT OF 1976, THE CLEAN WATER ACT, THE SAFE
DRINKING WATER ACT, THE HAZARDOUS MATERIALS TRANSPORTATION ACT, THE
TOXIC SUBSTANCE CONTROL ACT, AND REGULATIONS PROMULGATED UNDER ANY OF
THE FOREGOING;
(J) THE PRESENCE OR ABSENCE OF HAZARDOUS MATERIALS AT, ON,
UNDER, OR ADJACENT TO THE PROPERTY;
(K) THE CONTENT, COMPLETENESS OR ACCURACY OF ANY MATERIALS,
INCLUDING ANY INFORMATIONAL PACKAGE, COST TO COMPLETE ESTIMATE OR
OTHER MATERIALS PREPARED BY OR ON BEHALF OF SELLER;
(L) THE CONFORMITY OF THE IMPROVEMENTS TO ANY PLANS OR
SPECIFICATIONS FOR THE PROPERTY, INCLUDING ANY PLANS AND
SPECIFICATIONS THAT MAY HAVE BEEN OR MAY BE PROVIDED TO BUYER;
(M) THE CONFORMITY OF THE PROPERTY TO PAST, CURRENT OR FUTURE
APPLICABLE ZONING OR BUILDING REQUIREMENTS;
(N) DEFICIENCY OF ANY UNDERSHORING;
(O) DEFICIENCY OF ANY DRAINAGE;
(P) THE FACT THAT ALL OR A PORTION OF THE PROPERTY MAY BE
LOCATED ON OR NEAR AN EARTHQUAKE FAULT LINE OR LOCATED IN AN
ALQUIST-PRIOLO SPECIAL STUDY ZONE;
(Q) THE EXISTENCE OF VESTED LAND USE, ZONING OR BUILDING
ENTITLEMENTS AFFECTING THE PROPERTY;
(R) ANY AND ALL REQUIREMENTS OR CONDITIONS OF APPROVAL OF
STATE AND LOCAL GOVERNMENTAL AGENCIES FOR DEVELOPMENT OF THE PROPERTY
INCLUDING, WITHOUT LIMITATION, THE CONSTRUCTION OF OFFSITE AND ONSITE
ROADS, UTILITIES AND OTHER IMPROVEMENTS; OR
10.
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(S) WITH RESPECT TO ANY OTHER MATTER CONCERNING THE PROPERTY
EXCEPT AS MAY BE OTHERWISE EXPRESSLY STATED HEREIN, INCLUDING ANY AND
ALL SUCH MATTERS REFERENCED, DISCUSSED OR DISCLOSED IN ANY DOCUMENTS
DELIVERED BY SELLER TO BUYER, IN ANY PUBLIC RECORDS OF ANY
GOVERNMENTAL AGENCY OR ENTITY OR UTILITY COMPANY, OR IN ANY OTHER
DOCUMENTS AVAILABLE TO BUYER.
(T) BUYER FURTHER ACKNOWLEDGES AND AGREES THAT BUYER IS
RELYING SOLELY ON ITS OWN INVESTIGATION OF THE PROPERTY AND ITS OWN
REVIEW OF ALL INFORMATION AND DOCUMENTATION CONCERNING THE PROPERTY,
AND NOT ON ANY INFORMATION PROVIDED OR TO BE PROVIDED BY SELLER.
BUYER FURTHER ACKNOWLEDGES AND AGREES THAT ANY INFORMATION MADE
AVAILABLE TO BUYER OR PROVIDED OR TO BE PROVIDED BY OR ON BEHALF OF
SELLER WITH RESPECT TO THE PROPERTY WAS OBTAINED FROM A VARIETY OF
SOURCES AND THAT SELLER HAS NOT MADE ANY INDEPENDENT INVESTIGATION OR
VERIFICATION OF SUCH INFORMATION AND MAKES NO REPRESENTATIONS AS TO
THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION EXCEPT AS MAY
OTHERWISE BE PROVIDED HEREIN. BUYER AGREES TO FULLY AND IRREVOCABLY
RELEASE ALL SUCH SOURCES OF INFORMATION AND PREPARERS OF INFORMATION
AND DOCUMENTATION TO THE EXTENT SUCH SOURCES OR PREPARERS ARE SELLER,
OR ITS EMPLOYEES, OFFICERS, DIRECTORS, REPRESENTATIVES, BENEFICIARIES,
INVESTORS, AGENTS, SERVANTS, ATTORNEYS, AFFILIATES, PARENT COMPANIES,
SUBSIDIARIES, SUCCESSORS OR ASSIGNS FROM ANY AND ALL CLAIMS, DAMAGES
AND LIABILITIES ARISING FROM SUCH INFORMATION OR DOCUMENTATION, EXCEPT
IF AND TO THE EXTENT THAT BUYER EMPLOYS SUCH SOURCES OR PREPARERS OF
INFORMATION TO ACT ON BEHALF OF BUYER, IN WHICH EVENT THE LIABILITY OF
SUCH SOURCES OR PREPARERS OF INFORMATION TO BUYER SHALL BE DETERMINED
BY THEIR OWN INDEPENDENT AGREEMENTS WITH BUYER, AND SELLER SHALL NOT
BE LIABLE FOR SUCH AGREEMENTS OR OBLIGATIONS. SELLER IS NOT LIABLE OR
BOUND IN ANY MANNER BY ANY ORAL OR WRITTEN STATEMENTS, REPRESENTATIONS
OR INFORMATION PERTAINING TO THE PROPERTY, OR THE OPERATION THEREOF,
FURNISHED BY ANY OF THE FOREGOING ENTITIES AND INDIVIDUALS OR ANY
OTHER INDIVIDUAL OR ENTITY.
10.2 DISCLOSURES; SPECIFIC ACKNOWLEDGMENT REGARDING CONDITION OF
PROPERTY. Buyer acknowledges the disclosures expressly made by Seller in this
Agreement, the Prospectus and in correspondence from Seller, its attorneys
and/or its agents to Buyer, its attorneys and/or its agents.
11.
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11. TITLE INSURANCE: At the Close of Escrow, the Title Company will
issue to Buyer at Buyer's sole cost and expense an ALTA Standard Coverage Policy
(1990) with coverage in an amount equal to the appraised value of the Real
Property as determined by Buyer in its sole discretion, showing title to the
Real Property vested in Buyer, subject only to the Permitted Exceptions and the
standard printed exceptions and conditions in the policy of title insurance
("TITLE POLICY"). If Buyer elects to obtain any additional endorsements or an
extended coverage policy, the additional premium and costs of survey for the
extended coverage policy and the cost of any endorsements will be at Buyer's
sole cost and expense; however, Buyer's election to obtain an extended coverage
policy will not delay the Closing and Buyer's inability to obtain an extended
coverage policy or any such endorsements will not be deemed to be a failure of
any condition to Closing.
12. COSTS AND EXPENSES: Buyer will pay the costs of Closing the
transaction as follows:
(a) all premiums for the Title Policy;
(b) all escrow fees and costs;
(c) all city and county documentary transfer taxes;
(d) all document recording charges;
(e) all sales taxes;
(f) one half of all escrow fees and costs;
(g) the entire additional cost of any ALTA extended coverage
title policy, the cost of any required survey and, the cost of any
endorsements required by Buyer; and
(h) All other costs and expenses necessarily incurred to close
the transaction.
13. DISBURSEMENTS AND OTHER ACTIONS:
13.1 ESCROW HOLDER. At the Close of Escrow, Escrow Holder will
promptly undertake all of the following:
(a) Cause the Grant Deed (with documentary transfer tax
information to be affixed AFTER recording) to be recorded with the County
Recorder and obtain conformed copies thereof for distribution to Buyer and
Seller.
(b) Direct the Title Company to issue the Title Policy to
Buyer within 15 BUSINESS DAYS after Closing.
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(c) Deliver to Buyer the FIRPTA Certificate, the Form 590 and
any other documents (or copies thereof) deposited into Escrow by Seller.
Deliver to Seller any other documents (or copies thereof) deposited into
Escrow by Buyer.
(d) Notify the Transfer Agent by telephone and facsimile that
the Close of Escrow has occurred.
13.2 BY TRANSFER AGENT. Promptly after the Close of Escrow,
Transfer Agent shall deliver all shares of common stock of AFH in payment of the
Exchange Value for the Property to the persons, at the addresses and in the
amounts designated by Seller.
13.3 POSSESSION. Possession of the Other Assets in Seller's
possession or control and all other Property shall be delivered by Seller to
Buyer at the Close of Escrow.
14. JOINT REPRESENTATIONS AND WARRANTIES: In addition to any express
agreements of the parties contained herein, the following constitute
representations and warranties of the parties each to the other, provided that
liability for any breach is subject to Sections 8.1.2 and 23.13 hereof:
14.1 AUTHORITY. Each party has the legal power, right and authority
to enter into this Agreement and the instruments referenced herein, and to
consummate this transaction.
14.2 ACTIONS. All requisite action (corporate, trust, partnership or
otherwise) has been taken by each party in connection with the entering into of
this Agreement, the instruments referenced herein, and the consummation of this
transaction. Except as provided in Section 9, no further consent of any
partner, shareholder, creditor, investor, judicial or administrative body,
governmental authority or other party is required.
14.3 DUE EXECUTION. The individuals executing this Agreement and the
instruments referenced herein on behalf of each party and the partners, officers
or trustees of each party, if any, have the legal power, right, and actual
authority to bind each party to the terms and conditions of those documents.
14.4 VALID AND BINDING. This Agreement and all other documents
required to close this transaction are and will be valid, legally binding
obligations of and enforceable against each party in accordance with their
terms, subject only to applicable bankruptcy, insolvency, reorganization,
moratorium laws or similar laws or equitable principles affecting or limiting
the rights of contracting parties generally.
14.5 BROKER. Seller represents and warrants to Buyer, and Buyer
represents and warrants to Seller, that no broker or finder has been engaged by
them, respectively, in connection with any of the transactions contemplated by
this Agreement, or to its knowledge is in any way connected with any of such
transactions. Buyer will indemnify, save harmless and defend Seller from any
liability, cost, or expense arising out of or connected with any claim for any
commission or compensation made by any person or entity claiming to have been
retained or contacted by Buyer in connection with this transaction. Seller will
indemnify, save harmless and defend Buyer
13.
<PAGE>
from any liability, cost, or expense arising out of or connected with any claim
for any commission or compensation made by any person or entity claiming to have
been retained or contacted by Seller in connection with this transaction. This
indemnity provision will survive the Closing or any earlier termination of this
Agreement.
15. SELLER'S WARRANTIES AND REPRESENTATIONS: Seller makes the
following representations, and warranties and acknowledges that Buyer will rely
on such representations and warranties in acquiring the Property; provided that
liability for any breach is subject Sections 8.1.2 and 23.13 hereof:
15.1 NON-FOREIGN ENTITY. Seller is not a "foreign person" within the
meaning of Section 1445(f)(3) of the Internal Revenue Code.
15.2 HAZARDOUS SUBSTANCES. To Seller's Actual Knowledge, since the
date of Seller's acquisition of the Property, no Hazardous Substances are now or
have been used, stored, generated or disposed of on or within the Property
except in the normal course of use and operation of the Property and in
compliance with all applicable Environmental Laws.
15.3 CLEAN-UP. To Seller's Actual Knowledge, since the date of
Seller's acquisition of the Property, there are and have been no federal, state
or local enforcement, clean-up, removal, remedial or other governmental or
regulatory actions instituted or completed affecting the Property, other than
such other matters as may otherwise be disclosed in any Environmental Audit or
in any other documents provided or made available to Buyer.
15.4 CLAIMS. To Seller's Actual Knowledge, there are no outstanding
claims that have been made by any third party against Seller relating to any
Hazardous Substances on or within the Property.
The provisions of this Section 15 shall no longer bind Seller if
this Agreement expires or is terminated for any reason, or if the Closing
contemplated hereunder does not occur.
16. PRE-CLOSING COVENANTS. So long as this Agreement remains in full
force and effect:
16.1 NO TRANSFERS. Without the prior written consent of Buyer, Seller
will not convey any interest in the Property and will not subject the Property
to any additional liens, encumbrances, covenants, conditions, easements, rights
of way or similar matters after the date of this Agreement, except as may be
otherwise provided for in this Agreement, which will not be eliminated prior to
the Close of Escrow.
16.2 NO ALTERATIONS. Seller will not make any material alterations to
the Property without Buyer's consent, which will not be unreasonably withheld or
delayed.
14.
<PAGE>
16.3 MAINTENANCE. Seller will maintain the Property in substantially
the same condition as it is in, as of the date of this Agreement, and manage the
Property in accordance with Seller's established practices.
16.4 OBLIGATIONS UNDER CONTRACTS. Seller will keep and perform all of
the obligations to be performed by Seller under any contracts affecting the
Property. Without prior written consent of Buyer, which will not be
unreasonably withheld or delayed, Seller will not enter into any contract or
agreement providing for the provision of goods or services to or with respect to
the Property or the operation thereof unless such contracts or agreements can be
terminated without penalty by the Closing Date. Seller will not enter into any
leases for any portion of the Property.
16.5 EXPENDITURES. Seller will incur only expenditures necessary for
the day-to-day operation and maintenance of the Property, and will not incur
capital expenditures or liabilities not in the ordinary course of business.
Seller shall retain all Other Assets in Seller's possession on or after the date
hereof except for payment of such permitted liabilities and expenditures.
17. CONDEMNATION AND DESTRUCTION:
17.1 EMINENT DOMAIN OR TAKING. If proceedings under a power of
eminent domain relating to the Property or any part thereof are commenced prior
to Close of Escrow, Seller will promptly inform Buyer in writing.
(a) If such proceedings involve the taking of title to all or
a material interest in the Property, Buyer may elect to terminate this
Agreement by notice in writing sent within 10 DAYS of Seller's written
notice to Buyer, in which case neither party will have any further
obligation to or rights against the other except any rights or obligations
of either party which are expressly stated to survive termination of this
Agreement.
(b) If the proceedings do not involve the taking of title to
all or a material interest in the Property, or if Buyer does not elect to
terminate this Agreement, this transaction will be consummated as described
herein and any award or settlement payable with respect to such proceeding
will be paid or assigned to Buyer upon Close of Escrow.
(c) If this sale is not consummated for any reason, any
condemnation award or settlement will belong to Seller.
17.2 DAMAGE OR DESTRUCTION. Except as provided in this Section, prior
to the Close of Escrow the entire risk of loss of damage by earthquake, flood,
landslide, fire or other casualty is borne and assumed by Seller. If, prior to
the Close of Escrow, any part of the Improvements is damaged or destroyed by
earthquake, flood, landslide, fire or other casualty, Seller will promptly
inform Buyer of such fact in writing and advise Buyer as to the extent of the
damage and whether it is, in Seller's reasonable opinion, "MATERIAL" or not
"MATERIAL".
15.
<PAGE>
(a) If such damage or destruction is "MATERIAL", Buyer has the
option to terminate this Agreement upon written notice to the Seller given
not later than 10 DAYS after receipt of Seller's written notice to Buyer
advising of such damage or destruction.
(b) For purposes hereof, "MATERIAL" is deemed to be any damage
or destruction to the Improvements where the cost of repair or replacement
is estimated to be more than 25% of the Exchange Value of the Property and
will take more than 60 DAYS to repair.
(c) If this Agreement is so terminated, the provisions of
Section 5 will govern.
(d) If Buyer does not elect to terminate this Agreement, or if
the casualty is not material, Seller will reduce the Exchange Value by the
value reasonably estimated by Seller to repair or restore the damaged
portion of the Improvements, less any sums expended by Seller to make
emergency repairs to the Improvements or the Property or otherwise protect
the physical condition of the Improvements or the Property, and this
transaction will close pursuant to the terms of this Agreement.
(e) If the damage is not material, Seller's notice to Buyer of
the damage or destruction will also set forth Seller's reduced Exchange
Value and Seller's allocation of value to the damaged portion of the
Improvements. If Buyer does not accept Seller's reduced Exchange Value,
Buyer's sole remedy will be to terminate this Agreement.
(f) Whether or not the sale of the Property is consummated
hereunder, all rights to insurance claims or proceeds in respect of damage
or destruction to the Improvements occurring prior to the Close of Escrow
will belong to Seller.
18. UTILITIES AND DEPOSITS:
18.1 UTILITIES . Seller will notify all utility companies servicing
the Property of the sale of the Property to Buyer and will notify the utility
companies that all utility bills henceforth are to be sent to Buyer. Buyer
shall be entitled to receive any and all refunds of all utility deposits held by
utility companies and Seller will assign to Buyer all of Seller's right, title
and interest in any such utility deposits.
18.2 REFUNDABLE DEPOSITS. To the extent there exists any refundable
deposits made in connection with the development of the Property prior to the
Closing ("Refundable Deposits"), Seller shall assign to Buyer all of Seller's
right, title and interest in and to such Refundable Deposits.
19. MEDIATION OF DISPUTES: No party to this Agreement shall initiate
any litigation against any other party to this Agreement concerning any
controversy or claim arising out of or relating to this Agreement or any
agreements or instruments relating hereto or delivered in connection herewith,
including, but not limited to, any claim based on or arising from an alleged
tort, unless and until (i) at least 60 days before the same shall be filed, a
complete copy of each of
16.
<PAGE>
the summons and complaint (and/or any other documentation required to initiate
such litigation) to be filed by the complaining party shall have been delivered
to the other party or parties to any such dispute, and (ii) the complaining
party has made itself available to meet in Los Angeles, California with the
other party or parties for no more than 3 business days of non-binding
mediation. Until and unless such mediation has taken place, the complaining
party must give notice to the non-complaining party that it will, and then it
must, make itself available for such mediation during at least 20 business days
during the 60 days before the date on which such summons and complaint will be
filed.
20. ARBITRATION OF DISPUTES: ANY CONTROVERSY OR CLAIM ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR ANY AGREEMENTS OR INSTRUMENTS RELATING HERETO
OR DELIVERED IN CONNECTION HEREWITH, INCLUDING, BUT NOT LIMITED TO A CLAIM BASED
ON OR ARISING FROM AN ALLEGED TORT WILL, AT THE REQUEST OF ANY PARTY, BE
DETERMINED BY ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (9
U.S.C. SECTION 1 ET SEQ.) UNDER THE AUSPICES AND RULES OF THE AMERICAN
ARBITRATION ASSOCIATION ("AAA"). THE AAA WILL BE INSTRUCTED BY EITHER OR BOTH
PARTIES TO PREPARE A LIST OF THREE (3) JUDGES WHO HAVE RETIRED FROM THE SUPERIOR
COURT OF THE STATE OF CALIFORNIA, A HIGHER CALIFORNIA COURT OR ANY FEDERAL
COURT. WITHIN 10 DAYS OF RECEIPT OF THE LIST, EACH PARTY MAY STRIKE 1 NAME FROM
THE LIST. THE AAA WILL THEN APPOINT THE ARBITRATOR FROM THE NAME(S) REMAINING
ON THE LIST. THE ARBITRATION WILL BE CONDUCTED IN SAN FRANCISCO, LOS ANGELES OR
SAN DIEGO, WHICHEVER IS THE CLOSEST CITY TO THE NEXUS OF THE DISPUTE. ANY
CONTROVERSY IN INTERPRETATION OR ENFORCEMENT OF THIS PROVISION OR WHETHER A
DISPUTE IS ARBITRABLE, WILL BE DETERMINED BY THE ARBITRATOR. JUDGMENT UPON THE
AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED IN ANY COURT HAVING
JURISDICTION. THE INSTITUTION AND MAINTENANCE OF AN ACTION FOR JUDICIAL RELIEF
OR IN PURSUIT OF AN ANCILLARY REMEDY DOES NOT CONSTITUTE A WAIVER OF THE RIGHT
OF ANY PARTY, INCLUDING THE PLAINTIFF, TO SUBMIT THE CONTROVERSY OR CLAIM TO
ARBITRATION.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION
DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING
UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR BY
JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL
RIGHTS TO DISCOVERY AND APPEAL UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN
THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY.
17.
<PAGE>
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION TO
NEUTRAL ARBITRATION.
Buyer's Initials ________ Seller's Initials _________
21. NOTICES: All notices or other communications required or
permitted hereunder must be in writing, and must be personally delivered
(including by means of professional messenger service) or sent by overnight
courier, or sent by registered or certified mail, postage prepaid, return
receipt requested to the addresses set forth in Section 1 hereof. All notices
sent by mail will be deemed received 2 DAYS after the date of mailing and all
notices sent by other means permitted herein shall be deemed received on the
earlier of the date delivered or the date on which delivery is refused.
22. ASSIGNMENT: Neither party shall have the right to assign this
Agreement without the other party's prior written consent.
23. MISCELLANEOUS:
23.1 COUNTERPARTS. This Agreement may be executed in counterparts.
23.2 PARTIAL INVALIDITY. If any term or provision of this Agreement
will be deemed to be invalid or unenforceable to any extent, the remainder of
this Agreement will not be affected thereby, and each remaining term and
provision of this Agreement will be valid and be enforced to the fullest extent
permitted by law.
23.3 POSSESSION OF THE PROPERTY. Seller will deliver possession of
the Property to Buyer upon the Close of Escrow.
23.4 WAIVERS. No waiver of any breach of any covenant or provision
contained herein will be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision contained herein. No extension
of time for performance of any obligation or act will be deemed an extension of
the time for performance of any other obligation or act except those of the
waiving party, which will be extended by a period of time equal to the period of
the delay.
23.5 SUCCESSORS AND ASSIGNS. This Agreement is binding upon and
inures to the benefit of the permitted successors and assigns of the parties
hereto.
23.6 PROFESSIONAL FEES. In the event of the bringing of any action,
arbitration or suit by a party hereto against another party hereunder by reason
of any breach of any of the covenants, agreements or provisions on the part of
the other party arising out of this Agreement, then in that event the prevailing
party will be entitled to have the recovery of and from the other party all
costs and expenses of the action, mediation or suit, actual attorneys' fees,
witness fees and any other professional fees resulting therefrom.
18.
<PAGE>
23.7 ENTIRE AGREEMENT. This Agreement (including all Exhibits
attached hereto) constitutes the entire contract between the parties hereto with
respect to the subject matter hereof and may not be modified except by an
instrument in writing signed by the party to be charged.
23.8 TIME OF ESSENCE. Seller and Buyer hereby acknowledge and agree
that time is strictly of the essence with respect to each and every term,
condition, obligation and provision hereof.
23.9 CONSTRUCTION. Seller and Buyer and their respective advisors
believe that this Agreement is the product of all of their efforts, that it
expresses their agreement and that it should not be interpreted in favor of or
against either Buyer or Seller. The parties further agree that this Agreement
will be construed to effectuate the normal and reasonable expectations of a
sophisticated seller and buyer.
23.10 GOVERNING LAW. The parties hereto expressly agree that this
Agreement will be governed by, interpreted under, and construed and enforced in
accordance with the laws of the State of California.
23.11 WEAR AND TEAR. Buyer specifically acknowledges that Seller will
continue to use the Property in the course of its business and accepts the fact
that reasonable wear and tear will occur after the date of this Agreement.
Buyer specifically agrees that Seller is not responsible for repairing such
reasonable wear and tear and that Buyer is prohibited from raising such wear and
tear as a reason for not consummating this transaction or for requesting a
reduction in the Exchange Value.
23.12 NO RECORDATION. No memorandum or other document relating to this
Agreement will be recorded without the prior written consent of Seller, and any
such consent or approval will be conditioned upon Buyer providing Seller with a
quitclaim deed fully executed and acknowledged by Buyer, quitclaiming any and
all interests that it may have in the Property to Seller, which quitclaim deed
Seller may record in the event that this Agreement is terminated or the
transaction contemplated herein is not consummated.
23.13 SURVIVAL. All obligations of the parties contained herein which
by their terms do not arise until after the Close of Escrow and any other
provisions of this Agreement which by their terms survives the Close of Escrow,
shall survive the Close of Escrow. Notwithstanding anything to the contrary
contained in this Agreement, the representations and warranties contained in
this Agreement shall survive the Closing for a period of 1 year; provided that
any claims by one party hereto must be made in writing to the other party within
the 1 year period.
23.14 DISCLAIMER. Nothing herein creates any right or remedy for the
benefit of any person not a party hereto, nor creates a fiduciary relationship,
an agency or a partnership.
23.15 WAIVER OF JURY TRIAL. EACH PARTY, ACTING WITH KNOWLEDGE OF ITS
RIGHTS AFTER A FULL OPPORTUNITY TO CONSULT WITH COUNSEL,
19.
<PAGE>
VOLUNTARILY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ALL PROCEEDINGS FOR WHICH A
TRIAL BY JURY WOULD OTHERWISE BE AVAILABLE OR REQUIRED, AND WHICH INVOLVE ANY
MATTER ARISING OUT OF OR CONNECTED WITH RIGHTS OR DUTIES UNDER, OR ENFORCEMENT
OR INTERPRETATION OF, THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year hereinabove written.
"SELLER": "BUYER":
NATIONAL INVESTORS FINANCIAL, PALMDALE/JOSHUA RANCH, INC.,
INC., a California corporation, AS TRUSTEE a California corporation
for NATIONAL INVESTORS LAND
HOLDING TRUST ___
By:___________________________________ By:_____________________________
Its:___________________________________ Its:_____________________________
and and
By:___________________________________ By:_____________________________
Its:___________________________________ Its:_____________________________
Agreed to and accepted
by Escrow Holder:
By:____________________________________
Its:___________________________________
20.
<PAGE>
MORI POINT
EXHIBIT A
LEGAL DESCRIPTION
<PAGE>
EXHIBIT B
FORM OF DEED
RECORDING REQUESTED BY:
WHEN RECORDED MAIL TO:
Arter & Hadden LLP
725 South Figueroa Street, Suite 3400
Los Angeles, California 90017
Attn.: Bruce H. Newman, Esq.
________________________________________________________________________________
(Above Space For Recorder's Use Only)
GRANT DEED
In accordance with Section 11932 of the California Revenue and Taxation
Code, Grantor has declared the amount of transfer tax which is due by a separate
statement which is not being recorded with this Grant Deed.
FOR A VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED,
NATIONAL INVESTORS FINANCIAL, INC., a CALIFORNIA corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ("Grantor"), hereby grants to
PALMDALE/JOSHUA RANCH, INC., a California corporation ("Grantee"), the real
property in the County of Los Angeles, State of California, and described in
EXHIBIT A attached hereto and made a part hereof.
DATED: _______________, 1998
NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST __
By: _________________________
Its:_________________________
By: _________________________
Its:_________________________
____________
MAIL TAX STATEMENTS TO:
<PAGE>
ACKNOWLEDGMENT
STATE OF CALIFORNIA )
) ss.
COUNTY OF _________________ )
On ____________________, before me, _____________________________________,
personally appeared ______________________________, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
______________________________
Notary Public in and for said
County and State [SEAL]
<PAGE>
Document No. ____________________ Date Recorded_________________
STATEMENT OF TAX DUE AND REQUEST THAT TAX DECLARATION
NOT BE MADE A PART OF THE PERMANENT RECORD
IN THE OFFICE OF THE COUNTY RECORDER
(Pursuant to Section 11932 R&T Code)
To: Registrar-Recorder
County of _____________
Request is hereby made in accordance with the provisions of the Documentary
Transfer Tax Act that the amount of tax due not be shown on the original
document which names:
________________________________
(as grantor)
and
________________________________
(as grantee)
Property described in the accompanying document is located in
( ) unincorporated area or (x) City of _________________.
The amount of tax due on the accompanying document is $_______________.
_____ Computed on full value of property conveyed, or
_____ Computed on full value less liens and encumbrances remaining at time
of sale.
________________________________
________________________________
By: ___________________________
Its: ___________________________
<PAGE>
EXHIBIT C
Seller's FIRPTA Affidavit
CERTIFICATION OF NON-FOREIGN STATUS
Section 1445 of the Internal Revenue Code provides that a transferee
of a U.S. real property interest must withhold tax if the transferor is a
foreign person. To inform the transferee that withholding of tax is not
required upon the disposition of a U.S. real property interest by NATIONAL
INVESTORS FINANCIAL, INC., a California corporation, AS TRUSTEE for NATIONAL
INVESTORS LAND HOLDING TRUST ("TRANSFEROR"), each of the undersigned hereby
certifies the following on behalf of Transferor:
1. Transferor is not a foreign corporation, foreign partnership,
foreign trust and foreign estate (as those terms are defined in the Internal
Revenue Code and Income Tax Regulations);
2. Transferor's U.S. employer identification number is ________; and
3. Transferor's office address is _________________________________,
___________________.
Transferor understands that this certification may be disclosed to the
Internal Revenue Service by transferee and that any false statement contained
herein could be punished by fine, imprisonment or both.
Under penalties of perjury each of the undersigned declares that he
has examined this certification and to the best of his knowledge and belief it
is true, correct and complete, and he further declares that he has authority to
sign the document on behalf of the Transferor.
NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___
By: _________________________
Its:_________________________
By: _________________________
Its:_________________________
<PAGE>
EXHIBIT D
ASSIGNMENT AND ASSUMPTION
OF
AGREEMENTS
THIS ASSIGNMENT AND ASSUMPTION OF AGREEMENTS (this "Assignment") is
executed as of ______________, but effective as of the Effective Date (as
hereinafter defined), by and between NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for NATIONAL INVESTORS LAND HOLDING TRUST ___
("Assignor") and PALMDALE/JOSHUA RANCH, INC., a California corporation
("Assignee"), with reference to the following facts:
RECITALS:
A. Assignor, as the agent of and for the benefit of various
investors, holds title to that certain real property commonly known as "Joshua
Ranch ", located in the County of Los Angeles, State of California, as more
particularly described on Exhibit "A" attached hereto and incorporated herein by
reference (the "Property").
B. Concurrently herewith, Assignor has executed that certain Grant
Deed conveying and granting to Assignee the Property.
C. As part of the transfer and conveyance of the Property to
Assignee, Assignor has agreed to transfer, assign, grant and convey to Assignee
all of its right, title and interest in and to all agreements relating to the
Property, on the terms and conditions herein contained.
NOW, THEREFORE, in consideration of the foregoing Recitals, which
Recitals are by this reference incorporated herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. ASSIGNMENT. Assignor hereby grants, assigns, transfers, sets
over, sells, conveys and delivers to Assignee all of Assignor's right, title,
interest, benefits and privileges under the agreements relating to the Property
which are set forth in Exhibit "B" attached hereto and made a part hereof
(collectively, the "Agreements"). The assignment provided for in this Section 1
is effective concurrently with the transfer of the Property from Assignor to
Assignee (the "Effective Date").
i.
<PAGE>
2. ASSIGNEE'S ASSUMPTION. Assignee hereby accepts the assignment
from Assignor, assumes and agrees to perform all duties and obligations of
Assignor under the terms of the Agreements which are required to be performed on
or after the Effective Date.
4. DELIVERIES; REPORTS. On or before the Effective Date, Assignor
shall deliver to Assignee the original Agreements or if such original Agreements
are not in Assignor's possession, certified copies of such Agreements. Assignor
shall furnish and deliver to Assignee, promptly after receipt thereof,
duplicates or copies of all reports, notices, requests, demands, declarations,
certificates or other instruments hereafter received by Assignor and relating to
the Agreements. Assignee's address for receipt of the foregoing is
___________________________________________________________________________.
5. FURTHER ASSURANCES. Assignor and Assignee shall execute,
acknowledge and deliver all such instruments and take all such action as may be
necessary to further assure to Assignee the rights assigned hereby and the full
benefits hereof and to preserve and protect this Assignment and all of the
rights, powers and remedies of Assignee provided for herein.
6. SUCCESSORS AND ASSIGNS. This Assignment shall be binding upon
and inure to the benefit of the successors and assigns of the respective parties
hereto.
7. GOVERNING LAW. This Assignment shall be governed by, and
construed in accordance with, the laws of the State of California.
8. COUNTERPARTS. This Assignment may be executed in several
counterparts, each of which shall be an original, but all of which taken
together shall constitute one and the same instrument.
ii.
<PAGE>
IN WITNESS WHEREOF, Assignor and Assignee have executed this
Assignment as of the date first above written but effective as of the Effective
Date.
ASSIGNOR: NATIONAL INVESTORS FINANCIAL, INC., a California
corporation, AS TRUSTEE for NATIONAL INVESTORS
LAND HOLDING TRUST ___
By: ________________________________
Its: ________________________________
By: ________________________________
Its: ________________________________
ASSIGNEE: PALMDALE/JOSHUA RANCH, INC., a
California corporation
By: _________________________________
Its: __________________________________
By: _________________________________
Its: __________________________________
iii.
<PAGE>
EXHIBIT E
BILL OF SALE AND GENERAL ASSIGNMENT OF INTANGIBLES
This Bill of Sale and General Assignment of Intangibles is made as of
the ____ day of ___________________________, 1998 (this "Assignment"), by
NATIONAL INVESTORS FINANCIAL, INC., a California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___ ("Assignor") to PALMDALE/JOSHUA RANCH,
INC., a California corporation ("Assignee").
R E C I T A L
Assignee and Assignor have entered into an Agreement of Purchase and
Sale and Joint Escrow Instructions dated ________, 1998 ("Agreement of Purchase
and Sale") under which Assignee has agreed to purchase from Assignor, that
certain real property and any and all buildings, structures and improvements on
said real property commonly identified as "Joshua Ranch", located in the County
of Los Angeles, State of California and legally described on EXHIBIT A attached
hereto (the "Property").
TERMS AND CONDITIONS
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Assignor hereby assigns, transfers and sets over unto Assignee,
its successors and assigns, all personal property of Seller, if any, located on
and used in connection with the operation of the improvements on the Property
(the "Personal Property"). Buyer accepts such Personal Property in its "AS-IS"
condition and "WITH ALL FAULTS". Seller specifically disclaims all express or
implied warranties regarding the existence or condition of, or title to, such
Personal Property, including without limitation the implied warranties of
merchantability and suitability for a particular purpose.
2. Assignor hereby assigns, transfers and sets over unto Assignee,
its successors and assigns, all of its right, title and interest in and to the
following ("General Intangibles") if, and only to the extent, that the General
Intangibles exist and Assignor has the right to so transfer them:
(A) All of Assignor's right, title and interest in and to all
intangible property used, owned or issued solely in connection with the
Property, including but not limited to, all licenses, permits, certificates of
occupancy, approvals, maps, dedications, subdivision maps and entitlements
issued, approved or granted by any governmental agencies or instrumentalities
having any jurisdiction over the Property (the "Authorities") or otherwise in
iv.
<PAGE>
connection with the Property; all development rights, conditional use permits,
variances, "floor area ratio" development rights and other intangible rights,
titles, interests, privileges and appurtenances owned by Assignor and related to
or issued in connection with the Property and/or its use, occupancy, operation
and/or development; all licenses, consents, easements, rights of way, and
approvals required from private parties to make use of utilities and to insure
vehicular and pedestrian ingress and egress to the Property; and any pending
applications or requests as to any of the foregoing;
(B) All building plans, specifications and drawings,
engineering, and other documents prepared in connection with the construction,
reconstruction, maintenance, repair, or operation any improvements on the
Property (the "Improvements");
(C) All warranties and guarantees relating to the workmanship,
construction, installation materials, and design of the Improvements and the
personal property situated on the Property, including but not limited to those
made by or received from any third party with respect to any building, building
component, structure, fixture, machinery, equipment or material situated on,
contained in any building or other improvement situated on, or comprising a part
of any building or other improvement situated on any part of the Property;
(D) All rights, claims or awards benefiting the Property;
(E) All prepaid fees and fee credits, and all of Seller's right,
title and interest in and to refundable deposits, bonds and other collateral
furnished in connection with development of the Property; and
(F) All rights and general intangibles now owned by Assignor
solely in connection with the Property and any improvement and/or fixture
located on the Property, including, without limitation, the rights to hold, use,
sell and transfer the Property and Improvements and general intangibles.
3. Assignor hereby covenants that it will, at any time and from time
to time upon written request therefor, execute and deliver to Assignee, its
successors and assigns any new or confirmatory instruments and take such further
acts as Assignee may reasonably request to fully evidence the assignment
contained herein and to enable Assignee, its successors and assigns to fully
realize and enjoy the rights and interests assigned hereby.
4. Assignee hereby accepts the foregoing assignment.
5. Assignor hereby represents and warrants to Assignee that it has
not previously assigned or hypothecated its interest in the foregoing described
General Intangibles; however, Assignee shall have no claims or rights against
Assignor, and Assignor shall have no obligation or liability to Assignee for any
General Intangibles described herein which do not exist, or which Assignor does
not have the right to transfer to Assignee.
v.
<PAGE>
6. This Assignment shall be binding upon and inure to the benefit of
the legal representatives, assigns, or successors in interest of the Assignor
and Assignee.
IN WITNESS WHEREOF, the Assignor has executed this Assignment as of
_________, 1998.
NATIONAL INVESTORS FINANCIAL, INC., a
California corporation, AS TRUSTEE for
NATIONAL INVESTORS LAND HOLDING TRUST ___
By:__________________________________
Its:__________________________________
By:__________________________________
Its:__________________________________
vi.
<PAGE>
EXHIBIT 5.2
[Arter & Hadden LLP letterhead]
July 31, 1998
66944/66608
American Family Holdings, Inc.
4220 Von Karman Avenue
Suite 110
Newport Beach, California 92660
Re: REGISTRATION STATEMENT ON FORM SB-2
Gentlemen:
We have acted as special counsel to American Family Holdings, Inc. (the
"Company") in connection with the preparation and filing with the Securities
and Exchange Commission under the Securities Act of 1933, as amended, of a
Registration Statement on Form SB-2 (the "Registration Statement") relating
to the public offering by the Company of up to 1,000,000 units, each unit
consisting of one share of Common Stock and a warrant to purchase two shares
of Common Stock for a per share purchase price equal to 80% of the closing
market price on the trading day before exercise, and the public offering by
the Company of the 2,000,000 shares of Common Stock underlying the warrants
which are a part of the units.
In so acting, we have examined and relied upon the original or copies,
certified or otherwise identified to our satisfaction, of such corporate
records, documents, certificates, and other instruments, and such factual
information otherwise supplied to us by the Company as in our judgment are
necessary or appropriate to enable us to render the opinion expressed below.
On the basis of and subject to the foregoing, we are of the opinion the
units, when issued and sold pursuant to the Registration Statement and
Prospectus, will, under the laws of the State of Delaware, upon payment
therefor in accordance with the terms of the Registration Statement and the
Prospectus, be duly and validly issued, fully paid, and non-assessable. We
consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the heading "Legal Matters" in the
Preliminary Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ Arter & Hadden LLP
<PAGE>
EXHIBIT 23.15
CONSENT
The undersigned hereby consents to the filing of its real estate
appraisals for the property identified below 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: July 30, 1998
Property: Esperanza LIKAS & ASSOCIATES
By /s/ David J. Likas
---------------------------------
Print Name David J. Likas, MAI
-------------------------
Title Appraiser
------------------------------
<PAGE>
EXHIBIT 23.16
CONSENT
The undersigned hereby consents to the filing of its real estate
appraisals for the property identified below 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: July 30, 1998
Property: Stacey Rose A and B LIKAS & ASSOCIATES
By /s/ David J. Likas
---------------------------------
Print Name David J. Likas, MAI
-------------------------
Title Appraiser
------------------------------
<PAGE>
EXHIBIT 23.17
CONSENT
The undersigned hereby consents to the filing of its real estate
appraisals for the property identified below 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: July 30, 1998
Property: Palmdale/Joshua Ranch LIKAS & ASSOCIATES
By /s/ David J. Likas
---------------------------------
Print Name David J. Likas, MAI
-------------------------
Title Appraiser
------------------------------
<PAGE>
EXHIBIT 23.18
CONSENT
The undersigned hereby consents to the filing of its real estate
appraisal for the property identified below 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: July 31, 1998
Property: Cypress Lakes SEDWAY GROUP
By /s/ Lynn M. Sedway
---------------------------------
Print Name Lynn M. Sedway
-------------------------
Title President, CEO, Principal
------------------------------
<PAGE>
EXHIBIT 23.19
CONSENT
The undersigned hereby consents to the filing of its real estate
appraisal for the property identified below 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: July 30, 1998
Property: Mori Point PKF CONSULTING
By /s/ Thomas E. Callahan
---------------------------------
Print Name Thomas E. Callahan
-------------------------
Title Executive Vice President
------------------------------
<PAGE>
EXHIBIT 23.20
CONSENT
The undersigned hereby consents to the filing of its real estate
appraisal for the property identified below 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: July 30, 1998
Property: Sacramento/Delta Greens DAVID E. LANE, INC.
By /s/ David E. Lane
---------------------------------
Print Name David E. Lane
-------------------------
Title President
------------------------------
<PAGE>
EXHIBIT 23.21
CONSENT
The undersigned hereby consents to the filing of its real estate
appraisal for the property identified below 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: July 30, 1998
Property: Yosemite/Ahwahnee I and II ARNOLD ASSOCIATES
By /s/ R. W. Arnold
---------------------------------
Print Name R. W. Arnold
-------------------------
Title Owner
------------------------------
<PAGE>
EXHIBIT 23.22
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 July 17, 1998,
relating to the financial statement of American Family Holdings, Inc., as of
June 30, 1998; and our reports dated February 24, 1998 relating to the
financial statements of the Oceanside Program, the Yosemite/Ahwahnee
Programs, the Mori Point Program, the Sacramento/Delta Greens Program, the
Cypress Lakes Program, the Palmdale/Joshua Ranch Program, the Esperanza
Program and the Stacey Rose Programs for each of the two years in the period
ended December 31, 1997, which are contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
/s/ BDO Seidman, LLP
Los Angeles, California
July 31, 1998
<PAGE>
EXHIBIT 23.23
CONSENT
The undersigned hereby consents to the filing of its 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: July 31, 1998
HOULIHAN VALUATION ADVISORS
By /s/ Bret Tack
---------------------------------
Print Name Bret Tack
-------------------------
Title Principal
------------------------------
<PAGE>
EXHIBIT 99.8
SCHEDULE E
Schedule E shows, as of June 30, 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> <C>
1. Name, location and type of property 660 acres located in Madera County, 990 acres located in Madera County,
California. Improvement consisted of 47 California. Improvements consisted of an
finished lots with roads and utilities.(1) 18-hole golf course with clubhouse, pro
shop, recreational vehicle area with roads
and utilities.(1)
2. Date of foreclosure September 19, 1995 September 19, 1995
3. Balance of loan due including
interest accrued through foreclosure $ 7,954,629 $ 17,388,470
date
4. Acquisition price(2) $ 7,954,629 $ 17,383,470
5. Foreclosure costs expensed $ 19,113.49 $ 38,226.99
6. Foreclosure costs capitalized None None
7. Total acquisition costs(3) $ 19,113.49 $ 38,226.99
</TABLE>
- -----------------
(1) These parcels are adjacent to each other.
(2) Same as balance of loan due plus accrued interest through foreclosure date.
(3) Total of lines 5 and 6.
<PAGE>
EXHIBIT 99.8
SCHEDULE E (continued)
<TABLE>
<CAPTION>
Cypress Lakes
-------------
<S> <C> <C>
1. Name, location and type of property 660 acres located in Contra Costa County,
California. Planned for a golf course and 1,330
residential units
2. Date of foreclosure July 14, 1995
3. Balance of loan due including interest
accrued through foreclosure date $ 18,183,404
4. Acquisition price(2) $ 18,183,404
5. Foreclosure costs expensed $ 31,783.18
6. Foreclosure costs capitalized None
7. Total acquisition costs(3) $ 31,783.18
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
UPDATED APPRAISAL OF THE FEE SIMPLE ESTATE
IN A 104.98 ACRE PARCEL
DESIGNATED FOR HOTEL DEVELOPMENT
LOCATED AT MORI POINT IN PACIFICA, CALIFORNIA
(LETTER REPORT FORMAT)
EFFECTIVE DATE OF THE APPRAISAL:
MARCH 31, 1998
PREPARED FOR:
MR. MARK KAWANAMI
NATIONAL INVESTORS FINANCIAL, INC.
4220 VON KARMAN AVENUE, SUITE 110
NEWPORT BEACH, CALIFORNIA 92660
PREPARED BY:
PKF CONSULTING
SAN FRANCISCO, CA 94104
DATE OF THE REPORT:
JUNE 1, 1998
- -------------------------------------------------------------------------------
<PAGE>
[LOGO]
June 1, 1998
Mr. Mark Kawanami
National Investors Financial, Inc.
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
RE: UPDATED APPRAISAL OF THE 104.98-ACRE MORI POINT PARCEL, PACIFICA,
CALIFORNIA
Dear Mr. Kawanami:
In accordance with your request, we have completed an updated appraisal of the
104.98-acre parcel located at Mori Point in Pacifica, California.
The purpose of this appraisal is to estimate the current "as is" market value of
the fee simple estate in the above-referenced property. The function of the
appraisal is for use by National Investors Financial for financial reporting
purposes as well as to provide necessary information for an offering circular
which will be distributed to investors. The effective date of this appraisal is
March 31, 1998.
The scope of our work included an inspection of the subject property, an
analysis of local economic and market conditions, an analysis of the local hotel
and conference center market, and derivation of a value estimate using the
Subdivision (discounted cash flow) Development, Ground Rent Capitalization and
Sales Comparison Approaches to valuation.
To develop our opinion of value, we have performed a complete appraisal process,
as defined by the Uniform Standards of Professional Appraisal Practice. It
should be noted that this appraisal is an update of our prior summary appraisal
of the subject property which had an effective date of May 1, 1997. In this
report, which is codified in a letter format, we have addressed all relevant
changes to the market conditions and the status of the subject since the date of
our prior appraisal. In addition, we have analyzed the effect of these changes
on the subject in arriving at our current market value estimate. For a more
detailed description of the local area, property and hotel market, the reader is
referred to our original report.
------------------------------------------
Member, Pannell Kerr Firster International
<PAGE>
2
To the best of our belief, this appraisal report conforms to requirements of the
Code of Professional Ethics and Standards of Professional Appraisal Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice (USPAP) established by the Appraisal Foundation. The report is subject
to the Certification and General Statement of Assumptions and Limiting
Conditions presented in the Addenda. In addition, this appraisal is subject to
the following three special assumptions.
- In 1984 a development plan for the subject was approved through a
public referendum. This plan allowed for the development of 60
residential units, an equestrian complex and a hotel/conference
center. Following a draft Environment Impact Report, the plan
received approval by the City of Pacifica and the California
Coastal Commission for a 275-room hotel/conference center and two
restaurants. The 60 residential units would not be approved until
the hotel was constructed. Following a series of extensions, the
specific plan and tentative map expired in 1992. Accordingly, to
develop the site, a new specific plan will need to be approved.
This would include review and approval of a new Environmental
Impact Report, a specific plan, tentative map, development and
phasing schedule, and if necessary, a variance from the land
coverage controls standards of the Hillside Preservation District
Ordinance. For the purpose of this appraisal, it was assumed that
the subject would receive all necessary approvals for the
development of a 275-room hotel/conference center.
- Due to the fact that the 60 residential units will not be approved
until the hotel is constructed, the value of this development right
is highly speculative. Accordingly, for the purpose of this
appraisal, we have not reflected any contributory value from this
residential component.
- Portions of the site may include primary or secondary habitat of
the San Francisco garter snake. As a result, an appropriate
biological study must precede any development of this area, and
development will be permitted only if it can be demonstrated that
any impact from the development of the site can be adequately
mitigated. For the purpose of this appraisal, we have assumed that
any mitigation, if required, would be approved by the Department of
Fish and Game. We understand that, since the date of our last
appraisal, progress has been made on filing a Section 7 Permit
which will allow the developer to begin habitat enhancement work.
In addition, the approval of a Wetland Report has been received and
mitigation plans have been developed.
<PAGE>
3
Based on the work undertaken and our experience as real estate analysts and
appraisers, we are of the opinion that the "as is" market value of the fee
simple estate in the 104.98 acre Mori Point parcel, as of March 1, 1998, is:
<TABLE>
<CAPTION>
<S> <C>
---------------------------------------
Six million Dollars
---------------------------------------
$6,000,000
---------------------------------------
</TABLE>
PKF Consulting appreciates this opportunity to be of service to you. Should
you have any questions, or if we can be of further assistance, please do not
hesitate to contact us.
Yours sincerely,
PKF Consulting
/s/ Thomas E. Callahan
------------------------------------
By Thomas E. Callahan, CPA, CRE, MAI
Executive Vice President
California Certified General Appraiser #AG9618
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
A. INTRODUCTION 1
1. Identification of the Property 2
2. Purpose and Function of the Appraisal 2
3. Property Rights Appraised 2
4. Important Dates 2
5. Summary of Ownership and Sales History 2
6. Definition of Values 3
a. Market Value 3
7. Scope and Methodology of the Appraisal 3
B. AREA AND NEIGHBORHOOD REVIEW 4
C. SITE DESCRIPTION 4
1. Location, Access, and Visibility 4
2. Topography, Shape and Size 4
3. Zoning and Other Governmental Regulation 5
4. Easements and Covenants 7
5. Utilities 7
6. Assessed Value and Property Taxes 7
7. Soil Conditions and Hazardous Materials 8
8. Flood, Wetlands, and Earthquake Zones 8
9. Proposed Development Plan 9
10. Development Timeline 10
D. MARKET ANALYSIS AND HIGHEST AND BEST USE 10
1. The Performance of Executive Conference Centers 10
2. The Performance of the Competitive Lodging Market 11
3. Additions to Supply 12
4. Projected Performance of the Proposed Mori Point
Conference Center 13
5. Highest and Best Use 13
E. VALUATION 14
1. Subdivision Development (Discounted Cash Flow Analysis) 14
a. Introduction 14
b. Projected Market Position of the Subject Property 15
c. Cash Flow Projections
i. Operating Statistics on Comparable
Conference Centers 15
ii. Stabilized Year Estimate 16
iii. Estimated Operating Results for the Holding Period 19
d. Discounted Cash Flow Analysis 22
e. Deduction for the Costs to Open the Conference Center 23
</TABLE>
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
E. VALUATION (Continued)
f. Estimated "As Is" Value of the Subject 24
2. Ground Rent Capitalization 25
3. Sales Comparison Approach 26
a. Introduction 26
b. Analysis of Sale 27
</TABLE>
F. RECONCILIATION AND FINAL ESTIMATE OF VALUE 28
ADDENDA
A. Certification of the Appraisers
B. Statement of Assumptions and Limiting Conditions
C. Qualifications of the Appraisers
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUMMARY OF IMPORTANT FACTS AND CONCLUSIONS
- --------------------------------------------------------------------------------
<S> <C>
Property Location West of Highway 1 between the Rockaway
Beach and Sharp Park exits at Mori
Point, in Pacifica, San Mateo County,
California
Owner National Investors Financial, Inc.
Assessor's Parcel Number 018-150-010 and 016-430-010
Effective Date of Appraisal March 31, 1998
Property Rights Appraised Fee Simple Estate
HIGHEST AND BEST USE
Highest and Best Use Development of a 275-room
Hotel/Conference Center
- --------------------------------------------------------------------------------
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Site:
Area 104.98 Acres (4,572,924 square feet)
Zoning Planned Development (P.D.) allowing for
a 275-room Hotel/Conference Center
Flood Zone C
Environmental Development Plan:
Earthquake Fault Zone No
Shape Roughly rectangular
Topography Steep slopes
Recommended Development:
Number of Rooms 275
Estimated Gross Building Area 213,375 square feet or 776 square feet
per room
Estimated Date of Opening January 1, 2002
Stabilized Occupancy 68.0%
Average Room Rate $156.00 (1998 value dollars)
Stabilized Net Operating Income $5,836,000 (1998 value dollars)
- --------------------------------------------------------------------------------
VALUATION CONCLUSION
- --------------------------------------------------------------------------------
Development Approach $6,000,000
Ground Rent Capitalization $6,300,000
Sales Comparison Approach $6,300,000
- --------------------------------------------------------------------------------
FINAL ESTIMATE OF "AS IS"
MARKET VALUE--MARCH 31, 1998 $6,000,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
A. INTRODUCTION
1. IDENTIFICATION OF THE PROPERTY
The subject of this appraisal is a 104.98-acre parcel located on Mori Point in
the City of Pacifica, County of San Mateo, State of California. A legal
description of the site is included in the Addenda of our original appraisal.
2. PURPOSE AND FUNCTION OF THE APPRAISAL
The purpose of this appraisal is to estimate the "as is" market value of the fee
simple estate in the subject. The function of the appraisal is for use by
National Investors Financial for financial reporting purposes as well as to
provide necessary information for an offering circular which will be distributed
to investors.
3. PROPERTY RIGHTS APPRAISED
The property rights appraised represent the fee simple estate in the subject. A
fee simple estate is defined as:
ABSOLUTE OWNERSHIP UNENCUMBERED BY ANY OTHER INTEREST OR ESTATE, SUBJECT
ONLY TO THE LIMITATIONS IMPOSED BY THE GOVERNMENTAL POWERS OF TAXATION,
EMINENT DOMAIN, POLICE POWER, AND ESCHEAT.(1)
4. IMPORTANT DATES
The effective date of the appraisal is March 1, 1998. The property was
inspected by Thomas E. Callahan, CPA, CRE, MAI and Corey Limbach on several
occasions between April 29th and May 15th, 1997.
5. SUMMARY OF OWNERSHIP AND SALES HISTORY
National Investors Financial, on behalf of investors, took title to the subject
through foreclosure on August 31, 1992. The amount of the unpaid debt secured
by the subject at that time was $11,975,058. We are not aware of any sales
transactions involving the subject which have occurred during the past three
years.
- ----------------
(1) Appraisal Institute, THE DICTIONARY OF REAL ESTATE APPRAISAL, 3rd Ed
(Chicago: Appraisal Institute, 1993) pg. 140
2
<PAGE>
6. DEFINITION OF VALUES
A. MARKET VALUE
"Market value" means the most probable price which a property should bring in
a competitive and open market under all conditions requisite to a fair sale,
the buyer and seller each acting prudently and knowledgeably, and assuming
the price is not affected by undue stimulus. Implicit in this definition is
the consummation of a sale as of a specified date and the passing of title
from seller to buyer under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting in what
they consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and,
5. The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.(2)
"MARKET VALUE AS IS" on the appraisal date means an estimate of the market
value of a property in the condition observed upon inspection and as it
physically and legally exists without hypothetical conditions, assumptions,
or qualifications as of the date the appraisal is prepared.(3)
7. SCOPE AND METHODOLOGY OF THE APPRAISAL
The scope of the appraisal included an inspection of the subject property and
its immediate area, and analysis of the hotel and conference center market as
it relates to the subject and an estimation of the subject's market value
using the Subdivision Development, Ground Rent Capitalization and Sales
Comparison Approaches to valuation.
Sources of information for the appraisal included interviews with management
personnel of competitive and comparable hotel and conference facilities,
representatives of local government and community agencies, industry
professionals, and local realtors and brokers. Our research, methodology,
analyses and conclusions were presented in the original summary report with
an effective date of May 1, 1997. As noted previously, this is an updated
appraisal conveyed in a letter report format.
- -------------------
(2) FEDERAL REGISTER, Vol. 55, 165, Friday, August 24, 1990, Rules and
Regulations, 12 CFR Part 34, 42(F)
(3) Appraisal Policies and Practices of Insured Institutions and Services
Corporation Federal Home Loan Bank Board, "Final Rule", 12 CFR Parts 563
and 571, December 31, 1987
3
<PAGE>
B. AREA REVIEW
In the past year, economic indicators for the San Francisco Bay Area show
steady growth in all areas of population, employment, income levels, and
tourism. The market area for the subject has remained strong, indicating a
healthy arena to operate a hotel.
It should be noted that passenger counts at the San Francisco International
Airport (SFO) have increased and expansion plans for SFO have progressed
during the past year. SFO is the fifth largest passenger airport in the
United States and the sixth largest in terms of international passengers.
SFO has more than 60 scheduled airlines, including international, domestic,
commuter, seasonal, and charter airlines, as well as air cargo carriers. In
1997, the airport handled approximately 40.5 million passengers which
represents a 3.2 percent increase over 1996 and a 3.9 compound annual growth
rate (CAGR) since 1990. SFO is forecasting passenger volume to grow to 51
million by the year 2006 which represents a CAGR of 2.6 percent over 1997.
In response to the projected economic growth of the Bay Area, SFO has adopted
a Master Plan Program that is currently under construction. This $2.4
billion improvement and expansion program is designed to meet the increasing
number of domestic and international travelers who use SFO. The project
includes a new two-million-square-foot International Terminal, an Airport
Rail Transit System (the "ART System"), entrance roadways and public parking
facilities, a consolidated rental car facility, expanded cargo facilities,
and an Aviation Library and Museum. Upon completion, the Master Plan Program
will increase the number of international gates from 10 to 24, and provide
the infrastructure and amenities to support and serve the increased passenger
volume. The near-term Master Plan Program, which includes the new
International Terminal, is currently scheduled for completion in mid-2001,
prior to the opening of the proposed Mori Point Conference Center.
Given the proximity of the subject site to SFO and its location being within
the San Francisco Bay Area, the proposed Mori Point Conference Center, upon
opening, may be positively impacted by the growth in the area.
C. SITE DESCRIPTION
1. LOCATION, ACCESS, AND VISIBILITY
The subject site is located west of Highway 1 with direct ocean frontage in
the City of Pacifica, County of San Mateo, State of California. The subject
site is approximately 6 miles south of the San Francisco city limits, 7.5
miles west of the San Francisco Airport, and 18 miles north of Half Moon Bay.
Travel time to the airport is approximately 15 minutes, and 20 minutes to
downtown San Francisco.
4
<PAGE>
North of the subject site are single-family, modest residential homes in the
Fairway Park complex. Further north of Fairway Park is the Sharp Park
Municipal Golf Course, owned and operated by the City and the County of San
Francisco. On the western side of the golf course is an important habitat
for the San Francisco garter snake. South of the subject site is Rockaway
Beach, a commercial and visitor hub in Pacifica.
Improvements are proposed to create one or more access roads to the subject
site. These roadways would improve commercial access by providing an
alternative access to and from the Coast Highway. Alternatives such as a
local roadway on an overpass of Highway 1 at the Mori Point cut as well as a
frontage road extending from Clarendon Road have been proposed. Each
alternative needs more study. However, Caltrans is considering the addition
of a new interchange at Mori Point Road as part of their Highway One project.
Should this occur, access would be direct to the subject site from the Coast
Highway. Access to the site is currently available off of Highway 1 from
Mori Point road, currently an unimproved private road. This exit is between
the Rockaway Beach and Sharp Park exits.
Access to the site from the surrounding area is considered very good due to
its proximity to both SFO and downtown San Francisco. Direct access from the
road is not ideal considering that this particular section of Highway 1 is a
two-lane highway. In this area, the highway is now at capacity during
commuter's peak-use hours.
Because of its prominent elevation, Mori Point has excellent visibility for
travelers driving both north and south on Highway 1.
2. TOPOGRAPHY, SHAPE AND SIZE
The subject's land area is approximately 4,572,924 sq. ft., or 104.98 acres.
The site has a roughly rectangular shape with a smaller rectangular component
extending from the center of the northern section of the parcel. According
to the plat map the site has frontage of approximately 1,360 feet along the
ocean, 1,100 on Highway 1 and 3,100 feet on both the south and north end of
the parcel. The smaller protrusion has dimensions of approximately 650 feet
by 450 feet. The topography of the site consists of highly visible steep
slopes and a striking ridgeline. The highest point of the site is on the
northwest tip, just south of where the proposed hotel/conference center would
be located. The view of the ocean is spectacular from Mori Point.
3. ZONING AND OTHER GOVERNMENTAL REGULATIONS
The subject site is legally identified as A.P. No. 016-430-010 and
018-150-010 and zoned to P-D (planned development). This site was previously
zoned for A/B-5 (Agriculture) and C-R (Commercial Recreation) but in 1984,
was re-zoned through a public referendum (City of Pacifica, Measure C) in
which the city's voters approved the proposed Development Plan. The proposed
development plan consisted of 60 residential units to be located on the
northern section of the property, an equestrian
5
<PAGE>
complex to be located at the eastern end of the property and a
hotel/conference center with two restaurants and retail space to be located
at the western end of the property. The ridgeline area and marsh area are
restricted to open space which shall either be dedicated to a public agency
or, if not accepted by a public agency, restricted to privately owned and
maintained open space.
Following a draft Environment Impact Report in 1984, the plan received
approval by the city and the Coastal Commission for a 275-room
hotel/conference center and two restaurants. The 60 detached single family
dwellings could not be approved until the hotel was constructed.
On February 9, 1988, there were amendments made to the Mori Point Land Use
Plan. They have been approved by the city council but have not yet been
submitted to the Coastal Commission for approval. To understand the
important elements of these amendments, please refer to page 16 of our
previous appraisal.
Following a series of extensions, the approvals for the site expired in 1992.
On August 31, 1992, National Investors Financial, on behalf of its investors,
took title to the property through foreclosure, with the intent to pursue the
conference center development. National will now have to go through similar
processes in order for a new plan to be approved. Review by the Planning
Commission will be required and will include consideration of a new
Environmental Impact Report, a Specific Plan, the Tentative Map, development
and phasing schedule, and, if necessary, a variance from the land coverage
control standards of the Hillside Preservation District (HDP) Ordinance.
In the course of our research, we spoke with Mr. Malcolm Carpenter, A.I.C.P
and Mr. Tim Molinare, Community and Economic Development Director for the
City of Pacifica. These individuals are knowledgeable of the history of the
development and the process required to proceed with the development. Based
on our discussions, it is clear that the City of Pacifica is interested in
fostering new lodging development, and considers the Mori Point project a
major priority for future economic growth. Our understanding from these
parties is that the zoning allowing for the hotel development, as passed by
public vote, cannot be changed except as a result of another vote or court
action.
While it is anticipated that there will be some opposition to the project
based on environmental issues, the developers appear to be taking every
precaution to ensure that the key issues of endangered species and soil
erosion are being addressed properly. It is a stated assumption of this
report that the appraised value assumes that the project will receive all
necessary approvals and will therefore be able to be developed.
Progress has been made during the past year in the permit process to further
development on the subject site. First, it was determined that the
California red-legged
6
<PAGE>
frog and the California garter snake do exist on the subject site. A wetland
report has been approved and a draft has been completed for a
mitigation/monitoring plan. It has been decided that a Section 7 Permit can
substitute the 10(A) Permit, which is underway and should be completed in
four months. Once approved, the developer can begin the necessary habitat
enhancement work. Open space for the garter snakes has been designated and
progress has been made in identifying a custodian agency to monitor this
habitat. Per Mac Carpenter, it is estimated that all entitlements should be
issued in approximately 24 months in order to receive the final permit to
begin grading for construction.
4. EASEMENTS AND COVENANTS
Included in the Addenda to this report is a copy of the Policy of Title
Insurance issued by Commonwealth Land Title Insurance Company, dated April
30, 1990. The title policy refers to a non-exclusive easement and right of
way for ingress and egress. In addition, there is an easement for access
along Mori Point Road to the Horse Stable Pond. We are not aware of any
easements or covenants which would adversely affect the value of the property.
5. UTILITIES
All utilities are available and connected to the site. Utility services to
the building are provided by the following agencies:
<TABLE>
<CAPTION>
----------------------------------------------------
----------------------------------------------------
<S> <C>
Electricity Pacific Gas and Electric Company
Natural Gas Pacific Gas and Electric Company
Water North Coast County Water District
Sewer City of Pacifica
Telephone Pacific Telephone Company
----------------------------------------------------
----------------------------------------------------
</TABLE>
6. ASSESSED VALUE AND PROPERTY TAXES
The subject site is assessed by the County of San Mateo on a tax year
commencing July 1 of every year. Under the provisions of Article 13-A of the
State of California, properties are assessed based upon their fair market
value as of the change of ownership date. The assessed value can be
increased a maximum of two percent per year until such date as the property
is subsequently sold, substantial new construction take place, or the use of
the property is substantially changed.
7
<PAGE>
The current assessed value of the property is as follows:
<TABLE>
<CAPTION>
------------------------------------
------------------------------------
APN# 018-150-010
------------------------------------
<S> <C>
Land Value $3,315,811
Improvements 0
Personal Property 0
Net Taxable Value $3,315,811
------------------------------------
<CAPTION>
APN # 016-430-010
------------------------------------
<S> <C>
Land Value $441,752
Improvements 0
Personal Property 0
Net Taxable Value $441,752
------------------------------------
------------------------------------
</TABLE>
For the 1997/98 fiscal year, the annual tax amount was $41,005.72, indicating
a tax rate of 1.09 percent. It is our understanding that National Investors
Financial has a five-year tax payment plan which has been paid on a regular
basis.
7. SOIL CONDITIONS AND HAZARDOUS MATERIALS
The steep slopes, covered with coastal vegetation, have only a thin layer of
soil and are subject to serious erosion. Also, emergency access to this area
is difficult. According to the amendments to the land use plan, the steep
slopes and upper ridgeline have been designated Open Space Residential and
Prominent Ridgeline. These designations will preclude any development unless
it is shown that the public's safety can be assured, no geotechnical problems
will result and there is no other place on the site to develop. Currently,
there are several geotechnical firms being interviewed to conduct a study of
the land.
We have no knowledge of any hazardous materials present in the soil. It is
assumed that the soil and improvements do not contain any toxic or hazardous
materials.
8. FLOOD, WETLANDS, AND EARTHQUAKE ZONES
According to the Flood Insurance Rate Map Community Panel Number 060323-0004D
of the Federal Emergency Management Agency, dated February 19, 1987, the
subject property is zoned "C", an area determined to be outside the 500-year
flood plain. This area has been identified in the community flood insurance
study as having a moderate or minimal hazard from the principal source of
flood, and flood insurance is not mandatory.
Flood control is by a drainage plan of storm drains and adheres to city
codes. Federal Flood Insurance is available but not mandatory.
According to a representative of the California State Department of Mines and
Geology, the subject is not in an Earthquake Fault Zone. However, the entire
Northern California area is considered to be a seismically active region.
8
<PAGE>
9. PROPOSED DEVELOPMENT PLAN
As described in detail on page 19 of the original appraisal dated May 19,
1997, the proposed Mori Point Conference Center is intended to be a fully
dedicated conference center by offering a self-contained, full-service
meeting environment. It is our opinion that the group meeting market in the
San Francisco Bay Area is strong and that a fully dedicated conference center
proximate to SFO and downtown San Francisco is an appropriate hotel
development.
The current property owner will be engaging a new architect to design a new
plan to submit for approval. It is our understanding that as long as the
overall development program remains the same, they will have the ability to
make minor alterations to the design. At this time, however, detailed plans
are not available.
As we do not have detailed plans, we have therefore used the foregoing
criteria for an executive conference center as the basis for our estimates of
the space requirements for the Mori Point Conference Center. It is important
to design sufficient meeting space in relation to the number of guest rooms
and enough food and beverage outlet seats to accommodate both the in-house
guests and meeting attendees. The following table summarizes our estimates
of the space for the individual components and the total project, which we
have used in our estimate of the development cost (presented in the following
section).
<TABLE>
<CAPTION>
-----------------------------------------
-----------------------------------------
MORI POINT CONFERENCE CENTER
ESTIMATED DEVELOPMENT PROGRAM
-----------------------------------------
<S> <C>
Number of Rooms 275
Square Feet Per Room 400
Circulation 30.0%
Total Guest Room Square Footage 143,000
Meeting Space 27,500
Pre-Function/Circulation 6,875
Lobby 5,000
Restaurant Space 9,000
Lounge 2,000
Recreation 3,000
Back-of-House 17,000
Total Square Feet 213,375
Square Feet Per Room (Gross) 776
Parking Spaces Per Hotel Room 1.5
Parking Spaces 412
-----------------------------------------
-----------------------------------------
</TABLE>
The management and affiliation of the proposed conference center has not yet
been identified.
9
<PAGE>
10. DEVELOPMENT TIMELINE
As mentioned previously, it was decided that a Section 10(A) Permit was not
necessary and that a Section 7 Permit would suffice in order to enable the
developer to begin Habitat Enhancement work. According to the developer,
good progress has been made in dedicating the identified "open space" to a
custodian agency for the SF garter snake as required by the Habitat
Conservation Plan. In addition, a study by a geotechnical firm to determine
if there is any erosion or cliff retreat is needed and a tentative map needs
to be filed. Finally, a new architect will be selected to re-plan this
development.
Another hurdle in the development process is to build adequate infrastructure
to support a conference center in an efficient and safe manner. Whether the
developer decides to create a frontage road along the ocean, an overpass over
Highway 1, or a four-way signaled intersection, the process will be time
consuming and expensive. Should Caltrans assist by creating an interchange
at Mori Point Road, an encroachment permit will not be needed. More study of
potential infrastructure changes will need to be done.
The entire entitlement process prior to obtaining the final permit is
estimated to take approximately 24 months. We are then allotting 18 months
for construction. Given this estimated pre-development and development
timeline, we have projected that the Mori Point Conference Center would be
open by January 1, 2002.
D. MARKET ANALYSIS AND HIGHEST AND BEST USE
1. THE PERFORMANCE OF EXECUTIVE CONFERENCE CENTERS
As mentioned in our previous appraisal, our research has shown that executive
conference centers are best able to take advantage of the recent improvements
in the national economy and corporate profits. In addition, corporate
meeting planners prefer executive conference centers over traditional hotels
when their budget allows.
The International Association of Conference Centers (IACC) and PKF Consulting
have recently completed the biennial CONFERENCE CENTER INDUSTRY, A
STATISTICAL AND FINANCIAL PROFILE - NORTH AMERICA 1998 report. The following
summarizes the market performance and of executive conference centers as
researched by the IACC and PKF Consulting.
- An independent executive conference center located near an airport enjoys
the highest occupancy rate, at approximately 70.0 percent;
- Between 1996 and 1997, ADR growth was highest among executive conference
centers, at an increase of approximately 9.0 percent;
10
<PAGE>
- Unlike resort and full-service hotels, conference centers were able to
increase their occupancy in 1997;
- In 1997, executive conference centers averaged 70.1 percent occupancy,
while conference centers with 250 rooms or more averaged 67.3 percent.
In sum, our research has indicated that the overall national meeting market
is a broad and important sector within the national hospitality industry,
with the corporate segment being the largest. Moreover, executive conference
centers are the most successful type within the corporate segment as
evidenced by the growth in occupancy levels and average daily rates.
2. THE PERFORMANCE OF THE COMPETITIVE LODGING MARKET
The competitive market for the proposed conference center at Mori Point is
derived from comparable hotels located within both the coastal and the San
Francisco Airport sub-markets. Presented in the following text is a brief
analysis of the proposed subject's competitive hotel market.
The primary competitive lodging market for the proposed conference center at
Mori Point is comprised of four hotels with a total of 492 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 to 2,357 rooms.
While a more descriptive summary of each of the competitive hotels is included
in our previous appraisal, the primary competitive hotels include the Seascape
Resort in Aptos, the Chaminade Conference Center in Santa Cruz, the Lighthouse
Inn in Pacifica, and the Half Moon Bay Lodge. The secondary competitive hotels
include the Hyatt Regency, Marriott and the Westin at SFO.
The year-end 1997 occupancy level for the overall competitive supply was 78.9
percent, a slight decrease from the aggregate occupancy of 80.3 percent in 1996.
The primary competitive market's occupancy increased to 70.4 percent in 1997
from 68.7 percent in 1996. This can be attributed to the positive impact of the
new renovations at the Lighthouse Inn as well as an increase in demand with very
little increase in supply in the coastal area. The secondary competitive market
saw a slight decrease in occupancy from 83.3 percent in 1996 to 81.2 percent in
1997, most likely attributed to an emphasis by management to increase average
daily rates at the risk of an occupancy decrease. The range of occupancy levels
within the overall competitive supply was from approximately 68.0 percent to
83.0 percent.
11
<PAGE>
Average daily rate (ADR) growth within the competitive market has been
significant, representing approximately a 15.0 percent increase from an ADR
of $117.43 in 1996 to $135.85 in 1997. The primary competitive hotels
increased at a lower rate of approximately 9.0 percent from $134.59 in 1996
to $147.21 in 1997. The secondary hotels increased dramatically from $113.69
in 1996 to $133.26 in 1997, representing a 17.0 percent increase. The ADR's
ranged between approximately $85.00 and $200.00.
Based on discussions with hotel operators and year-to-date trends in the Bay
Area, 1998 occupancies are projected to remain flat or even decrease
slightly, with growth in ADR to continue, but at lower rates than seen in
previous years.
3. ADDITIONS TO SUPPLY
In addition to the existing properties, we have reviewed information on other
properties which could enter the market and potentially offer additional
competition to the subject. We have identified the following potential
additions:
- The Beach House, with 54 rooms, opened in April of 1997 in El Granada,
just north of Half Moon Bay. This property is upscale in nature, but
with limited meeting space is geared primarily to the individual leisure
and commercial markets. According to management, they exceeded 1997
forecast in both occupancy and ADR.
- A 38-unit Holiday Inn Express in Rockaway Beach in Pacifica, proximate
to the Lighthouse Inn, is under review for its building permit. A
proposed 120-unit limited-service hotel, east of Highway One on Oceana
Boulevard has just started its application process. If built, this
would be a chain-affiliated, commercial oriented property.
- Numerous smaller commercial hotels are being discussed in the airport
area.
- A 414-unit upscale resort in Half Moon Bay has received approvals from
the City and Coastal Commission, and is awaiting a building permit.
This development, otherwise known as Ocean Colony, is rumored to be a
Four Seasons Resort and is in the final provisions for construction.
Should the hotel be completed and under the affiliation with Four
Seasons, the hotel will cater to the high-end leisure traveler.
We are of the opinion that none of these developments would create a
significant impact on the potential performance of the proposed subject due
to its conference center orientation.
12
<PAGE>
4. PROJECTED PERFORMANCE OF THE PROPOSED MORI POINT CONFERENCE CENTER
Based on the performance of executive conference centers and the competitive
market, we believe there is sufficient market demand in the San Francisco Bay
Area to support a high quality conference center similar to that proposed in
Pacifica.
Based on all of the information on the local competitive market as well as
the performance of executive conference centers nationally, we estimate the
subject property will achieve a stabilized occupancy level of 68.0 percent,
with an average daily room rate of $156.00 in current value (1998) dollars.
Because of the strength of the ADR increase in the market, we have increased
our 1997 projection of a $145.00 average rate for the subject by
approximately 8.0 percent to derive at our 1998 average rate of $156.00. The
following table summarizes our conclusion of the subject's occupancy and
average room rate for its first ten years of operation.
<TABLE>
<CAPTION>
--------------------------------------------------------------
--------------------------------------------------------------
PROPOSED MORI POINT CONFERENCE CENTER
PROJECTED OCCUPANCY LEVELS AND AVERAGE ROOM RATE
(2002 TO 2011)
--------------------------------------------------------------
ANNUAL AVERAGE DAILY PERCENT
YEAR OCCUPANCY ROOM RATE CHANGE
--------------------------------------------------------------
<S> <C> <C> <C>
Stabilized Year(1) 68.0% $156.00 -
2002 60.0% $176.00 -
2003 64.0% $181.00 3.0%
2004 68.0% $186.00 3.0%
2005 68.0% $192.00 3.0%
2006 68.0% $198.00 3.0%
2007 68.0% $204.00 3.0%
2008 68.0% $210.00 3.0%
2009 68.0% $216.00 3.0%
2010 68.0% $222.00 3.0%
2011 68.0% $229.00 3.0%
--------------------------------------------------------------
(1)Stated in 1998 value dollars.
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
The subject property would be expected to derive approximately 60 percent of
its demand from conferences. The remainder of its business would be from
leisure travelers seeking coastal accommodations, primarily on the weekends
and in the summer, and overflow commercial demand from the airport market.
5. HIGHEST AND BEST USE
Based on our analysis of the subject site and the existing market conditions
within the immediate area, it is our opinion that the highest and best use of
the property as vacant would be to develop an executive conference center
hotel such as the proposed.
13
<PAGE>
E. VALUATION
As outlined in our previous appraisal, we are of the opinion that a
"Subdivision" Development Analysis, Ground Rent Capitalization, and the Sales
Comparison Approach are appropriate methods to value the subject site. These
three procedures were discussed on page 36 of the previous appraisal report.
We have revised our valuation analysis for the purposes of the updated
appraisal. Any updates or changes to each approach will be referenced.
1. SUBDIVISION DEVELOPMENT (DISCOUNTED CASH FLOW ANALYSIS)
a. INTRODUCTION
A discounted cash flow (subdivision development) analysis is used to value
vacant land that has the potential for development for a use (such as a
hotel) when that use represents the likely highest and best use of the land.
As outlined previously, the subject has city approval to develop a 275-room
hotel and conference center, and based on our analysis, this use represents
he highest and best use of the site.
In order to develop an estimate of the value of the subject using this
approach, we have performed the following tasks.
1. Based on our market analysis and recommended development program
outlined in the prior sections, we developed a ten-year statement of
estimated annual operating results (net operating income) for a 275-room
hotel/conference center.
2. Using a yield capitalization (discounted cash flow) analysis, we
developed an estimate of the prospective market value of the conference
center upon completion of development (assumed to be January 1, 2002).
3. From this prospective market value, we then deducted the estimated cost
to develop the conference center, as well as an appropriate
entrepreneurial or developer profit. The resulting residual value
represents what a prudent and knowledgeable investor would presumably
pay for the subject property under this development scenario ("as is"
value).
Presented in the following text is a discussion of our findings and
conclusion as to the value of the subject using a development approach.
14
<PAGE>
b. PROJECTED MARKET POSITION OF THE SUBJECT PROPERTY
As stated in the market analysis section of this report, we have estimated
that the property would stabilize at 68.0 percent occupancy by the year 2004,
the third year of operation for the conference center. In terms of average
daily room rate, we are of the opinion that a rate equivalent to $156.00 in
1998 dollars would be achievable.
c. CASH FLOW PROJECTIONS
Our approach to develop a cash flow forecast for the subject conference
center upon completion was to first prepare an estimate of the net operating
income (NOI) of the conference center for a typical or stabilized year of
operation stated in current value (1998) dollars. The performance of the
property in a stabilized year reflects the normal level of operation of the
conference center at its stabilized occupancy (68.0 percent in the case of
the subject), unaffected by temporary non-recurring expenses such as
extraordinary start-up marketing, administrative and operational costs which
can occur in the initial years of operation of a conference center or upon
repositioning of the facility.
From this stabilized year estimate, we then develop a cash flow forecast over
a typical holding period (here assumed to be ten years). This forecast over
a holding period reflects the impact of such factors as changes in room
rates, occupancy, inflation and the fixed and variable components of each
revenue and expense item.
i. OPERATING STATISTICS ON COMPARABLE CONFERENCE CENTERS
The UNIFORM SYSTEM OF ACCOUNTS FOR CONFERENCE CENTERS, developed by the IACC
and PKF Consulting, has been used in the classification of income and
expenses in this report. In conformity with this system of account
classification, only direct operating expenses are charged to operating
departments of the conference center. The general overhead items which are
applicable to operations as a whole are classified as deductions from income
and include administrative and general expenses, a franchise fee, marketing,
property operations and maintenance, and energy costs.
To portray price level changes during the analysis period, we have assumed a
3.0 percent annual inflation rate. This rate reflects the current long-term
outlook for the future movement of prices projected by leading economists in
the market, which is for the continuation of the prevailing low rates. It
should be noted that inflation is caused by many factors, and unanticipated
events and circumstances will affect the anticipated rate. Therefore, the
operating results computed over the analysis period will vary from actual
results, and the variations may be material.
To estimate the future operating results of the proposed conference center at
Mori Point in Pacifica, we began with the analysis of the operating
performance of five national conference centers. This information is
primarily obtained from confidential
15
<PAGE>
information submitted in compilation of the 1997 edition of THE CONFERENCE
CENTER INDUSTRY - A STATISTICAL AND FINANCIAL PROFILE published cooperatively
by the IACC and PKF Consulting.
ii. STABILIZED YEAR ESTIMATE
Based on our evaluation of these comparable properties, as well as the
overall industry averages, we were able to develop a statement of estimated
annual operating results for the subject property for a stabilized year. Key
assumptions used to develop the operating statement are summarized below.
For more supporting rationale behind each line item, please refer to our
original appraisal report.
REVENUES
ROOMS revenues are based on our previously indicated stabilized
operating performance of 68.0 percent annual occupancy at an average
daily room rate of $156.00. This results in total rooms revenue for a
stabilized year of $10,648,000.
FOOD AND BEVERAGE revenues are based on comparable conference centers as
well as an analysis of the local market for sales, to derive to 1998
revenues of approximately $6.9 million for food sales and $1.7 million
for beverage.
TELEPHONE revenues are estimated at $6.30 per occupied room (POR) based
on comparable conference centers, with a range of $4.37 to $7.68 POR and
a weighted average of $5.70.
CONFERENCE SERVICES revenues, which include room rental are projected to
be approximately $52.00 POR based on comparable conference centers which
ranged from $8.28 POR to $99.20 POR, and a weighted average of $43.43.
OTHER DEPARTMENT revenue and RENTALS AND OTHER INCOME are estimated at
$5.20 POR and $10.25 POR, respectively, based on comparable conference
centers.
DEPARTMENTAL EXPENSES
ROOMS expenses are estimated to be 21.0 percent of rooms revenue, based
on the operating performance of the comparable hotels.
FOOD AND BEVERAGE expenses are forecast to approximate 70.0 percent of
revenue, which is similar to the expense ratio achieved by the
comparable hotels.
16
<PAGE>
TELEPHONE expenses are estimated to equal approximately 50.0 percent of
telephone revenues, compared to the weighted average of the comparables
at 45.5 percent.
CONFERENCE SERVICES expenses is estimated to be 50.0 percent of
revenues, based on comparable conference centers
OTHER DEPARTMENTS expense are forecast at 100.0 percent of revenue,
based on our experience of other conference center facilities.
UNDISTRIBUTED EXPENSES
Based on comparable conference center facilities and our experience with
hotels in the local area, we estimated undistributed expenses on a per
available room basis to be approximately $6,800 for ADMINISTRATIVE AND
GENERAL, $6,200 for MARKETING, $3,700 for PROPERTY MAINTENANCE, $2,600
for ENERGY AND UTILITIES.
MANAGEMENT FEES AND FIXED CHARGES
We have utilized a 3.0 percent MANAGEMENT FEE for the subject property.
PROPERTY TAXES are estimated based on the current property tax rate
applied to the estimated fee simple value of the subject property.
These taxes are inflated at 2.0 percent each year, in-line with
California State law, and will equal $612,000 in a stabilized year.
INSURANCE costs are estimated at $825 PAR, or $227,000 in a stabilized
year, based on the operating performance of hotels in Northern
California.
RESERVE FOR REPLACEMENT is estimated at 4.0 percent annually, based on
industry standard.
Based on the previous analysis, presented on the following page is an
estimate of the proposed conference center's stabilized year operating
results expressed in current value 1998 dollars.
17
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MORI POINT CONFERENCE CENTER
REPRESENTATIVE YEAR OPERATING RESULTS (1998 $)
----------------------------------------------
Total Ratios Per Room Per ORN
----------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Rooms $10,648,000 43.8% $38,720 $156.00
Food 6,914,000 28.5 25,142 101.30
Beverage 1,729,000 7.1 6,287 25.33
Telephone 427,000 1.8 1,553 6.26
Conference Services 3,515,000 14.5 12,782 51.50
Other Departments 352,000 1.4 1,280 5.16
Rentals and Other Income 700,000 2.9 2,545 10.26
----------------------------------------------
Total Revenues 24,285,000 100.0 88,309 355.80
----------------------------------------------
DEPARTMENTAL EXPENSES (1)
Rooms 2,236,000 21.0 8,131 32.76
Food and Beverage 6,050,000 70.0 22,000 88.64
Telephone 213,000 49.9 775 3.12
Conference Services 1,758,000 50.0 6,393 25.76
Other Departments 352,000 100.0 1,280 5.16
----------------------------------------------
Total Departmental Expenses 10,609,000 43.7 38,578 155.43
----------------------------------------------
DEPARTMENTAL INCOME 13,676,000 56.3 49,731 200.37
----------------------------------------------
UNDISTRIBUTED OPERATING EXPENSES
Administrative and General 1,863,000 7.7 6,775 27.29
Marketing 1,712,000 7.0 6,225 25.08
Property Maintenance 1,018,000 4.2 3,702 14.91
Energy and Utilities 708,000 2.9 2,575 10.37
----------------------------------------------
Total Undistributed Expenses 5,301,000 21.8 19,276 77.66
----------------------------------------------
INCOME BEFORE FIXED CHARGES 8,375,000 34.5 30,455 122.70
----------------------------------------------
MANAGEMENT FEES AND FIXED CHARGES
Management Fees 729,000 3.0 2,651 10.68
Property Taxes 612,000 2.5 2,225 8.97
Insurance 227,000 0.9 825 3.33
----------------------------------------------
Total 1,568,000 6.5 5,702 22.97
----------------------------------------------
INCOME BEFORE RESERVE 6,807,000 28.0 24,753 99.73
----------------------------------------------
Reserve for Replacement 971,000 4.0 3,531 14.23
----------------------------------------------
INCOME BEFORE OTHER CHARGES (4) $5,836,000 24.0% $21,222 $85.50
----------------------------------------------
----------------------------------------------
Number of Rooms 275
Room Occupancy 68%
Average Room Rate $156.00
- -------------------------------------------------------------------------------
Notes: (1) Departmental expense ratios are based on
the respective department's revenue, not
total revenue.
(2) Income before amortization, depreciation,
and income taxes.
Numbers may not foot due to rounding.
- -------------------------------------------------------------------------------
Source: PKF CONSULTING
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
iii. ESTIMATED OPERATING RESULTS FOR THE HOLDING PERIOD
The previous analysis provided for the income and expenses incurred in the
operation of the subject in a stabilized year of operation. We then
estimated income and expenses for the subject during each year of the holding
period anticipated by a typical investor, concluded to be ten years. To
portray price level changes during the holding period, we have assumed an
inflation rate of 3.0 percent throughout the projection period. This rate
reflects the consensus of several well-recognized economists for the current
long-term outlook for the future movement of prices and is consistent with
the inflation rates experienced in recent years. Property taxes are
projected to increase at a rate of 2.0 percent per year as required by law.
The estimated annual operating results for the proposed conference center at
Mori Point for the 10-year holding period beginning January 1, 2002 is
presented on the two following pages.
19
<PAGE>
MORI POINT CONFERENCE CENTER
PROJECTED OPERATING RESULTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Rooms $10,600,000 $11,627,000 $12,695,000 $13,105,000 $13,514,000
Food 7,131,000 7,681,000 8,256,000 8,504,000 8,759,000
Beverage 1,783,000 1,920,000 1,064,000 2,126,000 2,190,000
Telephone 424,000 465,000 509,000 525,000 540,000
Conference Services 3,491,000 3,835,000 1,197,000 4,323,000 4,453,000
Other Departments 349,000 384,000 420,000 432,000 445,000
Rentals and Other Income 695,000 763,000 835,000 860,000 886,000
------------------------------------------------------------------------
Total Revenues 24,473,000 26,675,000 20,976,000 29,875,000 30,787,000
------------------------------------------------------------------------
DEPARTMENTAL EXPENSES (1)
Rooms 2,369,000 2,516,000 2,670,000 2,750,000 2,833,000
Food and Beverage 8,468,000 6,838,000 7,224,000 7,440,000 7,664,000
Telephone 212,000 233,000 255,000 262,000 270,000
Conference Services 1,745,000 1,918,000 2,099,000 2,162,000 2,226,000
Other Departments 349,000 384,000 420,000 432,000 445,000
------------------------------------------------------------------------
Total Departmental Expenses 11,143,000 11,889,000 12,668,000 13,047,000 13,438,000
------------------------------------------------------------------------
DEPARTMENTAL INCOME 13,330,000 14,786,000 16,308,000 16,828,000 17,349,000
------------------------------------------------------------------------
UNDISTRIBUTED OPERATING EXPENSES
Administrative and General 2,054,000 2,130,000 2,224,000 2,291,000 2,360,000
Marketing 2,058,000 2,053,000 2,043,000 2,103,000 2,169,000
Property Maintenance 1,145,000 1,180,000 1,215,000 1,251,000 1,289,000
Energy and Utilities 797,000 621,000 846,000 871,000 897,000
------------------------------------------------------------------------
Total Undistributed Expenses 6,054,000 6,192,000 6,328,000 6,518,000 6,715,000
------------------------------------------------------------------------
INCOME BEFORE FIXED CHARGES 7,276,000 8,594,000 9,980,000 10,310,000 10,634,000
------------------------------------------------------------------------
MANAGEMENT FEES AND FIXED CHARGES
Management Fees 734,000 804,000 869,000 896,000 924,000
Property Taxes 662,000 674,000 689,000 703,000 717,000
Insurance 255,000 261,000 271,000 279,000 287,000
------------------------------------------------------------------------
Total 1,651,000 1,734,000 1,829,000 1,878,000 1,928,000
------------------------------------------------------------------------
INCOME BEFORE RESERVE 5,625,000 6,055,000 8,151,000 8,432,000 8,706,000
------------------------------------------------------------------------
Reserve for Replacement 979,000 1,067,000 1,159,000 1,195,000 1,231,000
------------------------------------------------------------------------
INCOME BEFORE OTHER CHARGES (2) $4,646,000 $5,784,000 $6,992,000 $7,217,000 $7,475,000
------------------------------------------------------------------------
------------------------------------------------------------------------
Number of Rooms 275 275 275 275 275
Room Occupancy 60% 64% 68% 68% 68%
Average Room Rate $ 176.00 $ 181.00 $ 186.00 $ 192.00 $ 198.00
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
2007 2008 2009 2010 2011
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Rooms $13,924,000 $14,334,000 $14,743,000 $15,153,000 $15,630,000
Food 9,022,000 9,292,000 9,571,000 9,858,000 10,154,000
Beverage 2,256,000 2,323,000 2,393,000 2,465,000 2,539,000
Telephone 557,000 573,000 591,000 608,000 626,000
Conference Services 4,585,000 4,724,000 4,866,000 5,012,000 5,162,000
Other Departments 459,000 472,000 487,000 501,000 516,000
Rentals and Other Income 933,000 940,000 968,000 997,000 1,027,000
------------------------------------------------------------------------
Total Revenues 31,717,000 32,658,000 33,619,000 34,594,000 35,654,000
------------------------------------------------------------------------
DEPARTMENTAL EXPENSES (1)
Rooms 2,918,000 3,005,000 3,095,000 3,188,000 3,264,000
Food and Beverage 7,894,000 8,131,000 8,325,000 8,626,000 6,885,000
Telephone 278,000 287,000 295,000 304,000 313,000
Conference Services 2,293,000 2,362,000 2,433,000 2,506,000 2,501,000
Other Departments 499,000 472,000 457,000 501,000 516,000
------------------------------------------------------------------------
Total Departmental Expenses 13,842,000 14,257,000 14,655,000 15,125,000 15,579,000
------------------------------------------------------------------------
DEPARTMENTAL INCOME 17,875,000 18,401,000 18,934,000 19,469,000 20,075,000
------------------------------------------------------------------------
UNDISTRIBUTED OPERATING EXPENSES
Administrative and General 2,411,000 2,504,000 2,579,000 2,656,000 2,736,000
Marketing 2,224,000 2,301,000 2,369,000 2,439,000 2,513,000
Property Maintenance 1,318,000 1,367,000 1,408,000 1,451,000 1,494,000
Energy and Utilities 974,000 952,000 980,000 1,010,000 1,040,000
------------------------------------------------------------------------
Total Undistributed Expenses 6,917,000 7,124,000 7,336,000 7,556,000 7,736,000
------------------------------------------------------------------------
INCOME BEFORE FIXED CHARGES 10,958,000 11,277,000 11,596,000 11,913,000 12,392,000
------------------------------------------------------------------------
MANAGEMENT FEES AND FIXED CHARGES
Management Fees 932,000 980,000 1,009,000 1,038,000 1,070,000
Property Taxes 211,000 746,000 761,000 776,000 192,000
Insurance 296,000 305,000 314,000 323,000 133,000
------------------------------------------------------------------------
Total 1,979,000 2,031,000 2,084,000 2,137,000 2,195,000
------------------------------------------------------------------------
INCOME BEFORE RESERVE 8,979,000 9,246,000 9,514,000 9,776,000 10,092,000
------------------------------------------------------------------------
Reserve for Replacement 1,269,000 1,306,000 1,345,000 1,384,000 1,426,000
------------------------------------------------------------------------
INCOME BEFORE OTHER CHARGES (2) $ 7,710,000 $ 7,940,000 $ 8,169,000 $ 8,392,000 $ 8,671,000
------------------------------------------------------------------------
------------------------------------------------------------------------
Number of Rooms 275 275 275 275 275
Room Occupancy 68% 68% 68% 68% 68%
Average Room Rate $ 204.00 $ 210.00 $ 216.00 $ 222.00 $ 229.00
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes: (1) Departmental expense ratios are based on the respective
department's revenue, not total revenue.
(2) Income before amortization, depreciation, and income taxes.
Numbers may not foot due to rounding.
Source: PKF CONSULTING
<PAGE>
MORI POINT CONFERENCE CENTER
RATIOS TO REVENUE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Rooms 43.3% 43.6% 41.8% 43.9% 43.9% 43.9% 43.9% 43.9% 43.8% 43.8%
Food 29.1% 28.8% 28.5% 28.5% 28.5% 28.4% 28.5% 28.5% 28.5% 28.5%
Beverage 7.3% 7.2% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1%
Telephone 1.7% 1.7% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8%
Conference Services 14.3% 14.4% 14.5% 14.5% 14.5% 14.5% 14.5% 14.5% 14.5% 14.5%
Other Departments 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4%
Rentals and Other Income 2.8% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9%
-------------------------------------------------------------------------------------------------
Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES (1)
Rooms 22.3% 21.6% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0%
Food and Beverage 72.6% 71.2% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0%
Telephone 50.0% 50.1% 50.1% 49.9% 50.0% 49.9% 50.1% 49.9% 50.0% 50.0%
Conference Services 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%
Other Departments 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------------------------------
Total Departmental Expenses 45.5% 44.6% 43.7% 43.7% 43.6% 43.6% 43.7% 43.7% 43.7% 43.7%
-------------------------------------------------------------------------------------------------
DEPARTMENTAL INCOME 54.5% 55.4% 56.3% 56.3% 56.4% 56.4% 56.3% 56.3% 56.3% 56.3%
-------------------------------------------------------------------------------------------------
UNDISTRIBUTED OPERATING EXPENSES
Administrative and General 8.4% 8.0% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7%
Marketing 8.4% 7.7% 7.1% 7.0% 7.0% 7.0% 7.0% 7.0% 7.1% 7.0%
Property Maintenance 4.7% 4.4% 4.2% 4.2% 4.2% 4.2% 4.2% 4.2% 4.2% 4.2%
Energy and Utilities 3.3% 3.1% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9%
-------------------------------------------------------------------------------------------------
Total Undistributed Expenses 24.7% 23.2% 21.8% 21.8% 21.8% 21.8% 21.8% 21.8% 21.8% 21.8%
-------------------------------------------------------------------------------------------------
INCOME BEFORE FIXED CHARGES 29.7% 32.2% 31.4% 34.5% 34.5% 34.5% 34.5% 34.5% 34.5% 34.5%
-------------------------------------------------------------------------------------------------
MANAGEMENT FEES AND FIXED CHARGES
Management Fees 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Property Taxes 2.7% 2.5% 2.4% 2.4% 2.3% 2.3% 2.3% 2.3% 2.2% 2.2%
Insurance 1.0% 1.0% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%
-------------------------------------------------------------------------------------------------
Total 6.7% 6.5% 6.3% 6.3% 6.3% 6.2% 6.2% 6.2% 6.2% 6.2%
-------------------------------------------------------------------------------------------------
INCOME BEFORE RESERVE 23.0% 25.7% 23.1% 28.2% 28.3% 28.3% 28.3% 28.3% 28.3% 28.3%
-------------------------------------------------------------------------------------------------
Reserve for Replacement 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
-------------------------------------------------------------------------------------------------
INCOME BEFORE OTHER CHARGES (2) 19.0% 21.7% 24.1% 24.2% 24.3% 24.3% 24.3% 24.3% 24.3% 24.3%
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Number of Rooms 275 275 275 275 275 275 275 275 275 275
Room Occupancy 60% 64% 68% 68% 68% 68% 68% 68% 68% 68%
Average Room Rate $176.00 $181.00 $186.00 $192.00 $198.00 $204.00 $210.00 $216.00 $222.00 $229.00
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes: (1) Departmental expense ratios are based on the respective
department's revenue, not total revenue.
(2) Income before amortization, depreciation, and income taxes.
Numbers may not foot due to rounding.
Source: PKF CONSULTING
<PAGE>
d. DISCOUNTED CASH FLOW ANALYSIS
To estimate the value of the subject using a discounted cash flow analysis, it
is assumed that the property will be sold at the end of the tenth year of a
typical ten-year holding period. The value of the property is the present value
of the net operating income in each year, plus the present value of the property
as if sold at the end of the holding period (the "reversion"). The present
value of these elements is obtained by applying a market-derived discount rate.
The value of the property at that time is estimated by capitalizing the expected
or anticipated net operating income of the property in the eleventh year, which
should be normalized for a typical year, with a deduction for the costs of sale.
Using a market derived 14.0 percent discount rate and a 12.5 reversionary
capitalization rate, we estimate the prospective value of the hotel to
approximate $56.1 million, or $204,000 per room. Presented in the following
table is the present value of the projected net operating income of the subject
for the ten year holding period beginning January 1, 2002, along with the
present value of the reversion deriving a prospective value estimate.
PROPOSED CONFERENCE CENTER AT MORI POINT
DISCOUNTED CASH FLOW ANALYSIS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
CASH FLOW FROM PRESENT VALUE PRESENT VALUE
YEAR OPERATIONS FACTOR @ 14.0%
- --------------------------------------------------------------------
<S> <C> <C> <C>
2002 $ 4,646,000 0.8772 $ 4,075,439
2003 $ 5,788,000 0.7695 $ 4,453,678
2004 $ 6,992,000 0.6750 $ 4,719,401
2005 $ 7,237,000 0.5921 $ 4,284,885
2006 $ 7,475,000 0.5194 $ 3,882,281
2007 $ 7,710,000 0.4556 $ 3,512,572
2008 $ 7,940,000 0.3996 $ 3,173,120
2009 $ 8,169,000 0.3506 $ 2,863,717
2010 $ 8,392,000 0.3075 $ 2,580,607
2011 $ 8,671,000 0.2697 $ 2,338,949
- --------------------------------------------------------------------
Reversion $75,096,000 0.2697 $20,256,681
- --------------------------------------------------------------------
Net Present
Value $56,141,329
- --------------------------------------------------------------------
Value, Rounded $56,100,000
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
Source: PKF CONSULTING
Thus, based on the income generated from the hotel's operations and its value
upon sale, the prospective market value of the fee simple estate in the subject
conference center as of January 1, 2002, based on a discounted cash flow
analysis is $56,100,000 or $204,000 per available room.
22
<PAGE>
e. DEDUCTION FOR THE COSTS TO OPEN THE CONFERENCE CENTER
In order to estimate the "as is" value of the subject under this development
scenario, the costs for the construction of the proposed conference center must
be deducted from the estimated prospective market value. As described in the
Property Description section, the subject property is expected to have a total
of 213,375 square feet, which includes the guest rooms, meeting space,
restaurants, other public space, back-of-the house and mechanical space, and
circulation. This is equivalent to 776 square feet per guest room.
An explanation of our estimated development costs is described in detail on
pages 56 to 59 of our previous appraisal report. To update our estimate for
building improvements, we utilized current costs indicated in MARSHALL VALUATION
SERVICES. For the remaining of our costs, we adopted our original estimates, as
the basis for turnkey development costs have remained approximately the same
over the past year.
As discussed in the Property Description, section we have estimated the project
would be open by January 1, 2002. This indicates approximately 3.5 years from
the current date (the date of valuation) to the prospective opening date. We
have therefore made an adjustment for the time required to complete the
development. All of the development costs except for building improvements,
pre-development costs, and real estate taxes are inflated at 3.0 percent per
year for the 3.5 years until opening. Construction costs for both base and
parking were inflated for only three years, infrastructure/pre-development were
inflated at two years, and real estate taxes were inflated at 2.0 percent for
the full 3.5 years.
22
<PAGE>
The following table presents a summary of the estimated development cost for the
subject property.
PROPOSED CONFERENCE CENTER AT MORI POINT
ESTIMATED DEVELOPMENT COST
<TABLE>
<CAPTION>
PER PERCENT
TOTAL ROOM OF TOTAL
------------------------------------------
<S> <C> <C> <C>
CONSTRUCTION - BASE $28,451,000 $103,458 56.8%
CONSTRUCTION - PARKING 584,000 2,124 1.2%
FF&E/TI 6,078,000 22,102 12.1%
INFRASTRUCTURE/PRE-DEVELOPMENT 1,590,000 5,782 3.2%
LEGAL, TITLE, AND ESCROW 288,000 1,047 0.6%
REAL ESTATE TAXES 482,000 1,753 1.0%
PRE-OPENING EXPENSES 1,155,000 4,200 2.3%
CONTINGENCY 1,178,000 4,284 2.4%
FINANCE COSTS 684,000 2,487 1.4%
OPERATING RESERVE 1,154,000 4,196 2.3%
------------------------------------------
SUBTOTAL 41,644,000 151,433 83.2%
------------------------------------------
ENTREPRENEURIAL PROFIT $ 8,426,000 30,640 16.8%
TOTAL PROJECT COST $50,070,000 $182,073 100.0%
------------------------------------------
------------------------------------------
ROUNDED $50,100,000 $182,000
</TABLE>
Source: PKF CONSULTING, MARSHALL & SWIFT
f. ESTIMATED "AS IS" VALUE OF THE SUBJECT
From our estimate of the prospective market value derived from the Discounted
Cash Flow Analysis, $56,100,000, we then deduct the costs to develop the
proposed conference center. This calculation is shown in the following table.
<TABLE>
<S> <C>
Market Value, Discounted Cash Flow Analysis $56,100,000
Less: Total Project Costs $50,100,000
Market Value, Rounded $ 6,000,000
</TABLE>
Therefore, our conclusion as to the market value "as is" of the fee simple
estate interest in the subject using the Subdivision Development (Discounted
Cash Flow) Analysis, as of March 1, 1998, is:
SIX MILLION DOLLARS
$6,000,000
24
<PAGE>
2. GROUND RENT CAPITALIZATION
Ground rent can be capitalized at an appropriate rate to indicate the market
value of a site. Ground rent is defined as 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 landowner's interest in the land, the lease fee interest.
As previously discussed, the subject is owned in fee simple estate and not
encumbered with a ground lease. However, the market value of the subject site
can be estimated using this approach by estimating an appropriate "hypothetical"
ground rent for the subject. This ground rent would be then converted into a
value estimate by applying a market derived ground rent capitalization rate.
The use of this approach is particularly appropriate for special use properties
such as hotels, where there are not a sufficient number of truly comparable land
sales to accurately estimate the value of the site using the Sales Comparison
Approach. If the estimated rent corresponds to market rent, the value
indication obtained by applying a market capitalization rate will be equivalent
to the market value of the fee simple interest in the land.
The first step in valuing the subject site using this method is to estimate the
market rent for the site. Ground rent for hotels are typically calculated as
percentage of revenues. Our research in the local market indicates that the
typical ground rent for a full-service hotel approximates 4.0 percent of total
sales. Based on this hypothetical ground rent, the rent expense for a 275-room
hotel/conference center based on the stabilized year revenues projected earlier,
would be $971,000, as detailed below.
<TABLE>
<CAPTION>
ESTIMATED TOTAL PERCENTAGE RENT
REVENUES RENTAL EXPENSES
--------------------------------------------------------
<S> <C> <C>
$24,285,000 4.0% $971,000
</TABLE>
Based on our discussions with persons familiar with ground lease transactions,
we have been informed that most land owners typically would require an 8.0 to
10.0 percent return on the value of a site in the San Francisco Bay Area.
Based on a 10.0 percent capitalization rate, the calculated market value of the
subject's underlying land utilizing this approach is as follows.
<TABLE>
<S> <C>
Projected Stabilized Ground Rent $ 971,000
Ground Rent Capitalization Rate 10.0%
Estimated Value of the Site $9,710,000
-------------------------------------------------
Rounded To $9,700,000
</TABLE>
25
<PAGE>
As can be noted, we estimate that the value of the subject utilizing the ground
rent capitalization approach is approximately $9.7 million, or $35,273 per room.
However, this reflects the value of the site assuming that the development of
the hotel is completed and the property is available for occupancy. In order to
estimate the current value of the site a discount to this value must be applied
to reflect the risks associated with obtaining the required approvals. In
addition, a discount must also be applied to reflect the opportunity cost of
holding the site until the hotel is available for development.
While there are no specific guidelines for this type of discount, based on our
discussions with persons knowledgeable in the development of hotels, we were
informed that a downward adjustment of between 30.0 and 40.0 percent from the
value of the site assuming the hotel is ready for construction is appropriate.
Based on an adjustment or discount of 35.0 percent, the "as is" value of the
Mori Point site is estimated to approximate $6.0 million using this approach.
<TABLE>
<S> <C>
Value of Site if Hotel is Operational $9,700,000
Less: Discount for Development Risk and Opportunity Cost (35.0%) ($3,400,000)
- ----------------------------------------------------------------------------------
Estimated "As Is" Value of Site $6,300,000
</TABLE>
3. SALES COMPARISON APPROACH
a. INTRODUCTION
The Sales Comparison Approach is generally the most common technique valuing
land and it is the preferred method when comparable sales are available. To
apply this method, sales of similar parcels of land are analyzed, compared, and
adjusted to provide a value indication for the land being appraised. In the
comparison process, the similarity or dissimilarity of the parcel is considered.
In addition to our comparable land sales included in our original appraisal
report, we have learned of an additional land sale that is considered comparable
to the subject site. The following table highlights the important facts of this
sale.
SUMMARY OF COMPARABLE LAND SALES
<TABLE>
<CAPTION>
SALES
PRICE
SITE PER
SALE AREA SALE GUEST
NO. LOCATION DATE OF SALE (ACRES) TYPE OF LODGING PRICE ROOM
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Subject Mori Point, Pacifica N/A 104.98 275-room conference hotel N/A N/A
1 3295 Dunes Drive, off Highway 1 at 6/95 19.49 93-room resort hotel $1,200,000 $12,903
Reservation Road exit,
City of Marina
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: PKF CONSULTING
26
<PAGE>
b. ANALYSIS OF SALE
The foregoing sale is the June 30, 1995 transfer of a 19.49-acre parcel
in the City of Marina. The sales price was $1,200,000, purchased by John
and Carole King of King Ventures. At the time of sale, the site did
contain any entitlements for development. In the summer of 1996, the
City of Marina Planning Commission approved the site for the development
of 71 hotel units and 112 vacation club units, a proposed hotel to be
named the Marina Dunes Resort. At that time, the EIR and architectural
plans were submitted to the Coastal Commission. In December 1996, the
Coastal Commission reduced the development to included 33 vacation club
units and 30 hotel/bungalow units (two keys each), making the total
number of salable units 93. A new EIR and revised architectural plans
have been submitted and approved by the Coastal Commission and the site
is now ready for the addition of public improvements. According to the
owner, they have spent approximately $2.0 million in entitlements since
the sale and $1.4 in infrastructure to get the site ready for
development. Factoring these costs, the cost of the land increases to
$49,462 per room.
Similar to the subject site, the Marina Dunes site is an ocean front
site, approximately eight miles north of downtown Monterey and 85 miles
south of the subject. Due to the ocean front orientation of the Marina
Dunes site and its location within Monterey, a strong hotel market, we
are in the opinion that this particular land sale is comparable to the
subject site.
By including the aforementioned comparable land sale to our previously selected
comparable land sales, the range of the five sales was from a low of $25,095 to
a high of $49,462 per room, with a mean of $35,039 per room. Based on our
evaluation of each of these sites in comparison to the subject, we are of the
opinion that an appropriate value for the subject, ASSUMING ALL ENTITLEMENTS AND
APPROVALS ARE IN PLACE, AND THE PROPERTY IS READY FOR DEVELOPMENT, is
approximately $35,000 per room. Based on 275 rooms, this would equate to
$9,625,000 as shown below.
<TABLE>
<CAPTION>
NUMBER OF ROOMS LAND VALUE PER ROOM TOTAL LAND VALUE
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
275 x $35,000 = $9,625,000
- -------------------------------------------------------------------------
</TABLE>
As with our Ground Rent Capitalization analysis, a discount must be applied to
the above value to reflect the risks and costs associated with obtaining all the
required approvals to develop the site, as well as the opportunity cost of
holding the site until the hotel is developed. As previously discussed, we have
estimated this discount to approximate 35.0 percent of the value of the site as
ready for development. Applying this discount to our above value estimate
results in an "as is" value of the subject of approximately $6.3 million as
shown on the following page.
27
<PAGE>
<TABLE>
<S> <C>
Value of Site as if Ready for Development $9,625,000
Less: Discount for Development Risk and Opportunity Cost (35.0%) ($3,369,000)
- ---------------------------------------------------------------------------------
Estimated "As Is" Value of Site $6,256,000
- ---------------------------------------------------------------------------------
Rounded To $6,300,000
</TABLE>
F. RECONCILIATION AND FINAL ESTIMATE OF VALUE
The reconciliation involves the correlation of the conclusions reached from the
three valuation methodologies applied, considering the property type and the
requirements of the appraisal assignment. This process depends on the
appropriateness and reliability of each approach, and of the quality and
reliability of the data obtained. The results from the three approaches are as
follows.
<TABLE>
<S> <C>
Subdivision Approach $6,000,000
- --------------------------------------
Ground Rent Capitalization $6,300,000
- --------------------------------------
Sales Comparison Approach $6,300,000
</TABLE>
Typically, the Sales Comparison Approach is the most common technique for
valuing land. However, this approach is most useful when the sales are similar
to the subject. While the nine sales identified in our analysis were all
approved for the development of hotels, they differed from the subject in terms
of size, development potential (density), and location. In addition, the sales
extended over in excess of seven years, making direct comparisons difficult due
to changes in market conditions. Finally, none of these sites have the same
entitlement requirements as the subject, making a direct comparison of value
further difficult. As a result of the foregoing, this approach was given
secondary consideration in our analysis.
The use of the Subdivision Development (discounted cash flow) Analysis and
Ground Rent Capitalization Approaches are most applicable in cases where sales
data from vacant land sales are inadequate, but market data is available on the
demand for the property. As discussed, we had good market support for the
potential cash flow and development cost of this potential project.
Accordingly, greatest reliance was placed on the Subdivision Development
Approach, with the Ground Rent Capitalization method primarily used as a test of
reasonableness.
Based on the work undertaken and our experience as real estate analysts and
appraisers, we are of the opinion that the "as is" market value of the fee
simple estate in the 104.98 acre Mori Point parcel, as of March 31, 1998, is:
SIX MILLION DOLLARS
$6,000,000
28
<PAGE>
ADDENDA
<PAGE>
ADDENDA
A. CERTIFICATION OF THE APPRAISERS
B. STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS
C. QUALIFICATIONS OF THE APPRAISERS
<PAGE>
ADDENDUM A
CERTIFICATION OF THE APPRAISERS
<PAGE>
CERTIFICATION OF THE APPRAISERS
I, Thomas E. Callahan, MAI, certify that, to the best of our knowledge and
belief:
. The statements of fact contained in this report are true and correct.
. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal, unbiased
professional analyses, opinions, and conclusions.
. I have no present or prospective interest in the property that is the
subject of this report, and I have no personal interest or bias with
respect to the parties involved.
. My compensation is not contingent upon the reporting of a predetermined value
or direction in value that favors the cause of the client, the amount of the
value estimate, the attainment of a stipulated result, or the occurrence of a
subsequent event.
. My analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice.
. I have made a personal inspection of the property that is the subject of
this report.
. Corey Limbach and Shelley Halloran provided significant professional
assistance to the persons signing this report.
. This appraisal engagement was not based on a requested minimum valuation,
specific valuation or the approval of a loan.
. This appraisal engagement was not based on a requested minimum valuation,
specific valuation or the approval of a loan.
. The reported analyses, opinions and conclusions were developed, and this
report has been prepared, in conformity with the requirements of the Code
of Professional Ethics and the Standards of Professional Appraisal Practice
of the Appraisal Institute.
. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
. Thomas E. Callahan, CPA, CRE, MAI, is a Certified General Real Estate
Appraiser in the State of California.
. As of the date of this report, Thomas E. Callahan, CPA, CRE, MAI, has
completed the requirements of the continuing education program of the
Appraisal Institute.
<PAGE>
-3-
Based on the work undertaken and our experience as real estate analysts and
appraisers, we are of the opinion that the market value "as is" of the fee
simple estate in the 104.98 acre Mori Point parcel, as of March 31, 1998, is:
SIX MILLION DOLLARS
$6,000,000
PKF Consulting appreciates this opportunity to be of service to you. Should you
have any questions, or if we can be of further assistance, please do not
hesitate to contact me.
Yours sincerely,
PKF CONSULTING
/s/ Thomas E. Callahan
-------------------------------
Thomas E. Callahan, CPA, CRE, MAI
Executive Vice President
California Certified General Appraiser #AG9618
<PAGE>
ADDENDUM B
STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS
<PAGE>
STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS
DATE OF VALUE - The conclusions and opinions expressed in this report apply to
the date of value set forth in the letter of transmittal accompanying this
report. The dollar amount of any value opinion or conclusion rendered or
expressed in this report is based upon the purchasing power of the American
dollar existing in the date of value.
ECONOMIC AND SOCIAL TRENDS - 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.
INFORMATION FURNISHED BY OTHERS - 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. The appraiser reserves the right to make such adjustments
to the analyses, opinions and conclusions set forth in this report as may be
required by consideration of additional data or more reliable data that may
become available.
TITLE - 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.
HIDDEN CONDITIONS - 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.
HAZARDOUS MATERIALS - 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.
ZONING AND LAND USE - 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.
LICENSES AND PERMITS - 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.
<PAGE>
STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS
(CONTINUED)
ENGINEERING SURVEY - 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.
SUBSURFACE RIGHTS - No opinion is expressed as to the value of subsurface oil,
gas or mineral rights or whether the property is subject to surface entry for
the exploration or removal of such materials, except as is expressly stated.
MAPS, PLATS AND EXHIBITS - Maps, plats and exhibits included in this report are
for illustration only to serve as an aid in visualizing matters discussed within
the report. They should not be considered as surveys or relied upon for any
other purpose, nor should they be removed from, reproduced or used apart from
the report.
LEGAL MATTERS - No opinion is intended to be expressed for matters which require
legal expertise or specialized investigation or knowledge beyond that
customarily employed by real estate appraisers.
ALLOCATION BETWEEN LAND AND IMPROVEMENTS - The distribution, if any, of the
total valuation in this report between land and improvements applies only under
the stated program of utilization. The separate allocations for land and
improvements must not be used in conjunction with any other appraisal and are
invalid if so used.
RIGHT OF PUBLICATION - Possession of this report, or a copy of it, does not
carry with it the right of publication. Without the written consent of the
appraiser, this report may not be used for any purpose by any person other than
the party to whom it is addressed. In any event, this report may be used only
with properly written qualification and only in its entirety for its stated
purpose.
TESTIMONY IN COURT - Testimony or attendance in court or at any other hearing is
not required by reason of rendering this appraisal, unless such arrangements are
made a reasonable time in advance of said hearing. Further, unless otherwise
indicated, separate arrangements shall be made concerning compensation for the
appraiser's time to prepare for and attend any such hearing.
STRUCTURAL DEFICIENCIES - The appraiser has personally inspected the subject
property, and except as noted in this report, finds no obvious evidence of
structural deficiencies in any improvements located on the subject property.
However, the appraiser assumes no responsibility for hidden defects or
non-conformity with specific governmental requirements, such as fire,
building and safety, earthquake or occupancy codes, unless inspections by
qualified independent professionals or governmental agencies were provided to
the appraiser. Further, the appraiser is not a licensed engineer or
architect and assumes no responsibility for structural deficiencies not
apparent to the appraiser at the time of this inspection.
TERMITE/PEST INFESTATION - No termite or pest infestation report was made
available to the appraiser. It is assumed that there is no significant termite
or pest damage or infestation, unless otherwise stated.
INCOME DATA PROVIDED BY THIRD PARTY - Income and expense data related to the
property being appraised was provided by the client and is assumed, but not
warranted, to be accurate.
ASBESTOS - The appraiser is not aware of the existence of asbestos in any
improvements on the subject property. However, the appraiser is not trained to
discover the presence of asbestos and assumes no responsibility should asbestos
be found in or at the subject property. For the purposes of this report, the
appraiser assumes the subject property is free of asbestos and that the subject
property meets all federal, state and local laws regarding asbestos abatement.
<PAGE>
STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS
(CONTINUED)
ARCHEOLOGICAL SIGNIFICANCE - No investigation has been made by the appraiser and
no information has been provided to the appraiser regarding potential
archeological significance of the subject property or any portion thereof. This
report assumes no portion of the subject property has archeological
significance.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT - The Americans with
Disabilities Act ("ADA") became effective January 26, 1992. We have not made
a specific compliance survey and analysis of this property to determine
whether or not it is in conformity with the various detailed requirements of
the ADA. It is possible that a compliance survey of the property, together
with a detailed analysis of the requirements of the ADA could reveal that the
property is not in compliance with one or more of the requirements of the
Act. If so, this fact could have a negative effect upon the value of the
property. Since we have no direct evidence relating to this issue, we did
not consider possible non-compliance with the requirements of ADA in
estimating the value of the property.
DEFINITIONS AND ASSUMPTIONS - The definitions and assumptions upon which our
analyses, opinions and conclusions are based are set forth in appropriate
sections of this report and are to be part of these general assumptions as if
included here in their entirety.
UTILIZATION OF THE LAND AND/OR IMPROVEMENTS - 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.
ENCROACHMENTS - 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.
DISSEMINATION OF MATERIAL - Use and disclosure of the contents of this report is
governed by the bylaws and regulations of the Appraisal Institute. Neither all
or any part of the contents of this report (especially the conclusions as to
value, the identity of the appraiser or the firm with which they are connected,
or any reference to the Appraisal Institute or to the MAI or RM designations)
shall be disseminated to the general public through advertising or sales media,
public relations media, new media or other public means of communication without
the prior written consent and approval of the appraiser(s).
DISTRIBUTION AND LIABILITY TO THIRD PARTIES - The party of whom this appraisal
report was prepared may distribute copies of this appraisal report only in its
entirety to such third parties as may be selected by the party for whom this
appraisal report was prepared; however, portions of this appraisal report shall
not be given to third parties without our written consent. Liability to third
parties will not be accepted.
USE IN OFFERING MATERIALS - This appraisal report, including all cash flow
forecasts, market surveys and related data, conclusions, exhibits and supporting
documentation may not be reproduced or references made to the report or to PKF
Consulting in any sale offering, prospectus, public or private placement
memorandum, proxy statement or other document ("Offering Material") in
connection with a merger, liquidation or other corporate transaction unless PKF
Consulting has approved in writing the text of any such reference or
reproduction prior to the distribution and filing thereof.
LIMITS TO LIABILITY - PKF Consulting cannot be held liable in any cause of
action resulting in litigation for any dollar amount which exceeds the total
fees collected from this individual engagement.
LEGAL EXPENSES - Any legal expenses incurred in defending or representing
ourselves concerning this assignment will be the responsibility of the client.
<PAGE>
ADDENDUM C
QUALIFICATIONS OF THE APPRAISERS
<PAGE>
QUALIFICATIONS OF
THOMAS E. CALLAHAN, CPA, CRE, MAI
EXECUTIVE VICE PRESIDENT
PROFESSIONAL HISTORY
Present Executive Vice President, PKF Consulting
San Francisco, California
Prior Pannell Kerr Forster, Boston and Los Angeles
Partner-in-Charge
Pannell Kerr Forster, Dallas and Houston
Partner
AREAS OF EXPERTISE Economic, financial, operational, management and
valuation consulting for the real estate, hospitality and
related service industries.
REPRESENTATIVE
PROJECTS Numerous market and economic feasibility studies for hotels,
motor hotels, and resorts in the United States, Europe,
the Pacific, and Southeast Asia.
Acquisition studies and development planning for
numerous hotels and motor hotels.
Appraisal of the market value of all types of income
producing properties including: hotels, restaurants, ski
resorts, office buildings, golf courses, mixed-use and
retail developments.
Market and economic feasibility studies for retirement
and long-term health care facilities located in Texas and
California.
Preparation of master plan studies for the development of
multi-use real estate projects in the Republic of China,
Singapore, and the United States. These studies include
highest and best use analyses for the proposed site,
market and financial feasibility analyses, economic
valuations and development of the management structure
for project implementation.
Development of reorganization plans and expert testimony
in court for bankruptcy proceedings associated with all
types of hotels and resorts.
<PAGE>
QUALIFICATIONS OF
THOMAS E. CALLAHAN, CPA, CRE, MAI
REPRESENTATIVE
PROJECTS Evaluation of the organization structure, financial
controls and management information systems of the Armed
Forces Recreation Center located in the Federal Republic
of Germany.
Operational reviews, financial analyses, management
evaluations and systems analyses for hotels, resorts,
restaurants, and clubs.
Valuation of large, complex real estate and business
holdings, including the Aspen Skiing Company, Aspen
Colorado; Angel Fire Ski Company, Angel Fire, New Mexico;
and the Embarcadero Center, San Francisco, California.
Preparation of cash flow and return on investment
calculations for proposed, operating and distressed
hotels, resorts, restaurants, and clubs.
Appraisal of the market value of large real estate
portfolios, including all Trusthouse Forte, Inc. hotel
properties; all company owned Hilton Hotels; all Vagabond
Inns; all Western 6 Motels; and all of the holdings of
Hotel Investors Trust.
Operational analysis, financial review and long-range
development for hotels and resorts.
Market and economic feasibility study for a proposed
major international class hotel to be located in Bandar
Seri Begawan, Brunei.
Long-range budgeting, economic feasibility and economic
impact analysis for the Industry Hills Civic Recreation
Center located in the City of Industry, California.
Market and economic feasibility analysis for numerous
convention and exhibit centers including the Los Angeles
Convention Center and the Taipei World Trade Center.
Development of the organizational structure and job
descriptions and requirements for a multi-use facility,
which includes a hotel, convention center and numerous
recreational facilities.
<PAGE>
QUALIFICATIONS OF
THOMAS E. CALLAHAN, CPA, CRE, MAI
REPRESENTATIVE
PROJECTS
(Continued) Development of procedural manuals for the operation of
major hotels.
Accounting system, internal control procedures and
management information system design and implementation
for hotel, club, and restaurant operations.
EDUCATION WASHINGTON STATE UNIVERSITY
Bachelor of Arts in Business Administration
APPRAISAL INSTITUTE
Completed All Courses Required for Membership
PROFESSIONAL
QUALIFICATIONS Certified Public Accountant in Massachusetts, California
and Texas
Certified General Real Estate Appraiser - State of
California
PROFESSIONAL
AFFILIATIONS Member of the Appraisal Institute (MAI)
American Society of Real Estate Counselors (CRE)
International Society of Hospitality Consultants (ISHC)
American Institute of Certified Public Accountants
California Society of Certified Public Accountants
Texas Society of Certified Public Accountants
Massachusetts Society of Certified Public Accountants
American Hotel & Motel Association - Research Committee
American Institute of Certified Public Accountants - MAS
Executive Committee Member
PROFESSIONAL
ACTIVITIES Guest speaker at various industry seminars
EXPERT
TESTIMONY Admitted as an expert in both State and Federal courts
located in Massachusetts, Illinois, California, Texas and
New Mexico
<PAGE>
COMPLETE, SELF-CONTAINED
APPRAISAL
VALUATION OF
539 SINGLE-FAMILY LOTS SITUATED
WITHIN JOSHUA RANCH
NORTHWEST QUADRANT OF ELIZABETH LAKE ROAD
AND THE CALIFORNIA AQUEDUCT
PALMDALE, CA
PREPARED FOR
MR. MARK KAWANAMI
NATIONAL INVESTORS FINANCIAL, INC.
4220 VON KARMAN AVENUE, SUITE NO. 110
NEWPORT BEACH, CA 92660
PREPARED BY
DAVID J. LIKAS, MAI
NOBLE R. TUCKER JR., SRA
LIKAS & ASSOCIATES
20101 SW BIRCH ST., SUITE 150B
NEWPORT BEACH, CA 92660
DATES OF VALUE
OCTOBER 8, 1993 AND MARCH 31, 1998
<PAGE>
LIKAS & ASSOCIATES
REAL ESTATE APPRAISERS & CONSULTANTS
March 31, 1998
Our File No. 98-18
National Investors Financial, Inc.
4220 Von Karman Avenue, Suite No. 110
Newport Beach, CA 92660
Attn: Mark Kawanami
RE: Complete, Self Contained Appraisal
539 Single-Family Lots situated within Joshua Ranch
Northwest Quadrant of Elizabeth Lake Road and the California Aqueduct
Palmdale, CA
Dear Mr. Kawanami:
Pursuant to your request and authorization, We have conducted the investigations
and analyses necessary to form opinions of market value on an "As-Is" and
"Finished Lot" basis at two separate dates of value, respectively. The values
reported within this appraisal are of the above referenced property's fee simple
estate. The function of this appraisal is for use in making financial decisions
in regards to the property.
It is our understanding that the purpose and intended use of the appraisal will
be to be referenced in an audit of your company to register it under the
Securities Act with the SEC and to provide necessary information for the
offering circular which will be distributed to investors. However, the report,
including all market surveys and related data, conclusions, exhibits and
supporting documentation may not be reproduced or references made to the report
or to Likas & Associates/David J. Likas, MAI in any sale offering, prospectus,
public or private placement memorandum, proxy statement or other document
("Offering Material") in connection with a merger, liquidation or other
corporate transaction unless Likas & Associates/David J. Likas, MAI has approved
in writing the text of such reference or reproduction prior to the distribution
and filing thereof.
20101 SW BIRCH STREET, SUITE 150B
NEWPORT BEACH, CA 92660
(714) 752-6122 * FAX (714) 752-7509
<PAGE>
National Investors Financial, Inc. March 31, 1998
RE: Our File No. 98-18 Page Two
Based on the investigations undertaken, the analyses made, and on our experience
as a real estate analysts and appraisers, and subject to the Assumptions and
Limiting Conditions set forth in the report which follows, we have formed the
opinions that the subject property has market value estimates as follows:
"AS-IS" MARKET VALUE, AS OF OCTOBER 8, 1993
FIVE MILLION THREE HUNDRED NINETY THOUSAND DOLLARS
$5,390,000
"FINISHED LOT" MARKET VALUE AS OF OCTOBER 8, 1993
TWENTY FOUR MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS
$24,250,000
"AS-IS" MARKET VALUE, AS OF MARCH 31, 1998
TWO MILLION SEVEN HUNDRED THOUSAND DOLLARS
$2,700,000
"FINISHED LOT" MARKET VALUE, AS OF MARCH 31, 1998
TWENTY ONE MILLION FIVE HUNDRED SIXTY THOUSAND DOLLARS
$21,560,000
The narrative report which follows sets forth the data and analyses upon which
our opinions of value are, in part, predicated.
Respectfully submitted,
/s/ David J. Likas /s/ Noble R. Tucker Jr.
David J. Likas, MAI Noble R. Tucker Jr., SRA
State Cert. #AG003694 State Cert. # AG001532
<PAGE>
EXECUTIVE SUMMARY
<TABLE>
<S> <C>
Property Location: Joshua Ranch at Palmdale
Northwest Quadrant of Elizabeth Lake Rd. &
the California Aqueduct
Palmdale, CA
Thomas Guide: Page 4195-A/6, Los Angeles County
Property Type: 539 Proposed Single Family Lots
Date of Values: October 8, 1993 & March 31, 1998
Date of Report: March 31, 1998
Property Rights: Fee Simple Estate
Site Size: 794 Acres
Zoning: Single Family Residential (R-1)
City of Palmdale, CA
Highest & Best Use: Single-Family Development
</TABLE>
VALUATION
<TABLE>
<S> <C>
"AS-IS" MARKET VALUE
AS OF OCTOBER 8, 1993 . . . . . . . . . . . . . . $ 5,390,000 ($10,000/LOT)
"FINISHED LOT" MARKET VALUE
AS OF OCTOBER 8, 1993 . . . . . . . . . . . . . . $24,250,000 ($45,000/LOT)
"AS-IS" MARKET VALUE
AS OF MARCH 31, 1998. . . . . . . . . . . . . . . $2,700,000 ($5,000/LOT)
"FINISHED LOT" MARKET VALUE
AS OF MARCH 31, 1998 . . . . . . . . . . . . . . $21,560,000 ($40,000/LOT)
EXPOSURE PERIOD:. . . . . . . . . . . . . . . . . 10-12 MONTHS
</TABLE>
DISCUSSION OF THE CONCLUDED VALUES
The subject's current value is significantly lower than its historic value.
Although the region's economy has improved over the past several years, and
although real estate prices in most Southern California markets have
increased, real estate prices within the subject's Antelope Valley area have
not responded yet to the improved economy. This is evidenced by the Sale
Comparables submitted for analysis within this report.
Factors creating this trend include the Antelope Valley area being a secondary
location within the Los Angeles Basin. The Antelope Valley area is a relatively
remote location as compared with most other sub-regions within the basin, and is
situated relatively far from the region's CBD, as well as other major employment
centers. Additionally, the area proposes physical challenges due to its hot, dry
desert
<PAGE>
climate with summer month temperatures frequently exceeding 100 degrees.
As the economy has improved over the past 3 years, there has been a population
trend towards more centrally located markets where higher paying jobs are
provided. It is these factors combined, which have held down real estate prices
within the subject's market.
In conclusion, relative to more centrally located real estate markets, which
have appreciated over the past 6-to-24 months, the subject is situated within a
secondary market where prices have remained soft. This holds particularly true
for vacant land, of which there is an abundance in the high desert region.
However, the current forecast is that of increasing prices within the subject's
market area.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ASSUMPTION AND LIMITING CONDITIONS . . . . . . . . . . . . . . . . . . . 1
CERTIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
AREA DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
THE LAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
ASSESSED VALUATION AND TAXES . . . . . . . . . . . . . . . . . . . . . .31
HIGHEST AND BEST USE . . . . . . . . . . . . . . . . . . . . . . . . . .32
VALUATION METHODOLOGY. . . . . . . . . . . . . . . . . . . . . . . . . .35
SALES COMPARISON APPROACH. . . . . . . . . . . . . . . . . . . . . . . .37
VALUATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
</TABLE>
ADDENDA
Title Report
Site Costs
Qualifications of Appraisers
<PAGE>
ASSUMPTIONS & LIMITING CONDITIONS
The Analyses and opinions set forth in this appraisal are subject to the
following assumptions and limiting conditions:
1. No responsibility is assumed for matters which are legal in nature. A
preliminary title report was reviewed by the appraisers and is included in
the addenda. The client is recommended to review a current preliminary
title report.
There are easements which are assumed to be typical utility easements and
do not negatively impact the value of the property. We assume that none of
these easements would adversely effect the subject property. Should this
later be found to be not the case, we reserve the right to change our value
estimate as stated herein. No responsibility is assumed by us for matters
which are legal in nature. No opinion of title is rendered, and the
property is appraised as though free of all easements, liens, or
encumbrances and the title is assumed to be marketable. No survey of the
boundaries of the property was undertaken by us. All areas and dimensions
furnished to us are presumed to be correct. We recommend at the reader's
discretion that a formal survey be commissioned to confirm the legal
description, land areas and that no encroachments or adverse liens exist.
We assume all taxes are current.
2. No soils report was provided for our review. We checked with the
Palmdale's City Engineering Department and Land Development offices on
March 12, 1998 and no report was on file.
3. Information contained in this appraisal has been gathered from sources that
are believed to be reliable, and, where feasible, has been verified. No
responsibility is assumed for the accuracy of information supplied by
others.
4. We assume no responsibility for economic or physical factors occurring
subsequently to the date of value that effect the opinions stated herein.
5. We reserve the right to make such adjustments to the valuation herein
reported as may be required by the consideration of additional data or more
credible data that may become available.
6. Forecasts of future events that influence the valuation process are
predicated on the continuation of historic and current trends in the
market.
7. The property is appraised assuming it to be under responsible ownership and
competent management and available for its highest and best use.
8. No engineering survey has been made. Except as specifically stated, data
relative to sizes and
-1-
<PAGE>
areas were taken from sources considered reliable.
9. Maps, plats and exhibits included herein are for illustration only, as an
aid in visualizing matters discussed within the appraisal. They should not
be considered as surveys nor relied upon for any other purpose, nor should
they be removed from, reproduced, or used apart from this report.
10. No opinion is expressed as to the value of sub-surface oil, gas, or mineral
rights, or whether the property is subject to surface entry for the
exploration or removal of such materials except as is expressly stated.
11. No opinion is intended to be expressed on matters which require legal
expertise or specialized investigation or knowledge beyond that customarily
employed by real estate appraisers.
12. The appraiser has inspected, as far as possible, by observation, the land;
however, it was impossible to personally inspect the entire parcel.
Therefore, no representations are made as to the site conditions unless
specifically considered in the appraisal.
13. We shall not be required, by reason of this appraisal, to give testimony or
to be in attendance in court or any governmental or other hearing in
reference to the subject property without prior arrangements having first
been made with the appraiser relative to such additional employment.
14. David Likas, MAI, and Noble R. Tucker Jr, SRA, the signatories of this
appraisal, are members of the Appraisal Institute. The Bylaws and
Regulations of the Appraisal Institute require each member and/or candidate
to control the use and distribution of each appraisal by such member or
candidate. Therefore, except as may hereinafter be provided, the party for
whom this appraisal was prepared may distribute copies of this appraisal,
in its entirety, to such third parties as may be selected by the party for
whom this appraisal was prepared; however, selected portions of this
appraisal shall not be given to third parties without the prior written
consent of the signatories of this appraisal.
15. Neither all nor any part of the contents of this shall be conveyed to any
person or entity, other than the appraisers' or firm's client, through
advertising, solicitation materials, public relations, new media, sales or
other media for public or private communication without written consent and
approval of the signatories of this appraisal, particularly as to valuation
conclusions, or to any reference to the Appraisal Institute or the MAI
designation. Furthermore, this report is for the sole use of our client.
Further, the appraisers or firm assumes no obligation, liability, or
accountability to any third party. If this report is placed in the hands
of anyone but the client, the client shall make such party aware of all the
assumptions and limiting conditions of the assignment.
16. No environmental site assessment report was provided for our review. It is
assumed that
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<PAGE>
there are no hidden or unapparent conditions or substances in
the soil or subsoil that may be hazardous or toxic. Our inspection of the
subject property revealed no obvious problems. The appraisers are not
qualified to detect such substances or conditions and are not responsible
for arranging any engineering or research studies that may be necessary to
discover such conditions or substances.
17. It is assumed that there are no deed restrictions to a single use of the
subject. The presence of such restrictions could adversely impact site
value.
18. No consideration has been given in this appraisal to personal property (if
any) located on the site; only the real estate has been considered unless
otherwise specified. This appraisal excludes the value of any items of a
historical, archaeological or biological nature.
19 We assume that the property taxes are current, even though they are
currently delinquent.
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<PAGE>
CERTIFICATION
We, the undersigned, certify that, to the best of our knowledge and belief:
- - the statements of fact contained in this report are true and correct and
subject to the Assumptions and Limiting Condition herein set forth.
- - the reported analyses, opinions, and conclusions are limited only by the
reported Assumptions and Limiting Conditions, and are our personal,
unbiased professional analyses, opinions and conclusions.
- - we have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
- - our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, or the
occurrence of a subsequent event. Furthermore, the appraisal assignment
was not based on a requested minimum valuation, a specific valuation or the
approval of a loan.
- - our reported analyses, opinions and conclusions were developed, and this
report has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice, USPAP, as published by the Appraisal
Foundation, and the federal regulating agencies.
- - we are competent to preform this appraisal assignment, by virtue of
previous experience with similar assignments and/or appropriate research
and education regarding the specific property type being appraised.
- - David Likas, MAI, and Noble R. Tucker Jr, SRA, have made a personal
inspection of the property that is the subject of this report. We have
considered pertinent facts affecting the value thereof.
- - no one has provided significant professional assistance to the persons
signing this report.
- - the reported analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the requirements of the Code of
Professional Ethics and the Standards of Professional Practices of the
Appraisal Institute.
- - market data pertaining to the Final Value Estimate has been accumulated
from various sources and where possible examined and verified as to
details, motivation and validity.
- - the use of this report is subject to the requirements of the Appraisal
Institute relating to
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<PAGE>
review by its duly authorized representatives.
- - the Appraisal Institute conducts a program of continuing professional
education for its designated members. David Likas, MAI, is currently
certified under the continuing education program of the Appraisal
Institute.
- - the Appraisal Institute conducts a program of continuing professional
education for its designated members. Noble R. Tucker Jr., SRA, is
currently certified under the continuing education program of the Appraisal
Institute.
- - David Likas and Noble R. Tucker Jr. currently hold Certified General Real
Estate Appraiser certificates from the State of California Office of Real
Estate Appraisers.
/s/ Noble R. Tucker Jr
----------------------------------------------
Noble R. Tucker Jr, SRA
"Certified General Real Estate Appraiser"
California State Certification No.: AG001532
/s/ David Likas
---------------------------------------------
David Likas, MAI
"Certified General Real Estate Appraiser"
California State Certification No.:AG003694
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<PAGE>
INTRODUCTION
PURPOSE OF THE REPORT
The purpose of this report is to set forth the data, analyses and conclusions
relative to our opinion of market value of the proposed 539 single-family lots
situated within the Joshua Ranch located at the northwest Quadrant of Elizabeth
Lake Road and the California Aqueduct in Palmdale, California. The valuation of
the subject is provided on an "As-Is" and "Finished Lot" basis as of two
separate dates of value. They are as follows:
"AS-IS" MARKET VALUE AS OF OCTOBER 8, 1993
"FINISHED LOT" MARKET VALUE AS OF OCTOBER 8, 1993
"AS-IS" MARKET VALUE AS OF MARCH 31, 1998
"FINISHED LOT" MARKET VALUE AS OF MARCH 31, 1998
The opinions set forth in this report are subject to the Assumptions & Limiting
Conditions set forth within.
FUNCTION OF THE APPRAISAL
The function of this appraisal is for use in making financial decisions in
regards to the property.
It is our understanding that the purpose and intended use of the appraisal will
be to be referenced in an audit of your company to register it under the
Securities Act with the SEC and to provide necessary information for the
offering circular which will be distributed to investors. However, the report,
including all market surveys and related data, conclusions, exhibits and
supporting documentation may not be reproduced or references made to the report
or to Likas & Associates/David J. Likas, MAI in any sale offering, prospectus,
public or private placement memorandum, proxy statement or other document
("Offering Material") in connection with a merger, liquidation or other
corporate transaction unless Likas & Associates/David J. Likas, MAI has approved
in writing the text of such reference or reproduction prior to the distribution
and filing thereof.
SCOPE OF THE APPRAISAL
The scope of this appraisal includes the process of collecting primary and
secondary data (Comps Inc., TRW, etc. for sale data) relative to the subject
property along with the supporting market data. This data has been analyzed and
confirmed, whenever possible, leading to the value conclusions set
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forth.
All three traditional approaches to value, The Cost, Income, and Sales
Comparison Approaches, were considered within this appraisal. The Developmental
Approach was also considered. Please see the Valuation Methodology Section for
further explanation.
EFFECTIVE DATE OF THE APPRAISAL
The opinions expressed in this report are stated as of March 31, 1998, which
coincides with the date of our property inspection. We have also rendered
opinions of value as of October 8, 1993.
DATE OF APPRAISAL PREPARATION
The appraisal was prepared on March 31, 1998.
INTEREST APPRAISED
This report pertains to a valuation of the fee simple estate.
FINISHED LOT DEFINED
As utilized within this appraisal, the term "Finished Lot" is defined as
follows:
FINAL GRADED LOTS WITH ASPHALT PAVED STREETS IN PLACE AND UTILITIES
AVAILABLE TO EACH LOT. CURBS, GUTTERS AND PERIMETER WALLS ARE IN PLACE AND
FEES HAVE BEEN PAID, EXCLUSIVE OF THE BUILDING PLAN CHECK AND PERMIT FEE.
SCHOOL FEES ARE INCLUDED IN THE FINISHED LOT COST.
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<PAGE>
MARKET VALUE DEFINED
The term "market value"(1) is defined as follows:
"MARKET VALUE" MEANS THE MOST PROBABLE PRICE WHICH A PROPERTY SHOULD BRING IN A
COMPETITIVE AND OPEN MARKET UNDER ALL CONDITIONS REQUISITE TO A FAIR SALE, THE
BUYER AND SELLER EACH ACTING PRUDENTLY AND KNOWLEDGEABLY, AND ASSUMING THE PRICE
IS NOT AFFECTED BY UNDUE STIMULUS. IMPLICIT IN THIS DEFINITION IS THE
CONSUMMATION OF A SALE AS OF A SPECIFIED DATE AND THE PASSING OF TITLE FROM
SELLER TO BUYER UNDER CONDITIONS WHEREBY:
1. BUYER AND SELLER ARE TYPICALLY MOTIVATED;
2. BOTH PARTIES ARE WELL INFORMED OR WELL ADVISED, AND ACTING IN WHAT THEY
CONSIDER THEIR OWN BEST INTERESTS;
3. A REASONABLE TIME IS ALLOWED FOR EXPOSURE IN THE OPEN MARKET;
4. PAYMENT IS MADE IN TERMS OF CASH IN U.S. DOLLARS OR IN TERMS OF FINANCIAL
ARRANGEMENTS COMPARABLE THERETO; AND
5. THE PRICE REPRESENTS THE NORMAL CONSIDERATION FOR THE PROPERTY SOLD
UNAFFECTED BY SPECIAL OR CREATIVE FINANCING OR SALES CONCESSIONS GRANTED BY
ANYONE ASSOCIATED WITH THE SALE.
THIS APPRAISAL IS PREDICATED ON AN ALL CASH TO THE SELLER TRANSACTION.
HIGHEST AND BEST USE DEFINED
"Highest and Best Use"(2) is an appraisal concept which has been defined as
follows:
THAT REASONABLE AND PROBABLE USE THAT WILL SUPPORT THE HIGHEST PRESENT
VALUE, AS DEFINED, AS OF THE EFFECTIVE DATE OF THE APPRAISAL.
ALTERNATIVELY, THAT USE, FROM AMONG REASONABLY PROBABLE AND LEGAL
ALTERNATIVE USES, FOUND TO BE PHYSICALLY POSSIBLE, APPROPRIATELY SUPPORTED,
FINANCIALLY FEASIBLE, AND WHICH RESULTS IN HIGHEST LAND VALUE.
- ---------------------------------
(1) Title XI of the Federal Financial Institutions Reform, Recovery and
Enforcement Act of 1989(FIRREA), Section 34.42(f)
(2) REAL ESTATE APPRAISAL TERMINOLOGY, Byrl N. Boyce, Ph.D., Ed., Ballinger
Publishing Company, Cambridge, Massachusetts, 1981.
-8-
<PAGE>
FEE SIMPLE ESTATE DEFINED
The term "fee simple estate"(3) is defined as follows:
ABSOLUTE OWNERSHIP UNENCUMBERED BY ANY OTHER INTEREST OR ESTATE; SUBJECT
ONLY TO THE LIMITATIONS IMPOSED BY THE GOVERNMENTAL POWERS OF TAXATION,
EMINENT DOMAIN, POLICE POWER, AND ESCHEAT.
OWNERSHIP
According to a title report, which is located within the Addenda for reference,
the subject's current vesting is:
NATIONAL INVESTORS FINANCIAL
PROPERTY HISTORY
The subject has not transferred within the last three years. Furthermore, it is
not officially listed for sale.
- ---------------------------------
(3) The Dictionary of Real Estate Appraisal,m 3rd Edition, THE APPRAISAL
INSTITUTE, Chicago Illinois, 1993, p 140.
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<PAGE>
AREA DESCRIPTION
The subject property is situated within the City of Palmdale, Los Angeles
County, California. It is located within an area which is commonly referred to
as the Antelope Valley which consists of the sister cities of Palmdale and
Lancaster. This sub-regional area is situated within the northern section of
Los Angeles County. A Location Map is included for reference on the following
page.
PHYSICAL ENVIRONMENT
Los Angeles County encompasses 4,060 square miles. The infrastructure of the
region includes a complete freeway, street and utility system. Freeways that
serve the subject's area include Interstate Highway 5 and California State
Highway 14, respectively. The subject is located approximately 3 miles west of
California State Highway 14 and has adequate local and regional access.
California State Highway 14 bisects the Antelope Valley and via Interstate
Highway 5, which is located 20 miles to the southwest, connects the Antelope
Valley to Central Los Angeles County areas.
The Antelope Valley is located over 40 miles north of the region's Central
Business District (CBD), or Downtown Los Angeles. However, vehicular access
requires closer to a 60 mile drive, and during commute hours, the commute time
to Downtown LA is near two hours each-way. Consequently, many of Antelope
Valley's residents commute to closer-in, secondary employment centers. There
are major employment centers closer to the Antelope Valley within the San
Fernando Valley Region of Los Angeles. Still, however, this destination is over
a 40 mile drive and is heavily trafficked during commute hours.
The Antelope Valley represents a secondary location within the Greater Los
Angeles Basin. This is due to its somewhat remote location from the region's
CBD and hot, dry desert climate with summer month temperatures frequently
exceeding 100 degrees. It represents the high desert region of the Los Angeles
County. These physical factors in part, point towards the area's lower cost of
housing as compared with more central county markets.
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<PAGE>
REGIONAL LOCATION MAP
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<PAGE>
SOCIAL ENVIRONMENT
In terms of population, the greater Los Angeles area is the fourth largest
urban area in the world and second largest in the United States. According
to the California Department of Finance, as of January 1997, the population
of Los Angeles County was 9,488,200 and the City of Palmdale had a population
of 114,900. The county grew at an annual compound rate of 0.9% from 1993 to
1997 and Palmdale grew at an annual compound rate of 6.4% over the same time
period.
This information indicates that population growth within Palmdale has been
significantly higher (7 times) than that of the overall County's. This trend
is attributable to Palmdale's developing nature and ample stock of affordable
housing alternatives, and is forecast to continue.
The social characteristics of the subject's local area are comprised of a mix
of traditional family, non-family, and single person households.
ECONOMIC ENVIRONMENT
The Los Angeles-Long Beach Standard Metropolitan Statistical Area (SMSA) is a
dynamic employment center and has one of the most diversified economy's in
the United States. The development of Los Angeles as the primary center for
trade with Pacific Rim countries has resulted in significant economic growth
in the Los Angeles area. The combined port complex of Los Angeles and Long
Beach is the busiest on the West Coast and serves as the major port of entry
for international trade.
The Los Angeles-Long Beach SMSA's economy has historically out-performed the
national economy. The SMSA's economy, however, is not insulated from
international and domestic cycles and trends and was in a recession during
the 1990-to-1993 time period.
According to the State of California Economic Development Department (EDD),
total employment within Los Angeles County was 4,289,100 as of February 1998.
Leading employment sectors within the County include the services (30%),
retail trade (20%), manufacturing (16%) and government (13%).
The February 1998 unemployment rate for the County of Los Angeles was 6.0%.
The state and the nation reported unemployment rates of 6.3% and 5.0% for the
same time period, respectively. By comparison, the February 1997
unemployment rate for the County of Los Angeles was 7.5%. Overall, this
employment data indicates that employment trends within the county have
significantly improved from the same time in 1997 and now outperforming the
state as a whole, but still lagging behind the nation. The Los Angeles
economy is in much better condition than during the first part of the 1990's
when unemployment rates were significantly higher.
The economy of Los Angeles area is the financial center of the West Coast and
Pacific Rim with total bank deposits of over 60 billion dollars in all
insured and reporting non-insured commercial banks. This ranks Los Angeles
behind only New York and Chicago. Major companies located in the Los Angeles
include Hughes Aircraft, Twentieth Century Fox, Northrop Corporation,
Atlantic Richfield
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<PAGE>
Company, Litton Industries and Occidental Petroleum Corporation. Within the
San Fernando Valley Region, in which the subject is located within 40 miles
of, there are major employment centers situated within Canoga Park, Warner
Center, Encino, Sherman Oaks and Van Nuys, respectively.
Overall, the current economic environment impacting the subject is on a
positive trend which is forecast to continue. This in turn should bode well
for the subject property. The subject's local employment market will be
discussed forthcoming within the City of Palmdale Description section of this
report.
COUNTY CONCLUSION
The area surrounding the subject property provides for an adequate physical
environment. Increasing population forecasts and the region's economy are
supportive of the economic viability of residential land uses. However, the
Antelope Valley represents a secondary location within the Greater Los
Angeles Region. This is due to its somewhat remote location from the
region's CBD and its hot, dry desert climate with summer month temperatures
frequently exceeding 100 degrees. It represents the high desert region of
the Los Angeles Basin. These factors in part, point towards the area's lower
cost of housing as compared with more central county markets.
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<PAGE>
CITY OF PALMDALE DESCRIPTION
Palmdale is located in the southern portion of the Antelope Valley,
approximately 40 miles north of downtown Los Angeles. Palmdale was
incorporated on August 24, 1962. The city is irregular in shape and is
generally bounded on the west by Bouquet Canyon Road and on the east by the
Big Rock Wash. It extends northwards to the city of Lancaster with its
southern most point near the California Aqueduct. It contains approximately
100 square miles of land area and hosts the Palmdale Airport. A location map
is included for reference on the following page.
POPULATION TRENDS
Palmdale has been one of the fastest growing cities in the state of
California. It has grown as a suburban community of the metropolitan Los
Angeles Basin. The actual trend in population of the City of Palmdale is as
follows:
POPULATION GROWTH TRENDS - CITY OF PALMDALE - 1980 TO 1998
<TABLE>
<CAPTION>
YEAR POPULATION ANNUAL % CHANGE
---- ---------- ---------------
<S> <C> <C>
1980 12,200 --
1990 56,500 17%
1993 89,650 17%
1998 114,900 5%
</TABLE>
Palmdale's population has grown by 13% annually since 1980. It is the 13th
largest city in Los Angeles County and the 51st largest city in the state.
Actual growth has exceeded forecasts in past years, and there are concerns
that the existing infrastructure may be overburdened if growth continues.
The total housing units in Palmdale is at 30,597 and the average household
size is 2.87 persons. The primary household type in Palmdale is a married
couple with children (42%), followed by married couples without children
(30%), and non-family households (18%). The remaining 10% consists of single
heads of households.
The median household income within Palmdale is approximately $44,000. Most
residents of Palmdale are frequently two-income households with professional
and managerial employment in the San Fernando Valley Region.
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<PAGE>
CITY LOCATION MAP
[MAP]
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<PAGE>
ECONOMY
Most of Palmdale's residents are employed in areas such as the San Fernando
Valley and other portions of Los Angeles County. Employment in the Antelope
Valley includes a variety of employment categories. Twenty percent of the
workers are college graduates and fifty-seven percent of the jobs are for
white collar workers. Palmdale has instituted a duty free zone to attract
new employers. According to the Palmdale Chamber of Commerce, major
employment categories within the Antelope Valley are as follows:
<TABLE>
<CAPTION>
CATEGORY NUMBER OF WORKERS
-------- -----------------
<S> <C>
Services 31,200
Retail Trade 21,459
Manufacturing 17,207
Government Services 14,240
Finance/Insurance/Real Estate 6,527
Transportation, Communications & Utilities 5,241
Construction 2,670
Mining 800
Agriculture 247
----------- ------
Total Workers 99,591
</TABLE>
As can be seen from the employment category table, most of the area's
employment is in the services. This is due to the area being a secondary
location with major regional employment located closer to Central Los
Angeles. Much of Palmdale's local employment is in the trades and services
which serves it's local population. The Antelope Valley is home to the
production of the U.S. Airforce's B-1 Bomber which favorably affects the
area's employment base. The Palmdale Regional Airport is located in the
Antelope Valley at US Air Force Plant 42.
CONCLUSION
Overall, the City of Palmdale provides for adequate physical and economic
attributes to support it's growing population. Again, however, it represents
a remote and secondary city within the overall Los Angeles Region.
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NEIGHBORHOOD OVERVIEW
The subject is located at the Northwest Quadrant of Elizabeth Lake Rd. and
the California Aqueduct, Palmdale, California. A location Map is presented
for reference on the following page.
The subject property is situated within the southwestern section of the City
of Palmdale. It's neighborhood can generally be described as being bounded
by California State Hwy. 14 to the east, the Masterplan Community of Rancho
Vista to the north, and the Leona Valley/Mountain areas to the south and
west, respectively. The subject is located in a rural setting with the
surrounding land uses consisting largely of open land areas and single-family
dwellings. There are adequate supportive commercial services within the area
such as retail stores and community facilities. The subject has adequate
local and regional access and is situated approximated 3 miles west of
California State Hwy. 14. The neighborhood is in its initial growth stage.
Located directly north of the subject is the noted Rancho Vista Masterplan
Community. This mixed-use residential with support commercial development
provides for variety of single-family dwellings tracts with retail and
community services, such as schools and parks. It is in its initial stage of
development. To the east of the subject are tracts of single-family
dwellings. Directly to the south and west are open land areas and various
ranch home estates.
The subject represents a mountainous parcel consisting mostly of steep and
rolling topography. It is planned to have an equestrian orientation and the
City of Palmdale has recently approved there to be $200,000 of equestrian
trails installed within the subject development area. Due to the subject's
rolling and steep topography, many of its lots will provide for good views.
Joshua Ranch will represent an upper-end, exclusive hillside community with
an equestrian theme. However, due to its mountainous terrain, site
development costs will be high.
As noted, the subject fronts Elizabeth Lake Road to the south. This roads
becomes Palmdale Blvd. where it intersects California Hwy. 14 to the east.
Located approximately 1.5 miles northeast of the subject is the Antelope
Valley Mall, an enclosed regional mall which serves the valley.
Approximately two miles east of the subject are supportive grocery and retail
stores situated along Elizabeth Lake Rd., including the Posada West Plaza.
Highland High School as well as an elementary school are located only 0.25
miles east of the subject. The subject is located approximately 4 miles east
of the city's CBD, or Downtown Palmdale. The Palmdale International Airport
is situated 5 miles northeast of the subject which hosts the Rockwell
International Aircraft Assembly Facility.
The subject's neighborhood provides for a well conceived housing mix and is
served via adequate recreational amenities, such as parks, retail and
community services. As noted, commercial/retail developments that serve the
area include retail centers, auto service outlets, restaurants, and grocery
stores. There is adequate fire, police, and medical services provided for
within the area.
Overall, the subject is considered to be well -located for residential usage
and has adequate local and regional access.
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<PAGE>
NEIGHBORHOOD LOCATION MAP
[MAP]
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<PAGE>
RESIDENTIAL MARKET OVERVIEW
The following housing market overview is based on a study performed by The
Meyers Group, Real Estate Information & Consultation Services, dated February
19, 1998. Furthermore, we have also conducted numerous interviews with
developers and land brokers active within the subject's market area.
In the analysis of market trends, the most recent 1997 quarter will be
discussed in relationship to the same quarter in the previous year. Since
the subject's housing market is seasonal in nature, this quarterly analysis
is a meaningful method of comparison relative to gauging the current
direction of the market. The figures reported within this discussion are of
new, "single-family" subdivisions of 10 units or more.
ANTELOPE VALLEY
The subject is situated within the Antelope Valley Housing Market. This
regional market reported sales of 177 units in the 4th Qtr. 1997 ending
February 1998. This is a 9% decrease from the same Qtr. in 1996. Forth Qtr.
1997's inventory stood at 133 units, or 40% lower than that of the same Qtr.
in 1996. In regards to price, the average home price decreased by 12% to
$114,990 from the 4th Qtr. 1996. The average square footage as of February
1998 was 1,801 SF, a 7% decrease from the same time in 1996.
Applying the region's 4th Qtr. 1997's sales rate of 59 (177/3) units per
month to its inventory (133) would indicate there to be an approximate 2
(133/59) month supply of product, if sales continued at 4th Qtr. 1997's pace
and no new product was introduced.
Overall, these trends are indicative of a soft market, as evidenced by the
declining sales and prices. However, in response to a lower demand, the
area's supply (inventory) has been reduced by builders. Overall, the current
profile of the market is that of moderate supply & demand conditions.
SOUTH (SO) SUBMARKET
The subject is situated within what is known as the South (SO) Submarket. Of
the county's 2 defined submarket areas, the SO Submarket represents the
upper-end market within the region. This is due to its closer proximity to
Los Angeles and more desirable natural physical attributes.
The SO Submarket reported sales of 72 units in the 4th Qtr. 1997. This
represents a 23% decrease from the same Qtr. in 1996. However, 4th Qtr. 1997
inventory stood at 55 units, 47% lower than that of the same Qtr. in 1996.
In regards to price, the average unit price effectively remained level at
$122,990. The average square footage as of February 1998 was 1,950 SF, a 1%
increase from the same time in 1997.
Applying the SO Submarket's 4th Qtr. 1997's sales rate of 24 (72/3) units per
month to its inventory (55) would indicate there to be an approximate 2
(55/24) month supply of product, if sales continued
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<PAGE>
at 4th Qtr. 1997's pace and no new product was introduced.
Similar to the regional market, the subject's local market is demonstrating
soft market conditions, as evidenced by the decrease in sales. However,
prices have remained level and inventory (supply) is at a reasonable ratio
with sales (demand). Overall, the current forecast for the submarket is that
of moderate supply & demand conditions.
Within the SO Submarket, the subject is situated within the City of Palmdale
which comprises a large portion of the market's total sale activity.
Inclusive of the Quartz Hill area, there are currently 17 tracts selling
product within Palmdale/Quartz Hill. Lot sizes typically range from 7,000 SF
to 10,000 SF with 7,000 SF being the most common size. However, there is one
project in Quartz Hill with 12,000 SF lots and home prices at the $175,000
(2,200 SF) level, and one project in Palmdale with 20,000 SF lots and home
prices at the $170,000 (2,200 SF) level. In regards to the 7,000 SF to
10,000 SF lots, home prices were found to typically range from approximately
$100,00 to $200,000 with homes typically ranging from 1,500 to 3,000 SF in
size. Within its market, the subject would represent an upper-end product
with an average lot size of approximately 15,000 SF. Home prices are
forecast to be near the $200,000 level for the subject with an average size
of approximately 2,500 SF, based on market trends for lots similar in size to
the subject.
It need be noted that there are two, 1 acre lot projects located within the
Acton area of the subject's market. These two project's have an average home
size of 2,800 SF and average prices of approximately $275,000. Acton,
however, has a superior location 15 miles closer to Los Angeles. Similar to
the subject, these two developments provide for view lots. Overall, these
project's larger lot sizes and superior locations account for their
respective higher home prices.
The demand to live in Palmdale is largely driven by home prices, which are
significantly lower than more centrally located markets within Los Angeles
County. With a recent population trend toward more central county areas, the
subject's area has experienced slower sales. However, as prices in the more
centrally located markets have now substantially increased, sales within the
subject's market should begin to improve in 1998. Proposed product will
remain in check with market demand.
HOUSING MARKET CONCLUSION
The Antelope Valley has recently reported declining sales from the 4th Qtr.
1996 to the 4th Qtr. in 1997, and prices have also declined. However, in
response to a lower demand, the area's supply (inventory) has been reduced by
builders. Overall, the current profile of the market is that of moderate
supply & demand conditions. Similar to the regional market, the subject's
local market is also demonstrating soft conditions, as evidenced by the
decrease in sales. However, prices have remained level and inventory
(supply) is at a reasonable ratio with sales (demand).
Overall, the current forecast for the subject's surrounding market is that of
moderate supply & demand conditions.
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<PAGE>
THE LAND
LOCATION
The subject is located at the Northwest Quadrant of Elizabeth Lake Rd. and
the California Aqueduct, Palmdale, California. Site Maps are presented for
reference on the following two pages.
SIZE, SHAPE & VIEWS
The subject consists of 539 proposed Single-Family lots. The vesting
tentative tract map number is 52200. The site comprises approximately 794
acres, including 472 acres of open space and proposed streets. The overall
site is irregular in configuration.
The subject site currently consists of vacant land. When completed, the
subject lots will have typical pad sizes of range from 10,000 to 20,000
square feet. The lots will provide for significant views, and be basically
rectangular in configuration. According to the project engineer, Marjorie
Knitter at Paul A. Moote & Associates (714-751-5557), approximately 30
percent of the lots will have views, and the pad sizes will average 15,000
square feet. There will be a future equestrian center and horse trails
located in this estate lot project.
TOPOGRAPHY & DRAINAGE
The property consists of unimproved raw land with varying terrain and
topography. The subject property represents a mountainous parcel consisting
largely of steep and rolling topography. However, there are also significant
level areas. It is planned to have an equestrian orientation with various
horse trails being installed. Due to the subject's steep topography, many of
it's lots will provide for good views. However, site development costs will
be high.
Upon completion, the lot's will have level topography and will be at street
grade when grading is completed. Site drainage will be directed toward both
on and off-site gutters and the local flood control system. Drainage is
assumed to be adequate.
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<PAGE>
SUBJECT SITE
[MAP]
-22-
<PAGE>
SUBJECT SITE
[MAP]
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<PAGE>
UTILITIES
The subject site is in need of all utilities except electricity. Upon
completion of proposed development, all of the necessary and normal public
utilities will be available to each lot, including water & sewer,
electricity, gas and telephone service.
SOILS & GEOLOGY
No soils or environmental reports were uncovered or made available for the
appraiser's review. We explicitly assume that a soils report would not
reveal any unusual conditions and that there are no adverse soil conditions
at the subject site. We also assume that the subject's soils conditions will
not negatively affect the value of the subject property.
EASEMENTS & RESTRICTIONS
A title report, which is included in the Addenda of this report for
reference, was made available for our review. This report did not reveal any
unusual circumstances. Within this appraisal, it is explicitly assumed that
the only easements are normal street, utility and access easements which do
not adversely affect the value of the subject property. In our valuation
analysis of the subject property, we have assumed that the subject has clear
and marketable title.
NUISANCES & HAZARDS
Based on a visual inspection of the subject site and the surrounding areas,
the subject site does not appear to be impacted with hazards or nuisances.
The subject site is reportedly not located within a designated flood hazard
area or special study earthquake fault zone. No responsibility is assumed
for any expertise/knowledge in uncovering such hazard, and the client is
urged to retain an expert in this field, if desired.
ZONING & PLANNING
The subject property is zoned Planned Development, City of Palmdale. The
subject lots come under the city's Single-Family (R-1) zoning and a Master
Tentative Tract Map (No.52200) is currently being processed. According to
Sharon McCaughey with the city of Palmdale Planning Department, the
probability that the development will be approved is good.
The General Plan Designation for the site is also Residential and allows for
single-family development. The General Plan and zoning are apparently in
conformance and no zoning changes area reportedly in effect at this time.
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<PAGE>
The Single Family Residential (R-1) Zone is established for the development
of single family detached dwellings at gross densities ranging from 1 to 6
dwelling units per acre and a minimum lot size of seven thousand (7,000)
square feet. Development within the R-1 Zone generally consists of
single-family residential neighborhoods of a suburban type and density.
Accessory uses of a rural residential nature may be permitted where lot sizes
and community character warrant such uses. Additional uses are permitted
that are complementary to and not detrimental to the residential
neighborhood. A basic overview of the R-1 zoning is as follows:
<TABLE>
<S> <C>
Maximum Density: 6 Units per acre
Minimum Lot Size: 7,000 square feet in R-1
Height: 35 Feet or 2-stories
Side Setbacks: 5 Feet
Front Setbacks: 20 Feet
Rear Setbacks: 20 Feet, varies
</TABLE>
The R-1 zoning designation is appropriate for areas which are, or are
anticipated to be utilized for single family residential development. Lot
size and density within the R-1 zone is determined by the underlying General
Plan designation, as it may be modified due to topographical, environmental
and physical constraints. Equestrian use at the subject will be legal and
conforming.
STREETS & ACCESS
The subject currently consists of a vacant land. The subject's interior
subdivision streets are proposed and have not yet been named. When
complete, its interior streets will be approximately 35' in width and be
improved with asphaltic concrete paving, curbs, gutters, sidewalks, and
street lamps. Access to the subject's various lots should be adequate and
the development will be adequately landscaped.
SITE COMPLETION COSTS
As previously noted, the subject currently consists of a vacant land. The
subject will require significant grading, streets, curbs, gutters, asphalt
paving, utility lines, landscaping, perimeter walls and various fees to be
paid in order to reach a finished lot condition. According to an estimate
provided to your appraiser by a representative with the subject's site
engineer (Paul A. Moote & Associates), which is located within the Addenda
Section of this report for reference, there will be approximately $83,500/LOT
in costs & fees for the 539 lots to reach a finished condition, excluding of
school fees. Consequently, the total cost to finish the lots is estimated to
be approximately $45,000,000 ($83,500 x 539 lots).
-25-
<PAGE>
As utilized within this appraisal, the term "Finished Lot" is defined as:
FINAL GRADED LOTS WITH ASPHALT PAVED STREETS IN PLACE AND UTILITIES
AVAILABLE TO EACH LOT. CURBS, GUTTERS AND PERIMETER WALLS ARE IN PLACE
AND FEES HAVE BEEN PAID, EXCLUSIVE OF THE BUILDING PLAN CHECK AND PERMIT
FEE. SCHOOL FEES ARE INCLUDED IN THE FINISHED LOT COST.
SUMMARY
The subject lots will have level topography, be basically rectangular in
configuration, and will have all the necessary and normal utilities
available. The subject is planned to have average pad size of approximately
15,000 square feet and will represent an upper-end product within Palmdale.
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<PAGE>
SUBJECT PHOTOGRAPHS
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<PAGE>
[PHOTO]
View of the subject looking in a northerly direction.
[PHOTO]
View of the subject parcel looking northwest
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<PAGE>
[PHOTO]
View of the subject property looking south.
[PHOTO]
Street Photo of Elizabeth Lake Road looking east.
-29-
<PAGE>
[PHOTO]
Street Photo of Elizabeth Lake Road looking west
[PHOTO]
Subject Property Photograph looking southwest
-30-
<PAGE>
ASSESSED VALUATION AND TAXES
Real property taxes in California are limited to 1% of market value of the
property, as of a specified base year. The base year valuation is the 1975
Assessor's market value estimate, or market value indicated by a sale, or
market value based upon reappraisal of the property which is triggered by new
construction or long term leasing of the property. In addition to the taxes
at 1% of the base year market value, there is an additional tax to amortize
any previous voter-approved bonded indebtedness. To provide for inflation,
if there is no sale, lease, or new construction, there is a maximum 2% per
year increase allowed in the assessed values assigned to land and
improvements.
The subject's 1997/98 effective tax rate, inclusive of special assessments,
is 1.18%. Tax rates in the subject area have remained fairly constant over
the past two years and are expected to remain stable in the near future. The
subject's tax rate is line with those at competing sites.
<TABLE>
<CAPTION>
ASSESSOR PARCEL NUMBER ASSESSED VALUE 1998/1999 TAXES
- ---------------------- -------------- ---------------
<S> <C> <C>
3206-018-029 $ 136,606 $ 1,633
3206-018-017 $ 158,625 $ 1,893
3206-018-006 $ 283,856 $ 3,287
3206-018-005 $ 100,184 $ 1,227
3206-018-028 $ 199,222 $ 2,345
3206-018-001 $ 110,620 $ 1,344
3001-002-060 $ 343,342 $ 3,965
- ------------ ----------- --------
Totals $ 1,332,455 $ 15,694
</TABLE>
It is important to note that the property taxes are past due and delinquent
in the amount of $103,637, as indicated by the Los Angeles County Tax
Collector. There is currently a structured pay-off agreement with the
balance to be paid off in April of 2000. Based upon the final market value
in the report, property taxes would most likely increase if the property was
sold. Within this valuation analysis, we explicitly assume all taxes are
current.
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<PAGE>
HIGHEST AND BEST USE
The Highest and Best Use is that use which is most likely to produce the
greatest net return over a given period of time. Net return refers to the
residual left over from gross yield after all costs have been deducted. Only
those uses which are natural, probable, and legally permissible may be
considered tenable. Thus, Highest and Best Use may be defined as the
available use and program of future utilization that produces the highest
present land value.
We have investigated and analyzed the Highest and Best Use of the subject
site in regard to the following four (4) considerations.
PHYSICALLY POSSIBLE
The physical characteristics of the subject site, such as its size, frontage,
topography, accessibility, and utility availability are sufficient for a
variety of residential uses. However, the subject is situated in a
neighborhood which lends itself to single-family development, as evidenced by
other sites having been improved with this usage within the area. Due to the
rural nature and natural beauty of the subject site, which has an equestrian
orientation, commercial uses area not considered to be physically practical.
As previously discussed within The Land section of this report, the subject
is planned to have lot sizes ranging from 10,000 SF to 20,000 SF, as set
forth under its tentative tract map which is currently being processed. As
discussed within the RESIDENTIAL MARKET OVERVIEW section of this report,
there is one project in Quartz Hill with 12,000 SF lots and home prices at
the $175,000 (2,200 SF) level, and a project in Palmdale with 20,000 SF lots
and home prices at the $170,000 (2,200 SF) level. Within the market, the
subject would represent an upper-end product with average lot sizes at the
15,000 SF level and home prices forecast to be near the $200,000 level. Its
home sizes are forecast to be near the 2,500 SF level. Additional support of
product of this size and price evidenced in Acton in which there are two, 1
acre projects selling 2,800 SF homes at average prices of approximately
$275,000, respectively. Acton, however, has a superior location 15 miles
closer to Los Angeles. Similar to the subject, these two developments
provide for view lots. Overall, these project's larger lot sizes and
superior locations account for their higher home prices. After having made
adjustments for these factors, these comparables are supportive of the
subject's concluded product.
When eventually developed, the subject will represent a fairly exclusive,
hilltop community with an equestrian orientation. This factor, combined with
its good location within the southern section of Palmdale, points the subject
towards being upper-level product.
In regards to the subject's current valuation, its proposed 539 lots are
considered to be fairly well market supported as to both density of
development and lot sizes. In regards to the subject's historic 1993
valuation, at this point in time the market was beginning to firm after a 3
year recessionary period. However, there were no known development plans for
the subject. With market conditions
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<PAGE>
poised for a gradual rebound, however, and considering the physical and
economic factors impacting the subject site which began to take form in 1993
leading to its current development plan, for the purposes of this analysis we
have concluded that a 539 lot project with 10,000 SF to 20,000 SF could have
reasonably been considered for development in 1993. Consequently, both the
historical 1993 and current 1998 valuations will be predicated on 539 lots
with a typical lot size of approximately 15,000 SF, respectively.
LEGALLY PERMITTED
The subject site is zoned for single-family usage and a tentative tract map
is currently being processed to allow the development of the subject 539
single-family lots, as set forth within this report. The subject's zoning
effectively allows for only single-family development.
ECONOMICALLY FEASIBLE
Based on the preceding, of the Physically Possible and Legally Permitted
uses, single-family development appears to be the most likely candidate.
However, as previously discussed within the RESIDENTIAL MARKET Overview
section of this report, the Antelope Valley housing market reported declining
sales from the 4th Qtr. 1996 to the 4th Qtr. in 1997, and prices also
declined. In response to a lower demand, the area's supply (inventory) was
reduced by builders. Overall, the current profile of the regional market is
that of moderate conditions.
Similar to the regional market, the subject's local market is also
demonstrating soft conditions, as evidenced by a decline in sales. However,
prices have remained level and inventory (supply) is at a reasonable ratio
with sales (demand). Overall, the current forecast for the subject's local
market is that too of only moderate supply & demand conditions.
The demand to live in Palmdale is largely driven by home prices which are
significantly lower than more centrally located markets in Los Angeles
County. With a recent population trend towards more central county areas, the
subject's area has experience slower sales. However, as prices in these more
centrally located markets have now substantially increased, sales within the
subject market should begin to improve in 1998.
In order to test the economically feasibility of the subject, we have
conducted a contribution analysis. This entailed a comparison of the costs
to bring the subject to a finished lot condition with the current finished
lot value estimated for the property. As can be seen via the subject's site
completions costs, which are located within the Addenda section of this
report for reference, the cost to bring the subject lots to a finished
condition are approximately $85,000/Lot, inclusive of school fees. This is
significantly higher than the current finished lot value conclusion of
$40,000/Lot. Overall, this comparison indicates that it would not be
economically feasible to develop the subject in today's market and as such,
it is our opinion that the subject should be held as an investment for future
single-family development at time when market conditions are stronger.
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<PAGE>
In need be noted that in evaluating single-family land, a frequently employed
method of valuation is to subtract finishing COSTS from the concluded
finished lot "value" in order to estimate the land value "As Is". In the
case of the subject, this would yield a negative value of $45,000 ($40,000 -
$85,000). This of course is not a practical method in valuing the subject
site, since the subject does have utility, thus value. This study does,
however, support the exclusion of the usage of the Developmental Approach to
value which when we employed it in various cursory analysis of the subject,
it resulted in a similar conclusion.
Although it may not feasible to develop the subject in today's market, the
subject has future development potential in which its current values lies.
Within the market, large acreage sites, such as the subject, are often
purchased by land speculators and held as investments in their portfolios.
Consequently, in order to estimate the subject's "As Is" value, sales of
other vacant parcels were abstracted from the market, evaluated, and found to
provide for a reasonable indication of subject's market value "As Is".
Overall, based on our market investigations and analysis of the subject
property, it is our opinion that the most economically feasible use would be
to hold the property for future single-family development.
CONCLUSION OF HIGHEST & BEST USE
After having applied the tests of availability, adaptability, and demand, we
have concluded that the highest and best use of the subject would be to hold
the site for future single-family development.
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<PAGE>
VALUATION METHODOLOGY
BASIS OF VALUATION
Valuation is based upon general and specific background experience, opinions
of qualified informed persons, consideration of all data gathered during the
investigative phase of the appraisal, and analysis of all market data
available to the appraiser.
VALUATION APPROACHES
Three basic approaches to value are available to the appraiser: the Cost
Approach, the Income Approach, and the Sales Comparison Approach.
COST APPROACH
This approach entails the preparation of a replacement or reproduction cost
estimate of the subject property improvements new and then deducting for
losses in value sustained through age, wear and tear, functionally
obsolescent features, and economic factors affecting the property.
The land value is then added to the depreciated cost and entrepreneurial
profit to arrive at a value estimate.
INCOME APPROACH
This approach is based upon the theory that the value of property tends to be
set by the expected net income to the owner. It is in effect the
capitalization of expected further income into present worth.
This approach requires an estimate of net income, an analysis of all expense
items, the selection of a capitalization technique, and the processing of the
net income stream into a value estimate.
SALES COMPARISON APPROACH
This approach is based upon the principle that the value of a property tends
to be set by the price at which comparable properties have recently been sold
or for which they can be acquired.
This approach requires a detailed comparison of sales of comparable
properties with the subject property. One of the main requisites, therefore,
is that sufficient transactions of comparable properties be available to
provide an accurate indicator of value and that accurate information
regarding price, terms, property description and use be obtained through
interview and observation.
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<PAGE>
VALUATION METHODOLOGY CONCLUSION
Since the subject property consists of vacant land, the Sales Comparison
Approach was utilized to estimate value on an all cash basis. This is one of
the most frequently utilized methods of valuing vacant sites. Furthermore,
there were adequate direct land sales of similar sites which made the Sales
Comparison Approach a meaningful indicator of value. Since the subject
consists of only land, neither the Cost or Income Approaches to value were
utilized.
There is also the Developmental Approach which is frequently utilized by
purchasers of development properties. The Developmental Approach, or
Discounted Cash Flow Analysis, involves the direct comparison of a
developments proposed housing units to similar product selling within the
market. In addressing value via this technique, various selling & holding
costs associated with the sell-out of the housing units are deducted. The
estimated net proceeds are then discounted to a present value. However,
since no grading plans or approved tract maps exist, and since there is no
unit mix, floor/building plans, or housing construction costs available as of
the dates of values, this approach to value was not utilized.
The Developmental Approach could also be utilized estimate the value of the
subject to one purchaser in bulk, via an analysis of super-pads to be sold to
merchant buildings. However, since the subject was found to not be
economically feasible to develop, and since the subject's "per lot" value as
the sale of a 539 lot tract was found to effectively be the same as its
retail value as if sold as smaller, 100+ lot tracts to merchant builders, and
due to the numerous assumptions utilized within this valuation technique
which are difficult to support, again, this approach was not utilized.
Furthermore, the subject is currently not feasible to develop which further
negates the use of this approach to value. We will commence with the October
1993 valuation of the subject, followed by it's 1998 valuation.
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<PAGE>
SALES COMPARISON APPROACH
GENERAL
The Sales Comparison Approach to Value consists of a comparison of the
entire property being appraised or various portions thereof with other
similar properties which have sold or which are offered for sale. The
indication of market value is the price at which an equally desirable
property has recently sold, or can be purchased in the open market. The
value found by the study of comparable sales yields market value directly in
accordance with its legal definition. This approach is based on the
principle of substitution which asserts that, when a property is replaceable,
its value tends to be set by the cost of acquisition of an equally desirable
substitute property, assuming no costly delay is encountered in making the
substitutions.
VALUATION
A search of the Los Angeles and San Bernardino County public records and a
market investigation were conducted in order to uncover sales of comparable
sites with similar highest & best uses. Our investigation uncovered several
meaningful sales. A summary sheet, location map, and sale data sheets
followed by an analysis of the sales and a conclusion of value for the
subject's respective dates of value are presented forthcoming.
We will commence with the October 1993 valuation of the subject followed by
it's March 1998 valuation.
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<PAGE>
BULK SALES OF
SINGLE-FAMILY LOTS
OCTOBER 1993 - DATE OF VALUE
<TABLE>
<CAPTION>
Data No. Sale No. of Lots As Is-$/Lot
Location Date Typical Pad Size Finished-$/Lot
---------- ------ ------------------ ----------------
<S> <C> <C> <C>
SALE NO.1 07/92 126 $9,921
N of Pearblossom 7,200 sf $30,000
& E of 42nd Street
Palmdale, CA
SALE NO.2 12/92 108 N/A
On Boxleaf Road 7,000 sf $32,000
& East Avenue
Palmdale, CA
SALE NO.3 09/94 233 $5,279
E of Summerwind 7,200 sf $31,000
& S of Avenue P-8
Palmdale, CA
SALE NO.4 05/92 80 N/A
SE Cnr of 20th Street W 7,000 sf $37,000
& Ave. P-4
Palmdale, CA
SALE NO.5 07/94 126 $5,512
S & N of Rancho Vista Rd 7,500 sf $32,000
& W of 30th Street
Palmdale, CA
SALE NO.6 10/92 142 $9,000
SE Cnr of 20th Street W 6,000 sf $29,623
& Avenue H-4
Lancaster, CA
</TABLE>
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<PAGE>
LOCATION MAP - LAND SALE NOS. 1 & 2
OCTOBER 1993 - DATE OF VALUE
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<PAGE>
LOCATION MAP - LAND SALE NOS. 3, 4, & 5
OCTOBER 1993 - DATE OF VALUE
-40-
<PAGE>
LOCATION MAP - LAND SALE NO. 6
OCTOBER 1993 - DATE OF VALUE
-41-
<PAGE>
SALE NO.1
<TABLE>
<S> <C>
Location: North of Pearblossom Highway, east of 42nd Street
Palmdale, CA
Grantor/Seller: Glendfed Development
Grantee/Buyer: PD 126 Ltd.
Sale Date: July 24, 1992
Document No. 92-1352503
Tract or Legal: Por Sec 5 T5N R11W SBB&M; Por Par 4, Licensed
surveyors map bk 11, pg 1
SALE PRICE
"As-Is" Per Lot: $ 9,921
Finishing Costs: $20,079
--------
"Finished" Lot: $30,000
Terms: $812,000 downpayment (65%LTV), 1st TD Glendfed Bank,
Variable Interest Rate, due in 2 years.
Time on Market: 12 months
Escrow Period: 3 months
Zoning: R17000, Palmdale
Approvals: Tentative Map
Use: 126 Single-Family Lots
Typical Pad: 7,200 SF
Site Condition at time of sale: Vacant Unimproved Land
Topography: Level
Utilities: All are to the site area
Views: None
Average Base Home Price: $115,000
Finished Lot Ratio: 26%
Verification: Bruce Elieff @ PD 126 LTD
(714)-996-6700
Rajan Puri @ Glenfed Development Corporation
(818)905-3030
</TABLE>
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<PAGE>
SALE NO.2
<TABLE>
<S> <C>
Location: On Boxleaf Road and East Avenue
Palmdale,CA
Grantor/Seller: BA Properties
Grantee/Buyer: Kaufman and Broad of Southern California Inc.
Sale Date: December 29, 1992
Document No. 92-2439923
Tract or Legal: Lots 1 to 5, 164 to 179, 210 to 231 Tract 43581
book 1122, pages 13 to 25 and lots 25 to 29, 61 to
78 tract 44813 book 1122, pages 1 to 12
SALE PRICE
"As-Is" Per Lot: N/A
Finishing Costs: N/A
--------
"Finished" Lot: $32,000
Terms: All Cash
Time on Market: 3 months
Escrow Period: 1 month
Zoning: R17000, Palmdale
Approvals: Final Map
Use: 108 Single-Family Lots
Typical Pad: 7,000 SF
Site Condition at time of sale: Finished Lots
Topography: Level
Utilities: All are to the site area
Average Base Home Price: $127,500
Finished Lot Ratio 25%
Verification: Pete Peterson @ Kaufman and Broad
(805)-265-7676
Jay Pruit @ BA Properties
(714)-433-6174
</TABLE>
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<PAGE>
SALE NO.3
<TABLE>
<S> <C>
Location: East of Summerwind, South of Avenue P-8
Palmdale, CA
Grantor/Seller: Homestead Land Development Corporation
Grantee/Buyer: Woods Canyon Associates/Paul Garrett
Sale Date: September 30, 1994
Document No. 94-1803502
Tract No or Legal: Lots 1 through 45 tract 43689 book 1074 pages 75
through 78, por par 2 PM 4790 bk 79 pages 2,3,4;
lots 1 through 62, tract 43690 bk 1074; APN# 3003-003-079; 3003-005-031 to 057
SALE PRICE
"As-Is" Per Lot: $5,279
Finishing Costs: $25,721
--------
"Finished" Lot: $31,000
Terms: $184,500 down payment (85% LTV), 1st TD seller.
Time on Market: 24 months
Escrow Period: 11 months
Zoning: RPD6.6U, Palmdale
Approvals: Tentative Map
Use: 233 Single-Family Lots
Typical Pad: 7,200 sf
Site Condition at time of sale: Vacant Unimproved Land
Topography: Level
Utilities: All are to the site area
Views: None
Average Base Home Price: $139,990
Finished Lot Ratio: 22%
Verification: Dana Levee @ Chaparral Land Company @(805)-497-6332
Paul Garrett-Buyer @ (760)-723-5523
</TABLE>
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<PAGE>
SALE NO.4
<TABLE>
<S> <C>
Location: Southeast corner of 20th Street West and Avenue P-4
Palmdale,CA
Grantor/Seller: Waln-Barclay Company
Grantee/Buyer: West Venture Development Company
Sale Date: May 7, 1992
Document No. 92-0824078
Tract No.or Legal: Lots 1 through 80 tract 46430 book 1139 pages 81
through 84
SALE PRICE
"As-Is" Per Lot: $0
Finishing Costs: $0
-----------
"Finished" Lot: $37,000
Terms: All cash
Time on Market: 18 months
Escrow Period: 5 months
Zoning: R17000, Palmdale
Approvals: Final map
Use: 80 Single-Family Lots
Typical Pad: 7,000 SF
Topography: Level
Utilities: All are to the site area
Views: None
Average Base Home Price: Undetermined
Finished Lot Ratio: Not Available
Verification: Jeff Anderson @ West Venture Development Company
(818)-344-2000
</TABLE>
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<PAGE>
SALE NO. 5
<TABLE>
<S> <C>
Location: South and North of Rancho Vista, West of 30th Street
Palmdale, CA
Grantor/Seller: Rancho Vista Development Co.
Grantee/Buyer: Richland Golf Limited Partnership
Sale Date: July 5, 1994
Document No. 94-1268319
Tract No. or Legal: Pars 1,2,4 PM 22441 Bk 238, Pgs 84,85,86; por pars
2,3,11,12,13,18,20 PM 3556 Bk 44 pgs 5,6,7 and
pars 2,3 PM 23938 Bk 264
SALE PRICE
"As-Is" Per Lot: $ 5,512 *
Finishing Costs: $26,488
-------------
"Finished" Lot: $32,000
Terms: All Cash
Time on Market: Not Available
Escrow Period: Not Available
Zoning: R17500, Palmdale
Approvals: Final Map
Use: 126 Single-Family Lots
Typical Pad: 7,500 SF
Topography: Level
Utilities: All are to the site area
Views: No Views
Average Base Home Price: Not Available
Finished Lot Ratio: Not Available
Verification: John Schaeffer @ Richmond American (714)-708-4740
Jack Bray-President @ Richland Golf Limited
Partnership
(813)-286-4140
</TABLE>
* Indicated "As-Is" land price.
-46-
<PAGE>
SALE NO. 6
<TABLE>
<S> <C>
Location: SE of 20th Street West of Avenue H-4
Lancaster, CA
Grantor/Seller: Ahmanson/Sumitomo L.P.
Grantee/Buyer: Forecast Development
Sale Date: October 1, 1992
Document No. 92-1832627
Tract No.or Legal: Lots 1 through 13, 16-83, por lots 14, 15 tract
45314, book 1127 page 9-15; lots 9-15, 24,49, 54-63, 70-81, 114-124 tract 45315, book 1127, pages
13,14.
SALE PRICE
"As-Is" Per Lot: $ 9,000 *
Finishing Costs: $20,623
------------
"Finished" Lot: $29,623
Terms: Undisclosed
Time on Market: 1 month
Escrow Period: 4 months
Zoning: R6000, Lancaster
Approvals: Final Map
Use: 142 Single-Family Lots
Typical Pad: 6,000 SF
Topography: Level
Utilities: All are to the site area
Views: None
Average Base Home Price: $115,925
Finished Lot Ratio: 25%
Verification: Bruce Strickland at Forecast Homes @ (909)-987-7788
</TABLE>
* Indicated "As-Is" land price.
-47-
<PAGE>
ANALYSIS OF THE SALES
The following discussion encompasses both the "As-Is" and "Finished Lot"
valuations as of October 1993 and March 1998, respectively.
The unit of comparison utilized within this analysis is the price per lot which
is one of the most frequently utilized by purchasers of similar sites.
Adjustments to the comparables were considered for financing, condition of sale,
date of sale, location, project/development size, typical pad size, topography,
views, offsites, entitlements, and other factors such as site configuration &
utility.
Adjustments to the sales were based on analysis of the subject data set to
establish matched pair adjustments, from our past appraisal experience with
similar subdivision land data sets, interviews with developers and land brokers
active in the market, and general market and economic trends.
It need be noted that in making adjustments, the same concluded percentage
adjustments will be applied to both the "As Is" and "Finished Lot" prices
indicated by the sales, unless otherwise stated. A discussion of the various
adjustments considered is a follows:
FINANCING
Typically when seller carried financing is part of a sale transaction, it is
considered to be beneficial to the buyer, since it enables ownership with a
lower degree of capital outlay. Although a buyer may be able to achieve market
financing, the terms of the seller financing are frequently favorable and
granted by a party who is partial to the transaction. Factors that need be
examined are loan to value (LTV), interest rate, term and loan expedition.
Although several of the Historic Sales involved seller carried financing, our
examination of the terms of the financing, as well as interviews with the
verifying parties, has indicated that the financing did not measurably impact
the prices paid, respectively. All of the Current Sales were cash transactions
Consequently, no adjustments will therefore be further discussed or applied.
CONDITION OF SALE
Historic Sales Nos. 4 and 5 all of the Current Sales were arms-length
transactions between buyer & seller which sold at fair-market prices.
Consequently, no adjustments therefore need to be applied for condition of sale,
respectively.
Historic Sale No. 1 was an REO which was sold by Glenfed Development, (part of
Glenfed Bank). However, according to the verifying party, Mr. Bruce Elieff, the
property sold at market level and no adjustment was therefore applied. Historic
Sale No. 2 was also an REO sold BA Properties. According to the verifying
party, Mr. Jay Pruitt, the property sold marginally below market. Consequently,
we have reasonably estimated and applied a 10% upward adjustment to compensate
-48-
<PAGE>
for this factor. Historic Sale No. 3 was a transaction which was sold by
Homestead Land Development Corporation who acted as a servicing entity for the
Resolution Trust Corporation (RTC). According to the verifying party, Mr. Paul
Garrett, the property sold below a market level and again, we have estimated and
applied a 10% upward adjustment. Historic Sale No. 6 was a transaction which
was sold by Ahmanson/Sumitomo Limited Partnership. According to the verifying
party, Mr. Bruce Strickland, the property sold for below market price by
approximately 15%. As such, an upward adjustment of this magnitude is was
applied.
DATE OF SALE
In estimating time adjustments, we have made various comparisons within the data
set to in order to establish a difference attributable to date of sale. We have
also made various paired sales comparisons similar market sales not included in
the data set. Our research has indicated that over the past 12 months there has
been only moderate appreciation in prices. In determining time adjustments, we
have also considered changes in housing prices and overall market trends as
previously discussed within the RESIDENTIAL MARKET OVERVIEW section of this
report. Secondary sources, such as opinions of area developers and builders,
have also been considered.
When applying this adjustment for the Historic Sales, periods prior to October
1993 were from superior markets, for the market was declining. As such,
downward adjustments will be applied to these sales which included Sale Nos. 1,
2, 4 and 6. Sale Nos. 3 and 5 have more current dates and upward adjustments
were applied, since prices were found to be declining during this period. Based
on our market research, a time adjustment of 5% per year was utilized. In
regards to the Current Sales, sales occurring prior to February 1998 are from
slightly inferior markets and as such, slight upward adjustments will be
applied. The Current Sales warranting upward adjustment are Sale Nos. 3, 4 and
5. Again, based on our market research, a time adjustment of approximately 5%
per year was utilized over this time period.
LOCATION
Location adjustments were considered for the sales. Consideration was given to
surrounding land uses, home prices, sales volumes, area amenities such as
schools, retail & recreational facilities, local & regional access, highway
proximity and overall residential appeal.
The subject is located at the Northwest Quadrant of Elizabeth Lake Rd. and the
California Aqueduct, Palmdale, California. The subject property is situated
within the southwestern section of the City of Palmdale adjacent to the Leona
Valley. This is a desirable region relative to most other areas within the
Antelope Valley. The subject has a good rural setting and is adequately served
with commercial services. Joshua Ranch will represent an upper-end, exclusive
hillside community with an equestrian theme. Due to the subject's good location
and other desirable residential attributes, which were found to be superior to
many of the sales, upward adjustment were found to be necessary.
-49-
<PAGE>
As noted, various sales were found to be inferior relative to location to the
subject. This was due to their being located in inferior areas relative to
surrounding land uses, home prices, sales volumes, area amenities, access, and
overall appeal. Sales which are located in Lancaster were found to have
inferior locations, since Lancaster bodes lower home prices and is generally a
less desirable residential community. As such, upward adjustments to the
Lancaster Sales will be made. Similarly, sales which are located within the
sister desert valley area of Victorville were also found to have inferior
locations due to lower home prices and upward adjustments will therefore be
applied. Various Palmdale Sales will also be considered for location
adjustments.
After having made various comparisons within the data set in order to estimate
differences attributable to location, and considering the value impact on the
final product and correlating this difference to a purchase of land in bulk, and
based on our past appraisal experience with similar land sale data sets, we have
estimated and applied adjustments range from 10% to 25% in order to account for
differences in location, when warranted.
PROJECT SIZE
Inclusive of both sale data sets utilized for the 1993 and 1998 dates of values,
the sale comparables range in total lots sold from 43-to-1,686. The subject
consists of 539 lots.
In development properties, such as the subject, discounts for large size
purchasers are sometimes granted. However, based upon our various paired sales
comparisons made within the submitted data sets, and based upon our market
investigations, there was found to be no significant differences due to project
size within the submitted data sets. Further support of this conclusion is
provided in the March 1998 sale of 787 lots to 2 builders within masterplan
community of Fairfield Ranch, Chino Hills, California. Additionally, 1,228
lots are currently being purchased by one builder within the masterplan
community of Corona Farms, Riverside County, California. Based upon our
interviews with the buying entities involved in these transactions, the prices
being paid are effectively the same "per lot" as would be paid for a smaller 100
plus/minus lot tract.
Overall, the subject was found to be effectively similar to the comparables
relative to Project Size and no adjustments will therefore be further discussed
or applied.
TYPICAL PAD SIZE
The comparables range in typical pad size from approximately 6,000 to 8,000 SF,
with most of the data being at the 7,000 SF level. The subject development has
a much larger typical pad size of 15,000 SF. Although attempted, no sales of
pads this large size were uncovered from the market.
Larger pads almost always sell for more than smaller ones, assuming all other
factors are similar. The opposite relationship exists for smaller size pads.
Based upon our analysis of the data set to establish matched pair adjustments,
from our past appraisal experience with similar subdivision land data sets,
-50-
<PAGE>
and considering the value impact on the final product and correlating this
difference to a purchase of land in bulk, it is our opinion that adjustments
at the 20% level need be applied to all of the sales for this factor.
TOPOGRAPHY
The subject represents a mountainous parcel with significant rolling topography.
Due to the subject's rolling and steep topography, site development costs will
be high. The subject's rolling topography was found to be an inferior factor
due to higher grading and developmental costs involved for preparing the site
for housing construction. As such, downward adjustments to the sales will be
applied for this difference.
Based upon our analysis of the data set to establish matched pair adjustments,
from our past appraisal experience with similar subdivision land data sets, it
is our opinion that 10% downward adjustment be applied to all of the
comparables, respectively. HOWEVER, UNDER THE "FINISHED LOT" VALUATIONS, NO
ADJUSTMENT WILL BE APPLIED SINCE IT IS ASSUMED THAT ALL GRADING COSTS AND THE
LIKE HAVE ALREADY BEEN INCURRED.
VIEWS
Sales that have a higher ratio of lots with views typically sell for a higher
price, assuming all other factors are similar. This is attributable to the
higher premiums achievable on the final product. Within the subject's market,
view lots were found to command premiums typically within the $2,000 to $20,000
range.
As discussed within The Land section of this report, approximately 30% of the
subject's lots are forecast to qualify for view premiums. Based upon the degree
and intensity of the subject's views, and considering its premium location
within the Antelope Valley, we have forecast that the subject could achieve view
premiums at the $20,000 level. Since none of the comparables are view lots,
they need all be adjusted upwards for this factor.
In estimating adjustments for views, the subject's average view premium per lot
is first estimated by multiplying its percent of lots with views by the
concluded premium. This equated to an average view premium per lot of $6,000
($20,000 x 30%). Since the view premium is at a retail price, it need be
discounted in order to reflect the bulk purchase of lots at cost by a developer.
This discount is attributable to sales & marketing costs, holding costs,
developer's profit, and the risk associated with selling the lots over an
extended sell-out period. Overall, based upon an analysis of these factors, we
have estimated and applied a 40% discount to the retail price. Consequently,
the $6,000 would be adjusted to $3,600 ($6,000 x 0.60). Assuming that a sale
had a finished lot price of $30,000, this would equate to an upward adjustment
of approximately 12% ($3,600/$30,000).
-51-
<PAGE>
Within the data set, and after having conducted this same analysis for each
sale, adjustments for differences in views were estimated to range from
approximately 10% to 17%. It need be noted that the same level of percentage
adjustment was applied to both the "Finished" and "As-Is" prices, since there
was found to be a similar correlation pertaining to this factor.
OFFSITES
This adjustment category accounts for the degree of utilities available to the
site at time of sale as well as its development status. That is, site which
were superior relative to utility availability and infrastructure development
will received downward adjustments. If a site was found to be superior, it
would require less costs to reach finished lot basis. As such, this category
considered the intensity of construction that need be made in order to reach a
finished lot condition.
All of the sales were effectively found to be similar in this regard and no
adjustments will therefore be applied or discussed. It need be noted that
Historic Sale Nos. 2 and 4 sold on a "Finished" basis and no "As Is" prices were
therefore available for evaluation.
ENTITLEMENTS
This adjustment category accounts for approvals at time of sale. The subject
currently has a tentative tract map which is in a fairly advanced stage. This
map adds significant value to the subject. Various sales were found to have
either tentative maps or recorded final maps. Within the subject's market, our
various paired sales analysis did not reveal there to be a significant
difference between a tentative map in an advanced stage of processing with that
of an approved tentative or final recorded map. Consequently, no adjustments
will therefore be discussed or applied for this factor.
OTHER FACTORS
This category accounts for such factors as site configuration and overall
functional utility. The submitted sales were found to be fairly similar in
these regards and no adjustments will therefore be applied or discussed.
-52-
<PAGE>
DISCUSSION OF THE COMPARABLES-
OCTOBER 1993 DATE OF VALUE
SALE NO. 1 reportedly sold for a fair market price, even though it was an REO
sale. Consequently, no adjustment for condition of sale is considered
warranted. However, due to its older date of sale, a downward adjustment is
applied. It is situated within an inferior area of Palmdale which has less
favorable residential attributes and as such, an upward adjustment for location
is made. Due to its smaller pad size and inferior views, upward adjustments are
warranted for these factors, respectively. However, a downward adjustment is
made due to its superior (level) topography.
SALE NO. 2 was REO sold by BA Properties. According to the verifying party, Mr.
Jay Pruitt, the property sold below market. We have reasonably estimated and
applied a 10% upward adjustment to compensate for this factor. However, due to
its older date of sale, a downward adjustment is made. This property has
inferior location in a secondary area of Palmdale which is less desirable than
the subject's and as such, an upward adjustment for location is applied. Due to
its smaller pad size and inferior views, upward adjustments are made. A
downward adjustment is warranted due to its superior topography.
SALE NO. 3 was a transaction which was sold by Homestead Land Development
Corporation who acted as a servicing entity for the Resolution Trust Corporation
(RTC). According to the verifying party, Mr. Paul Garrett, the property sold
below market and we have estimated and applied a 10% upward adjustment. Due to
its more current date of sale, an upward adjustment is warranted. It has a
fairly similar location within Palmdale near the subject, but due to its smaller
pad size and inferior views, upward adjustments are applied, respectively. A
downward adjustment is made for superior topography.
SALE NO. 4 was an arms-length transaction. However, due to its older date of
sale, a downward adjustment is made It has a fairly similar location in
Palmdale near the subject. However, due to its smaller typical pad size and
inferior views, upward adjustments are applied for these factors, respectively.
SALE NO. 5 was an arms-length transaction. However, due to its more current
date of sale, an upward adjustment is warranted. It has a fairly similar
location within Palmdale near the subject. However, due to its smaller pad size
and inferior views, upward adjustments are necessary. A downward adjustment is
made for topography.
SALE NO. 6 was sold by Ahmanson/Sumitomo Limited Partnership. According to the
verifying party, Mr. Bruce Strickland, the property sold for below market price
by approximately 15%. As such, an upward adjustment of this magnitude is
initially applied. However, due to its older date, a downward adjustment is
made. It has an inferior location within the City of Lancaster and an upward
adjustment for location is indicated. Due to its smaller typical pad size and
inferior views, upward adjustments are applied. However, a downward adjustment
is made for superior topography.
The adjustment grid presented on the following page summarizes the noted
adjustments for each sale.
-53-
<PAGE>
OCTOBER 1993
ADJUSTMENT GRIDS
"AS IS-GRID"
<TABLE>
<CAPTION>
SALE NO.: 1 2 3 4 5 6
------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
AS-IS/$: $9,921 N/A $5,279 N/A $5,512 $9,000
CONDITION: 0% +10% +10% 0% 0% +15%
ADJ. VALUE: $9,921 N/A $5,807 N/A $5,512 $10,350
DATE: -5% -5% +5% -7% +5% -5%
ADJ. VALUE: $9,425 N/A $6,097 N/A $5,788 $9,833
LOCATION: +15% +15% 0% 0% 0% +15%
PAD SIZE: +20% +20% +20% +20% +20% +20%
TOPO: -10% -10% -10% -10% -10% -10%
VIEWS: +12% +10% +12% +10% +10% +12%
------- ------ ------ ------ ------ -------
NET ADJ.: +37% +35% +22% +20% +20% +37%
FINAL
VALUE: $12,912 N/A $7,439 N/A $6,945 $13,471
</TABLE>
"FINISHED LOT-GRID"
<TABLE>
<CAPTION>
SALE NO.: 1 2 3 4 5 6
------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
FINISHED/$: $30,000 $32,000 $31,000 $37,000 $32,000 $29,623
CONDITION: 0% +10% +10% 0% 0% +15%
ADJ. VALUE: $30,000 $35,200 $34,100 $37,000 $32,000 $34,066
DATE: -5% -5% +5% -7% +5% -5%
ADJ. VALUE: $28,500 $33,440 $35,805 $34,410 $33,600 $32,363
LOCATION: +15% +15% 0% 0% 0% +15%
PAD SIZE: +20% +20% +20% +20% +20% +20%
TOPO: 0% 0% 0% 0% 0% 0%
VIEWS: +12% +10% +12% +10% +10% +12%
------- ------ ------ ------ ------ -------
NET ADJ.: +47% +45% +32% +30% +30% +47%
FINAL
VALUE: $41,895 $48,488 $47,263 $44,733 $43,680 $47,574
</TABLE>
-54-
<PAGE>
OCTOBER 1993 "AS IS" VALUE CONCLUSION
The sales ranged from $5,279 to $9,921 per lot before adjustments. After having
made adjustments, the indicated range is from $6,945 to $13,471 per lot. Based
on an analysis of all the data, but with primary emphasis placed on Data Nos. 1
and 3 due to their fairly similar characteristics, we reasonably have concluded
to a unit value of $10,000 per lot in bulk for the 539 subject lots. Utilizing
the $10,000 conclusion, we have estimated value as follows:
$10,000 X 539 LOTS = $5,390,000
OCTOBER 1993 "FINISHED LOT" VALUE CONCLUSION
The sales ranged from $29,623 to $37,000 per lot before adjustments. After
having made adjustments, the indicated range is from $41,895 to $48,895 per lot.
Based on an analysis of all the data, but again with primary emphasis placed on
Data Nos. 1 and 3 due to their fairly similar characteristics, we have
reasonably concluded to a unit value of $45,000 per lot in bulk for the 539
subject lots. Utilizing the $45,000 conclusion, we have estimated value as
follows:
$45,000 X 539 LOTS = $24,250,000
CORRELATION WITH FINISHED LOT TO BASE HOME PRICE RATIO
The sales indicated finished lot ratios as follows:
<TABLE>
<CAPTION>
SALE 1 SALE 2 SALE 3 SALE 4 SALE 5 Sale 6
------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Base Home: $115,000 $127,500 $139,990 N/A N/A $115,925
Finished Lot: $30,000 $32,000 $31,000 N/A N/A $29,623
LOT RATIO: 26% 25% 22% N/A N/A 26%
</TABLE>
As can be seen from the above table, the finished lot ratio range is from 22% to
26%, with a sample average of 25%. Based on the subject's October 1993
estimated "Finished Lot" value of $45,000 and applying its forecast average base
home price of $200,000, which is estimated to have been near this level in 1993,
its ratio is 23% ($45,000/$200,000).
Overall, its lot ratio is within the range demonstrated by the comparables which
lends secondary value support relative to the finished lot conclusion estimated
for the subject.
-55-
<PAGE>
BULK SALES OF SINGLE-FAMILY LOTS
MARCH 1998 - DATE OF VALUE
<TABLE>
<CAPTION>
Data No. Sale No. of Lots As Is-$/Lot
Location Date Typical Pad Size Finished-$/Lot
-------- ---- ---------------- --------------
<S> <C> <C> <C>
SALE NO.1 02/98 64 $3,738
Between 40th St E & 6,500 sf $29,000
37th St. E at Ave S-8
Palmdale, CA
SALE NO.2 02/98 43 $3,738
SEC of 25th St. E 6,500 sf $29,000
& Ave. R-12
Palmdale, CA
SALE NO.3 07/97 75 $ 1,983
On 20th St. West 7,000 sf $20,000
N of Avenue I
Lancaster, CA
SALE NO.4 08/97 59 $4,000
On 40th St. West 7,500 sf $25,000
& Ave. J-8
Lancaster, CA
SALE NO.5 01/98 1,686 $1,483
E of Amethyst Rd.& 7,200 sf $26,483
W of El Evado Rd. &
N. of Seneca Rd.&
S. of Mojave Rd.
Victorville, CA
SALE NO.6 10/97 440 $2,400
E of Amethyst Rd.& 7,200 sf $27,400
W of El Evado Rd. &
N. of Seneca Rd.&
S. of Mojave Rd.
Victorville, CA
</TABLE>
-56-
<PAGE>
LOCATION MAP - LAND SALE NOS. 1 & 2
MARCH 1998 - DATE OF VALUE
[MAP]
-57-
<PAGE>
LOCATION MAP - LAND TRACT SALE NOS. 3 & 4
MARCH 1998 - DATE OF VALUE
[MAP]
-58-
<PAGE>
LOCATION MAP - LAND TRACT SALE NOS. 5 & 6
MARCH 1998 - DATE OF VALUE
[MAP]
-59-
<PAGE>
<TABLE>
<CAPTION>
SALE NO. 1
- ----------
<S> <C>
Location: Between 40th Street East and 37th Street East at Avenue
S-8 Palmdale, CA
Grantor/Seller: Pardee
Grantee/Buyer: Westpointe Homes
Sale Date: February 1998
Document No.: 98-230637
Tract No/Legal: Vesting Tentative Tract Map 46597
Sale Price
- ----------
"As-Is" Per Lot: $3,738
Finishing Costs: $25,262
-------
"Finished" Lot: $29,000
Terms: All Cash
Time on Market: 12 months
Escrow Period: 2 months
Zoning: R1, Palmdale
Approvals: Tentative Map
Use: 64 SFD's
Typical Pad: 6,500 SF
Topography: Level
Utilities: All are to the site area
Views: None
Verification: Larry Lynch and Bill Korek @ Korek Land Company
(818)-905-1450
</TABLE>
-60-
<PAGE>
<TABLE>
<CAPTION>
SALE NO. 2
- ----------
<S> <C>
Location: SE Corner of 25th Street East and Avenue R-12
Palmdale, CA
Grantor/Seller: Pardee
Grantee/Buyer: Westpointe Homes
Sale Date: February 1998
Document No.: 98-230637
Tract No/Legal: Vesting Tentative Tract Map 46710
Sale Price
- ----------
"As-Is" Per Lot: $3,738
Finishing Costs: $25,262
-------
"Finished" Lot: $29,000
Terms: All Cash
Time on Market: 12 months
Escrow Period: 2 months
Zoning: R1, Palmdale
Approvals: Tentative Map
Use: 43 SFD's
Typical Pad: 6,500 SF
Topography: Level
Utilities: All are to the site area
Views: None
Verification: Larry Lynch and Bill Korek @ Korek Land Company
Phone Number: (818)-905-1450
</TABLE>
-61-
<PAGE>
<TABLE>
<CAPTION>
SALE NO. 3
- ----------
<S> <C>
Location: 20TH Street West just North of Avenue I
Lancaster, CA
Grantor/Seller: Pardee
Grantee/Buyer: New Century Development Company
Sale Date: July 2, 1997
Document No.: 97-989780
Tract No. Or Legal: Recorded Map #46423 and 46424
Sale Price
- ----------
"As-Is" Per Lot: $ 1,983
Finishing Costs: $18,017
-------
"Finished" Lot: $20,000
Terms: All Cash
Time on Market: 6 Months
Escrow Period: 4 Months
Zoning: R1, Lancaster
Approvals: Final Map
Use: 75 SFD's
Typical Pad: 7,000 SF
Topography: Level
Utilities: All are to the site area
Views: None
Verification: Larry Lynch and Bill Korek @ Korek Land Company
(818)-905-1450
</TABLE>
-62-
<PAGE>
<TABLE>
<CAPTION>
SALE NO. 4
- ----------
<S> <C>
Location: On 40th Street West and Avenue J-8
Lancaster, CA
Grantor/Seller: Peter Layden
Grantee/Buyer: Investment Group of America
Sale Date: August 21, 1997
Document No.: 97-1332541
Tract No. or Legal: Tentative Map #47775
Sale Price
- ----------
"As-Is" Per Lot: $ 4,000
Finishing Costs: $21,000
-------
"Finished" Lot: $25,000
Terms: All Cash
Time on Market: 18 Months
Escrow Period: 3 Months
Zoning: R1, Lancaster
Approvals: Tentative Map
Use: 59 SFD's
Typical Pad: 7,500 SF
Topography: Level
Utilities: All are to the site area
Views: None
Verification: Larry Lynch and Bill Korek @ Korek Land Company
(818)-905-1450
</TABLE>
-63-
<PAGE>
<TABLE>
<CAPTION>
SALE NO. 5
- ----------
<S> <C>
Location: East of Amethyst Road, West of El Evado Road, North of
Seneca Road, South of Mojave Drive
Victorville, CA
Grantor/Seller: Pacific Bay Homes
Grantee/Buyer: Highpointe Communities
Sale Date: January 30,1998
Document No.: 98-343503
Tract No/Legal: 1384
Sale Price
- ----------
"As-Is" Per Lot: $ 1,483
Finishing Costs: $25,000
-------
"Finished" Lot: $26,483
Terms: All Cash
Time on Market: 18 Months
Escrow Period: 5 months
Zoning: R-1,Victorville
Approvals: Tentative Map
Use: 1,686 SFD'S
Typical Pad: 7,200 SF Pads
Topography: Level
Utilities: All are to the site area
Views: None
Verification: Will Pruett at Odonnel Atkins In Newport Beach
(714)-966-1394
</TABLE>
-64-
<PAGE>
<TABLE>
<CAPTION>
SALE NO. 6
- ----------
<S> <C>
Location: East of Amethyst Road, West of El Evado Road, North of
Seneca Road, South of Mojave Drive
Victorville, CA
Grantor/Seller: TMP Inland-Empire
Grantee/Buyer: Stowe Communities
Sale Date: October 28, 1997
Document No.: 97-394135
Tract No. or Legal: APN# 0394-101-31,32,35,36,37,38,39
Sale Price
- ----------
"As-Is" Per Lot: $ 2,400
Finishing Costs: $25,000
-------
"Finished" Lot: $27,400
Terms: All Cash
Time on Market: 12 Months
Escrow Period: 5 Months
Zoning: R-1,Victorville
Approvals: Tentative Map
Use: 440 SFD'S
Typical Pad: 7,200 SF Pads
Topography: Level
Utilities: All are to the site area
Views: None
Verification: Will Pruett at Odonnel Atkins In Newport Beach
(714)-966-1394
</TABLE>
-65-
<PAGE>
DISCUSSION OF THE COMPARABLES-
MARCH 1998 DATE OF VALUE
- ----------
SALE NO. 1 was an arms-length transaction and is similar relative to date of
sale. However, it has an inferior secondary location in Palmdale which has
less desirable residential attributes, and an upward adjustment is therefore
applied. Due to its smaller typical pad sizes and inferior views, further
upward adjustments are indicated for these factors, respectively. However, a
downward adjustment is made due to its superior (level) topography.
SALE NO. 2 was also an arms-length transaction and is similar relative to date
of sale. However, it too has an inferior secondary location in Palmdale, and an
upward adjustment is therefore applied. Due to its smaller pad size and
inferior views, further upward adjustments are made. A downward adjustment is
necessary due to superior topography.
SALE NO. 3 was an arms-length transaction. However, it has an older date of
sale with market conditions having slightly improved and as such, a slight
upward adjustment is therefore initially applied. Due to its inferior location
in Lancaster, a further upward adjustment is warranted. Further upward
adjustments are necessary due to smaller pad size and inferior views,
respectively. However, a downward adjustment is made due to superior
topography.
SALE NO. 4 was an arms-length transaction. However, it too has an older date of
sale and an upward adjustment is therefore indicated. Due to its inferior
location in Lancaster, a further upward adjustment is made. Further upward
adjustments are necessary due to smaller pad size and inferior views. A
downward adjustment is made for superior topography.
SALE NO. 5 was an arms-length transaction and is similar in regards to date of
sale. However, it has an inferior secondary location in Victorville and an
upward adjustment is therefore applied. Further upward adjustments are
necessary due to smaller typical pad size and inferior views. However, a
downward adjustment is made for topography.
SALE NO. 6 was also an arms-length transaction, and is fairly similar in regards
to date of sale. However, it has an inferior location in Victorville and an
upward adjustment is made. Further upward adjustments are necessary due to its
smaller pad size and inferior views. A downward adjustment is necessary due to
this property's superior (level) topography.
The adjustment grid presented on the following page summarizes the noted
adjustments for each sale.
-66-
<PAGE>
MARCH 1998
ADJUSTMENT GRIDS
"AS IS-GRID"
<TABLE>
<CAPTION>
SALE NO.: 1 2 3 4 5 6
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
AS-IS/$: $3,738 $3,738 $1,983 $4,000 $1,483 $2,400
CONDITION: 0% 0% 0% 0% 0% 0%
ADJ. VALUE: $3,738 $3,738 $1,983 $4,000 $1,483 $2,400
DATE: 0% 0% +5% +3% 0% +2%
ADJ. VALUE: $3,738 $3,738 $2,082 $4,120 $1,483 $2,448
LOCATION: +10% +10% +15% +15% +25% +25%
PAD SIZE: +20% +20% +20% +20% +20% +20%
TOPO: -10% -10% -10% -10% -10% -10%
VIEWS: +12% +12% +17% +15% +12% +12%
------ ------ ------ ------ ------ ------
NET ADJ.: +32% +32% +42% +40% +47% +47%
FINAL
VALUE: $4,934 $4,934 $2,957 $5,768 $2,180 $3,599
</TABLE>
"FINISHED LOT-GRID"
<TABLE>
<CAPTION>
SALE NO.: 1 2 3 4 5 6
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
FINISHED/$: $29,000 $29,000 $20,000 $25,000 $26,483 $27,400
CONDITION: 0% 0% 0% 0% 0% 0%
ADJ. VALUE: $29,000 $29,000 $20,000 $25,000 $26,483 $27,400
DATE: 0% 0% +5% +3% 0% +2%
ADJ. VALUE: $29,000 $29,000 $21,000 $25,750 $26,483 $27,948
LOCATION: +10% +10% +15% +15% +25% +25%
PAD SIZE: +20% +20% +20% +20% +20% +20%
TOPO: 0% 0% 0% 0% 0% 0%
VIEWS: +12% +12% +17% +15% +12% +12%
------- ------- ------- ------- ------- -------
NET ADJ.: +42% +42% +52% +50% +57% +57%
FINAL
VALUE: $41,180 $41,180 $31,920 $38,625 $41,578 $43,878
</TABLE>
-67-
<PAGE>
MARCH 1998 "AS IS" VALUE CONCLUSION
- -----------------------------------
The sales ranged from $1,483 to $4,000 per lot before adjustments. After having
made adjustments, the indicated range is from $2,180 to $5,768 per lot. Based
on an analysis of all the data, but with primary emphasis placed on Data Nos.1
and 4 due to their fairly similar characteristics, we have reasonably concluded
to a unit value of $5,000 per lot in bulk for the 539 subject lots. Utilizing
the $5,000 conclusion, we have estimated value as follows:
$5,000 X 539 LOTS = $2,700,000
MARCH 1998 "FINISHED LOT" VALUE CONCLUSION
- ------------------------------------------
The sales ranged from $20,000 to $29,000 per lot before adjustments. After
having made adjustments, the indicated range is from $31,920 to $43,878 per lot.
Based on an analysis of all the data, and again with primary emphasis placed on
Data Nos. 1 and 4 due to their fairly similar characteristics, we reasonably
have concluded to a unit value of $40,000 per lot in bulk for the 539 subject
lots. Utilizing the $40,000 conclusion, we have estimated value as follows:
$40,000 X 539 LOTS = $21,560,000
PROFITABILITY TEST
In order to test the profitability of the concluded value to the home price, we
will conduct a brief cash flow analysis.+
Based on the subject's proposed average housing unit size estimated to be
approximately 2,500 SF and utilizing an estimated construction cost factor of
$40 per square foot of building area, the resulting unit cost is $100,000 (2,500
SF x $40/SF). Adding this figure to the finished lot value conclusion of
$40,000 equates to a total unit cost of $140,000 ($100,000 + $40,000).
Multiplying this by a industry profit & cost factor of 1.45, which takes into
account expenses of sales, holding costs, developer's profit at 10% and the
risk/time value of money associated with extended sell-out period of the
venture, equates to an estimated base home price of $203,000 ($140,000 x 1.45).
Overall, this analysis lends secondary value support as to the finished lot
conclusion of $40,000, since it supports the subject's forecast home price of
$200,000.
-68-
<PAGE>
VALUATION
Based on the investigations undertaken, the analyses made, and on our experience
as a real estate analysts and appraisers, we have formed the opinions, and
subject to the Assumptions and Limiting Conditions set forth in the report which
follows, the subject property has market value estimates as follows:
"AS-IS" MARKET VALUE, AS OF OCTOBER 8, 1993
FIVE MILLION THREE HUNDRED NINETY THOUSAND DOLLARS
$5,390,000
"FINISHED LOT" MARKET VALUE AS OF OCTOBER 8, 1993
TWENTY FOUR MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS
$24,250,000
"AS-IS" MARKET VALUE, AS OF MARCH 31, 1998
TWO MILLION SEVEN HUNDRED THOUSAND DOLLARS
$2,700,000
"FINISHED LOT" MARKET VALUE, AS OF MARCH 31, 1998
TWENTY ONE MILLION FIVE HUNDRED SIXTY THOUSAND DOLLARS
$21,560,000
EXPOSURE PERIOD
- ---------------
Our research regarding the current exposure period for the subject property
consisted of an analysis of the submitted sale comparables and interviews with
area real estate brokers. The surveyed sales were found to range from 1-to-24
months. A review of additional sale data has indicated ranges typically at the
10-to-12 month level.
Based upon this research, we have concluded to a exposure period of 10-to-12
months for the subject, which is the same as its Marketing Period.
DISCUSSION OF THE CONCLUDED VALUES
- ----------------------------------
The subject's current value is significantly lower than its historic value.
Although the region's economy has improved over the past several years, and
although real estate prices in most Southern
-69-
<PAGE>
California markets have increased, real estate prices within the subject's
Antelope Valley area have not responded yet to the improved economy. This is
evidenced by the Sale Comparables submitted for analysis within this report.
Factors creating this trend include the Antelope Valley area being a secondary
location within the Los Angeles Basin. The Antelope Valley area is a relatively
remote location as compared with most other sub-regions within the basin, and is
situated relatively far from the region's CBD, as well as other major employment
centers. Additionally, the area proposes physical challenges due to its hot, dry
desert climate with summer month temperatures frequently exceeding 100 degrees.
As the economy has improved over the past 3 years, there has been a population
trend towards more centrally located markets where higher paying jobs are
provided. It is these factors combined, which have held down real estate prices
within the subject's market.
In conclusion, relative to more centrally located real estate markets, which
have appreciated over the past 6-to-24 months, the subject is situated within a
secondary market where prices have remained soft. This holds particularly true
for vacant land, of which there is an abundance in the high desert region.
However, the current forecast is that of increasing prices within the subject's
market area.
-70-
<PAGE>
ADDENDA
<PAGE>
TITLE REPORT
<PAGE>
SITE COSTS
<PAGE>
QUALIFICATIONS OF APPRAISERS
<PAGE>
QUALIFICATIONS OF
DAVID J. LIKAS, MAI
PROFESSIONAL BACKGROUND
-----------------------
Actively engaged in the real estate profession since 1983. Principal of Likas &
Associates, a real estate appraisal firm with offices located at:
20101 SW BIRCH STREET, SUITE 150B
NEWPORT BEACH, CA 92660
Before starting Likas & Associates, Mr. Likas was employed as Senior Appraiser
at Pacific Real Estate Consultants, Newport Beach, California. Prior to that,
was employed as associate appraiser with Joseph J. Blake and Associates, San
Francisco, California. Additional real estate experience includes three years
of mortgage banking with Citicorp Savings and First Interstate Mortgage Company,
Orange County, California.
PROFESSIONAL AFFILIATIONS
-------------------------
Member of the Appraisal Institute, with MAI designation (No. 8807).
<PAGE>
LICENSES
--------
Certified General Real Estate Appraiser, State of California Office of Real
Estate Appraisers (No. AG003694).
EDUCATIONAL ACTIVITIES
----------------------
University of Southern California, Los Angeles, California. B.S., Business
Administration, 1983.
Courses sponsored by the Appraisal Institute:
Course 1A-1 Real Estate Appraisal Principals
Course 1A-2 Basic Valuation Procedures
Course 1B-A Capitalization Theory and Techniques, Part A
Course 1B-B Capitalization Theory and Techniques, Part B
Course 2-1 Case Studies in Real Estate Valuation
Course 2-2 Valuation Analysis and Report Writing
Course S-PP Standards of Professional Practice
Numerous seminars and courses on real estate appraisal and other related topics
on a continuing basis.
<PAGE>
SCOPE OF EXPERIENCE
VACANT LAND
Single-family residential sites, multi-family residential sites, commercial and
industrial sites, acreage, master planned communities.
RESIDENTIAL
Residential subdivisions, single-family residences, apartments, condominiums,
planned unit developments.
COMMERCIAL
Shopping centers, retail stores, general office buildings, medical office
buildings, office and retail condominiums, car dealerships.
INDUSTRIAL
Single and multi-tenant warehouses and manufacturing buildings, distribution
buildings, business parks, R & D buildings, mini- warehouses.
SPECIAL PURPOSES
Hotels, master planned communities, dormitories, senior housing facilities,
bowling alleys, health clubs, marinas, timeshares, restaurants, theaters,
churches, schools, mixed-use developments, and condemnation appraisals.
<PAGE>
QUALIFICATIONS OF NOBLE R.TUCKER JR., SRA
-----------------------------------------
EXPERIENCE
- ----------
Mr.Tucker is an independent fee appraiser. He has extensive experience in
appraisal and consulting projects consisting of investment-quality office
buildings, shopping centers, industrial planned communities, residential
subdivisions, multi-family housing, single family homes, and vacant land
throughout the Southwestern United States. Mr. Tucker is also an expert in
the valuation of businesses.
Mr.Tucker has performed valuations on proposed, partially completed,
renovated, and existing structures. Mr. Tucker has qualified as an expert
witness before various judicial and quasi-judicial bodies and has testified
in Superior Court, Bankruptcy Court, and Municipal Court, on matters
involving real estate in civil cases.
A large portion of Mr. Tucker's real estate appraisal practice involves
real estate and business consulting. Mr. Tucker also assists clients in
attaining real estate and business related financing through debt
offerings. In addition he assists clients in equity financing through
public offerings and private placements, debt offerings, loans, mergers
acquisitions and divestitures, accounts receivable financing, factoring,
lease/buy-back financing, real estate portfolio sales assistance. Mr.
Tucker has been involved in negotiations regarding real estate portfolios
in excess of $125,000,000.
PREVIOUS EXPERIENCE
- -------------------
Prior to working for Likas and Associates, Mr. Tucker was Chief Appraiser
at Traditional Mortgage in Woodland Hills, California. Duties included
overseeing major loan appraisals on apartments and high dollar single
family residences (1984-1985).
From 1980-1996 Mr.Tucker was an independent fee appraiser working for firms
such as Steve Smith and Associates in Canoga Park, Kennedy Appraisal
Service in Los Angeles, Chua Bailey and Associates in Glendale, Southland
Appraisal Services in Anaheim, Lenders Technology Service in Santa Ana,
Lenders Service in Pittsburgh, and several other firms.
Prior to working the Real Estate Appraisal Profession Mr.Tucker was
involved in the construction industry. From 1975 to 1980 duties included
project management, sales, job-site supervision, and construction
superintendent.
PROFESSIONAL ASSOCIATIONS
- -------------------------
S.R.A. Designated member of The Appraisal Institute. Designated in August
of 1991 Member #549981735.
PROFESSIONAL AFFILIATIONS
- -------------------------
MAI CANDIDATE with The Appraisal Institute.
STATE LICENSES/CERTIFICATIONS
- -----------------------------
CERTIFIED GENERAL REAL ESTATE APPRAISER with the State of California. This
allows Mr. Tucker to appraise any type of property (within his
capabilities) within the State of California. License Number AG001532.
Expires January 31, 2001.
EDUCATION
- ---------
Western Illinois University, Board of Governors Bachelor of Arts Degree
<PAGE>
COURT EXPERIENCE/EXPERT WITNESS TESTIMONY
- -----------------------------------------
Mr. Tucker has testified as an expert witness numerous times over the past
15 years. He has testified in Superior Court, Bankruptcy court, and
testified at Fair Value hearings in Los Angeles County, Orange County,
Riverside County, San Diego County, Ventura County, and San Bernardino
County. In addition to expert witness testimony Mr. Tucker has been hired
as an arbitrator to resolve real estate disputes between parties.
APPRAISAL COURSES SUCCESSFULLY COMPLETED-THE APPRAISAL INSTITUTE
- -----------------------------------------------------------------
1) Capitalization Theory and Techniques Part A/Course 1ba
The Appraisal Institute-The Conference Center in San Diego (October 31
to November 09, 1991)
2) Capitalization Theory and Techniques Part B/Course 1bb
The Appraisal Institute-The Conference Center in San Diego (November
14, to November 23, 1991)
3) Principals of Income Property Appraising/Course 201
The Appraisal Institute-Glendale College of Law (April 09 to June 25,
1988)
4) Standards of Professional Practice part A/Course SPPA
The Appraisal Institute-San Diego Chapter(May 10 to May 11, 1991)
5) Standards of Professional Practice part b/Course SPPB
The Appraisal Institute-San Diego Chapter (May 17 to May 18, 1991)
6) Real Estate Appraisal Principles/Course 1a1
The Appraisal Institute-University of Southern California (January 04
to February 08, 1986)
7) Residential Valuation/Course 8-2
The Appraisal Institute-University of Southern California (June 16 to
June 22, 1985)
8) Standards of Professional Practice/Course 2-3-Southern California
Chapter (July 14 to July 17, 1985)The Appraisal Institute
9) Basic Valuation Procedures/Course 1a2
The Appraisal Institute-Biola University (August 01 to September 19,
1987)
10) Report Writing and Valuation Analysis Course 540
The Appraisal Institute-Orange County Chapter (September 01 through
September 09, 1994)
11) Advanced Applications Course 550
The Appraisal Institute-Pepperdine University (November 10 through
November 19, 1994)
12) Course 120-Basic Income Capitalization
The Appraisal Institute-University of San Diego June 08 through June
16, 1995)
13) Case Studies in Real Estate Valuation
The Appraisal Institute-Glendale College of Law (June 1-9 1984)
14) Standards of Professional Appraisal Practice Part A and B-University
of San Diego (June 1996)
15) Advanced Income Approach-Southern California Chapter May-June 1997,
Tustin, California
16) Highest and Best Use and Market Analysis, Course 520, Montrose
California August 1997
SEMINARS ATTENDED:
- ------------------
<PAGE>
1) State License Preparation-Certified General Appraiser
2) State License Preparation-Certified Residential Appraiser
3) California OREA License Seminar (1996)
4) Demonstration Appraisal Report-Non Income Producing Property.
5) Demonstration Appraisal Report--Income Producing Properties.
6) Valuation of Leasehold Interests
7) HP 12/C Seminar
8) Easement Valuation
9) The Appraisers Complete Review Seminar
10) Legal Workshop
11) Business Valuation
12) Personal Property Valuation
UNIVERSITY REAL ESTATE COURSES SUCCESSFULLY COMPLETED
- -----------------------------------------------------
1) Real Estate Foundation
2) Residential Appraisal
3) Selected Topics in Real Estate-Nursing Homes
4) Selected Topics in Real Estate-Gasoline Service Stations
5) Selected Topics in Real Estate-Residential Subdivisions
6) Selected Topics in Real Estate-R.V. Resorts
7) Contemporary Issues in Real Estate
8) Income Property Appraising
9) Advanced Real Estate Evaluation
10) Real Estate Law Portfolio
11) Land Development Regulations
12) Report Writing
13) Land Development Regulations
14) Computer Applications in Real Estate Analysis
15) Residential Property Development
16) Real Estate Property Management
17) Real Estate Finance
18) Narrative Report Writing
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
APPRAISAL REPORT
CYPRESS LAKES -
A PROPOSED RESIDENTIAL COMMUNITY WITH GOLF COURSE
CONTRA COSTA COUNTY,
CALIFORNIA
PREPARED FOR:
NATIONAL INVESTORS FINANCIAL INC
DATE OF APPRAISAL: MARCH 31, 1998
DATE OF REPORT: APRIL 30, 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics San Francisco
Los Angeles
Principals:
Elizabeth C. Allen
Alan C. Billingsley, CRE
April 30, 1998 Carol A. Fredholm
Amy L. Herman, AICP
Mr. Mark K. Kawanami Kathryn Welch Howe
National Investors Financial, Inc. Terry R. Margerum
4220 Von Karman Avenue, Suite 110 Naomi E. Porat
Newport Beach, CA 92660 Roy J. Schneiderman
Lynn M. Sedway, CRE
RE: APPRAISAL OF CYPRESS LAKES AS OF MARCH 31, 1998
Dear Mr. Kawanami:
We have prepared the accompanying appraisal of the property known as Cypress
Lakes located near Oakley, in unincorporated Contra Costa County, California.
The site consists of approximately 686 acres of unimproved land. The Cypress
Lakes project received a vesting tentative map April 15, 1993. The development
rights granted by the vesting tentative map included 1,330 single-family
residential lots; an 18-hole golf course, clubhouse, and ancillary service
buildings; tennis courts; swimming pools; lakes and channels; parks; wetlands; a
school; and a fire station. The existing approvals are scheduled to expire on
April 15, 1999.
Subsequent to the 1993 approval of the project's tentative map, the developer
experienced financial difficulties and the project did not move forward. On July
25, 1995, the land was foreclosed upon by the lender, National Investors
Financial, Inc. The purpose of this appraisal is to estimate the as-is market
value of the property as of March 31,1998, in order to assign a value to the
property for financial reporting.
Much of the information about the project upon which our analysis relied was
prepared by a previous owner in 1991 and 1992. Most of this material has not
been updated since the early 1990s. In particular, no additional refinement has
been performed regarding the development costs related to Cypress Lakes. Our
analysis is based upon the cost estimates from the early 1990s, adjusted for
inflation to 1998 figures, and adjusted for a cost contingency. Due to the
significance of the development costs involved, the results of our current
appraisal are very sensitive to this cost assumption. Even modest changes in the
development costs attributed to the property would have a dramatic impact on the
value of the property.
As a result of our investigations and analysis, fully described in the
accompanying report, it is our opinion that the fee-simple value of the subject
as of March 31, 1998, subject to the assumptions and limiting conditions
contained in the report, is estimated to be:
$6,000,000
(SIX MILLION DOLLARS)
This value is based upon the economics of developing Cypress Lakes pursuant to
the entitlements granted in the April 1993 vesting tentative map, which is set
to expire on April 15, 1999. The economic value of the property is primarily
related to the economics of the rights to build 1,330 homes and the golf course.
The rights and requirements to build tennis courts; swimming pools; lakes and
channels; parks; wetlands; a school; and a fire station are considered to add
value only through 1) making the lots and golf course more attractive, or 2)
facilitating the final approval of the lots and golf courses.
Three Embarcadero Center, Suite 1150 San Francisco, CA 94111 415.781.8900
Fax 415.781.8118 [email protected]
<PAGE>
SEDWAY GROUP Mr. Mark Kawanami
Real Estate and Urban Economics April 30, 1998
Page 2
The value conclusion represents approximately $8,746 per acre over the entire
686 acres. Thus, based upon this value per acre, a value of approximately
$1,000,000 could be allocated to the 170 acres dedicated to the golf course.
However, a lower value for the golf course is indicated based solely upon the
economics of the golf course. This arises in part because the primary benefit to
the project of developing the golf course is the premiums that accrue to the
lots with direct access to and view of the golf course rather than the cash flow
that can be directly attributed to the course.
We appreciate this opportunity to be of assistance to National Investors
Financial and look forward to the possibility of working together again in the
future.
Very truly yours,
/s/ Roy J. Schneiderman /s/ Jay Harper, MAI
Roy J. Schneiderman Jay Harper, MAI
Principal
/s/ Clifford J. Dowd
Clifford J. Dowd
Associate
RJS:JH:CJD/nam
Enclosures
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
TABLE OF CONTENTS
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<S> <C> <C>
I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Identification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Purpose, Intended Use, and Intended User of the Appraisal . . . . . . . 1
Scope of the Appraisal. . . . . . . . . . . . . . . . . . . . . . . . . 1
Date of Value Estimates and Date of the Report. . . . . . . . . . . . . 2
Dates of Property Inspection. . . . . . . . . . . . . . . . . . . . . . 2
Property Rights Appraised . . . . . . . . . . . . . . . . . . . . . . . 2
Market Value Defined. . . . . . . . . . . . . . . . . . . . . . . . . . 2
II. AREA AND MARKET ANALYSIS. . . . . . . . . . . . . . . . . . . . . . . . 4
Contra Costa County Overview. . . . . . . . . . . . . . . . . . . . . . 4
Regional Demographics . . . . . . . . . . . . . . . . . . . . . . . . . 6
Growth Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Residential Market. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Conclusions Affecting Value . . . . . . . . . . . . . . . . . . . . . . 16
III. SITE DESCRIPTION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . 18
Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Surrounding Environs. . . . . . . . . . . . . . . . . . . . . . . . . . 18
Soils and Geology . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Legal Description . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Ownership History . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Assessed Value and Property Taxes . . . . . . . . . . . . . . . . . . . 19
Easements and Encumbrances. . . . . . . . . . . . . . . . . . . . . . . 20
Hazards of the Area . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Utilities, Services, and Off-Site Improvements. . . . . . . . . . . . . 21
General Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Proposed Residential Development. . . . . . . . . . . . . . . . . . . . 22
IV. HIGHEST AND BEST USE ANALYSIS . . . . . . . . . . . . . . . . . . . . . 24
Physically Possible . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Legally Allowable . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Financially Feasible. . . . . . . . . . . . . . . . . . . . . . . . . . 24
Highest Return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
V. VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Sales Comparison Approach . . . . . . . . . . . . . . . . . . . . . . . 26
Subdivision Development Approach. . . . . . . . . . . . . . . . . . . . 33
Reconciliation of Value . . . . . . . . . . . . . . . . . . . . . . . . 52
</TABLE>
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
LIST OF EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit 1: Regional Map . . . . . . . . . . . . . . . . . . . . . . . . 5
Exhibit 2: 1980-2005 Demographics, Contra Costa County. . . . . . . . . 8
Exhibit 3: Market Area. . . . . . . . . . . . . . . . . . . . . . . . . 10
Exhibit 4: Comparable Paper Lot Sales Summary Grid: Eastern Contra
Costa County . . . . . . . . . . . . . . . . . . . . . . . . 28
Exhibit 5: Paper Lot Sales. . . . . . . . . . . . . . . . . . . . . . . 29
Exhibit 6: Comparable Paper Lot Sales Adjustment Grid, Eastern Contra
Costa County . . . . . . . . . . . . . . . . . . . . . . . . 30
Exhibit 7: Single Finished Lot Comparables, Summary and Adjustment
Grid . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Exhibit 8: Lot Price Indication - 30% of Home Price Allocation Method . 38
Exhibit 9: Analysis of Historical Premiums, Comparable Subdivisions,
Bay Area . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Exhibit 10: Analysis of Current Premiums, Comparable Subdivisions, Bay
Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Exhibit 11: Neighborhood Mix and Pricing . . . . . . . . . . . . . . . . 44
Exhibit 12: Comparable Golf Courses in Market Area . . . . . . . . . . . 47
Exhibit 13: Comparable Golf Course Sales . . . . . . . . . . . . . . . . 48
Exhibit 14: Construction Cost by Phase . . . . . . . . . . . . . . . . . 50
Exhibit 15: Summary of Costs and Revenues and Estimated Residual Land
Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
</TABLE>
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
LIST OF ADDENDA
Addendum A: Assumptions and Standard Limiting Conditions
Addendum B: Certification of the Appraisers
Addendum C: Qualifications of Appraisers
Addendum D: Title Report and Plant Information Guarantee
Addendum E: Assessor, Site, Geotechnical, and Urban Limit Line Maps
Addendum F: Cashflow Detail and Assumption Sheets
Addendum G: 1995 Currently Selling Single-family Home Programs and Historical
Residential Permit Activity
Addendum H: Chartered Land & Cattle Original Cost Estimates and Production Plan
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
Ownership: National Investors Financial, Inc.
Site Location: East of the convergence of Cypress Road and Bethel
Island Road in unincorporated Contra Costa County,
approximately 3 miles east of the unincorporated
Town of Oakley.
Assessor's Parcel Numbers: 032-210-029; 032-220-007, 008, 012, 026
Purpose of Appraisal: Estimate "as is" fair market value of the property
as of March 31, 1998.
Function of Appraisal: Financial reporting.
Property Rights Appraised: Fee simple interest.
Appraisal Date: March 31, 1998
Report Date: April 30, 1998
Property Size/Description: Approximately 686 acres of generally flat land.
Surrounding Land Uses: North and East: Dutch Slough, Sand Mound
Slough, Bethel Island, a
trailer park, homes and
agricultural accessory
buildings.
South and West: Agricultural land and open
space.
Highest and Best Use: Residential golf course community.
Improvements: None
General Plan/Zoning: P1 - Planned Unit Development.
Entitlements: Vesting tentative map expiring April 15, 1999
(including extensions).
<TABLE>
<CAPTION>
Proposed Uses: Use Acres %
--- ----- -----
<S> <C> <C> <C>
Residential Areas 246.1 35.9
Golf Course 170.3 24.8
Roads 74.5 10.9
Levee/Access Road 63.6 9.3
Lakes/Channels 61.0 8.9
</TABLE>
CYPRESS LAKES 1998 APPRAISAL APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
<TABLE>
<CAPTION>
Proposed Uses (cont.): Use Acres %
--- ----- -----
<S> <C> <C> <C>
Public Parks 26.6 3.9
Open Space 23.2 3.4
Wetlands 8.8 1.3
School 7.4 1.1
Beach Club/Day
Care Center 2.4 0.3
Fire Station 2.0 0.3
----- ------
685.9 100.0%
</TABLE>
Development Plans: Construction of 1,330 single-family finished lots;
18-hole golf course; clubhouse; and tennis courts.
The residential lots are divided into the
following neighborhoods:
<TABLE>
<CAPTION>
Average Lot
Neighborhood No. of Lots Size (sq.ft.)
------------ ----------- -------------
<S> <C> <C> <C>
1 24 8,000
2 41 9,600
3 109 5,000/6,000
4 55 9,600
5 41 10,000/12,000
6 63 6,000+
7 91 7,000+
8 61 8,000
9 39 6,000
10 19 10,000
11 52 5,000/6,000
12 35 5,000/6,000
13 58 5,000
14 63 8,500
15 67 5,000
16 44 5,000
17 68 6,000
18 50 6,500
19 41 6,500
20 39 6,500
21 19 8,500+
22 19 8,500+
23 133 5,000
24 99 5,000
----- -----
Weighted
Total 1,330 Average 6,531
</TABLE>
CYPRESS LAKES 1998 APPRAISAL APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
Sales Comparison Approach: $6,100,000
Development Approach: $6,000,000
Estimated Market Value
as of March 31, 1998: $6,000,000
Note: This value is based upon the economics of developing Cypress Lakes
pursuant to the entitlements granted in the April 1993 vesting tentative map.
This conclusion is dependent upon the cost estimates from the early 1990s, and
the results of our appraisal are very sensitive to this assumption. Even modest
changes in the development costs attributed to the property would have a
dramatic impact on the value of the property. The reasonable accuracy of the
Chartered Land & Cattle cost estimates is an assumption of our report. As
instructed by National Investors Financial, Inc., we have also assumed that
delinquent property taxes of approximately $168,000 are paid off; therefore
these unpaid taxes do not cause any changes to the concluded value. Special
condition number 1 of Addendum A further explains treatment of the delinquent
taxes.
CYPRESS LAKES 1998 APPRAISAL APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
I. INTRODUCTION.
IDENTIFICATION
The subject is a proposed master-planned residential golf course community
known as Cypress Lakes & Country Club ("Cypress Lakes"). It is located near
Oakley in unincorporated eastern Contra Costa County, California. The subject
site includes a total of approximately 686 acres, and is planned for the
construction of 1,330 finished lots, an 18-hole golf course with clubhouse
and ancillary service building, tennis courts and swimming pools, a lake and
tributary channels, a school, a fire station, parks, and wetlands. The
subject received vesting tentative map approval on April 15, 1993. The
subject property received a P-1 rezoning on May 18 1993. Its prior zoning was
A-2 with an off-island density bonus.
PURPOSE, INTENDED USE, AND INTENDED USER OF THE APPRAISAL
The purpose of the appraisal is to estimate the market value of the subject
property as of March 31, 1998. The intended use of the appraisal is to assist
in an audit of National Investors Financial, Inc., to register under the
Security Act with the Securities and Exchange Commission, and to provide
necessary information for the offering circular that will be distributed to
investors. However, this appraisal report, including any cash flow forecasts,
market data, other information, conclusions, exhibits, and supporting
documentation, may not be reproduced. References may not be made to the
report, Sedway Group, or any of the individuals signing the report in any
sale offering, prospectus, public or private placement memorandum, proxy
statement, or other document in connection with a merger, liquidation, or
other corporate financing transaction, unless Sedway Group has approved in
writing the text of such reference or reproduction prior to the distribution
and filing thereof.
SCOPE OF THE APPRAISAL
The general scope of the work undertaken for this project is based on the
purpose and intended use of the appraisal. Sedway Group has completed the
following steps as part of the appraisal process in order to fulfill the
purpose of the appraisal assignment:
1. Inspect the subject site and analyze its utility and basic market
potential.
2. Inspect the subject neighborhood.
3. Research sales of comparable residential land, residential lots, and golf
courses. Research the eastern Contra Costa County residential market,
including market trends and competitive residential projects. Data sources
and verification include Comps Inc., Experian, Anthony Hurt & Associates,
County Assessor's offices, brokers active in eastern Contra Costa County,
and individual buyers and sellers.
4. Inspect the comparable land sales and view the exteriors of competitive
projects. Attempts were also made to verify every comparable sale used in
the report.
5. Contact personnel at Contra Costa County and various public agencies
regarding fees, proposed developments and other site and project issues.
6. Contact planning personnel at cities within the market area regarding
proposed and approved developments that may be competitive.
CYPRESS LAKES 1998 APPRAISAL 1 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
7. Review historical data regarding the project's plans, history, entitlement
status, infrastructure issues, development costs, etc.
8. Estimate the market value of the subject as residential development land.
This scenario employs the sales comparison and subdivision development
approaches.
Documents reviewed during the course of the appraisal include the site plans
prepared by Bohley/Maley Associates, project engineers, located in San Mateo,
California; site cost estimates provided by Chartered Land & Cattle Company;
a geotechnical report prepared by Kleinfelder in Stockton, California; and a
plant information guarantee report (to track ownership history) prepared in
1998. Secondary sources of data compiled include the Association of Bay Area
Governments; Comps, Inc. and Experian, on-line computer data services; and
various city and county planning and assessor's offices. Other research for
the appraisals included extensive discussions with local real estate brokers,
developers, public officials, lenders, appraisers, and other experts in the
local residential and recreational real estate market, as well as reference
to data on file at Sedway Group.
DATE OF VALUE ESTIMATES AND DATE OF THE REPORT
The value estimate is as of March 31, 1998. The date of the report is April
30, 1998.
DATES OF PROPERTY INSPECTION
The subject property was inspected on March 3, 1998, by Roy J. Schneiderman;
Alan C. Billingsley; Jay Harper, MAI; and Clifford J. Dowd. Clifford J. Dowd
made an additional inspection on April 1, 1998.
PROPERTY RIGHTS APPRAISED
The appraisal estimates the fee simple market value of the subject, which is
defined as:
An absolute ownership unencumbered by any other interest or
estate, subject only to the limitations imposed by the
governmental powers of taxation, eminent domain, police
power, and escheat. (1)
MARKET VALUE DEFINED
"Market Value" is defined as follows:
The most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming
the price is not affected by undue stimulus. Implicit in this
- --------------
(1) Appraisal Institute, THE APPRAISAL OF REAL ESTATE, 10th Ed.
(Chicago Ill.: Appraisal Institute, 1992, p. 122).
CYPRESS LAKES 1998 APPRAISAL 2 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
definition is the consummation of a sale as of a specified date and
the passing of title from seller to buyer under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and
acting in what they consider their own best interests;
3. A reasonable time is allowed for exposure in the open
market;
4. Payment is made in terms of cash in U.S. dollars or in
terms of financial arrangements comparable thereto; and
5. The price represents the normal consideration for the
property sold unaffected by special or creative
financing or sales concessions granted by anyone
associated with the sale.(2)
- --------------
(2) The Appraisal Foundation, Uniform Standards of Professional
Appraisal Practice , 1995 Ed. (Washington D.C.: The Appraisal Foundation,
1995, Definitions).
CYPRESS LAKES 1998 APPRAISAL 3 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
II. AREA AND MARKET ANALYSIS.
The subject property is located in the northeastern portion of Contra Costa
County, which itself is in the northeastern portion of the Bay Area. The
characteristics of the western portion of the county are primarily suburban
residential, while the eastern portion is more agricultural, transitioning
into suburban use as growth pressures push residents further and further from
the urban cores of San Francisco and Oakland. For this reason, the eastern
portions of Contra Costa County more closely resemble the western portions of
the adjacent Central Valley county of San Joaquin than they resemble the
built-out suburban communities such as Pleasant Hill, Walnut Creek, and
Lafayette in central and western Contra Costa County.
Downtown Oakland and San Francisco, two major employment centers, are located
approximately 40 and 50 miles, respectively, southwest of the subject.
Throughout the 1980s and 1990s, the importance of San Francisco and Oakland
has diminished as subregional employment centers have sprung up closer to the
subject property along Interstate 680. Downtown Walnut Creek and Concord are
only 20 to 25 miles from the Cypress Lakes site. However, traffic
considerations make the driving time to all of these locations quite
substantial during commute hours.
CONTRA COSTA COUNTY OVERVIEW
GEOGRAPHY
Contra Costa County's location along the northeastern shore of San Francisco
Bay, and on the southern shores of San Pablo and Suisun bays, provides it
with more than 65 miles of shoreline. Some recreation-oriented residential
developments in the county, including the well-known Discovery Bay, have
capitalized on the potential of this shoreline proximity. The county's
eastern boundary is the Delta, formed by the Sacramento and San Joaquin
rivers. The Delta provides a wide array of water-oriented recreation
opportunities for residents of nearby communities. Exhibit 1 on the following
page is a regional context map.
TOPOGRAPHY
Topographically, Contra Costa County can be divided into three distinct
areas. The West County area consists of marshlands, low-lying hills, and
valleys. This is the most established district of the county and includes
industrial development that extends into the North County area. The Central
County is separated from the West County area by a low-lying coastal mountain
range, largely composed of undeveloped rolling hills, much of which comprises
the East Bay Regional Park. The Central County is composed of several large
valleys and foothill areas leading to Mt. Diablo. The East County area,
divided by low-lying hills from the central portion of the county, is largely
gently rolling farmland and marshland areas. The Delta, a major watershed for
California, and the subject property are located in this area.
CYPRESS LAKES 1998 APPRAISAL 4 APRIL 1998
<PAGE>
EXHIBIT 1
REGIONAL MAP
[MAP]
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
TRANSPORTATION
Contra Costa County is linked to its neighboring counties by Bay Area
Rapid Transit (BART), four bridges, three tunnels, as well as several major
freeways, highways, and county roads. Interstate 80 follows the county's western
shoreline from El Cerrito to Crockett over the Carquinez Bridge and links with
Solano County and further on with Sacramento County. The Richmond-San Rafael
Bridge (Interstate 580) connects Contra Costa County to Marin County, to the
west. Interstate 680, which runs north-south through the Central County area,
connects with Alameda County to the south and over the Benicia-Martinez Bridge
to Solano County.
In East County, State Highway 4 provides the principal access to several
unincorporated communities and rural areas as well as intersecting with State
Route 160 (Antioch Bridge), which extends into the western Delta area of
Sacramento County. State Highway 4 extends to Stockton in San Joaquin County.
The Caldecott Tunnel (State Route 24) links the Central County area and the
suburban communities of Orinda, Lafayette, Pleasant Hill, Walnut Creek, Concord,
Alamo, Danville and San Ramon with Oakland in Alameda County, and eventually
with U.S. 80 and San Francisco. Interstate 680 (I-680) and State Route 24 are
the major arterials through the county.
BART has seven stations linking the county with the major employment
centers of Oakland and San Francisco. These stations extend as far northeast as
Pittsburg/Bay Point in Contra Costa County, approximately 15 miles from the
subject. There are plans for BART to be extended as far as Hillcrest Avenue in
Antioch by 2005, which would be within eight miles of Cypress Lakes.
The transportation systems, though generally functioning well, have in
the last several years become quite congested, especially during commute hours.
Eventually, this could impact desirability and growth in the area. Both CalTrans
and local governmental agencies are working to improve this network. Other major
improvements planned for the region include adding a second span to both the
Benicia-Martinez Bridge (George Miller Jr. Memorial Bridge) and the Carquinez
Bridge, easing the traffic flow between Contra Costa County and Napa and Solano
counties. These improvements were anticipated to be completed by 2000.
Further improvement of the transportation networks is also proposed to
include a new road, known as the Delta Expressway, to handle truck and regional
traffic that now uses the increasingly congested State Highway 4 to access
Pittsburg, Antioch, and Brentwood. This much-discussed expressway is anticipated
to be constructed 10 to 15 years into the future at the earliest.
REGIONAL DEMOGRAPHICS
COUNTY-WIDE STATISTICS AND TRENDS
Contra Costa County experienced significant growth between 1980, when
the population was 656,000 people, and 1990. The absolute increase reported by
the Census Bureau was 147,000 residents, or 22 percent growth. Comparing five
year periods from 1990 to 2005, annual population growth is expected to
accelerate, according to the Association of Bay Area Governments (ABAG). This
growth acceleration is reflective of the increasing lack of developable
residential land in the Bay Area, which will necessitate concentration of future
growth in undeveloped portions of Contra Costa County. Average annual growth
CYPRESS LAKES 1998 APPRAISAL 6 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
is expected to accelerate from 12,300 during the 1990-1995 period to 12,500
during 1995-2000, and 13,000 during 2000-2005. Thus, Contra Costa County
continued to grow even during the economic downturn that began in the early
1990s, and this growth is expected to accelerate under current positive
economic conditions. By the year 2000, ABAG projects a county population of
928,000.
Leading sources of personal income in the county traditionally were wholesale
and retail trade, services, manufacturing, and government. However, the 1970s
witnessed a major shift in the county's manufacturing mix. Agriculture, local
food processing firms, primary metal, and paper product firms decreased their
number of employees. However, the manufacturing employment slack was more
than offset by increased employment by electrical/electronics manufacturers,
printers and publishers.
Beginning in the late 1980s, the Central County (particularly the Walnut
Creek/Concord area along I-680) emerged as a regional financial/retail
center. This area extends from Martinez to San Ramon in Contra Costa County,
and to Pleasanton in Alameda County. The importance of the I-680 corridor has
continued to increase throughout the 1990s, creating a well-known subregional
employment center. Employee relocation by companies from Santa Clara County
and San Francisco to the East Bay stimulated this financial/retail build-up.
EAST COUNTY STATISTICS AND TRENDS
East County is roughly defined as the area extending from Concord/Clayton
past Pittsburg, Antioch, Brentwood, and into Oakley and other unincorporated
portions at the eastern-most part of the county. East County largely
comprises bedroom communities, as evidenced by its jobs/housing ratio of
0.89. Exhibit 2 presents additional data from ABAG concerning population and
household growth patterns.
Like Contra Costa County as a whole, East County population growth began to
slow through the early 1990s. While average annual growth was about 7,400
between 1985 and 1990, ABAG estimated that the period from 1990 to 1995
showed growth of only about 6,000 residents annually. Growth is expected to
accelerate to about 7,000 persons annually during 1995-2000 and further
accelerate to 7,700 persons annually during the 2000-2005 projection period.
In addition to accelerating population growth, statistics on income and job
counts for East County also indicate positive trends during the 1995-2000 and
2000-2005 periods. East County averaged annual growth of only 300 jobs during
the recessionary period from 1990-1995. In contrast, 1995-2000 is expected to
average annual growth of 3,700 jobs. As the economy stabilizes, job growth is
projected at 2,600 annually from 2000-2005. Similarly, average household
income (measured in constant 1995 dollars) grew only 4.2 percent during the
five-year period from 1990-1995. The period from 1995 to 2000 is expected to
show income growth of 12.8 percent, and the period from 2000-2005 is expected
to show growth of 8.2 percent.
Overall, East County continued to add jobs and housing even during the
recessionary early 1990s due to its relatively large amount of available land
and ability to offer affordable housing. Growth in East County is anticipated
to accelerate into the year 2000 and beyond as the rest of the Bay Area has
fewer and fewer parcels of developable land available, and East County land
becomes an increasingly important resource.
CYPRESS LAKES 1998 APPRAISAL 7 APRIL 1998
<PAGE>
EXHIBIT 2
1980-2005 DEMOGRAPHICS
CONTRA COSTA COUNTY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Projections Changes By Period
1980 1990 1995 2000 2005 1990-95 1995-00 2000-05
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
POPULATION Average Yearly Increments
------------------------------
ANTIOCH 44,195 63,062 74,900 86,900 97,800 2,368 2,400 2,180
BRENTWOOD 6,785 9,815 13,600 23,300 35,000 757 1,940 2,340
CLAYTON 7,154 7,894 9,800 11,200 12,200 381 280 200
CONCORD 106,102 112,741 115,500 118,000 119,600 552 500 320
PITTSBURG 43,843 65,230 68,000 71,500 76,800 554 700 1,060
RURAL EAST CC COUNTY 14,056 29,333 36,400 42,200 50,300 1,413 1,160 1,620
------ ------ ------ ------ ------ ----- ----- ------
TOTAL EAST COUNTY 222,135 288,075 318,200 353,100 391,700 6,025 6,980 7,720
TOTAL CC COUNTY 656,380 803,732 865,300 927,900 992,800 12,314 12,520 12,980
AVERAGE HOUSEHOLD INCOME (CONSTANT 1995 DOLLARS) Absolute Percent
------------------------------
ANTIOCH $47,453 $59,765 $63,200 $69,100 $75,400 5.7% 9.3% 9.1%
BRENTWOOD 46,389 54,446 55,400 70,200 71,300 1.8% 26.7% 1.6%
CLAYTON 74,836 87,820 89,300 100,800 105,600 1.7% 12.9% 4.8%
CONCORD 52,188 57,384 58,100 63,600 66,400 1.2% 9.5% 4.4%
PITTSBURG 40,528 48,587 50,000 53,300 57,000 2.9% 6.6% 6.9%
RURAL EAST CC COUNTY 47,308 65,631 73,300 82,200 97,800 11.7% 12.1% 19.0%
AVG EAST COUNTY AREAS $51,450 $62,272 $64,883 $73,200 $78,917 4.2% 12.8% 7.8%
AVERAGE CC COUNTY $57,200 $67,819 $70,700 $79,000 $85,500 4.2% 11.7% 8.2%
TOTAL JOBS (ALL SECTORS) Average Yearly Increments
------------------------------
ANTIOCH 8,522 13,680 13,870 18,590 21,800 38 944 642
BRENTWOOD 1,083 2,920 4,070 6,540 10,260 230 494 744
CLAYTON 472 1,000 960 1,140 1,230 -8 36 18
CONCORD 33,912 55,450 54,900 60,220 64,010 -110 1,064 758
PITTSBURG 9,164 15,900 16,130 20,890 22,600 46 952 342
RURAL EAST CC COUNTY 1,772 2,250 2,810 3,980 4,510 112 234 106
----- ----- ----- ----- -----
TOTAL EAST COUNTY 54,925 91,200 92,740 111,360 124,410 308 3,724 2,610
TOTAL CC COUNTY 201,237 303,830 298,420 339,150 370,100 -1,082 8,146 6,190
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Sources: ABAG Projections '98, Sedway Group.
<PAGE>
EXHIBIT 3
MARKET AREA
[MAP]
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
GROWTH RESTRICTIONS
The Contra Costa County General Plan (effective 1990 to 2005) establishes an
Urban Limit Line (ULL) that encompasses the urbanized area of the county and
allows for some additional urban growth. The General Plan states that "the
purpose of the ULL is twofold: (1) to ensure preservation of identified
non-urban agricultural, open space and other areas by establishing a line
beyond which no urban land uses can be designated during the term of the
General Plan, and (2) to facilitate the enforcement of the 65/35 Land
Preservation Standard." This standard was mandated by voter ballot measures
approved in 1988 and 1990, which specify that no more than 35 percent of the
land in the county should contain urban development through the horizon of
the General Plan. The remaining 65 percent of land is to be preserved for
agriculture, open space, wetlands, parks, and other non-urban uses. The
presence of this line limits the amount of developable available land within
the county.
The subject site is within the Urban Limit Line, which is a highly desirably
characteristic from a development standpoint. However, it is at the far
northeastern border of the ULL, which puts it several miles north and east of
the current path of growth.
RESIDENTIAL MARKET
DEFINITION OF MARKET AREA
The subject's primary market area is defined as eastern Contra Costa County,
which extends outward from the subject site in an inverted "L" formation
along major transportation corridors. A map of the market area appears on the
following page as Exhibit 3. The market area begins to the west just past
Concord/Clayton. It extends northeasterly along I-680 and State Highways 242
and 4 thorough Bay Point, Pittsburg, Antioch, and Oakley to the subject site,
at which point it turns south, extending along Highway 4 through Knightsen,
Brentwood, Discovery Bay, and Byron.
The purpose of defining this market area is to select the geographic
locations from which comparable data will be drawn. It is anticipated that
the proposed subject's residents will be drawn from a wider area.
Furthermore, many residents in this market area will be employed in the areas
around Walnut Creek and Concord or other Bay Area employment centers.
In this section, we present data for both the overall county and East County,
as available and appropriate, for comparison purposes.
CYPRESS LAKES 1998 APPRAISAL 9 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
OVERALL TRENDS(3) FOR NEW AND EXISTING SINGLE-FAMILY HOMES IN CONTRA COSTA
COUNTY
The graph below illustrates the price and sales volumes trends that have
characterized the Contra Costa County residential market from 1990 to 1997.
The graph indicates that prices in East County continued to increase into the
early 1990s even when other Bay Area markets were seeing price declines. It
was not until 1993 that the first signs of falling prices appeared, which
continued through 1995. Sales volume fell
[graph]
dramatically from 1990 to 1991, then remained relatively stable until the
1995 low point. This 1995 trough was a shared statewide event.
But after 1995, positive trends in both sales volume and sales prices
emerged. In 1997, we see that the market had a significant spike in both
sales volume and price. This price spike, however, is somewhat less due to
the fact that homes on the market are increasingly larger and more highly
amenitized. Real estate analysts project that the spike will give way to more
modest sales volume and price figures in 1998. Dramatic decreases in sales
volume and prices characteristic of earlier years are not expected to occur.
- ---------------
(3) Compiled by Real Estate Research Council of Northern California and
Sedway Group.
CYPRESS LAKES 1998 APPRAISAL 11 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
REGIONAL CONSTRUCTION ACTIVITY(4)
Contra Costa County accounts for the greatest volume of residential construction
in the nine-county Bay Area. As evident in the graph, this construction volume
slowed dramatically during the 1990s. Permit
[graph]
activity seems to have stabilized at about 3,000 annually during the last
several years (1995-1997). Despite the strong economy, permit activity is not
anticipated to return to pre-1990 levels.
EAST COUNTY CONSTRUCTION ACTIVITY
In addition to researching construction activity in the county as a whole,
Sedway Group examined market area activity in East County, in the vicinity of
the subject site near Oakley and Bethel Island. Within the three eastern
Contra Costa municipalities of Antioch, Brentwood and Pittsburg,
single-family home building permit volume has not been subject to the
dramatic swings in permit volume evident in the county as a whole. It should
be noted that the communities of Oakley and Byron are unincorporated, and
although gross statistics are available for unincorporated Contra Costa
County, they are not disaggregated for these two communities. These permits
are therefore not shown in our "Building Permit Volume" graph above (a table
of these data can be found in the Addenda).
- ---------------
(4) Compiled by Sedway Group from Economic Sciences Corporation data.
CYPRESS LAKES 1998 APPRAISAL 12 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
Between 1985 and 1989, an average of 1,232 single-family homes were permitted
annually within the three incorporated communities, compared to an average of
1,198 homes annually between 1990 and 1995. Antioch dominates the market
among these three communities, typically accounting for 65 percent of all
single-family homes permitted. During the past two "recovery" years (1996 and
1997), permit volume has increased to an average of 1,324 annually.
Overall, the East County area out-performed the larger San Francisco Bay Area
market during the early to mid-1990s economic recession. The subject area has
been able to provide affordably priced homes targeted toward a first-time
buyer market. With stable and sometimes declining land prices, production
builders have been able to deliver attractively priced homes in an
environment of low interest rates. As a result, with a strong Bay Area
"pent-up" demand for affordable homes, this market has performed well, even
during a recessionary market. As the economy improved after 1995, the area
permitting volume increased in response, but not dramatically, as this market
has typically been subject to tighter cycles than other locations in the Bay
Area.
EAST COUNTY EXISTING COMPETITIVE PRODUCT
Sedway Group tabulated information on single-family new home sales programs
within the communities of Oakley, Brentwood, Byron, Antioch, and Pittsburg as
of December 1997, the most recent data that would have been available as of
the March 31, 1998, valuation date. This information has been compiled from
the research document, SURVEY OF NEW SALES HOUSING, EAST CONTRA COSTA,
December 1997, by Anthony Hurt & Associates. Information has been compiled on
29 developments, including one in Oakley, nine in Brentwood, two in
Byron/Discovery Bay, 15 in Antioch, and two in Pittsburg. National,
statewide, and regional builders are represented in the data.
In terms of location, the communities of Oakley, Brentwood, and
Byron/Discovery Bay are the most comparable to that of the subject site,
located between Oakley and Bethel Island. Data for Antioch and Pittsburg are
also presented, as they provide market indications that relate to the subject
as well. A detailed table of currently selling projects appears in the
Addenda, while the text that follows provides a summary of this information.
While our previous experience in the East County market has shown
approximately 50 currently selling developments, these December 1997 data
showing only about 30 developments are an indication of the new-found
restraint of the market and the cautious recovery from earlier excesses.
Additionally, the current market orientation under the improved economy has
been toward a move-up product, which is typically more shallow with respect
to demand. This recent shift in product orientation seems to have impacted
Oakley - which has traditionally appealed more to lower-end consumers - most
dramatically. Oakley had no projects selling as of December 1997, and only
one project was taking reservations.
In addition to the current market orientation, Oakley's location at the outer
edge of Highway 4 has been an increasingly significant consideration. During
the late 1980s and early 1990s, the concentration of development along
Highway 4 was not significant enough to cause major cumulative delays as one
drove farther east toward Oakley. However, continued development along the
Highway 4 corridor has served to add time onto a Highway 4 commute, with
those traveling in the direction of Oakley suffering the most due to the
incremental increases that mount as one travels east.
A final reason for the absence of recent homebuilding activity in Oakley
is increases in various municipal and special district fees. While other
jurisdictions have seen similar fee increases, the historically low
CYPRESS LAKES 1998 APPRAISAL 13 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
home selling prices in Oakley have led many builders to develop in locations
where selling prices can more easily support the new fee structures.
[graph]
In the context of increasing fees, greater traffic congestion, and a trend
toward higher-end product development, the absorption and price graph above
shows how new East County home developments have fared over the last six
years. The unusually high absorption in 1993 was a consequence of the large
number of new developments recently opened in that year. This glut of
projects led to a notable price decline in 1994, which recovered slightly in
1995, and began to show a definite positive trend by mid-year 1996 and 1997.
Absorption had also rebounded by mid-1997, and we see that a price spike had
occurred by December 1997, when builders felt confident that heated market
conditions and a move-up product orientation could justify these prices.
The tables that appear on the following page provide a tabular summary of
home sales programs by community. A more detailed table listing information
specific to developments within these communities can be found in the Addenda.
CYPRESS LAKES 1998 APPRAISAL 14 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
- ------------------------------------------------------------------------------
SUMMARY OF STATISTICS ON CURRENTLY SELLING SFR DEVELOPMENTS
EASTERN CONTRA COSTA COUNTY
DECEMBER 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
AVG HOME AVG LOT AVG HOME AVG HOME AVG. MONTLY
LOCATION SIZE (SF) SIZE (SF) PRICE PRICE/SF ABSORPTION
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Oakley 1,569 6,000 $145,490 $93 N/A
Brentwood 2,028 5,669 $210,997 $104 4.7
Byron/Discovery Bay 1,808 6,000 $227,240 $126 8.2
Antioch 2,160 5,900 $192,574 $89 3.5
Pittsburg 1,769 5,500 $188,970 $107 3.0
</TABLE>
Sources: Anthony Hurt and Associates December 1997 survey, Sedway Group
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SUMMARY OF STATISTICS ON CURRENTLY SELLING SFR DEVELOPMENTS
EASTERN CONTRA COSTA COUNTY
JUNE 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
AVG HOME AVG LOT AVG HOME AVG HOME AVG. MONTLY
LOCATION SIZE (SF) SIZE (SF) PRICE PRICE/SF ABSORPTION
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Oakley 1,520 5,083 $144,387 $95 3.9
Brentwood 1,879 5,770 $192,532 $102 4.7
Byron/Discovery Bay 2,473 6,500 $267,740 $108 2.0
Antioch 1,917 5,488 $177,519 $93 2.8
Pittsburg 1,647 5,375 $173,595 $105 3.5
</TABLE>
Sources: Anthony Hurt and Associates, Sedway Group
- ------------------------------------------------------------------------------
CYPRESS LAKES 1998 APPRAISAL 15 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
Between 1995 and 1997, the tables indicate price increases in most
communities,(5) though these increases are partially explained by the larger
size of the homes and inclusion of more amenities. Like home sizes, lot sizes
have also increased, another indicator of the current move-up orientation of
the market.
PLANNED FUTURE DEVELOPMENT
There is a substantial inventory of approved subdivision lots within eastern
Contra Costa County, as indicated in the exhibit located in Addendum G.
Sedway Group contacted individual planning departments in Brentwood, Antioch,
Pittsburg, and unincorporated Contra Costa County in order to catalogue this
inventory. Unfortunately, Contra Costa County does not track this information
and therefore is excluded from our survey.
Our survey revealed a total of 16,364 single-family residential units pending
approval; approved, but not under construction; or under construction. Over
the period from 1995 to 2020, ABAG projects a growth of 51,590 households for
eastern Contra Costa County (defined as Antioch, Brentwood, Pittsburg, and
Rural East Contra Costa County), which is the equivalent of 2,064 new
households per year. Since our survey number essentially represents the same
area (with only Rural East Contra Costa County excluded), we can divide the
16,364 survey number by the annual increase of 2,064 new households to
estimate that this figure represents roughly eight years of inventory.
Brentwood has exceeded Antioch in recent years as the jurisdiction with the
largest number of units in the development pipeline. Brentwood reported
approximately 6,494 units planned, 40 percent of our survey total. Among this
group, the two most significant potential competitors for Cypress Lakes are
Brentwood Country Club (a 1,500-unit planned active adult community with a
27-hole golf course) and Spanos (a 1,031-unit golf course community).
Development approvals for the Spanos project were set to expire in January of
1998, but the project recently received a one-year extension.
Other large, master-planned communities are proposed in Antioch, Byron, and
Pittsburg. Antioch's largest project, with 770 units still to be completed,
is Black Diamond Knolls. Byron has a 1,400-unit addition to the Discovery Bay
community planned, and Pittsburg has the 1,363-unit San Marco project. When
considering the impact of these proposed projects, it is important to note
that many of them may never be realized, or their development may take place
over ten or more years.
CONCLUSIONS AFFECTING VALUE
ABAG estimates and projections for five-year periods between 1990 and 2005
indicated positive trends for East County. While population increases slowed
in the period from 1990 to 1995, an acceleration is expected in 1995 to 2000
and 2000 to 2005. This acceleration is anticipated as a consequence of the
improving residential market coupled with the Bay Area's increasing reliance
on Contra Costa County for developable residential land.
After 1995, the data show that a demand for move-up single-family home
products finally materialized in East County. This was in contrast to the
earlier part of the decade, when such demand never
- ---------------
(5) The Byron/Discovery Bay sample was too small to provide a reliable
indication of price increases or decreases.
CYPRESS LAKES 1998 APPRAISAL 16 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
materialized and housing prices remained flat or declined. The latter part of
the 1990s has been characterized by a significantly smaller number of home
programs selling concurrently (approximately 30 compared to the early 1990s
figure of 50). If maintained, this moderate volume of projects will likely
result in continued demand for both the move-up and entry-level product
types.
While the outlook for residential development in East County is positive, the
current regional economy has been in a state of expansion for an
unprecedented length of time. Some economists have suggested that this
expansion is part of a new era that is expected to continue into the
foreseeable future, others speculate that a downturn may be pending. Housing
prices and sales trends can be dramatically impacted by economic downturns
due to the degree of job security and confidence buyers typically require to
make such a major purchase; move-up purchases are typically more dramatically
affected by economic downturns, while demand for entry-level homes tends to
be more stable.
Within the East County residential market, the Cypress Lakes site is in a
more distant and northeasterly portion of the county than most other
residential developments, which tend to be concentrated in Antioch,
Pittsburg, and Brentwood. These communities represent the current "path of
growth" for East County. However, the site is within the county's Urban Limit
Line, and its large size and the opportunity to create a somewhat more
exclusive and self-contained community to a significant degree
counterbalances the issue of distance. The high degree of amenities in the
project would fit well with current consumer demands, although it could
present problems if an economic downturn leads to a decrease in demand for
highly amenitized projects.
CYPRESS LAKES 1998 APPRAISAL 17 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
III. SITE DESCRIPTION AND ANALYSIS.
The Cypress Lakes property is an approximately 686-acre site, comprising
generally flat agricultural land. Cypress Lakes is located near the Delta
area where the Sacramento and San Joaquin rivers converge, in the northeast
quadrant of Contra Costa County. The immediate surrounding land uses are
agricultural and recreational. The nearest transportation artery is Highway
4, located approximately 1.5 miles to the west of the subject. The Town of
Oakley is situated about three miles to the west.
ACCESS
The proposed Cypress Lakes development will have access from Cypress Road by
way of Highway 4 from the west and Bethel Island Road from the north. Freeway
access into Oakland and San Francisco is provided by taking Highway 4 West to
Highway 242 South, and then joining Highway 24 East. The nearest BART station
is in Pittsburg, approximately 15 miles from Cypress Lakes. Plans are
underway to bring BART to Antioch at Hillcrest Avenue (within eight miles of
Cypress Lakes) by early next century.
SURROUNDING ENVIRONS
The subject is bordered to the north and east by the Dutch Slough and the
Sand Mound Slough, two narrow waterways that lead to the San Joaquin River.
The Dutch Slough to the property's north divides it from Bethel Island, a
popular recreational area in the Delta where the Sacramento River and the San
Joaquin River converge. The subject is bordered to the south and west by
agricultural land and open space. There are several old and newer
single-family dwellings scattered near the site, but no large-scale
residential developments.
Of significance are five parcels that are entirely surrounded by the subject
property. These parcels are known as APNs 032-220-002-3, -004-9, -029-6,
- -030-4, and -005-6 (an assessor's map is located within the Addenda). It was
reported that the owners of these parcels had been approached in the early
1990s to sell their land in order for it to become part of the proposed
Cypress Lakes development as a school site. However, the owners declined to
sell. Chartered Land & Cattle was in negotiations with the school district to
have these parcels condemned and assembled as a school site at the time of
foreclosure by National Investors Financial, Inc. While these parcels remain
in private ownership, site plans for Cypress Lakes assume that this
condemnation occurs and the property is used as a school site.
SOILS AND GEOLOGY
According to a geotechnical investigation report prepared for the subject
site by Kleinfelder, the site lies in an area near several active faults.
Three main faults that may have a potential for generating major earthquakes
that might affect the site are the San Andreas, Hayward, and Calaveras
faults. These faults lie approximately 52, 34, and 24 miles to the west,
respectively. Other local active, yet smaller, faults that may have a
potential for affecting the site are also located within 18 miles of the
subject site.
CYPRESS LAKES 1998 APPRAISAL 18 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
The site proper is not crossed by any mapped active faults; however, it will
likely be subjected to a high degree of ground shaking from earthquakes
generated by the Antioch and Greenville faults, as well as other active
faults in the Bay Area.
The site is generally flat, ranging in elevation from approximately -5 feet
to -8 feet but as high as 22 feet. The north-central portion of the site is
covered by areas of fine-grained, wind-blown sands that exhibit slight to
moderate cementation. The site is currently used predominantly as rangeland
and is covered by short and tall grass. The interior of the site contains
several shallow drainage canals used for irrigation.
Based on data collected by Kleinfelder, there are four geotechnical concerns
relating to the feasibility of the project: (1) potential liquefaction of the
near surface sand layers; (2) lakes and levees; (3) subsidence and
settlement; and (4) levee underseepage. The consultant recommended mitigation
schemes to reduce the hazards to the development created by these
geotechnical concerns. These costs are substantial and have a significant
impact on the value of the project, as discussed in the valuation section of
this appraisal.
LEGAL DESCRIPTION
The legal description is shown in the plant information guarantee report,
which is contained in the Addenda.
OWNERSHIP HISTORY
Title to parcel 032-220-012 was granted from Leo and Hazel Mantelli to Three
Sisters Trust, A.J. Salomon, Trustee, on December 19, 1990. A grant deed
dated August 12, 1991, shows transfer of parcels 032-210-029, -007, -008, and
- -026 from Robert A. Dal Porto, Executor of the Estate of Norma E. Dal Porto,
to Three Sisters Trust. For purposes unknown to the appraiser, title to the
land was transferred back and forth from Three Sisters Trust to A.J. Salomon
between 1990 and 1993. On November 9, 1994, A.J. Salomon transferred
ownership ("fully encumbered") to Eastco, Inc., of Danville, California. On
July 25, 1995, title to all parcels was transferred from A.J. Salomon to
National Investors Financial, Inc. A copy of the information guarantee
showing this ownership history is contained within the Addenda.
ASSESSED VALUE AND PROPERTY TAXES
The site is currently identified on the tax roll of Contra Costa County as
Assessor's Parcel Numbers 032-210-029, 032-220- 007, 008, 012, and 026, and
these were assessed and taxed for the fiscal year 1997-98 as follows:
CYPRESS LAKES 1998 APPRAISAL 19 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
<TABLE>
<CAPTION>
APN 1997 ASSESSED VALUE 1997-98 TAXES
<S> <C> <C>
032-210-029-8 $698,190 $7,854.94
032-220-007-2 $731,544 $8,226.16
032-220-008-0 $382,398 $4,324.30
032-220-012-2 $745,008 $8,360.14
032-220-026-2 $493,986 $5,526.82
Subtotal: $3,051,126 $
Improvements $0 $0
-- --
TOTALS $3,051,126 $34,292.36
INDICATED TAX RATE: 1.124%
DELINQUENT TAXES/FEES AS OF 3/31/98: $168,446.22
</TABLE>
Taxes are levied annually for a fiscal year of July 1 through June 30. They
are paid in semi-annual installments, being delinquent in December and April,
respectively. As of the March 31, 1998, valuation date, taxes remained unpaid
since 1993. The County Tax Collector reported the unpaid taxes and delinquent
fees at approximately $168,446.22. Special condition number 1 of Addendum A
deals with our treatment of these taxes in the appraisal.
Under the provisions of Article XIIIA (Proposition 13), properties are
assessed based on their market value as of March 1, 1975, the base year lien
date. Assessment increases are limited to a maximum of 2 percent per year
until such time as the property is sold, substantial new construction takes
place, or the use of the property is changed. Under the foregoing
circumstances, the property may be reassessed to its market value. Future
taxes will be based on the added cost of the improvements or the market value
of the property.
Tax rates are also limited by Proposition 13 to 1 percent of the property's
assessed value. Increases in this rate can only be achieved by special
assessments approved by the voters. Additional assessments cannot be
legislated. Based upon current assessed value and taxes, the subject's tax
rate is 1.124 percent.
EASEMENTS AND ENCUMBRANCES
A preliminary title report by Commonwealth Land Title Insurance Company dated
May 3, 1993, was submitted for review. Easements outlined in the preliminary
title report were for access, mineral rights, and utilities only. There do
not appear to be any easements or encroachments that would negatively impact
the development of the subject site as proposed. However, a complete title
report should be prepared in order to review any changes that may have
occurred since the date of the preliminary report to verify the
developability of the site.
CYPRESS LAKES 1998 APPRAISAL 20 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
HAZARDS OF THE AREA
According to the geotechnical report conducted by Kleinfelder for the subject
site, the subject is located within a 100-year flood zone. The subject
development will be surrounded by a perimeter levee to reduce potential flood
hazards.
No toxic waste was found during the visual inspection of the property;
however, no toxic waste report was made available to the appraiser to verify
this. This report assumes the site is free and clear of any toxic materials
including but not limited to asbestos, underground storage tanks containing
hazardous materials, PCB transformers, etc.
UTILITIES, SERVICES, AND OFF-SITE IMPROVEMENTS
Adequate water, sewer, telephone, electricity and gas utilities will be
available to the site and will be provided by the following agencies:
Water: Diablo Water Supply
Sewer: Iron House Sewer District
Telephone: Pacific Bell
Gas and electricity: Pacific Gas and Electric Co.
In addition, police protection will be provided by the Contra Costa County
Sheriff's Department. Until the fire station is built on-site, fire
protection will be provided by either the Oakley Fire Protection District or
the Bethel Island Fire Protection District.
GENERAL PLAN
The subject site was originally zoned A-2: Agricultural land with a
recreational residential density bonus overlay. This land use designation
includes most of the privately owned rural lands in the county. The purpose
of the Agricultural Lands designation is to preserve and protect lands
capable of and generally used for the production of food, fiber, and plant
materials. Because the subject is located within the Urban Limit Line, a P-1
rezoning allows residential and recreational land use. As of May 18, 1993,
the property had obtained a P-1 rezoning of 1,330 lots, preliminary and final
development plans, and a vesting tentative map.
The subject property is located in the Oakley/Bethel Island area. As outlined
in the Contra Costa County General Plan, policies for development in this
area provide guidelines intended to preserve and enhance the area's rural and
recreational quality. Due to close proximity to the San Joaquin-Sacramento
Delta, the area lies within the 100-year flood zone, necessitating strict
compliance with levee construction and flood prevention regulations. The
General Plan also stipulates that residential development be recreationally
oriented and limited in size with mandatory retention of areas dedicated to
open space.
The development plan approved for the property complies with the standards
outlined in the General Plan. Approximately 246 acres, or 36 percent of the
686-acre parcel, will contain 1,330 housing units. Approximately 170 acres
(25 percent of the land area) will be designated as an 18-hole golf course,
with
CYPRESS LAKES 1998 APPRAISAL 21 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
another 199 acres (29 percent of the development) used for roads, levees,
lakes and channels. The remaining 70 acres (10 percent of the land area) will
be reserved for parks, open space, wetlands, a school, a fire station, and
other ancillary uses. This distribution of uses was consistent with the
county's vision for the area during the effective dates of the General Plan
(1990-2005).
PROPOSED RESIDENTIAL DEVELOPMENTRESIDENTIAL DEVELOPMENT
The proposed project consists of developing an area of approximately 686
acres in the Bethel Island area of East Contra Costa County. A site map is
located in the Addenda. The project will consist of constructing a ring levee
surrounding a development that will be separated into 24 individual
neighborhoods. The development will contain the following elements:
<TABLE>
<CAPTION>
Use Acres
--- -----
<S> <C>
Residential Area 246.1
Public Parks 26.6
Private Parks/Beach Club/Day Care Center 2.4
Golf Courses 170.3
Lakes/Channels 61.0
Open Space 23.2
Wetlands 8.8
School 7.4
Fire Station 2.0
Roads 74.5
Levee/Access Road 63.6
-----
Total Acreage 685.9
</TABLE>
The 24 neighborhoods will be developed as finished lots, which will be phased
over a period of approximately five years. The neighborhoods are to be
developed as follows.
<TABLE>
<CAPTION>
Neighborhood Number of Lots Average Lot Size (sq. ft.)
------------ -------------- --------------------------
<S> <C> <C>
1 24 8,000
2 41 9,600
3 109 5,000/6,000
4 55 9,600
5 41 10,000/11,000+
6 63 6,000+
7 91 7,000+
8 61 8,000
9 59 6,000
10 19 10,000
11 52 5,000/6,000
12 35 5,000/6,000
13 58 5,000
14 63 8,500
</TABLE>
CYPRESS LAKES 1998 APPRAISAL 22 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
<TABLE>
<S> <C> <C>
15 67 5,000
16 44 5,000
17 68 6,000
18 50 6,500
19 41 6,500
20 39 6,500
21 19 8,500+
22 19 8,500+
23 133 5,000
24 99 5,000
----- -----
Total 1,330 Weighted Average 6,531
</TABLE>
CYPRESS LAKES 1998 APPRAISAL 23 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
IV. HIGHEST AND BEST USE ANALYSIS
Highest and best use is defined as:
The reasonable, probable and legal use of vacant land or an improved
property, which is physically possible, appropriately supported,
financially feasible, and that results in the highest value.
The highest and best use of a property must be physically possible, legally
permissible, financially feasible, and maximally productive among feasible
uses. Highest and best use is determined for sites "as vacant" and "as
improved." Since the subject is vacant, this section only analyzes the
highest and best use "as vacant."
PHYSICALLY POSSIBLE
The topography of the property is primarily flat. The soils report prepared
by Kleinfelder found that residential development is physically feasible on
the site if recommended mitigation measures are implemented. While the issue
of flooding appears to have been addressed by the project's proposed
perimeter levee, the appraisers were not made aware of a mitigation plan for
settlement issues. These mitigation issues should be reviewed further by the
new developers of the project. Any significant findings impacting costs could
alter the concluded highest and best use of the property.
LEGALLY ALLOWABLE
The site is currently zoned by the County of Contra Costa as P1 (Planned Unit
Development), which will permit development of the project as planned. The
current vesting tentative map allows construction of 1,330 residential lots
and various other project amenities as detailed in earlier descriptive
sections of this report. However, the current zoning and vesting tentative
map will expire on April 15, 1999, if a final map is not submitted by the
expiration date. There are no more extensions to which the subject is
entitled.
FINANCIALLY FEASIBLE
The most financially feasible scenario is the subject development,
particularly given the improvement of the residential market and shift toward
a move-up product in the last few years (1996 to 1998).
HIGHEST RETURN
Due to physical site characteristics and local regulations, alternative uses
of the site would likely be a less densely developed residential,
recreational, agricultural, or open space use. While alternative development
plans or uses might possibly cost less and yield higher returns, we believe
that any such increment in return would be absorbed by the increased risk in
obtaining approval for such plans.
CYPRESS LAKES 1998 APPRAISAL 24 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
CONCLUSION
Based upon analysis of these factors as they relate to the subject, the
highest and best use for the subject is judged to be a 1,330-unit residential
and golf course Planned Unit Development, as set forth in the existing plans
and entitlements. This conclusion is based upon the assumption that the cost
estimates prepared by the original developer of the property are reasonable.
This significant cost issue is discussed in more detail in the following
chapter.
CYPRESS LAKES 1998 APPRAISAL 25 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
V. VALUATION
Sedway Group's estimate of the market value of the subject property relies on
the Sales Comparison and Subdivision Development approaches to value. Both
approaches are utilized to value the subject property in its "as is"
condition: raw land (i.e., no improvements) but with entitlements in place
(vesting tentative map) as of the date of the appraisal. Unimproved land with
entitlements in place is frequently referred to as "paper lots," and we will
use that terminology in our analysis.
We researched paper lot sales (unfinished lots with various entitlements
similar to those of the subject) for the Sales Comparison Approach. This
approach is based on the principle of substitution - a prudent buyer would
not pay more for a property than it would cost to acquire a comparable
substitute property. Market value is estimated by comparing the subject
property to similar properties that have sold recently or for which offers to
purchase have been made. All comparisons consider differences in real
property rights conveyed, entitlement status at sale, financing terms,
conditions of sale, and market conditions. Since no two properties are ever
identical, the appraiser must make adjustments for differences in physical
characteristics such as condition, location, size, and functional utility.
The Subdivision Development Approach combines the Sales Comparison Approach
with an estimate of costs to be incurred, along with certain income
capitalization techniques. In this manner, the discounted value of the
subject development's anticipated income stream can be estimated. In our
analysis, this discounted value is based on the completion and sale of the
finished lots to home builders.
As a final step in the valuation process, the estimates from the Sales
Comparison and Subdivision Development approaches are reconciled into a final
value estimate. The appraiser analyzes the appropriateness of each approach
to the property type appraised, the accuracy of the data collected, and the
quantity of evidence supporting each value estimate. This correlated amount,
as of the valuation specified date, is the final value estimate.
SALES COMPARISON APPROACH
There have been relatively few comparable paper lot sales in the Cypress
Lakes market area, and there have been no paper lot sales similar in size to
the subject property. This is consistent with the generally soft residential
development market in the early- and mid-1990s, when few developers were
acquiring land for future development. In addition, there are generally few
parcels as large as the subject available for development in Contra Costa and
other Bay Area counties adjacent to San Francisco.
For these reasons, our analysis of the paper lot sales is limited to projects
containing 30 to 189 lots. Because these comparable paper lot transactions
were all substantially smaller than the subject property, an adjustment is
made for size differential at the end of this analysis. This discount is
necessary as it will require more time to sell out the 1,330-lot subdivision
than if the subject project were a development of under 150 lots.
CYPRESS LAKES 1998 APPRAISAL 26 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
PAPER LOT SALES
Sedway Group identified five sales that we believe provide a reliable
indication of the subject property's value as paper lots. Two of the sales
transactions took place after a final map had been recorded for the
properties, two had vesting tentative maps in place at the time of sale, and
one had a combination of a final map and vesting tentative map. With the
exception of Sale 5, none of the lots were improved at the time of sale;
therefore, the price paid does not include site work or fees. While some of
the properties had assessments at the time of sale, the subject property does
not include any of the backbone infrastructure typically covered by these
assessments. For this reason, the comparable sales that have assessments are
not adjusted upward by the amount of the assessment when comparing the
comparables to the subject.
The five transactions identified as comparable are summarized in Exhibit 4. A
map identifying the location of these sales is presented as Exhibit 5, and an
adjustment grid as Exhibit 6. The five sales ranged from a low of $4,233 per
lot to a high of $23,014 per lot. Interviews with homebuilders active in the
market indicated that prices improved between late 1995 and late 1997, the
time period covered by the sales. Sedway Group used information from
interviews with homebuilders as well as historical home price data to
estimate a time adjustment for the paper lot sales.
In addition to market conditions, comparables are adjusted for the factors of
entitlement status at sale, location, master-planned or golf-community
status, and, as noted in the introduction, the overall size of the
development. All sales were further adjusted by the extraordinary cost of the
Cypress Lakes development, which will be discussed at the end of the
individual lot analysis. Sale 5 required some additional adjustments that
will be addressed in its own paragraph below. Summaries of the sales and an
adjustment grid appear as exhibits on the following pages.
PAPER LOT SALE NUMBER ONE took place in October of 1995, which was what many
consider the bottom of the residential market for all of California. The
project had a vesting tentative map at sale, and was transferred from Ti
Chien Ho to Hofmann Construction. Hofmann planned to develop homes of 1,500
to 2,400 square feet priced at $159,000 to $215,000. There were unusual
grading costs of approximately $11,000 per lot included in the finishing
costs of $41,000. Additionally, the buyer assumed $11,640 per lot in
assessments.
Several adjustments must be made to Paper Lot Sale Number One with respect to
Cypress Lakes. First, the base price must have unusual costs of $11,000 per
lot added to it. Our interviews with local brokers, analysis of home prices,
and review of land sales revealed that an 11 percent adjustment for the
improving residential market was appropriate. A location adjustment of -10
percent is necessary due to the comparable's Antioch location. Antioch is
much closer to regional employment centers and major transportation modes
than the subject's Oakley location. This adjustment is based upon historical
pricing differences between Oakley and Antioch, with a conversion factor
applied to make the difference applicable to a land value analysis.(6) A golf
master-planned community adjustment was necessary for Sale Number One, as
well as all other comparables, due to this unique characteristic of the
Cypress Lakes
- --------------
(6) A 5 percent price difference was divided by 30 percent to represent
the typical percentage of the home price applicable to land, then multiplied
by 60 percent to allocate this premium between the land and the home. This
methodology is utilized to make adjustments to all comparables for location.
CYPRESS LAKES 1998 APPRAISAL 27 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
<TABLE>
<CAPTION>
EXHIBIT 4
COMPARABLE PAPER LOT SALES SUMMARY GRID
EASTERN CONTRA COSTA COUNTY
- --------------------------------------------------------------------------------------------------------------------------
# LOCATION/APN REC SIZE ZONING SALE NO. DENSITY PRICE/ PRICE/ LOT
DATE (ACRES) PRICE LOTS (LOTS/AC) ACRE LOT SIZES
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lots
----
1 Deer Valley Road 10/27/95 53.470 HPD $800,000 189 3.53 $14,962 $4,233 6,000
E of Rock Island Drive Antioch
Antioch
052-410-035
053-010-006/7
2 60 Lone Tree Way 4/12/96 12.207 C-1/R-2 $780,000 65 5.32 $63,898 $12,000 5,000
Brentwood Brentwood
018-230-038-4 (por)
3 Sand Creek Road 12/12/96 21.292 PD6 $359,500 30 1.41 $16,884 $11,983 6,000
West of San Jose Ave Brentwood
Brentwood
019-110-037
019-280-020 to 029
4 Sunrise & Daybreak 9/25/97 16.673 PD6 $686,000 75 4.50 $41,144 $9,147 4,000
Sutter Creek N. of San Jose Rd Brentwood
Brentwood
019-110-040
019-290-031
5 N. Parkside Dr, N. of Polaris Dr. 12/31/97 28.078 RS $2,439,500 106 3.78 $86,883 $23,014 6,000
Pittsburg (est) Pittsburg
086-010-017,019
- --------------------------------------------------------------------------------------------------------------------------------
# LOCATION/APN APPRV. GRANTOR/ COMMENTS
AT SALE GRANTEE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOTS
1 Deer Valley Road Vesting Ti Chien Ho/ Finishing costs (excluding fees) of approximately
E of Rock Island Drive Tentative Hofmann Construction $41,000, which is approximately $11,000 above average,
Antioch Map due to grading. $2.2 million or $11,640/lot in
052-410-035 assessments assumed.
053-010-006/7
2 60 Lone Tree Way Vesting Ralph P. Garrow/ Special assessment bonds of $55,000/year assumed. Buyer
Brentwood Tentative Rural CA Housing did not know what principal was but this amount to be
018-230-038-4 (por) Map Corporation paid for 20 years.
3 Sand Creek Road Final Vasco Group/ Interest of approximately $8,000 per lot was assumed
West of San Jose Ave Map Greystone Homes with the purchase. Assessments of $8,800 per lot were
Brentwood assumed. Fees and finishing costs were approximately
019-110-037 $55,000 per lot.
019-280-020 to 029
4 Sunrise & Daybreak Final Vasco Group/ Interest of approximately $10,000 per lot was assumed
Sutter Creek N. of San Jose Rd Map Greystone Homes with the purchase. Assessments of $8,800 per lot were
Brentwood assumed. Fees and finishing costs were approximately
019-110-040 $55,000 per lot.
019-290-031
5 N. Parkside Dr, N. of Polaris Dr. Final & North American Buyer reported that he acquired 106 lots total, of which
Pittsburg Vesting Refractories/ 27 had a final map and were already finished. The
086-010-017,019 Tentative Schuler Homes remaining 79 lots were unfinished and had a vesting
tentative map. The buyer also received an option to buy
73 additional lots and purchased 14 completed SFRs on
the same site, the price of which is not included in
this transaction.
- -----------------------------------------------------------------------------------------------------------------------------------
Sources: COMPS, Inc, Buyers, Sellers, Sedway Group.
[CJD]
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CYPRESS LAKES 1998 APPRAISAL 28 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
EXHIBIT 5
PAPER LOT SALES
[Map]
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
EXHIBIT 6
COMPARABLE PAPER LOT SALES ADJUSTMENT GRID
EASTERN CONTRA COSTA COUNTY
- ----------------------------------------------------------------------------------------------------------------------
CHANGE IN PRICE
# LOCATION/ REC PRICE/ UNUSUAL(2) PRICE AFTER MARKET AT CURRENT
APN DATE LOT(1) COSTS/LOT UNUSUAL CONDITIONS MARKET
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOTS
----
1 Deer Valley Road 10/27/95 $4,233 $11,000 $15,233 11% $16,908
E of Rock Island Drive
Antioch
052-410-035
053-010-006/7
2 60 Lone Tree Way 4/12/96 $12,000 $3,500 $15,500 8% $16,740
Brentwood
018-230-038-4 (por)
3 Sand Creek Road 12/12/96 $11,983 $8,000 $19,983 6% $21,182
West of San Jose Ave
Brentwood
019-110-037
019-280-020 to 029
4 Sunrise & Daybreak 9/25/97 $9,147 $10,000 $19,147 3% $19,721
Sutter Creek N. of San Jose Rd
Brentwood
019-110-040
019-290-031
5 N. Parkside Dr, N. of Polaris Dr. 12/31/97 $15,500 $0 $15,500 1.0% $15,655
Pittsburg
086-010-017,019
AVERAGE PRICE/LOT INDICATION
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
EXHIBIT 6
COMPARABLE PAPER LOT SALES ADJUSTMENT GRID
EASTERN CONTRA COSTA COUNTY
- ------------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS ADJUSTED
# LOCATION/ ENTITLEMENT GOLF SIZE TOTAL PRICE/
APN STATUS LOCATION MPC(3) (# LOTS) ADJUSTMENTS LOT
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOTS
----
1 Deer Valley Road 0% -10% 10% -30% -30% $11,836
E of Rock Island Drive
Antioch
052-410-035
053-010-006/7
2 60 Lone Tree Way 0% -12% 10% -25% -27% $12,220
Brentwood
018-230-038-4 (por)
3 Sand Creek Road -15% -12% 10% -25% -42% $12,286
West of San Jose Ave
Brentwood
019-110-037
019-280-020 to 029
4 Sunrise & Daybreak -15% -12% 10% -25% -42% $11,438
Sutter Creek N. of San Jose Rd
Brentwood
019-110-040
019-290-031
5 N. Parkside Dr, N. of Polaris Dr. 0% -12% 10% -25% -27% $11,428
Pittsburg
086-010-017,019
AVERAGE PRICE/LOT INDICATION
<CAPTION>
- ----------------------------------------------------------------------------------
LESS SUBJECT CONCLUDED
# LOCATION/ KNOWN VALUE/
APN UNUSUAL COSTS(4) PAPER LOT
- ----------------------------------------------------------------------------------
<S> <C> <C>
LOTS
----
1 Deer Valley Road -$7,300 $4,536
E of Rock Island Drive
Antioch
052-410-035
053-010-006/7
2 60 Lone Tree Way -$7,300 $4,920
Brentwood
018-230-038-4 (por)
3 Sand Creek Road -$7,300 $4,986
West of San Jose Ave
Brentwood
019-110-037
019-280-020 to 029
4 Sunrise & Daybreak -$7,300 $4,138
Sutter Creek N. of San Jose Rd
Brentwood
019-110-040
019-290-031
5 N. Parkside Dr, N. of Polaris Dr. -$7,300 $4,128
Pittsburg
086-010-017,019
AVERAGE PRICE/LOT INDICATION $4,542
- ----------------------------------------------------------------------------------------------------------------------
NOTES:
(1) Original price for Sale 5 included 27 finished lots. The pre-adjustment figure of $15,500/lot is only for the
comparable's 79 unfinished lots with a vesting tentative map. $1,215,000 ($45,000/lot) of the original $2,439,500 sale
price was allocated to the finished lots.
(2) Unusual costs for comparables included extraordinary finishing costs, fees, or interest assumed.
(3) Projects which are not part of a master planned community with golf, like the proposed subject, require an upward
adjustment.
(4) Known unusual costs are the from the subject's reclamation project, which was inflated to a 1998 figure
of $9.7 million, or approximately $7,300/lot.
Sources: COMPS, Inc, Buyers, Sellers, Sedway Group.
[CJD] 07/21/98
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
CYPRESS LAKES 1998 APPRAISAL 30 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
development. Our familiarity with appraisal literature on the subject
has led us to conclude that a 10 percent upward adjustment is
appropriate.(7)
PAPER LOT SALE NUMBER TWO represents the transfer of a 65-lot proposed
development from Ralph P. Garrow to Rural California Housing Corporation (RCHC),
a non-profit entity. The sale took place on April 12, 1996, by which time the
market had begun to sense signs of recovery from 1995 lows. Assessments of
$55,000 per year for 20 years were assumed, although the buyer (a relatively
inexperienced non-profit) was unaware of the details of these assessments,
including the principal amount. A vesting tentative map existed at the time of
sale, and the buyer planned to develop homes of 1,150 to 1,350 square feet on
5,000-square-foot lots. As an affordable housing developer, RCHC planned to
price these homes at below market rates of $130,000 to $138,000.
Finished lot costs plus fees were approximately $58,500 per lot. The
buyer reported that about $3,500 represented unusual costs, for which we make an
adjustment to the sale. Since the market had already enjoyed some improvement
with an increasingly positive outlook, an 8 percent time adjustment was made. A
downward 12 percent adjustment was necessary due to the comparable's Brentwood
location, which has become an increasingly popular community in recent years. As
with all other comparables, a 10 percent upward adjustment was necessary in
consideration of Cypress Lakes's affordance of a master-planned community with
golf. While this comparable development's average lot size of 5,000 square feet
is below that of Cypress Lakes, no specific adjustment was made; to some degree
lot size is reflected in our master-planned community adjustment and market
demand at the time of sale. We will, however, consider lot size in our final
reconciliation of the Sales Comparison Approach.
PAPER LOT SALE NUMBER THREE is the December 1996 sale of 30 lots from
Vasco Group to Greystone Homes. Greystone assumed $8,000 per lot in interest and
$8,800 per lot in assessments as part of the transaction. The price reflects
that, by December 1996, the market had already enjoyed considerable
appreciation, although additional price increases would continue through year
end 1997. The buyer reported average finishing costs plus fees at $55,000. The
homebuilder planned to develop 1,600- to 2,200-square-foot homes on
6,000-square-foot lots. Prices were to be in the $175,000 to $225,000 range.
The first adjustment of 6 percent for market conditions reflects the
fact that the market continued to improve after 1996. The downward 15 percent
adjustment for entitlements is based on our knowledge of price differences in
the local market between lots with vesting tentative and final maps. The
location adjustment of -12 percent is in accordance with our market information
of the town of Brentwood's desirability versus that of unincorporated Oakley.
The final golf master-planned community adjustment is in accordance with the
adjustment made to all comparables.
PAPER LOT SALE NUMBER FOUR is near the location of Comparable Three and
has the same buyers and sellers. Greystone homes purchased this 75-lot site due
to the success of its earlier project represented by Comparable Three. In
addition to $8,800 per lot in assessments, Greystone assumed interest of $10,000
per lot. Finishing costs per lot ranged from $47,000 to $65,000 and averaged
approximately $55,000 per lot. The sale date in September of 1997 was in the
middle of the latter half of the year, which saw prices
- ----------------
(7)The APPRAISAL JOURNAL published a study in its July 1997 issue
("Adjusting the Value of Houses Located on a Golf Course") that showed home
prices are approximately 5 percent more just for being in a golf course
community and not with any views or frontage. We apply our 30 percent
division and 60 percent multiplication factor to convert the adjustment to
one applicable to lot prices. This results in a 10 percent adjustment factor.
CYPRESS LAKES 1998 APPRAISAL 31 APRIL 1998
<PAGE>
SEDWAY GROUP
Real Estate and Urban Economics
begin to spike. Greystone planned to develop homes of 1,100 to 1,700 square
feet, priced at $140,000 to $175,000. Lot sizes were small at only 4,000 square
feet.
As with Sale Two, no specific adjustment was made for small average lot size
for this comparable; lot size will be considered in our final reconciliation
of the Sales Comparison Approach. The time adjustment of 3 percent reflects
ongoing appreciation of land, which began to spike by the end of the year.
The -15 percent adjustment for entitlement status is typical for this market
when differentiating between vesting tentative and final map status. The
location and golf MPC adjustments were made using the same guidelines applied
to all comparables.
PAPER LOT SALE NUMBER FIVE was part of a complex transaction that took place
between North American Refractories and Schuler Homes. Schuler acquired a
total of 106 lots, of which 27 had a final map and were already finished. The
remaining 79 lots had a vesting tentative map and were unfinished. The buyer
also reported receiving an option to buy 73 additional lots with a vesting
tentative map and purchased 14 completed single-family homes. The price of
these option lots and single-family homes is not included in the purchase
price of $2,439,500. In addition to the purchase price, the buyer assumed
$10,000 per lot in assessments. Homes of 1,500 to 2,000 square feet were to
be developed on 6,000-square-foot lots. The anticipated selling price of the
homes is $150,000 to $175,000.
Because we were concerned only with the portion of the transaction involving
unfinished lots with a vesting tentative map, we had to separate the portion
of the sale price allocated to the finished lots. The buyer would not
disclose the allocation method, but the broker reported that approximately
$45,000 per lot was allocated to the finished lots and $15,500 per lot was
allocated to the unfinished lots with a vesting tentative map. We begin our
adjustment grid with this $15,500 figure, applicable to 79 lots. While the
December 1997 transaction date is relatively close to our valuation date, we
still included a one percent appreciation factor due to spiking prices
characteristic of the end of 1997 and beginning of 1998. Location and golf
master-planned community adjustments are made in a manner similar to the
adjustments with other comparables. While Pittsburg is somewhat less
desirable than Brentwood as a residential community, its closer proximity to
regional transportation and employment hubs necessitated a similar location
adjustment.
DISCOUNT FOR DEVELOPMENT SIZE
The comparable sales discussed above include 30 to 189 lots, which.
represents a typical purchase for a builder in this market. The Cypress Lakes
project includes the development of 1,330 lots, a golf course, and various
other amenities and requirements Therefore, each sale requires downward
adjustment for the larger size and longer development timeframe of Cypress
Lakes compared to the comparable sales.
Unfortunately, our research did not reveal any large property sales that
could be used to derive a size adjustment for this analysis. Therefore, we
have simulated a sell-out of the paper lots over time and discounted the
results in order to estimate the type of discount that might be required to
sell the property in bulk.
It is important to recognize that this is an analytical exercise that is
utilized to estimate a reasonable adjustment to account for the large size of
the subject relative to the comparable sales. It is extraordinarily unlikely
that a master-planned golf-course community like Cypress Lakes would actually
be sold off as paper lots. However, this approach is reasonable to simulate
the recognition of the paper lot value of the property over a realistic
timeframe, and thus is utilized to derive a size discount for the property.
CYPRESS LAKES 1998 APPRAISAL 32 APRIL 1998
<PAGE>
To perform this analysis, we divided the 1,330 planned lots into 12 groups
of 100 lots and a 13th group of 130 lots. We then experimented with the
phased sale of these 13 groups over a six- to eight-year timeframe, using
a variety of appreciation and discount rates. Generally, the discount
implied in this analysis ranged between 25 percent and 35 percent. For
those sales with approximately 100 or fewer lots, we utilized a discount
of 25 percent, which reflects the currently strong market for residential
products in East County. A 30 percent discount was utilized for the one
larger sale of 189 lots.
DISCOUNT FOR EXTRAORDINARY COSTS
As discussed later in the appraisal, there are substantial development
costs associated with the creation of finished lots at Cypress Lakes. Some
of these costs are typical costs incurred by any developer in moving from
paper lots to finished lots. Other costs (e.g., the lakes and parks) are
costs that will not be borne by other developers but will create
additional amenities that will add future value to the Cypress Lakes
development. However, there are some costs at Cypress Lakes that are
neither typical costs that would be borne by any development in East
County nor costs related to creating an attractive master-planned
community.
The primary extraordinary cost is the cost of the levee (reclamation
project) required of the project. The estimated cost for this reclamation
project is approximately $9.7 million (adjusted to 1998 dollars), or
$7,300 per lot. This $7,300 per lot cost is deducted from each comparables
adjusted price to arrive at the final value indication for Cypress Lakes.
CONCLUSION OF SALES COMPARISON APPROACH.
The comparables discussed above provide a relatively consistent indication
of value for the subject, ranging from $4,100 to $4,900 per lot after all
adjustments have been considered, and averaging approximately $4,500 per
lot. As discussed previously, all comparables had average lot sizes below
that of the subject's 6,500 square feet, for which no adjustment was made
in our grid. Considering lot sizes and taking into account the higher
level of amenities in the Cypress Lakes project relative to those of the
comparables, we conclude at a per lot value of $4,600, which is at the
upper middle end of the range. This is equivalent to $6.1 million
(rounded) for all 1,330 lots. No additional value is attributed to the
golf course, as the primary value that will accrue from the golf course is
the lot premiums that will accrue to many of the lots in the development.
The ultimate value of the golf course will be roughly equivalent to the
costs to develop it, as will be shown in a subsequent section of this
appraisal.
SUBDIVISION DEVELOPMENT APPROACH
The Subdivision Development Approach is a residual analysis used to
determine the value attributable to the raw land "as is" after an
allowance for sales and development costs have been subtracted from the
net discounted sales prices of the finished lots. This residual technique
combines elements of the direct sales, cost, and income approaches to
value.
The residual land valuation technique involves utilizing a discounted cash
flow analysis. The sales prices of the finished lots are projected using
an analysis of comparable sales occurring in the subject market area, in
addition to discussions with home developers active in the market area
throughout the 1990s. Selling expenses, developer overhead, site costs,
Mello-Roos carrying costs, and developer profit are
CYPRESS LAKES 1998 APPRAISAL 33 APRIL 1998
<PAGE>
subtracted from projected gross revenues, and net revenues are discounted
to the present over the absorption period. After discounting projected net
revenues over the absorption period, the resulting figure is the indicated
value of the subject raw land "as is." This method simulates one technique
used by potential buyers to determine a reasonable price for a site.
PROJECT SUMMARY
The proposed development contains 1,330 finished lots ranging in size from
5,000 square feet to 11,000+ square feet. These lots are to be developed
in 24 distinct neighborhoods, the construction of which is divided into
six separate phases. The neighborhoods south of Cypress Road will be
clustered around man-made lakes, while the community developed north of
Cypress Road will be centered around the 18-hole golf course developed in
conjunction with the project. Our model assumes that the finished lots
will be sold in clusters of 50 to 150 lots to merchant homebuilders.
Because of the large size of the project, development will be phased over
several years. The number of lots per phase is based primarily on
Chartered Land & Cattle's original development program, with modifications
made by Sedway Group to reflect a more protracted absorption period. The
project will be broken down into six phases with an average of 222 lots,
each supplying approximately one-and-a-half to two years of inventory,
depending on the absorption rate forecast for each particular phase.
The first three phases of the project will comprise neighborhoods in the
lake community south of Cypress Road and will be developed according to
the following program: Phase I includes neighborhoods 23 and 24 for a
total of 232 lots; Phase II comprises 238 lots in neighborhoods 14, 15,
18, 20, and 21; and, in addition to a pool and tennis facility, Phase III
includes 172 lots in neighborhoods 16, 17, 19, and 22. The golf course
community north of Cypress Road will be phased according to the following
program: Phase IV includes 229 lots in neighborhoods 1, 2, 3, and 4; Phase
V comprises 212 lots in neighborhoods 8, 9, 10, 12, and 13; and the final
247 lots in neighborhoods 5, 6, 7, and 11 will be developed in Phase VI.
The 18-hole golf course will be developed during Phase I.
BASE FINISHED LOT PRICES
In order to develop a cash flow for the Subdivision Development Approach,
we must first estimate the base prices for which each of the subject's
finished lot types will sell. Base prices for each of the subject's ten
lot size categories were estimated by three separate methods. Each method
had its strengths and weaknesses, and certain methods were better than
others for estimating the prices for particular lot size categories. The
three methods are 1) an analysis of comparable individual finished lot
sales, 2) a review of area home prices from which we extract finished lot
values based upon the estimated percentage of the home price attributable
to land, and 3) local home builder and developer surveys. Our base lot
price conclusions are based upon an examination of each of these three
techniques. A presentation of each of these methods appears below.
INDIVIDUAL FINISHED LOT SALES. Sedway Group analyzed 13 sales of
individual finished lots, which are detailed as Exhibit 7. These larger
than average lot sales were the only finished lot sales available in the
subject market, where homebuilders are typically responsible for both
finishing the lots and building the houses. We have therefore made
adjustments for size based upon an analysis and our experience of
historical pricing differences per square foot between various lot sizes
in master-planned communities. Our analysis considers price per square
foot in order to arrive at a concluded value for the subject's average
6,531-square-foot lot.
CYPRESS LAKES 1998 APPRAISAL 34 APRIL 1998
<PAGE>
EXHIBIT 7
SINGLE FINISHED LOT COMPARABLES
SUMMARY AND ADJUSTMENT GRID
EASTERN CONTRA COSTA COUNTY
<TABLE>
<CAPTION>
Change in
# Location/ Grantor/ Sale Lot Size Sale Price/ Market
APN Grantee Date (SF) Price SF Conditions
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OAKLEY
1 4012 Haley Court John K Lowell Trust/ 8/29/97 7,360 $70,000 $9.51 0%
035-040-021-4 HPH Homebuilders 2000 LP
2 4016 Haley Court John K Lowell Trust/ 8/29/97 7,400 $70,000 $9.46 0%
035-040-022-2 HPH Homebuilders 2000 LP
BETHEL ISLAND
3 Willow Road Elvis Felders/ 6/14/96 7,560 $77,500 $10.25 5%
030-080-015-8 Marvin & Delores Newton
BRENTWOOD (PART OF APPLE HILL/SUMMERSET MASTER PLANNED COMMUNITY)
4 40 Gala Lane Blackhawk Nunn Active Adult/ 10/20/97 5,840 $139,500 $23.89 0%
019-270-037-5 Vivian Wildes
5 51 Gala Lane Blackhawk Nunn Active Adult/ 7/27/97 4,570 $128,500 $28.12 1%
019-270-025-0 Sheryl Palmer
BYRON (PART OF DISCOVERY BAY MASTER PLANNED COMMUNITY)
6 3927 Lighthouse Place New Discovery Inc/ 12/15/97 9,600 $150,000 $15.63 0%
008-470-009-5 Richard & Christina Jorgensen
7 3924 Lighthouse Place New Discovery Inc/ 10/23/97 9,838 $144,000 $14.64 0%
008-460-011-3 Don & Rebecca Ferguson
8 4215 Beacon Place New Discovery Inc/ 7/31/97 7,200 $122,500 $17.01 1%
008-380-028-4 Gale & Karen Halbakken
9 2264 Reef Court Louise Reed Trust/ 6/27/97 7,080 $111,000 $15.68 1%
008-160-023-1 Joseph & Tina Bango
</TABLE>
<TABLE>
<CAPTION>
Price Adjustments
# Location/ Grantor/ at Current Golf Golf
APN Grantee Market Size MPC* Loc. Frontage
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OAKLEY
1 4012 Haley Court John K Lowell Trust/ $9.51 7% 10% -6% 0%
035-040-021-4 HPH Homebuilders 2000 LP
2 4016 Haley Court John K Lowell Trust/ $9.46 7% 10% -6% 0%
035-040-022-2 HPH Homebuilders 2000 LP
BETHEL ISLAND
3 Willow Road Elvis Felders/ $10.76 7% 10% 0% 0%
030-080-015-8 Marvin & Delores Newton
BRENTWOOD (PART OF APPLE HILL/SUMMERSET MASTER PLANNED COMMUNITY)
4 40 Gala Lane Blackhawk Nunn Active Adult/ $23.89 -5% 0% -12% -40%
019-270-037-5 Vivian Wildes
5 51 Gala Lane Blackhawk Nunn Active Adult/ $28.40 -10% 0% -12% -40%
019-270-025-0 Sheryl Palmer
BYRON (PART OF DISCOVERY BAY MASTER PLANNED COMMUNITY)
6 3927 Lighthouse Place New Discovery Inc/ $15.63 23% 0% -12% 0%
008-470-009-5 Richard & Christina Jorgensen
7 3924 Lighthouse Place New Discovery Inc/ $14.64 25% 0% -12% 0%
008-460-011-3 Don & Rebecca Ferguson
8 4215 Beacon Place New Discovery Inc/ $17.18 7% 0% -12% 0%
008-380-028-4 Gale & Karen Halbakken
9 2264 Reef Court Louise Reed Trust/ $15.83 7% 0% -12% 0%
008-160-023-1 Joseph & Tina Bango
</TABLE>
<TABLE>
<CAPTION>
Indicated Value
# Location/ Grantor/ Water View/ Adjusted Average (6,531 SF)
APN Grantee Access Totals Price/SF Subject Lot
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OAKLEY
1 4012 Haley Court John K Lowell Trust/ 0% 11% $10.56 $68,948
035-040-021-4 HPH Homebuilders 2000 LP
2 4016 Haley Court John K Lowell Trust/ 0% 11% $10.50 $68,576
035-040-022-2 HPH Homebuilders 2000 LP
BETHEL ISLAND
3 Willow Road Elvis Felders/ -15.0% 2% $10.98 $71,705
030-080-015-8 Marvin & Delores Newton
BRENTWOOD (PART OF APPLE HILL/SUMMERSET MASTER PLANNED COMMUNITY)
4 40 Gala Lane Blackhawk Nunn Active Adult/ 0% -57% $10.27 $67,083
019-270-037-5 Vivian Wildes
5 51 Gala Lane Blackhawk Nunn Active Adult/ 0% -62% $10.79 $70,481
019-270-025-0 Sheryl Palmer
BYRON (PART OF DISCOVERY BAY MASTER PLANNED COMMUNITY)
6 3927 Lighthouse Place New Discovery Inc/ -40% -29% $11.09 $72,453
008-470-009-5 Richard & Christina Jorgensen
7 3924 Lighthouse Place New Discovery Inc/ -40% -27% $10.69 $69,784
008-460-011-3 Don & Rebecca Ferguson
8 4215 Beacon Place New Discovery Inc/ -40% -45% $ 9.45 $61,726
008-380-028-4 Gale & Karen Halbakken
9 2264 Reef Court Louise Reed Trust/ -30% -35% $10.29 $67,221
008-160-023-1 Joseph & Tina Bango
</TABLE>
<PAGE>
CONTINUED
<TABLE>
<CAPTION>
Change in
# Location/ Grantor/ Sale Lot Size Sale Price/ Market
APN Grantee Date (SF) Price SF Conditions
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BYRON (PART OF DISCOVERY BAY MASTER PLANNED COMMUNITY)
10 3933 Lighthouse Place New Discovery Inc/ 6/26/97 9,600 $135,000 $14.06 1%
008-470-008-7 Michael & Katherine Stephenson
11 5636 Starfish Court Blaine Swint/ 1/23/97 7,200 $150,000 $20.83 2%
004-420-022-8 Frederic & Elizabeth Miller
12 5832 Drakes Dr New Discovery Inc/ 3/15/96 7,200 $150,000 $20.83 6%
004-390-022-4 Louis & Janice Karle
13 4440 Driftwood Court Marjorie Schroeder/ 11/19/97 7,080 $118,000 $16.67 0.0%
008-120-005-7 Russell & Janice Forrester
</TABLE>
<TABLE>
<CAPTION>
Price Adjustments
# Location/ Grantor/ at Current Golf Golf
APN Grantee Market Size MPC* Loc. Frontage
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BYRON (PART OF DISCOVERY BAY MASTER PLANNED COMMUNITY)
10 3933 Lighthouse Place New Discovery Inc/ $14.20 23% 0% -12% 0%
008-470-008-7 Michael & Katherine Stephenson
11 5636 Starfish Court Blaine Swint/ $21.25 7% 0% -12% 0%
004-420-022-8 Frederic & Elizabeth Miller
12 5832 Drakes Dr New Discovery Inc/ $22.08 7% 0% -12% 0%
004-390-022-4 Louis & Janice Karle
13 4440 Driftwood Court Marjorie Schroeder/ $16.67 6% 0% -12% 0%
008-120-005-7 Russell & Janice Forrester
</TABLE>
<TABLE>
<CAPTION>
Indicated Value
# Location/ Grantor/ Water View/ Total Adjusted Average (6,531 SF)
APN Grantee Access Adjustments Price/SF Subject Lot
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BYRON (PART OF DISCOVERY BAY MASTER PLANNED COMMUNITY)
10 3933 Lighthouse Place New Discovery Inc/ -40% -29% $10.08 $65,860
008-470-008-7 Michael & Katherine Stephenson
11 5636 Starfish Court Blaine Swint/ -40% -45% $11.69 $76,331
004-420-022-8 Frederic & Elizabeth Miller
12 5832 Drakes Dr New Discovery Inc/ -40% -45% $12.15 $79,324
004-390-022-4 Louis & Janice Karle
13 4440 Driftwood Court Marjorie Schroeder/ -30% -36% $10.67 $69,664
008-120-005-7 Russell & Janice Forrester
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ADJUSTED PRICE/SF AND PRICE/LOT FOR THE SUBJECT'S AVERAGE 6531 SF LOT $10.71 $69,935
AFTER 15% DISCOUNT TO SALE PRICE WHEN SOLD IN BLOCKS OF APPROXIMATELY 100 TO MERCHANT HOMEBUILDERS. $9.10 $59,445
- ----------------------------------------------------------------------------------------------------------------------------------
Note: Both percentage and numercial totals may not sum due to imbedded formulas and rounding.
*Adjustment for not being in a golf masterplanned community
Sources: Experian, Sedway Group. [CJD] 6/23/98
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The second significant adjustment made is for location. Home prices in
Brentwood differ from home prices in Oakley by approximately 6 percent.
However, this does not imply a 6 percent difference in lot pricing. Since
the costs of building in Brentwood and Oakley are generally similar, most
of the Brentwood premium of 6 percent of the price of the home must be
allocated to land. Therefore, the 6 percent adjustment is first divided by
30 percent, which converts the total location premium to a "premium as a
percentage of lot price" rather than "premium as percentage of home
price." Then, we multiply the result by 60 percent, which allocates the
share of the land premium to the land developer. (The remaining 40 percent
of the land premium remains for the homebuilder.) The end result of this
process is a negative 12 percent adjustment applied to all of the
Brentwood sales. We performed a similar conversion process for the other
comparable locations. Location adjustments were consistent with earlier
adjustments for finished and paper lots; a downward 6 percent adjustment
was made to the Oakley comparables due to their location within a more
desirable portion of the community near scenic vineyards.
Time adjustments were made in accordance with interviews with brokers and
our analysis of home and land appreciation; adjustments for market
conditions were made somewhat more conservatively with the finished lots
than the paper lots given the more immediate development timeframe for
finished lots. A 10 percent upward adjustment(E) was made for the sales that
were not part of a master-planned community. Adjustments for water
views/access and golf frontage were made based upon the premium analysis
that is presented in a following section.
In our final reconciliation, we adjusted the average price among all sales
by -15 percent in order to reflect a "mini-bulk" price for selling the
lots in blocks of 50-150 to merchant builders, rather than the comparable
single-lot sales. The final value indication for the subject's average
lot, after inclusion of all adjustments, is $59,000 (rounded).
LAND VALUE AS A PERCENTAGE OF LOCAL HOME PRICES. Sedway Group has found
that developers typically allocate 30 percent of the selling price of a
single-family home to land value for homes similar those found in most new
developments in East County. With this in mind, we studied prices for new
homes in Oakley, Brentwood, Byron and Antioch and applied the 30 percent
figure. We considered the impact of location, whether or not homes were
part of golf master-planned communities, and individual characteristics of
the homes in our sample in order to fine-tune the 30 percent land value
allocation. There were sufficient data in our sample to estimate prices
for the subject 5,000-, 5,500-, 6,000-, 6,500-, 7,000-, and
8,500-square-foot lots. A detailed analysis appears as Exhibit 8 on the
following page. Based on our survey sample of lots by size category, our
conclusions are in the table that follows.
- ----------------
(E)THE APPRAISAL JOURNAL published a study in its July 1997 issue
("Adjusting the Value of Houses Located on a Golf Course") that showed home
prices are approximately 5 percent more just for being in a golf course
community and not with any views or frontage. We apply our 30 percent
division and 60 percent division and 60 percent multiplication facto to
convert the adjustment to one applicable to lot prices. This results in a
10 percent adjustment factor.
CYPRESS LAKES 1998 APPRAISAL 37 APRIL 1998
<PAGE>
EXHIBIT 8
LOT PRICE INDICATION
30% OF HOME PRICE ALLOCATION METHOD
<TABLE>
<CAPTION>
APPROXIMATE AVERAGE 30% TO LOCATION GOLF MPC* TOTAL ADJUSTED
LOT SIZE HOME PRICE LAND ADJUSTMENT ADJUSTMENT ADJUSTMENT VALUE INDICATION
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BRENTWOOD SAMPLE
5,000 $187,203 $56,161 -12% 10% -2% $55,038
6,000-6,700 $209,369 $62,811 -12% 10% -2% $61,554
BYRON/DISCOVERY BAY SAMPLE
4,800 $171,690 $51,507 -12% 10% -2% $50,477
7,200 $214,307 $64,292 -12% 10% -2% $63,006
ANTIOCH SAMPLE
5,500-6,500 $188,140 $56,442 -10% 10% 0% $56,442
7,000 $213,218 $63,966 -10% 10% 0% $63,966
8,500 $220,958 $66,287 -10% 10% 0% $66,287
PITTSBURG SAMPLE
5,000 $178,690 $53,607 -12% 10% -2% $52,535
6,000 $198,350 $59,505 -12% 10% -2% $58,315
- ----------------------------------------------------------------------------------------------------------
Sources: Anthony Hurt and Associates, Sedway Group
D:\1698\[98Sprd1698.xls]30%Adjdetail[CJD] 06/23/98
*Master Planned Community with Golf Course.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOT PRICE INDICATIONS BY PERCENT HOME VALUE
-------------------------------------------
Lot size (sq.ft.) Indicated Price
-------------------------------------------
<S> <C>
5,000 $53,000
5,500 $55,000
6,000 $58,000
6,500 $61,000
7,000 $63,000
8,500 $66,000
</TABLE>
SURVEYS OF LOCAL HOME BUILDERS AND DEVELOPERS. During the course of our
research, we interviewed local homebuilders and developers for their
opinion of the East County market as of March 1998. Their opinions
generally formed a consensus that the subject's average 6,531-square-foot
finished lot would have been worth approximately $60,000 to $65,000. The
majority of those surveyed remarked that, in the local market, finished
lots are rarely sold. Rather, it is more usual for home builders to buy
lots with tentative or final maps and both finish the lots and build the
homes. In the case of the subject, however, homebuilders consistently
cited that the development had above average risk and it would be
necessary for the land developer to bring the property to the finished lot
level in order to induce them to buy the lots for building.
CONCLUSION OF FINISHED LOT PRICING ANALYSIS. Based upon the three analyses
presented above, as well as a careful weighing of other information and
our professional judgment, we estimate the value of each for the subject's
finished lot categories by size. For the average subject lot (6,531 square
feet), the three methods described above provided value indications of
$59,000, $61,000, and $60,000 to $65,000, respectively. Therefore, we
believe that our analyses show a consistent value indication for the
average lot, and we believe that the conclusions for other lot sizes are
consistent with the conclusion for the average lot. These individual lot
values are what will be used in the Subdivision Development Model, after
inclusion of lot premiums, which will be the subject of the next section.
Our base individual lot value estimates are set forth as follows:
CYPRESS LAKES 1998 APPRAISAL 39 APRIL 1998
<PAGE>
SEDWAY GROUP
- -------------------------------
Real Estate and Urban Economics
<TABLE>
<CAPTION>
----------------------------------------------
----------------------------------------------
SUBJECT LOT BASE PRICE CONCLUSIONS
----------------------------------------------
----------------------------------------------
Lot Size (sq.ft.) Base Price
----------------------------------------------
<S> <C>
5,000 $53,000
----------------------------------------------
5,500 $55,000
----------------------------------------------
6,000 $57,000
----------------------------------------------
6,500 $60,000
----------------------------------------------
7,000 $62,000
----------------------------------------------
8,000 $65,000
----------------------------------------------
8,500 $67,000
----------------------------------------------
9,600 $72,000
----------------------------------------------
10,000 $75,000
----------------------------------------------
11,000 $80,000
----------------------------------------------
</TABLE>
LOT PREMIUMS
The base lot prices must be adjusted upward to account for water views, golf
course views, and frontage. Downward adjustment is required for power line
proximity. Exhibit 9 illustrates historical premiums experienced in other Bay
Area residential developments in the mid-1990s. Exhibit 10 presents a
year-end 1997 survey of premiums. As illustrated in the tables, premiums as a
percentage of value have gone down somewhat in the last two years. These
premiums are based upon home prices rather than lot prices. We will discuss a
conversion process to adjust for lot pricing in the text that follows.
Based on these data and our understanding of the subject's comparability to
these developments, we conclude that the subject's golf view/frontage lots
should be able to achieve a 15 percent premium on the home price. This
premium percentage is lower than the historical premium found at Brookside in
Stockton, but higher than that of the current Madison Greens at Apple Hill.
Water view lots should be able to achieve a 10 percent premium, which we
believe is an appropriate mid-range conclusion given that the views will be
of small lakes and ponds rather than large natural or man-made bodies of
water. To account for the fact that some lots will have either partial golf
or water views, we have made a 5 percent and 2 percent view category to
express these degrees of view quality. Degree adjustments of -5 percent and
- -10 percent were estimated for power line proximity based upon our experience
and knowledge of appraisal research on the effects of power lines on value. A
detail of the individual adjustments made lot by lot is contained in the
Addenda. A detail of lot pricing and overall adjustments by neighborhood is
shown in the Addenda.
Before these premiums are applied to the subject property, two additional
adjustments are required. First, the data gathered in our survey express
premiums as a percentage of the base home price. Thus, our concluded
percentage premiums must be converted to reflect the fact that they are being
applied in this
CYPRESS LAKES 1998 APPRAISAL 40 APRIL 1998
<PAGE>
SEDWAY GROUP
- -------------------------------
Real Estate and Urban Economics
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
EXHIBIT 9
ANALYSIS OF HISTORICAL PREMIUMS
COMPARABLE SUBDIVISIONS
BAY AREA
- ----------------------------------------------------------------------------------------------------------------------------
DEEP WATER SHALLOW WATER WATER VIEW GOLF COURSE
SUBDIVISION PREMIUM PREMIUM PREMIUM PREMIUM
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BEL MARIN KEYS IV $30,000-$60,000
Novato 10%-19%
MARIN LAGOON $15,000
San Rafael 5%
THE VILLAGE AT $80,000
BAYPOINT LAGOONS 23%
San Rafael
MARIN SHORES $100,000
Greenbrae 25%
THE SHORES AT $58,000
CALIFORNIA BAYSIDE 17%
Redwood Shores
GOVERNOR'S BAY $15,000
Redwood Shores 3%
LAKESHORE VILLAS $65,000 $50,000 $15,000
Redwood Shores 16% 12% 4%
THE FAIRWAYS AT $25,000
APPLE HILL 15%
Brentwood
DISCOVERY BAY $80,000 $50,000 $25,000
Byron 25% 15% 8%
TRADITIONS-BROOKSIDE $20,000
Stockton 12%
DESIGNER COLLECTION- $55,000 $55,000
BROOKSIDE 24% 24%
Stockton
THE CLASSICS $39,000
Brookside 19%
- ----------------------------------------------------------------------------------------------------------------------------
RANGE 10%-25% 5%-24% 3%-25% 8%-24%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Note: Survey conducted mid-year 1995.
Sources: Survey of Various Brokers and Sales Agents; Sedway Group.
5/19/98
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
SEDWAY GROUP
- -------------------------------
Real Estate and Urban Economics
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
EXHIBIT 10
ANALYSIS OF CURRENT PREMIUMS
COMPARABLE SUBDIVISIONS
BAY AREA
- ----------------------------------------------------------------------------------------------------------------------------
DEEP WATER SHALLOW WATER WATER VIEW GOLF COURSE
SUBDIVISION PREMIUM PREMIUM PREMIUM PREMIUM
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THE PENINSULA AT $26,000
BAYPOINT LAGOONS 6%
San Rafael
MADISON GREENS AT $22,500
APPLE HILL 10%
Brentwood
MIRAMAR AT $15,000-$80,000
DISCOVERY BAY 14%-35%
Byron (1)
IRONWOOD AT $20,000
ADOBE CREEK 7%
Petaluma
VENTANA DEL MAR $36,500
Redwood City 14%
SUNSET POINT AT $62,500
MARINA BAY 25%
Richmond
FALCON RIDGE AT $27,500
OAKHURST 7%
Clayton
- ----------------------------------------------------------------------------------------------------------------------------
RANGE 14%-35% 6%-25% 14% 7%-10%
(1)
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Note: Survey conducted year-end 1997.
(1) Premium is applicable to finished lots for deep water frontage.
Sources: Survey of Various Brokers and Sales Agents; Sedway Group.
5/19/98
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
SEDWAY GROUP
- -------------------------------
Real Estate and Urban Economics
appraisal to the land only. Finished lots typically represent 25 to 45
percent of the total home price; the exact percentage rate is dependent on
the cost of the land and other market factors. Based upon the characteristics
of the East County residential market, we believe that 30 percent of the home
price would be attributable to land.
The second adjustment pertains to the distribution of the premium. Locational
premiums are due to the specific features of a given lot (i.e., frontage,
views, etc.); thus, they are attributed to the land. However, the home
builder and land developer both generally receive a portion of the premium.
The distribution of the premium between the land developer and the home
builder depends on market conditions and the individual project
characteristics. In the past, Sedway Group has found that either a 60/40 or
50/50 split is most common. Because so much of the value inherent in the
subject property will be due to the land developer's creation of a
master-planned community, we have allocated 60 percent of the premium to the
land developer. The conversion of premiums expressed as a percentage of home
price to premium expressed as a percentage of lot price is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PREMIUM
HOME PRICE DIVIDE MULTIPLY APPLICABLE
PREMIUM TYPE PREMIUM BY BY TO LOTS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOLF VIEW/FRONTAGE 15% 30% 60% 30%
WATER VIEW 10% 30% 60% 20%
PARTIAL WATER OR GOLF VIEW 5% 30% 60% 10%
LESSER VIEWS 2% 30% 60% 4%
MINOR POWER LINE PROXIMITY -5% 30% 60% -10%
CLOSE POWER LINE PROXIMITY -10% 30% 60% -20%
NO INFLUENCE 0% 30% 60% 0%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
RECONCILED BASE PRICES PLUS PREMIUMS
Exhibit 11 on the following page combines the base lot prices derived earlier
with the weighted average premiums and discounts by neighborhood discussed
above. The combined base prices plus premiums/discounts range from a low of
$51,865 for Phase I of the development to a high of $94,342 for Phase V of
the development, averaging $63,344 across all phases. These average lot
prices, including premiums, are what will be entered into our cash flow model
on a phase-by-phase basis.(9)
- -----------------------
(9)It is interesting to compare the $63,344 average lot price after a
consideration of premiums and discounts to the base lot price for the average
lot of $59,454. This increase represents the net value added by the golf
course amenity, lakes, and master-planned community nature of the project,
etc., less the discount attributed to the power lines.
CYPRESS LAKES 1998 APPRAISAL 43 APRIL 1998
<PAGE>
SEDWAY GROUP
- -------------------------------
Real Estate and Urban Economics
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
EXHIBIT 11
NEIGHBORHOOD MIX AND PRICING
CYPRESS LAKES
OAKLEY, CALIFORNIA
AS OF MARCH 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Base LOT Weighted AVERAGE TOTAL AVERAGE Value of
Price SIZE Average LOT PRICE PRICE LOT PRICE Phase as
Neighborhood Total Lots (1995 $) S.F. Premium Incl. Premium (Inc. Prem.) Incl. Premium % of Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
I. South of Cypress - Lake Community
- --------------------------------------
Phase I (Neighborhoods 23 and 24)
Neighborhood 23 133 $53,000 5,000 -1.83% $52,028 $6,919,680
Neighborhood 24 99 $53,000 5,000 -2.14% $51,865 $5,134,640
--- -----------
232 $12,054,320 $51,958 14.31%
Phase II (Neighborhoods 14,15,18,20, and 21)
Neighborhood 14 63 $67,000 8,500 13.61% $76,121 $4,795,601
Neighborhood 15 67 $53,000 5,000 -9.73% $47,842 $3,205,440
Neighborhood 18 50 $60,000 6,500 11.16% $66,696 $3,334,800
Neighborhood 20 39 $60,000 6,500 9.28% $65,569 $2,557,200
Neighborhood 21 19 $67,000 8,500 24.74% $83,574 $1,587,900
--- -----------
238 $15,480,941 $65,046 18.38%
Phase III (Neighborhoods 16,17,19 and 22)
Neighborhood 16 44 $53,000 5,000 0.00% $53,000 $2,332,000
Neighborhood 17 68 $57,000 6,000 0.41% $57,235 $3,891,960
Neighborhood 19 41 $60,000 6,500 9.41% $65,649 $2,691,600
Neighborhood 22 19 $67,000 8,500 23.16% $82,516 $1,567,800
--- -----------
172 $10,483,360 $60,950 12.44%
II. North of Cypress - Golf Community
Phase IV (Neighborhoods 1, 2, 3, and 4)
Neighborhood 1 24 $65,000 8,000 8.67% $70,633 $1,695,200
Neighborhood 2 41 $72,000 9,600 14.29% $82,291 $3,373,920
Neighborhood 3 109 $55,000 5,500 7.72% $59,249 $6,458,100
Neighborhood 4 55 $72,000 9,600 16.98% $84,227 $4,632,480
--- -----------
229 $16,159,700 $70,566 19.18%
Phase V (Neighborhoods 8, 9, 10, 12, and 13)
Neighborhood 8 61 $65,000 8,000 8.36% $70,434 $4,296,500
Neighborhood 9 39 $57,000 6,000 8.67% $61,940 $2,415,660
Neighborhood 10 19 $75,000 10,000 25.79% $94,342 $1,792,500
Neighborhood 12 35 $55,000 5,500 10.86% $60,971 $2,134,000
Neighborhood 13 58 $53,000 5,000 6.10% $56,234 $3,261,566
--- -----------
212 $13,900,226 $65,567 16.50%
Phase VI (Neighborhoods 5, 6, 7, and 11)
Neighborhood 5 41 $80,000 11,000 7.17% $85,737 $3,515,200
Neighborhood 6 63 $57,000 6,000 6.29% $60,583 $3,816,720
Neighborhood 7 91 $62,000 7,000 2.68% $63,662 $5,793,280
Neighborhood 11 52 $55,000 5,500 6.42% $58,533 $3,043,700
--- -----------
247 $16,168,900 $65,461 19.19%
-------------------------------------------------------------------------------------------------------------------------------
Total All Phases 1,330 6,531 $84,247,447 $63,344 100.00%
-------------------------------------------------------------------------------------------------------------------------------
Sources: Chartered Land and Cattle Company; Sedway Group.
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CYPRESS LAKES 1998 APPRAISAL 44 APRIL 1998
<PAGE>
[LOGO]
PROJECTED SALES PRICE APPRECIATION RATE
The residential market, and the regional economy in general, continued to
enjoy price and sales volume improvement through the end of 1997 and
beginning of 1998. In fact, the current overall economic expansion and
continued improvement of the residential market represents an unusually
positive condition that has led some to speculate a softening of the market
in the near future. Nevertheless, most economists remain optimistic that
positive, though gradually more modest, upward trends will continue.
As indicated in our data on East County single-family home developments,
overall absorption of homes has picked up from an average of about three
units per project per month in mid 1995 to about four units per month by
year-end 1997. Further, recent years have not been characterized a large glut
of new homes on the market as past years, which provides a sign that positive
absorption trends should continue.
Given these positive conditions and signs of continued market stability,
Sedway Group has utilized an underlying inflation rate for costs of 3.0 to
3.5 percent annually during the project development and sales period.
However, we forecast that home and lot prices will increase at rates that
differ somewhat from this inflation rate. Sedway Group forecasts price
appreciation during 1998 at 5.0 percent. Between 1998 and 1999, Sedway Group
estimates price increases at the rate of 4.0 percent, reflecting a more
modest scenario as the market begins to stabilize from earlier price spikes.
Prices are projected to increase by 3.0 percent annually from 2000 through
the project sellout period, consistent with the underlying inflation rate.
PROJECTED ABSORPTION
Projected absorption of lots is based upon absorption of homes as reported by
Anthony Hurt & Associates (see Chapter II, "Residential Market" section),
with the underlying assumption being that builders will generally wish to
acquire new lots at relatively the same pace at which homes are selling. The
December 1997 Anthony Hurt data show individual projects (containing an
average of about 170 homes and a median of 102 homes) selling at an average
absorption of 4.7 units in Brentwood, 8.2 units in Byron, 3.5 units in
Antioch, and 3.0 units in Pittsburg. As a large master-planned community,
Cypress Lakes should be able to have two to three approximately 100-unit
projects targeting different market segments selling simultaneously. Taking
the current average absorption of 3.7 units per month for projects in
Brentwood, Antioch, and Pittsburg, and assuming that three projects were
selling at once, the indicated absorption for the subject is just over 11
units per month.
Based on our market assessment and projections that the economy and housing
market will continue to perform well, we have projected sales that reflect
these conditions and improve as Cypress Lakes gains market acceptance. We
forecast absorption in Phase I of 12 lots per month (assuming three 100-unit
projects selling concurrently), which is slightly above the calculated
average of the last paragraph, though not as high as the per project average
of 4.7 in Brentwood (which would imply sales of 14 lots per month). This
lower absorption rate is also reflective of the somewhat pioneering nature of
the Cypress Lakes location.
As the project's marketing strategy begins to achieve success, we increase
absorption to 13 lots per month in Phases II and III of the Cypress Lakes
project. Because of the added amenity of the golf course and the anticipated
acceptance of the location by the time the lots are available for sale, the
absorption rate is projected to increase to 14 lots per month for the golf
course communities in Phases IV, V, and VI. This absorption figure is in line
with that of units in Brentwood. With the golf course in place, the subject
development will be closer in amenities and characteristics to the Brentwood
projects presented in the
45
<PAGE>
[LOGO]
Anthony Hurt survey, and we therefore conclude that Brentwood's current
absorption is a good benchmark for the subject at completion of its golf
course. Sales are projected to begin in December of 1999.
GOLF COURSE REVENUE
Revenue from the sale of the golf course is also included in our discounted
cash flow model. In order to simplify what is already a very complicated
model, we have assumed that the golf course will be sold upon the completion
of golf course development. In this manner, we eliminate the need to develop
an operating pro forma for the golf course, but simply recognize the capital
value of the course upon completion.(10)
Exhibit 12 summarizes the characteristics of various golf courses in the
eastern Contra Costa County market area. These are the courses that would
likely be competitive with the Cypress Lakes golf course. The physical nature
of the site and demographics of the subject indicate that subject golf course
would be considered a mid-level course in relation to the golf courses
summarized in the exhibit. Greens fees should be in excess of the nearby
Bethel Island course due to its newer construction and location within a
master-planned community.
Exhibit 13 summarizes various recent golf course sales in California. Sales
prices vary dramatically based upon the quality of the course and the other
items that are included with a sale (clubhouse, restaurant operations, etc.)
However, there is a clear relationship between typical greens fees and sales
price. Sales prices are shown on a "price per hole" basis in order to allow
for comparison with courses that have more or less than 18 holes. Based upon
the data presented, this would indicate a sales price of approximately
$500,000 per hole, or approximately $8.5 million. Therefore, our model
incorporates a value of $8.5 million for the golf course. The actual value
used in the model is appreciated to 2000, the year in which the course is
expected to be completed, using the same appreciation rates as used for lot
prices.
CONSTRUCTION SCHEDULE
The Cypress Lakes project is scheduled to be developed in six distinct
phases. The construction schedule is based on the previous developer's
anticipated construction schedule, with refinements made by Sedway Group in
anticipation of current market absorption. For purposes of this analysis, the
1,330 lots were divided into six phases averaging 222 lots, each supplying
approximately one-and-a-half to two years worth of inventory.
- ------------------------
(10) In reality, we would anticipate that the golf course would
continue to be operated by the developer as the residential portions of the
projects are built, or perhaps the golf course would be transferred to an
entity related to the developer. This is typical for golf course communities
where much of the value of the golf course is derived from lot premiums
rather than golf course operations.
46
<PAGE>
[LOGO]
EXHIBIT 12
GOLF COURSES IN MARKET AREA
MARCH 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Number of Annual
Golf Course Location Year Built Holes Rounds Weekday
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Public Courses
1 Buchanon Fields Concord 1960 9 NA $10
2 Lone Tree Golf Course Antioch NA 18 NA $16 (Antioch residents $13)
3 Pittsburgh Delta View Golf Course Pittsburgh 1947 18 54,300 (1992) $18 ($15 for Pitt res.)
$20 on Fridays ($17 for residents)
4 Bethel Island Golf Course Bethel Island 1965 18 NA $15 ($12 after noon, $8 at twilight)
5 Diablo Creek Concord 1962 18 105,000 (1992) $20
6 Boundary Oaks Walnut Creek 1969 18 NA $20
7 Las Positas Golf Course Livermore 1966 18 84,000 (1992) $23 ($21 for residents)
$15 at twilight
8 Brentwood Country Club Brentwood 1996 18 $45 Monday Thru Thursday
Semi-Private Courses
1 Oakhurst Country Club Clayton 1990 18 47,500 (1992) $65 ($90 on Fridays)
Private Courses
1 Discovery Bay Country Club Byron 1986 18 40,000 (1992) $33 ($22 after twilight) (2)
2 Round Hill Country Club Alamo 1964 18 NA $40 (2)
3 Green Valley Country Club Suisun City 1904 18 45,000 (1992) $40 ($60 w/o member)
4 Brookside Country Club Stockton 1991 18 NA $35 (2)
5 Crow Canyon Country Club Danville 1977 18 40,000 (1992) $45 Tue thru Thurs (2)
6 Diablo Country Club Diablo 1914 18 NA $45 Tue thru Thurs (2)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Golf Course Greens Fees (1) Weekend Comments
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Public Courses
1 Buchanon Fields $11.50
2 Lone Tree Golf Course $22 (Antioch residents $16)
3 Pittsburgh Delta View Golf Course $24 (Pittsburgh residents $19)
4 Bethel Island Golf Course $22 ($12 at twilight)
5 Diablo Creek $23 Carts $11 per person
6 Boundary Oaks $25 Carts $11.50
7 Las Positas Golf Course $31 ($27 for residents)
$18 at twilight
8 Brentwood Country Club $55 Friday Thru Sunday Cart Included
Semi-Private Courses
1 Oakhurst Country Club $90 Subtract $10 from from all greens fees
if accompanied by member
Private Courses
1 Discovery Bay Country Club $49 ($33 after twilight) (2)
2 Round Hill Country Club $50 (2)
3 Green Valley Country Club $50 ($70 w/o member)
4 Brookside Country Club $50 (2)
5 Crow Canyon Country Club $55 Friday Sat & Sun (2)
6 Diablo Country Club $55 Friday Sat & Sun (2)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Greens fees are as of an April 1998 survey.
(2) Greens fees are for non-members who are accompanied by a member.
Non-members golfing without a member is prohibited.
<PAGE>
[LOGO]
EXHIBIT 13
COMPARABLE GOLF COURSE SALES
1995 to 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Number of Price Per
Golf Course Location Date of Sale Holes Consideration Hole Year Built Type of Course
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Upland Hills Country Club Upland November 1995 18 $8,150,000 $452,777 1976 Semi-Private
2. Fountaingrove Resort Santa Rosa March 28, 1996 18 $7,500,000 $416,666 1982 Public
and Country Club
3. Seacliff Country Club Huntington Beach May 1996 18 $10,200,000 $566,666 1967 Non-Proprietary
Private
4. Eagle Crest Golf Club Escondido June 1996 18 $6,125,000 $340,277 1993 Daily Fee
5. San Geronimo Golf Course San Geronimo Dec 18, 1996 18 $6,200,000 $344,444 1964 Public
6. Oakhurst Country Club Clayton October 1997 18 $9,600,000 $533,333 Public
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
greens fees(1)
Golf Course Weekdays Weekends Cart Fees Annual Rounds Comments
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Upland Hills Country Club $18 $39 $11 during week; 55,000 (1995)
included on
weekend
2. Fountaingrove Resort $45 $70 $18 50,000 (1997) 1997 greens fees
and Country Club (cart included)
3. Seacliff Country Club
4. Eagle Crest Golf Club $35/$40 $50/$55 included 50,000 (1995)
5. San Geronimo Golf Course $40 $55 $10 per person 50 to 55,000 1997 greens fees
(1997)
6. Oakhurst Country Club
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) greens fees reflect time of sale unless
otherwise noted.
(3) $10 off of all greens fees for San Diego
County residents.
<PAGE>
[LOGO]
The analysis period begins March 31, 1998. Pre-development activities and
expenses are assumed to be incurred in the first three months of the
projection period. Construction of some off-site infrastructure for the
project (reclamation, some roads, sewer, and water, etc.) is anticipated to
be financed by a Mello-Roos bond issue. The bond issuance is anticipated in
July of 1998, concurrent with the start of construction of the off-site
infrastructure. The Mello-Roos financed infrastructure is anticipated to be
completed nine months later, in April of 1999. Phase I construction is
scheduled to commence six months after the start of off-site infrastructure
construction in January of 1999. Subsequent phases of construction will be
timed to provide a constant inventory of lots. The timing of start of
construction of subsequent phases will depend upon absorption, while allowing
for enough lead time to account for the anticipated nine-month construction
period.
The construction period for each phase is estimated to last nine months, with
the first lots in each phase available for sale upon completion of
construction. Absorption will be closely monitored and construction will be
curtailed in order to prevent a surplus of inventory. Inventory will be kept
within a nine-month supply based on absorption rates. The residual analysis
assumes that the timing of construction will be based on sales of units in
inventory and that a nine-month level of inventory is maintained.
The golf course will be developed in conjunction with the finished lots in
the Cypress Lakes community. The country club phases of the project (Phases
IV to VI) will ultimately be developed with 688 homes, many of which will be
clustered around the course. The 18-hole course will ultimately include a
clubhouse with a pro shop and restaurant facility. The golf course will be
developed concurrently with the construction of Phase I lots in the Lakes
community. By the time the first golf course community lots (Phase IV) are
available for sale, the golf course will have matured and be fully playable,
providing an amenity to the homebuyers.
DEVELOPMENT COSTS
Development costs are composed of direct and indirect costs associated with
the development of the site. The cost estimates are based on those provided
by the previous developer, Chartered Land & Cattle. These cost estimates are
provided in the Addenda. Exhibit 14 provides detailed cost estimates by
phase. As is shown in the exhibit, total development costs required to bring
the project to "finished lot" level are in excess of $68 million, or over
$50,000 per lot. And this represents costs before consideration of financing,
overhead, and contingency. Further, municipal and special district (such as
school district) fees are not included; they are to be paid by the
homebuilder, as is typical of development in this market.
Clearly, the Development Approach analysis is very sensitive to the accuracy
and reasonableness of the cost estimate. Unfortunately, the only estimate of
costs is that provided by the previous owner of the property. It is an
explicit assumption of our analysis that the costs provided by Chartered Land
& Cattle are reasonably accurate. Even small changes in the costs estimate
could have a very substantial impact on the concluded land value.
Cost estimates by phase and neighborhood are presented in the development pro
forma. These costs include all hard and soft costs, as well as a 5 percent
cost contingency on all costs, except that a 10 percent cost contingency is
applied to the reclamation project due to the uncertain nature of that type
of work.
Consistent with the original development plan, we assume
that a portion of the development costs will be financed with Mello-Roos
bonds. The carrying cost of the Mello-Roos bonds is included as a cost to
<PAGE>
[LOGO]
EXHIBIT 14
CONSTRUCTION COST BY PHASE
CYPRESS LAKES
OAKLEY, CALIFORNIA
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Aggregate Aggregate
Development Development
Phase Total Lots Costs (1993$)(1) Costs (1998$)(2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Off- Site Infrastructure (Mello-Roos Financed)
Reclamation NA $9,229,550 $9,737,175
Other Infrastructure NA $1,734,129 $1,829,506
----------- -----------
$10,963,679 $11,566,681
On- Site Infrastructure
Phase I
Neighborhood 23 133 $3,095,630 $3,265,890
Water Line NA $1,800,000 $1,899,000
Cypress SSFM NA $400,000 $422,000
Neighborhood 24 99 $1,530,885 $1,615,084
Fire Station NA $635,000 $669,925
----------- -----------
Total Cost (Phase I Lots) 232 $7,461,515 $7,871,898
Phase II
Neighborhood 15 67 $2,011,880 $2,122,533
Neighborhoods 18 and 21 69 $1,060,256 $1,118,570
Neighborhoods 14 and 20 102 $4,261,853 $4,496,255
Cypress/Bl Rd NA $1,000,000 $1,055,000
----------- -----------
Total Cost (Phase II Lots) 238 $8,333,989 $8,792,358
Phase III
Neighborhood 16 44 $2,391,688 $2,523,231
Neighborhoods 19 and 22 60 $1,016,500 $1,072,408
Cypress/Machado Road NA $850,000 $896,750
Neighborhood 17 68 $807,520 $851,934
Sheriff Station NA $200,000 $211,000
Swim/Tennis Club - Pool NA $150,000 $158,250
Swim/Tennis Club - Tennis Courts NA $160,000 $168,800
Swim/Tennis Club - Clubhouse NA $400,000 $422,000
Levee NA $710,000 $749,050
----------- -----------
Total Cost (Phase III Lots) 172 $6,685,708 $7,053,422
Phase IV
Neighborhoods 1 and 2 65 $2,008,175 $2,118,625
Park NA $1,000,000 $1,055,000
Neighborhood 3 109 $2,773,228 $2,925,756
Cypress/Knightsen NA $1,150,000 $1,213,250
Neighborhood 4 55 $2,489,202 $2,626,108
Trails NA $70,000 $73,850
----------- -----------
Total Cost (Phase IV Lots) 229 $9,490,605 $10,012,588
Phase V
Neighborhoods 8 and 10 80 $2,052,638 $2,165,533
Neighborhoods 9, 12 and 13 132 $3,328,495 $3,511,562
Sandmound NA $500,000 $527,500
----------- -----------
Total Cost (Phase V Lots) 212 $5,881,133 $6,204,595
Phase VI
Neighborhood 11 52 $375,847 $396,519
Neighborhood 6 63 $1,831,530 $1,932,264
Neighborhoods 5 and 7 132 $3,051,287 $3,219,108
----------- -----------
Total Cost (Phase VI Lots) 247 $5,258,664 $5,547,891
Total On-Site Costs $43,111,614 $45,482,753
Off-Site Costs $10,963,679 $11,566,681
------------ ------------
Total Infrastructure Costs $54,075,293 $57,049,434
</TABLE>
Notes:
(1) Construction costs based on 1993 estimates provided by Chartered
Land. Cost estimates include all soft cost estimates except:
financing, property tax, developer overhead and fee, and contingency.
(2) 1993 construction costs inflated to 1998 at 5.5 percent.
Sources: Chartered Land and Cattle Company; Sedway Group.
<PAGE>
[LOGO]
the project in our analysis. All of the assumptions related to this financing
assumption are included in the detailed printout of the pro forma in the
Addenda.
We examined both the Means and the Marshall cost estimating services in
order to form an opinion of inflation for the project costs between 1993 and
1998. Both services indicated construction cost increases in the 4.5 to 6.5
percent range for the period between when the cost estimates were made (early
1993) and the valuation date. We have utilized a 5.5 percent factor in our
analysis. During the projection period, costs are escalated at 3 percent during
1998, 3.5 percent for the following 12 months, and 3.0 percent annually
thereafter.
Golf course development costs comprise direct and indirect costs, including
staking and clearing the site, rough and final grading, irrigation systems,
drainage systems, cart paths, turf and trees, design team costs, furniture,
fixtures and equipment, maintenance facility and equipment, developer
overhead and fee, clubhouse, etc. Golf course and clubhouse direct and
indirect costs are estimated at $6.9 million (excluding developer fee,
overhead, contingency and developer profit). These estimates were provided by
the golf course construction company for the previous developer, the Robert
Muir Graves Company.(11)
OTHER INDIRECT COSTS
PROPERTY TAXES. Annual property taxes are based on the current property tax
rate of 1.124 percent applied to the land value concluded in this analysis.
The total assessed land value has been allocated to each phase based on the
relative value of each phase (i.e., average lot price multiplied by the
number of lots in the phase) as a percent of the total project value.
Property taxes are paid in two installments, in the second and fourth
quarters, and are inflated by 2 percent every year per Proposition 13. As
lots are constructed, the assessed property value is increased by the total
development cost incurred to date. As lots are sold, the property tax is
reduced proportionately by the number of lots sold to date.
DEVELOPER'S OVERHEAD. Developer's overhead is calculated at 3 percent of
direct costs, and is paid as direct costs are incurred.
DEVELOPER PROFIT. Developer profit is calculated at 10 percent of gross lot
and golf course sales revenue, and is paid as lots are sold.
SALES AND MARKETING EXPENSE. Based on industry standards and sales and
marketing costs at comparable developments, sales and marketing expenses are
estimated to approximate 4 percent of gross sales.
DISCOUNT RATE
A discount rate can be considered a blend of a safe rate, a risk rate,
and a liquidity premium. The discount rate for development projects can also be
viewed as the minimum return acceptable to a developer given the level of risk
associated with a project. Based on discussions with developers, we have
selected
- ---------------------------------
(11)It can easily be seen that based upon an "as complete" value of $8.5
million and development costs excluding overhead, contingency, and profit of
$6.9 million, there is very little residual value in the golf course land. In
fact, after taking into account the items mentioned above as well as the time
value of money, the net direct impact of the golf course in our discounted
cash flow analysis is negligible. The primary benefits of the golf course are
lot premiums and faster absorption. a
51
<PAGE>
[LOGO]
discount rate that is somewhat above the midpoint of a range of required
returns for a development with this level of risk. Based on the risk inherent
in this project, with particular consideration given to the age of the cost
estimates and the pending expiration of entitlements, a discount rate of 13
percent was determined to be reasonable. The expiration of entitlements is a
significant consideration since it will occur in April of 1999, and little
work has been done to move the project forward since foreclosure on Chartered
Land & Cattle in 1995. A separate line item for profit further accounts for
risk associated with the project.
RESIDUAL VALUE CONCLUSION
Exhibit 15 presents the construction period cash flows for Phases I through
VI and the golf course, the lot absorption by year, and the quarterly summary
of the discounted cash flow and the results of the residual value analysis
for the subject. As indicated, the exhibit results in a present value for the
subject land "as is" of approximately $6.0 million or $4,511 per lot or
$8,746 per acre.
RECONCILIATION OF VALUE
The Sales Comparison Approach yielded a value indication of $6.1 million. The
Development Approach resulted in a value indication of $6.0 million.
Given that the Development Approach is better able to accommodate the
particular characteristics of the Cypress Lakes project, it is this approach
that is given primary weight in our reconciliation. A prospective purchaser
would be likely to give primary emphasis to this approach as well.
Therefore, based upon the assumptions and limiting conditions contained
elsewhere in the report (among them that delinquent property taxes of
$168,446 were paid as of the date of value), and with a particular
recognition that our value conclusion is extremely sensitive to the
reliability of the cost estimates prepared by the prior landowner, we
estimate that the as-is market value of the subject property as of March 31,
1998, is SIX MILLION DOLLARS ($6,000,000).
52
<PAGE>
EXHIBIT 15
SUMMARY OF COSTS AND REVENUES
& ESTIMATED RESIDUAL LAND VALUE
CYPRESS LAKES
OAKLEY, CALIFORNIA
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
QUARTER ENDING
----------------------------------------------------------------------------------------------
I. NET REVENUES Apr-98 Jul-98 Oct-98 Jan-99 Apr-99 Jul-99 Oct-99
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative Lots Sold 0 0 0 0 0 0 0
Mello-Roos Infrastructure Financing $0 0 4,336,188 4,373,642 4,411,419 0 0
Phase I $0 0 0 0 0 0 0
Phase II $0 0 0 0 0 0 0
Phase III $0 0 0 0 0 0 0
Phase IV $0 0 0 0 0 0 0
Phase V $0 0 0 0 0 0 0
Phase VI $0 0 0 0 0 0 0
Golf Course $0 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenues $0 0 4,336,188 4,373,642 4,411,419 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
Mello-Roos Infrastructure Cost $0 0 4,336,188 4,373,642 4,411,419 0 0
Mello-Roos Interest Cost $0 0 0 0 0 0 0
Phase I $0 114,595 0 5,479 2,951,772 2,999,463 3,002,984
Phase II $0 6,209 0 6,244 0 6,404 0
Phase III $0 4,205 0 4,228 0 4,336 0
Phase IV $0 6,482 0 6,518 0 6,684 0
Phase V $0 5,575 0 5,607 0 5,750 0
Phase VI $0 6,485 0 6,522 0 6,688 0
Golf Course $0 0 0 0 0 1,252,364 1,263,181
- ------------------------------------------------------------------------------------------------------------------------------------
Total Costs $0 143,552 4,336,188 4,408,240 7,363,191 4,281,689 4,266,165
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net Funds Flow $0 (143,552) 0 (34,598) (2,951,772) (4,281,689) (4,266,165)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
I. NET REVENUES Jan-2000 Apr-2000 Jul-2000 Oct-2000 Jan-2001
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Lots Sold 36 72 108 144 180
Mello-Roos Infrastructure Financing 0 0 0 0 0
Phase I 1,748,197 1,761,163 1,774,226 1,787,385 1,800,643
Phase II 0 0 0 0 0
Phase III 0 0 0 0 0
Phase IV 0 0 0 0 0
Phase V 0 0 0 0 0
Phase VI 0 0 0 0 0
Golf Course 0 0 0 0 8,026,610
- --------------------------------------------------------------------------------------------------------------
Total Revenues 1,748,197 1,761,163 1,774,226 1,787,385 9,827,253
- --------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
Mello-Roos Infrastructure Cost 0 0 0 0 0
Mello-Roos Interest Cost 0 325,341 316,030 306,720 297,410
Phase I 51,590 0 34,470 0 17,051
Phase II 6,440 0 6,602 2,303,164 3,499,954
Phase III 4,361 0 4,471 0 4,496
Phase IV 6,722 0 6,892 0 6,931
Phase V 5,782 0 5,928 0 5,962
Phase VI 6,726 0 6,896 0 6,935
Golf Course 1,272,550 1,281,988 1,291,497 1,301,076 0
- --------------------------------------------------------------------------------------------------------------
Total Costs 1,354,169 1,607,329 1,672,787 3,910,960 3,838,737
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Net Funds Flow 394,027 153,834 101,439 (2,123,575) 5,988,516
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
III. RESIDUAL VALUE CALCULATION (1)
Annual Discount Rate 13.0%
Quarterly Discount Rate 3.103%
Indicated Raw Land Value $6,012,700
(as of March 1, 1998)
Value Per Unit $4,521
NOTES:
(1) Based on discounted net funds flow.
Sources: Chartered Land and Cattle Company; Sedway Group.
<PAGE>
EXHIBIT 15
SUMMARY OF COSTS AND REVENUES
& ESTIMATED RESIDUAL LAND VALUE
CYPRESS LAKES
OAKLEY, CALIFORNIA
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
QUARTER ENDING
----------------------------------------------------------------------------------------------
I. NET REVENUES Apr-2001 Jul-2001 Oct-2001 Jan-2002 Apr-2002 Jul-2002 Oct-2002
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative Lots Sold 216 258 297 336 375 414 453
Mello-Roos Infrastructure Financing 0 0 0 0 0 0 0
Phase I 1,813,998 812,201 0 0 0 0 0
Phase II 0 1,652,276 2,496,797 2,515,316 2,533,972 2,552,767 2,571,701
Phase III 0 0 0 0 0 0 0
Phase IV 0 0 0 0 0 0 0
Phase V 0 0 0 0 0 0 0
Phase VI 0 0 0 0 0 0 0
Golf Course 0 0 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total Revenues 1,813,998 2,464,477 2,496,797 2,515,316 2,533,972 2,552,767 2,571,701
- -----------------------------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
Mello-Roos Infrastructure Cost 0 0 0 0 0 0 0
Mello-Roos Interest Cost 288,100 277,238 267,152 257,066 246,980 236,893 226,807
Phase I 0 1,955 0 0 0 0 0
Phase II 3,506,184 1,233,256 0 42,579 0 21,060 0
Phase III 0 4,609 0 4,635 1,931,413 2,934,213 2,940,256
Phase IV 0 7,104 0 7,144 0 7,322 0
Phase V 0 6,111 0 6,145 0 6,298 0
Phase VI 0 7,108 0 7,148 0 7,326 0
Golf Course 0 0 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total Costs 3,794,284 1,537,382 267,152 324,717 2,178,393 3,213,113 3,167,063
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net Funds Flow (1,980,286) 927,095 2,229,645 2,190,598 355,579 (660,346) (595,362)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------
I. NET REVENUES Jan-2003 Apr-2003 Jul-2003 Oct-2003 Jan-2004
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Lots Sold 496 535 574 613 656
Mello-Roos Infrastructure Financing 0 0 0 0 0
Phase I 0 0 0 0 0
Phase II 1,129,312 0 0 0 0
Phase III 1,618,416 2,445,630 2,463,769 2,482,043 1,859,311
Phase IV 0 0 0 0 1,039,221
Phase V 0 0 0 0 0
Phase VI 0 0 0 0 0
Golf Course 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------
Total Revenues 2,747,728 2,445,630 2,463,769 2,482,043 2,898,532
- -----------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
Mello-Roos Infrastructure Cost 0 0 0 0 0
Mello-Roos Interest Cost 215,687 205,601 195,515 185,429 174,308
Phase I 0 0 0 0 0
Phase II 2,375 0 0 0 0
Phase III 1,032,299 0 27,731 0 4,609
Phase IV 7,363 1,411,981 4,282,842 4,299,013 2,949,029
Phase V 6,334 0 6,490 0 6,526
Phase VI 7,367 0 7,549 0 7,592
Golf Course 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------
Total Costs 1,271,425 1,617,582 4,520,127 4,484,442 3,142,064
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Net Funds Flow 1,476,303 828,048 (2,056,358) (2,002,399) (243,532)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
III. RESIDUAL VALUE CALCULATION (1)
Annual Discount Rate 13.0%
Quarterly Discount Rate 3.103%
Indicated Raw Land Value $6,012,700
(as of March 1, 1998)
Value Per Unit $4,521
NOTES:
(1) Based on discounted net funds flow.
Sources: Chartered Land and Cattle Company; Sedway Group.
<PAGE>
EXHIBIT 15
SUMMARY OF COSTS AND REVENUES
& ESTIMATED RESIDUAL LAND VALUE
CYPRESS LAKES
OAKLEY, CALIFORNIA
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
QUARTER ENDING
-------------------------------------------------------------------------------------
I. NET REVENUES Apr-2004 Jul-2004 Oct-2004 Jan-2005 Apr-2005 Jul-2005
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cumulative Lots Sold 698 740 782 824 866 913
Mello-Roos Infrastructure Financing 0 0 0 0 0 0
Phase I 0 0 0 0 0 0
Phase II 0 0 0 0 0 0
Phase III 0 0 0 0 0 0
Phase IV 3,140,786 3,164,082 3,187,550 3,211,192 3,235,010 387,977
Phase V 0 0 0 0 0 3,028,120
Phase VI 0 0 0 0 0 0
Golf Course 0 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
Total Revenues 3,140,786 3,164,082 3,187,550 3,211,192 3,235,010 3,416,097
- --------------------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
Mello-Roos Infrastructure Cost 0 0 0 0 0 0
Mello-Roos Interest Cost 163,446 152,584 141,722 130,860 119,998 107,843
Phase I 0 0 0 0 0 0
Phase II 0 0 0 0 0 0
Phase III 0 0 0 0 0 0
Phase IV 0 53,384 0 23,971 0 884
Phase V 0 6,686 2,743,931 2,786,427 2,784,785 42,965
Phase VI 0 7,777 0 7,821 0 8,011
Golf Course 0 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
Total Costs 163,446 220,432 2,885,653 2,949,080 2,904,784 159,704
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Net Funds Flow 2,977,340 2,943,650 301,897 262,112 330,226 3,256,392
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
I. NET REVENUES Oct-2005 Jan-2006 Apr-2006 Jul-2006 Oct-2006 Jan-2007
--------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Cumulative Lots Sold 955 997 1,039 1,081 1,125 1,167
Mello-Roos Infrastructure Financing 0 0 0 0 0 0
Phase I 0 0 0 0 0 0
Phase II 0 0 0 0 0 0
Phase III 0 0 0 0 0 0
Phase IV 0 0 0 0 0 0
Phase V 3,050,580 3,073,206 3,096,000 3,118,964 149,624 0
Phase VI 0 0 0 0 3,137,019 3,160,287
Golf Course 0 0 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------
Total Revenues 3,050,580 3,073,206 3,096,000 3,118,964 3,286,643 3,160,287
- -------------------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
Mello-Roos Infrastructure Cost 0 0 0 0 0 0
Mello-Roos Interest Cost 96,981 86,120 75,258 64,396 53,017 42,155
Phase I 0 0 0 0 0 0
Phase II 0 0 0 0 0 0
Phase III 0 0 0 0 0 0
Phase IV 0 0 0 0 0 0
Phase V 0 21,833 0 510 0 0
Phase VI 0 2,553,914 2,564,740 2,620,735 0 38,514
Golf Course 0 0 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------
Total Costs 96,981 2,661,867 2,639,998 2,685,641 53,017 80,668
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Net Flow Flow 2,953,598 411,340 456,003 433,323 3,233,626 3,079,618
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
III. RESIDUAL VALUE CALCULATION (1)
Annual Discount Rate 13.0%
Quarterly Discount Rate 3.103%
Indicated Raw Land Value $6,012,700
(as of March 1, 1998)
Value Per Unit $4,521
NOTES:
(1) Based on discounted net funds flow.
Sources: Chartered Land and Cattle Company; Sedway Group.
<PAGE>
EXHIBIT 15
SUMMARY OF COSTS AND REVENUES
& ESTIMATED RESIDUAL LAND VALUE
CYPRESS LAKES
OAKLEY, CALIFORNIA
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
QUARTER ENDING
------------------------------------------------------------------------------------------------
I. NET REVENUES Apr-2007 Jul-2007 Oct-2007 Jan-2008 Apr-2008 Jul-2008 Oct-2008 Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative Lots Sold 1,209 1,251 1,293 1,330 1,330 1,330 1,330 1,330
Mello-Roos Infrastructure Financing 0 0 0 0 0 0 0 13,121,249
Phase I 0 0 0 0 0 0 0 11,497,813
Phase II 0 0 0 0 0 0 0 15,452,141
Phase III 0 0 0 0 0 0 0 10,869,169
Phase IV 0 0 0 0 0 0 0 17,365,817
Phase V 0 0 0 0 0 0 0 15,516,494
Phase VI 3,183,727 3,207,341 3,231,130 2,867,584 0 0 0 18,787,086
Golf Course 0 0 0 0 0 0 0 8,026,610
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenues 3,183,727 3,207,341 3,231,130 2,867,584 0 0 0 110,636,379
- ------------------------------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
Mello-Roos Infrastructure Cost 0 0 0 0 0 0 0 13,121,249
Mello-Roos Interest Cost 31,293 20,431 9,569 0 0 0 0 5,317,948
Phase I 0 0 0 0 0 0 0 9,179,360
Phase II 0 0 0 0 0 0 0 10,640,472
Phase III 0 0 0 0 0 0 0 8,905,861
Phase IV 0 0 0 0 0 0 0 13,090,268
Phase V 0 0 0 0 0 0 0 8,459,647
Phase VI 0 21,081 0 3,909 0 0 0 7,910,845
Golf Course 0 0 0 0 0 0 0 7,662,656
- ------------------------------------------------------------------------------------------------------------------------------------
Total Costs 31,293 41,511 9,569 3,909 0 0 0 84,288,305
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net Funds Flow 3,152,434 3,165,829 3,221,561 2,863,675 0 0 0 26,348,074
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
III. RESIDUAL VALUE CALCULATION (1)
Annual Discount Rate 13.0%
Quarterly Discount Rate 3.103%
Indicated Raw Land Value $6,012,700
(as of March 1, 1998)
Value Per Unit $4,521
NOTES:
(1) Based on discounted net funds flow.
Sources: Chartered Land and Cattle Company; Sedway Group.
<PAGE>
ADDENDUM A
ASSUMPTIONS AND STANDARD LIMITING CONDITIONS
SPECIAL CONDITIONS AND ASSUMPTIONS
1. As of the appraisal date, there was a property tax delinquency of
$168,446.22. It is the intention of the client to satisfy the property
taxes in the future before a transfer of title occurs or significant
punitive measures are taken by the county assessor. We have therefore
been instructed not to reduce our value estimate by the amount of the
arrearage. Further, National Investors Financial, Inc., has already made
a line item in their accounting system to cover the taxes; if the
appraisers were to make adjustment to the value, it would result in
double-counting.
GENERAL CONDITIONS AND ASSUMPTIONS
1. The title to the subject property is assumed to be marketable and the
property is free and clear of all liens and encumbrances, except as
noted.
2. The appraiser shall be held harmless and indemnified by the client for
any environmental conditions that may exist on or near the subject
property. Environmental contamination, such as toxic and hazardous
materials, on are near the property, may affect the value of the subject
property. Toxic or hazardous material may include, but is not limited
to, petroleum based products, paints and solvents, lead, cyanide, DDT,
printing inks, acids, pesticides, ammonium compounds, asbestos, PCBs,
other metals, minerals, chemicals, hydrocarbons, biological or
radioactive materials in the soil, buildings, or building components, in
above-ground or underground storage tanks, or elsewhere in the property.
The appraiser bases the valuation of the property as if there were no
toxic or hazardous materials in, on, under, around or over the subject
property. Except as stated, the appraiser has not inspected the subject
property or neighboring property for any environmental conditions.
3. Ownership and management are assumed to be in competent and responsible
hands.
4. No engineering study, property survey, soil study or environmental
investigation has been made and no liability is assumed in connection
with such matters. The described property is based on visual inspection
only, and it is assumed that there are no hidden or unapparent physical
conditions affecting value. Dimensions and areas are as supplied by
others or based upon field measurements and are subject to survey by
qualified professional surveyors or architects.
5. Any plans, diagrams or drawings provided are intended solely to
facilitate understanding and are not meant to be used as reference in
matters of survey. The legal description furnished should be verified
with the aid of competent legal counsel.
6. This appraisal is prepared for the specific objective stated and shall
not be used for any other purposes without the written permission of
Sedway Group.
7. The signatories shall not be required to give further consultation or
testimony, or appear in court or at any public hearing with reference to
the property appraised, unless prior arrangements have been made with
the client.
<PAGE>
8. This report is intended to be read and used as a whole and not in parts.
Separation of any section or page from the main body of the report is
expressly forbidden and invalidates the report.
9. Any estimates of future rents, sales prices, expenses, net operating
income, mortgage debt service, capital outlays, cash flows, inflation,
capitalization rates, yield rates or interest rates are intended solely
for analytical purposes and are not to be construed as predictions of
the appraisers. They represent only the judgment of the authors as to
the assumptions likely to be used by purchasers and sellers active in
the market place as of the date of value, and their accuracy is in no
way guaranteed.
10. It is assumed that all necessary entitlements, licenses, agreements,
franchises, etc., remain in full force and effect in order to continue
the operations of the property as a going concern throughout the
financial analysis period of this appraisal, unless otherwise noted.
11. Possession of this report does not carry with it the right of
publication. This report shall be used for its intended purpose only and
by the party to whom it is addressed. Neither all nor any part of the
contents of this report shall be conveyed to any person or entity, other
than the appraiser's client, through advertising, solicitation
materials, public relations, news, sales, or other media without the
written consent and approval of the author. This applies particularly to
value conclusions, the identity of the appraiser or firm with which the
appraiser is connected, and any reference to the Appraisal Institute, or
MAI designation. Further, the appraiser or firm assumes no obligation,
liability, or accountability to any third party. If this report is
placed in the hands of anyone but the client, client shall make such
party aware of the assumptions and limiting conditions of the assignment.
12. Property values are influenced by a large number of external factors.
The information contained in the report comprises the pertinent data
considered necessary to support the value estimate. We have not
knowingly withheld any pertinent facts, but we do not guarantee that we
have knowledge of all factors which might influence the value of the
subject property. Due to the rapid changes in the external factors, the
value estimate is considered reliable only as of the effective date of
the appraisal.
13. The appraisers reserve the right to make such adjustments to the
analyses, opinions, and conclusions set forth in this report as may be
required by consideration of additional data or more reliable data which
may become available.
14. The date of value to which the conclusions and opinions expressed in
this report apply is set forth in the letter of transmittal and the
appraisal document. The dollar amount of any value opinion rendered in
this report is based upon the purchase power of the U.S. Dollar existing
on that date.
15. If this report is placed in the hands of anyone other than the Client,
the Client shall make such party aware of all limiting conditions and
assumptions of the assignment and related discussions. The appraiser is
in no way to be responsible for any cost incurred to discover or correct
any deficiencies of any type present in the property, physically,
financially and/or legally. The Client also agrees that in case of
lawsuit (brought by lender, partner or part owner in any form of
ownership, tenancy or any other part), Client will hold appraisers
completely harmless from and against any liability, loss, cost or
expense incurred or suffered by appraiser in such action, regardless of
its outcome.
<PAGE>
ADDENDUM B
CERTIFICATION OF THE APPRAISERS
The undersigned hereby certify that, to the best of our knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal, unbiased
professional analyses, opinions, and conclusions. No matters affecting the
value conclusions have been knowingly withheld or omitted.
This appraisal report sets forth all of the limiting conditions (imposed by
the terms of our assignment or by the undersigned) affecting the analyses,
opinions, and conclusions contained in this report.
We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with respect
to the parties involved.
Our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, or the
occurrence of a subsequent event. The appraisal assignment is also not based
on a requested minimum valuation, a specific valuation, or the approval of a
loan.
Our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformance with the Uniform Standards of Professional
Appraisal Practice of the Appraisal Foundation, as amended by the Appraisal
Institute. The report also conforms with the Code of Professional Ethics of
the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
Jay Harper, MAI, Roy J. Schneiderman, Alan Billingsley, and Clifford J. Dowd
made a personal inspection of the property that is the subject of this report.
Kurt W. Fuchs, Mary Smitheram-Sheldon, and Alan Billingsley provided
significant professional assistance to the undersigned.
We have the knowledge and expertise to complete this appraisal assignment.
/s/ Jay Harper /s/ Roy J. Schneiderman
- ------------------------------ ----------------------------------
Jay Harper, MAI Roy J. Schneiderman, Principal
/s/ Clifford J. Dowd
- ------------------------------
Clifford J. Dowd, Associate
<PAGE>
ADDENDUM C
QUALIFICATIONS OF APPRAISERS
<PAGE>
JAY M. HARPER, M.A.I.
Mr. Harper has 15 years of experience as a real estate appraiser, consultant,
and management analyst. Clients have included financial institutions,
developers, property owners and managers, governmental agencies, syndicators,
attorneys, consulting firms, and schools. Mr. Harper has completed
self-contained narrative reports, summary appraisals, and appraisal reviews
of commercial real estate with values ranging from $100,000 to $50 million.
Areas of particular consulting expertise include financial analysis for
renovation and new construction, litigation support, market research,
affordable housing development, and property management reviews.
Prior to founding Harper & Associates in 1995, Mr. Harper was a partner in
Real Estate Decisions Company. Mr. Harper has also been a commercial
appraiser with Cushman and Wakefield of California and a management analyst
with Fox and Carskadon Financial Corporation.
The following engagements are representative of Mr. Harper's real estate
experience:
APPRAISAL AND VALUATION
Assignments have included the following property types:
* Office buildings * Retail Properties
* Warehouses * Apartments
* Condominiums * Single-Family Residences
* Hotels * Golf Courses
* Master-Planned Communities * Leaseholds
* Research & Development * Undeveloped Land
* Schools * Prisons
* Automobile Dealerships * Senior Care Facilities
* Marinas * Mobile Home Parks
* Resorts * Billboards
* Shopping Centers * Factories
* Tennis Clubs * Downtown Retail Buildings
CONSULTING TASKS
* RANCHO CIELO COMPANY - Documented the decline in property value of an
approved but undeveloped project of 440 luxury homes and commercial space in
San Diego County due to deteriorating market conditions; resulting in a
$37 million reduction in the property tax assessment.
* FIRST UNION REIT - Estimated the loss in operating profits over 10 years
and reduction in property value of a northern California regional mall due to
a natural disaster, and subsequent loss of anchor tenants, increased local
competition, and other changes in market conditions.
* ETEC - Estimated market value and replacement cost of real estate,
manufacturing equipment, and personal property for management buyout of a
high technology firm.
<PAGE>
JAY M. HARPER, M.A.I., cont.
* DELOITTE & TOUCHE - Performed a long-term analysis of sale trends for
condominiums in southern Marin County and then analyzed the impact of a
construction defect stigma upon resale prices.
* WELLS FARGO BANK/GOOD SAMARITAN HOUSING CORP. - Estimated the financial
feasibility and value of tax credits for a proposed 20-unit apartment complex
in San Francisco being developed under the Low Income Housing Tax Credit
program.
* FRENCH-AMERICAN INTERNATIONAL SCHOOL - Research and prepared cash-flow model
of construction costs, operating expenses, financing, fund raising, and
student body growth for development of a multi-user private school campus in
San Francisco.
* CITY OF ROHNERT PARK - Performed due diligence for acquisition of a mobile
home park by a non-profit entity; including reserarch of supply and demand of
affordable housing, income and expense projections, and market survey and
analysis of tax-exempt bond financing.
* BANK OF AMERICA - Surveyed owner's and lenders' investment strategies, yield
requirements, financing terms, and holding periods for leaseholds, sandwich
leasehold, and leased fee ownership interests in hotels and other commercial
property.
* FOX & CARSKADON FINANCIAL CORPORATION - Documented and trained staff in
management procedures; conducted on-site audits of 60 property management and
accounting offices in eight states; developed and monitored corporate capital
expense policy.
PROFESSIONAL AFFILIATIONS
Member of the Appraisal Institute
Certified General Real Estate Appraiser-California
EDUCATION
* Master of Science (History/Social Science), Carnegie-Mellon University; 1982.
* Bachelor of Arts (Urban Studies) Lehigh University, 1980.
<PAGE>
ROY J. SCHNEIDERMAN
PRINCIPAL
Mr. Schneiderman, Principal with the Sedway Group, has been providing real
estate consulting services since 1983. Clients include pension funds,
financial institutions, investors, developers, law firms, and public sector
entities. Particular areas of expertise include real estate valuation,
investment analysis, transaction negotiation, development feasibility, real
estate investment strategy, and real estate litigation support. He is highly
experienced with office, retail, hotel and residential properties. He has
analyzed properties values in excess of $1.5 billion throughout the United
States.
Prior to joining Sedway Group Mr. Schneiderman was manager of real estate
consulting with Deloitte & Touche, an internationally recognized "Big 6"
accounting firm. Before his tenure at Deloitte & Touche, he was a senior
associate with Keyser Marston Associates for four years.
Selected real estate consulting engagements representatives of Mr.
Schneiderman's practice follow:
APPRAISAL AND VALUATIONS
* WELLS FARGO BANK - Valuation of both the land and the partnership interests
related to a 107-acre commercial site in Las Vegas, Nevada.
* OBAYASHI AMERICA CORPORATION - Appraisal of a five-acre industrial
development site in Torrance, California.
* INTERNATIONAL COMPONENTS TECHNOLOGY - Valuation of a 62,000-square-foot
manufacturing facility in San Jose.
* PEBBLE BEACH COMPANY - Development of property valuations for all of the
Company's development properties and ground leases. The valuation
encompassed land leased to a retail center, a hotel, a condominium
development, as well as other smaller uses. The development properties
included a partially completed golf-oriented townhome development as well
as over 1,700 acres of undeveloped land slated for residential or golf
course usage.
* SUMMMIT BANK - Appraisal of the Simmons plant in San Leandro, California.
The facility included a total of over 500,000 square feet of industrial
space, a portion of which was used by Simmons and a portion of which was
leased.
* PROVIGO CORPORATION - Appraisal of a 122,000-square-foot warehouse used as a
food distribution facility. The property also includes eight acres of
additional developable land.
* CADWALADER, WICKERSHAM & TAFT - Appraisal of the Corte Madera Town Center, a
major retail mall in Marin County. The property consisted of 420,000 square
feet of retail space as well as over 70,000 square feet of office space.
* HOUSEHOLD INTERNATIONAL - Valuation for property tax assessment appeal of a
100,000-square-foot office facility in Salinas, California.
* SCANTRONICS/ARROWHEAD TECHNOLOGY - Valuation of an industrial site with
excess land in Stockton, California. Also reviewed the leasehold value of a
second Stockton industrial site.
* THORN/EMI - Valuation of the company's industrial properties in Concord,
California. Complex included approximately 200,000 square feet of buildings
and four acres of excess land.
<PAGE>
ROY J. SCHNEIDERMAN
PRINCIPAL, CONT.
APPRAISAL REVIEW
* GLENDALE FEDERAL BANK - Review and supervision of review of over 50 appraisal
reports for assets located in California and Florida with an appraised value
of over $177 million.
* THE PACIFIC BANK - Review and supervision of review of numerous appraisal
reports for troubled assets, as well as appraisal reports for loans and REO
previously identified by Federal regulators as being non-compliant with
Federal standards. Total appraised value in excess of $60 million. Also
drafted a new set of appraisal department policies and procedures.
* CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM - Review and supervision of 14
appraisal reviews (underlying properties valued at $484 million). Also,
management of the 1992 appraisal and appraisal review process for the
System's entire $5 billion real estate portfolio.
PROPERTY DISPOSITION AND JOINT VENTURE NEGOTIATION
* CITY OF SAN MATEO - Negotiations related to the disposition of a mid-rise
office development site in downtown San Mateo.
* CITY OF DAVIS - Negotiating the disposition of a 2+ acre mixed-use
development site in downtown Davis.
* SANTA CRUZ SEASIDE COMPANY - Preparation of a development package to attract
interest in the client's seven-acre site near the Boardwalk in Santa Cruz.
Developer selection and negotiations with prospective developers.
* BART - Analysis of developer proposals and developer selection related to a
proposed office development at the Pleasant Hill BART Station. Also assisted
in the negotiation of joint venture development agreements at both the
Pleasant Hill and Concord stations.
* LONG BEACH REDEVELOPMENT AGENCY - Assisted the Agency in the disposition of
numerous sites in the downtown and airport areas, as well as extensive
predevelopment and pricing work related to a proposed Automall. Analyzed and
valued projects worth over $200 million. Analyzed and negotiated lease terms,
sales prices, and other financial considerations with IDM, Kilroy Industries,
Heltzer Enterprises, Cushman Development, Carlton Browne, McDonnell Douglas,
etc.
PROFESSIONAL AFFILIATIONS
* Candidate for the M.A.I. Designation; Appraisal Institute
* Certified General Real Estate Appraiser - California
* Certified General Real Estate Appraiser - Nevada
* Certified General Real Estate Appraiser - New Mexico
SPEAKING ACTIVITIES AND PUBLICATIONS
Mr. Schneiderman has been a panelist at the Appraisal Institute's Fall
Conference. He has also made presentations before the Davis and San Mateo City
Councils. He has had articles published in THE AMERICAN BANKER newspaper as
well as as APPRAISAL MANAGEMENT magazine.
<PAGE>
ROY J. SCHNEIDERMAN
PRINCIPAL, CONT.
EDUCATION
* Master of Business Administration (real estate and finance), University
of California, Berkeley, 1984. Editor of the Business School newspaper.
* Master of Arts (Philosophy), Yale University; 1980. University Scholarship
* Bachelor of Arts (Philosophy and Religious Studies) Beloit College, 1977.
Phi Beta Kappa
<PAGE>
CLIFFORD J. DOWD
ASSOCIATE
Clifford J. Dowd, Associate with Sedway Group, conducts a variety of real
estate studies for developers, corporations, financial institutions, law
firms and governmental bodies. His industry experience includes property
valuations, market studies, financial feasibility analyses, strategic
positioning consulting, and litigation support services.
Prior to joining Sedway Group, Mr. Dowd was an Analyst for another San
Francisco real estate consulting firm. Mr. Dowd has also assisted in the
preparation of an economic development plan in the City of Berkeley and
managed a nonprofit urban community service organization.
Select consulting assignments representative of Mr. Dowd's expertise in urban
and real estate economics follow.
VALUATION
* CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL, LLC - For this unique
mixed-use Fisherman's Wharf property, the assignment required research
into recent improvement in the local retail and office market, projections
of market-rate office and retail lease terms, and an analysis of local
parking garage operating performance. A full narrative appraisal was
prepared.
* DOVER HOUSE CAPITAL AND JP MORGAN - Performed valuation and risk
assessment for the lender refinancing the La Jolla Inn by the Sea and
Restaurant. The assignment included review of the San Diego Area hotel
market, analysis of zoning changes since the property's construction,
development of a 10-year discounted cash flow, and evaluation of the impact
of a long-term ground lease on value and risk.
* SHORELINE LIFE CARE LLC - Valuation of this life care community in
Connecticut involved research into actuarial assumptions, health care
utilization rates, market area historical entry and monthly fees,
existing and proposed life care developments in two neighboring states,
and the status of the life care regulatory climate at the time of
valuation.
DEVELOPMENT FEASIBILITY
* VALENTI INTERNATIONAL - This study first analyzed the market feasibility
of developing a destination spa and cosmetic surgery center within the Las
Vegas Area. Local and national trends in spa concepts and cosmetic surgery
were researched. After refinement of the concept based on the results of
the market study, a financial feasibility study was prepared incorporating
site acquisition, development cost estimates, and dynamic revenue forecast
under the absorption period.
* JACK HORTON INVESTMENTS - This proposed project was to incorporated market
rate and income-restricted units in a 160-unit efficiency studio complex in
San Jose. The assignment first required a market study to determine rental
rates for the market rate units, and later the creation of several
financial models incorporating possible loan terms from conventional
lenders, FHA-backed lenders, the City of San Jose Housing Department, and
equity investors to determine the optimal financing scheme. Additional
financial models were tested illustrating the economic impacts of changing
the market rate/income-restricted unit mix, proposed rental rates, and
project size. The
<PAGE>
CLIFFORD J. DOWD
ASSOCIATE, CONT.
history of SRO development and recent innovations increasing the
affordability of such projects was researched for the project.
* HERITAGE PARTNERS - For nine markets in seven states, extensive research
on developing cutting-edge Alzheimer's facilities was prepared. The
assignments included recommendations of possible site locations by
analyzing GIS maps, analysis of competitive developments, application of
quantitative supply and demand techniques based upon population and health
statistics, assessment of state and local regulations, and detailed
interviews with front-line service providers in order to refine facility
concepts, designs, and management practices.
STRATEGIC EVALUATION AND POSITIONING
* CATELLUS CORPORATION - Over 1,300 individual properties ranging from
suburban to remote desert locations were evaluated in Southern California.
The engagement involved designing a systematic method of evaluating these
extensive holds, earmarking underutilized properties for potential
development, and preparation of a mass appraisal.
* MEDICAL MALLS, INC - A land acquisition strategy was prepared for this
client under negotiations with the City of Seaside to obtain a medical
mall site. Historical redevelopment subsidies, analysis of the economic
impact of the proposed project, and research into recent area land sales
transactions were supplemented by an analysis of alternative uses of the
site to determine the clients leverage over other developers in acquiring
the land.
PROFESSIONAL AFFILIATIONS AND AWARDS
Member, San Francisco Planning and Urban Research Association (SPUR)
Recipient, Assemblyman John Vasconcellos Human Corps Award for Community
Service.
PUBLICATIONS
SENIOR HOUSING: LOOKING TOWARDS THE THIRD MILLENNIUM. Co-Authored with Arthur
E. Gimmy and Susan B. Brecht. Due out late 1998.
EDUCATION
Bachelor of Arts, Architecture, Minor in City and Regional Planning,
University of California at Berkeley.
<PAGE>
ADDENDUM D
TITLE REPORT AND PLANT INFORMATION GUARANTEE
BOUND SEPARATELY DUE TO SIZE
<PAGE>
ADDENDUM E
ASSESSOR, SITE, GEOTECHNICAL, AND URBAN LIMIT LINE MAPS
<PAGE>
[MAP]
<PAGE>
[MAP]
<PAGE>
[MAP]
<PAGE>
[MAP]
<PAGE>
[MAP]
<PAGE>
[MAP]
<PAGE>
ADDENDUM F
CASHFLOW DETAIL AND ASSUMPTION SHEETS
<PAGE>
ASSUMPTIONS FOR DISCOUNTED CASH FLOW AND RESIDUAL LAND VALUATION ANALYSIS
CYPRESS LAKES
OAKLEY, CALIFORNIA
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
Total Total
Start/First Sale End/Sellout Months Quarters
----------------- ----------- -------- ---------
<S> <C> <C> <C> <C>
1. DEVELOPMENT PHASING
Model Start Date (hold period) 31-Mar-98 31-Mar-98 0 0.00
Mello-Roos Financed Infrastructure 31-Jul-98 30-Apr-99 9 3.00
PHASE I
ON-Site Development 31-Jan-99 30-Oct-99 9 3.00
Lot Sales : 31-Oct-99 08-Jun-2001 19 6.40
PHASE II
ON-Site Development 05-Sep-2000 06-Jun-2001 9 3.00
Lot Sales : 07-Jun-2001 Dec-2002 18 6.00
PHASE III
ON-Site Development 04-Mar-2002 02-Dec-2002 9 3.00
Lot Sales : 03-Dec-2002 Jan-2004 13 4.30
PHASE IV
ON-Site Development 04-Apr-2003 01-Jan-2004 9 3.00
Lot Sales : 02-Jan-2004 May-2005 16 5.40
PHASE V
ON-Site Development 06-Aug-2004 05-May-2005 9 3.00
Lot Sales : 06-May-2005 Aug-2006 15 4.90
PHASE VI
ON-Site Development 01-Nov-2005 03-Aug-2006 9 3.00
Lot Sales : 04-Aug-2006 Jan-2008 17 5.80
GOLF COURSE
Course Development 02-May-99 31-Oct-2000 18 6.00
Course Sale 01-Nov-2000
</TABLE>
TIMING ASSUMPTIONS
Sales start after completion of on-site infrastructure
ON-Site Lot Development starts three quarters prior to lot sales, and
lasts three quarters
Off-site infrastructure cost (financed by Mello-Roos) for entire
project is incurred in Phase I
Predevelopment expenses of $100,000 per quarter are
incurred prior to the start of construction.
Golf course land is assumed developed one quarter after
the start of construction of Phase I
2. CONSTRUCTION COSTS (1998 $)
<TABLE>
<CAPTION>
NOTE : SEE EXHIBIT 14 FOR COST DETAIL BY PHASE.
<S> <C>
Contingency on all Costs 5.0%
Contingency on Levy and Off-sites 10.0%
</TABLE>
<TABLE>
<CAPTION>
BASE COST CONTINGENCY TOTAL COST
--------------- --------------- ---------------
<S> <C> <C> <C>
OFF-SITE COSTS (FINANCED BY MELLO-ROOS)
For Entire Project (Costs Incurred in Phase I) $11,566,681 $1,156,668 $12,723,349
ON-SITE COSTS
Pre-Development Cost $100,000 $5,000 $105,000 per quarter
Phase I $7,871,898 $393,595 $8,265,493
Phase II $8,792,358 $439,618 $9,231,976
Phase III $7,053,422 $352,671 $7,406,093
Phase IV $10,012,588 $500,629 $10,513,218
Phase V $6,204,595 $310,230 $6,514,825
Phase VI $5,547,891 $277,395 $5,825,285
Total On-Site Costs $45,582,753 $2,279,138 $47,861,890
Total Infrastructure Costs $57,149,434 $3,435,806 $60,585,240
GOLF COURSE COSTS
Golf Course Costs - Direct, Indirect $4,510,000 $225,500 $4,735,500
Clubhouse Costs $2,112,500 $105,625 $2,218,125
---------- -------- ----------
Total Golf Construction Cost $6,622,500 $331,125 $6,953,625
</TABLE>
NOTE: GOLF COSTS BASED ON 1993 ESTIMATES PROVIDED BY THE ROBERT MUIR
GRAVES COMPANY.
<PAGE>
ASSUMPTIONS FOR DISCOUNTED CASH FLOW AND RESIDUAL LAND VALUATION ANALYSIS
CYPRESS LAKES
OAKLEY, CALIFORNIA
AS OF MARCH 31, 1998
3. INDIRECT CONSTRUCTION COSTS (1998 $)
<TABLE>
<CAPTION>
Property Tax Calculation (1995)
-------------------------------
<S> <C> <C> <C>
Property Tax Rate 1.1240%
Land Value $0 $6,012,700 Based on land value concluded in this analysis.
Annual property tax until construction $67,583
begins (inflated at 2% annually)
Property Tax Allocation 100.0% Allocated to lots
----------------------- ------
Phase I 14.3%
Phase II 18.4%
Phase III 12.4%
Phase IV 19.2%
Phase V 16.5%
Phase VI 19.2%
Golf Course 0.0%
Note: Property tax land value prorated based on the relative aggregate retail value of
each phase.
Developer's Overhead and Fees 3.0% of construction costs
Developer Profit 10.0% of gross sales
Mello Roos Financing
Bond Issue (to cover off-site infrastructure) $12,723,349
Interest Reserve (2 years @ 7%) $1,781,269
Upfront Reserve Fund (12.5% of total bond) $2,042,214
Issue Cost (3.5% of bond issue & int. reserves) $526,074
--------
Total Mello Roos Bond $17,072,906
Bond Interest Rate 7.0%
Amortization Period 30
Annual Debt Service $1,375,844
Quarterly Debt Service $343,961
Date of Bond Issue 31-Jul-98
Years Before First Payment Due 1.5
First Payment Due 30-Jan-2000
</TABLE>
4. REVENUE ASSUMPTIONS (1998$)
NOTE: SEE EXHIBIT 11 FOR DETAILED LOT MIX AND PRICING SUMMARY.
<TABLE>
<CAPTION>
Average 1995 Monthly Quarterly
Residential Total Lots Price Absorption Absorption
----------- ---------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Phase I Lots 232 $51,958 12.0 36
Phase II Lots 238 $65,046 13.0 39
Phase III Lots 172 $60,950 13.0 39
Phase IV Lots 229 $70,566 14.0 42
Phase V Lots 212 $65,567 14.0 42
Phase VI Lots 247 $65,461 14.0 42
Total/Average 1,330 $63,344
Golf Course
------------
Golf Course Sale $8,500,000
Sales Commissions/Marketing 4.00% of gross sales price
</TABLE>
5. OTHER ASSUMPTIONS
<TABLE>
<CAPTION>
Inflation Before 31-Dec-98 Annual Quarterly
------------------------------------------------------ --------- ------ ---------
<S> <C> <C> <C>
Annual Inflation Rate - Revenues (residential) 5.0% 1.23%
Annual Inflation Rate - Costs 3.0% 0.74%
Annual Inflation Rate - Revenues (golf) 3.0% 0.74%
Inflation Between 01-Jan-99 31-Dec-99
------------------------------------------------------ --------- ---------
Annual Inflation Rate - Revenues (residential) 4.0% 0.99%
Annual Inflation Rate - Costs 3.5% 0.86%
Annual Inflation Rate - Revenues (golf) 3.5% 0.86%
Inflation After 01-Jan-2000
------------------------------------------------------ -----------
Annual Inflation Rate - Revenues 3.0% 0.74%
Annual Inflation Rate - Costs 3.0% 0.74%
Annual Inflation Rate - Revenues (golf) 3.0% 0.74%
Sources: Chartered Land and Cattle Company; Sedway Group.
</TABLE>
<PAGE>
ANNUAL SUMMARY OF LOT ABSORPTION
CYPRESS LAKES
OAKLEY, CALIFORNIA
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003
------ ------------ ----------- ----------- ------------ -----------
Phase 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
--------- ------ ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
I 0 0 0 0 0 36 36 36 36 36 36 16 0 0 0 0 0 0 0 0 0 0
II 0 0 0 0 0 0 0 0 0 0 0 26 39 39 39 39 39 17 0 0 0 0
III 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 26 39 39 39 29
IV 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 14
V 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
VI 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
- --------------------------------------------------------------------------------
Total 0 0 0 0 0 36 36 36 36 36 36 42 39 39 39 39 39 43 43 39 39 39 43
- --------------------------------------------------------------------------------
2004 2005 2006 2007 2008
---------------------------------------------------------------------
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
I 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 232
II 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 238
III 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 172
IV 42 42 42 42 42 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 229
V 0 0 0 0 0 42 42 42 42 42 2 0 0 0 0 0 0 0 0 0 212
VI 0 0 0 0 0 0 0 0 0 0 42 42 42 42 42 37 0 0 0 0 247
- -------------------------------------------------------------------------------
42 42 42 42 42 47 42 42 42 42 44 42 42 42 42 37 0 0 0 0 1,330
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CASH FLOW ANALYSIS
CYPRESS LAKES - PHASE I
OAKLEY, CALIFORNIA
QUARTER ENDING
------------------------------------------------------------------------------------
Apr-98 Jul-98 Oct-98 Jan-99 Apr-99 Jul-99 Oct-99
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
I. LOT SALES
Phase I Lots
------------
Lots Absorped 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Cumulative Absorption 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Average Sales Price $52,596 53,241 53,895 54,426 54,962 55,504 56,051
Total Revenues $0 0 0 0 0 0 0
Marketing and Commissions $0 0 0 0 0 0 0
Developer Profit $0 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------
NET REVENUES $0 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
Mello-Roos Site Development Costs $0 0 4,336,188 4,373,642 4,411,419 0 0
Mello-Roos Reimbursement of Off-Sites $0 0 (4,336,188) (4,373,642) (4,411,419) 0 0
Predevelopment Cost $0 106,563 0 0 0 0 0
ON-Site Development Costs $0 0 0 0 2,865,798 2,890,551 2,915,518
Developers Overhead and Fee $0 3,197 0 0 85,974 86,717 87,466
Property Tax $0 4,835 0 5,479 0 22,195 0
-------------------------------------------------------------------------------------
TOTAL DEVELOPMENT COST $0 114,595 0 5,479 2,951,772 2,999,463 3,002,984
-------------------------------------------------------------------------------------
CONSTRUCTION PERIOD CASH FLOW $0 (114,595) 0 (5,479) (2,951,772)(2,999,463)(3,002,984)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING
------------------------------------------------------------------------------------
Jan-2000 Apr-2000 Jul-2000 Oct-2000 Jan-2001 Apr-2001 Jul-2001 Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
I. LOT SALES
Phase I Lots
------------
Lots Absorped 36.0 36.0 36.0 36.0 36.0 36.0 16.0 232.0
Cumulative Absorption 36.0 72.0 108.0 144.0 180.0 216.0 232.0
Average Sales Price 56,466 56,885 57,307 57,732 58,160 58,592 59,026
Total Revenues 2,032,787 2,047,864 2,063,053 2,078,355 2,093,771 2,109,300 944,420 13,369,550
Marketing and Commissions (81,311) (81,915) (82,522) (83,134) (83,751) (84,372) (37,777) (534,782)
Developer Profit (203,279) (204,786) (206,305) (207,836) (209,377) (210,930) (94,442)(1,336,955)
- -----------------------------------------------------------------------------------------------------------------------------
NET REVENUES 1,748,197 1,761,163 1,774,226 1,787,385 1,800,643 1,813,998 812,201 11,497,813
$49,560 per lot
- -----------------------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
Mello-Roos Site Development Costs
Mello-Roos Reimbursement of Off-Sites 0 0 0 0 0 0 0 13,121,249
Predevelopment Cost 0 0 0 0 0 0 0 (13,121,249)
ON-Site Development Costs 0 0 0 0 0 0 0 106,563
Developers Overhead and Fee 0 0 0 0 0 0 0 8,671,868
Property Tax 0 0 0 0 0 0 0 263,353
51,590 0 34,470 0 17,051 0 1,955 137,576
------------------------------------------------------------------------------------------
TOTAL DEVELOPMENT COST 51,590 0 34,470 0 17,051 0 1,955 9,179,36
- -----------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION PERIOD CASH FLOW 1,696,607 1,761,163 1,739,756 1,787,385 1,783,592 1,813,998 810,246 2,318,45
$39,566 per lot
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CASH FLOW ANALYSIS
CYPRESS LAKES - PHASE II
OAKLEY, CALIFORNIA
<TABLE>
<CAPTION>
QUARTER ENDING
------------------------------------------------------------------------------------
Oct-2000 Jan-2001 Apr-2001 Jul-2001 Oct-2001 Jan-2002 Apr-2002
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
I. LOT SALES
Phase II Lots
-------------
Lots Absorped 0.0 0.0 0.0 26.0 39.0 39.0 39.0
Cumulative Absorption 0.0 0.0 0.0 26.0 65.0 104.0 143.0
Average Sales Price 72,274 72,810 73,350 73,894 74,442 74,995 75,551
Total Revenues 0 0 0 1,921,251 2,903,252 2,924,786 2,946,479
Marketing and Commissions 0 0 0 (76,850 (116,130) (116,991) (117,859)
Developer Profit 0 0 0 (192,125 (290,325) (292,479) (294,648)
----------------------------------------------------------------------------------------------------------------
NET REVENUES 0 0 0 1,652,276 2,496,797 2,515,316 2,533,972
----------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
ON-Site Development Costs 2,236,082 3,379,000 3,404,063 1,143,104 0 0 0
Developers Overhead and Fee 67,082 101,370 102,122 34,293 0 0 0
Property Tax 0 19,583 0 55,860 0 42,579 0
-------------------------------------------------------------------------------------------------------------------
TOTAL DEVELOPMENT COST 2,303,164 3,499,954 3,506,184 1,233,256 0 42,579 0
-------------------------------------------------------------------------------------------------------------------
CONSTRUCTION PERIOD CASH FLOW (2,303,164) (3,499,954) (3,506,184) 419,020 2,496,797 2,472,737 2,533,972
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
QUARTER ENDING
-----------------------------------------------
Jul-2002 Oct-2002 Jan-2003 Total
-----------------------------------------------
07-Dec-2002
<S> <C> <C> <C> <C>
I. LOT SALES
Phase II Lots
-------------
Lots Absorped 39.0 39.0 17.0 238.0
Cumulative Absorption 182.0 221.0 238.0
Average Sales Price 76,111 76,676 77,244
Total Revenues 2,968,333 2,990,350 1,313,154 17,967,605
Marketing and Commissions (118,733) (119,614) (52,526) (718,704)
Developer Profit (296,833) (299,035) (131,315) (1,796,761)
-----------------------------------------------------------------------------
NET REVENUES 2,552,767 2,571,701 1,129,312 15,452,141
$64,925 per lot
-----------------------------------------------------------------------------
II. DEVELOPMENT COSTS
ON-Site Development Costs 0 0 0 10,162,248
Developers Overhead and Fee 0 0 0 304,867
Property Tax 21,060 0 2,375 173,356
-----------------------------------------------------------------------------
TOTAL DEVELOPMENT COST 21,060 0 2,375 10,640,472
$44,708 per lot
-----------------------------------------------------------------------------
CONSTRUCTION PERIOD CASH FLOW 2,531,706 2,571,701 1,126,937 4,811,669
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
<PAGE>
CASH FLOW ANALYSIS
CYPRESS LAKES - PHASE III
OAKLEY, CALIFORNIA
<TABLE>
<CAPTION>
QUARTER ENDING
-----------------------------------------------------------------------------------------
Apr-98 Jul-98 Oct-98 Jan-99 Apr-99 Apr-2002 Jul-2002 Oct-2002 Jan-2003
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
I. LOT SALES
Phase III Lots
--------------
Lots Absorped 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 26.0
Cumulative Absorption 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 26.0
Average Sales Price $61,698 62,455 63,221 63,844 64,473 70,793 71,318 71,847 72,380
Total Revenues 0 0 0 0 0 0 0 0 1,881,879
Marketing and Commissions 0 0 0 0 0 0 0 0 (75,275)
Developer Profit $0 0 0 0 0 0 0 0 (188,188)
-----------------------------------------------------------------------------------------
NET REVENUES 0 0 0 0 0 0 0 0 1,618,416
-----------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
ON-Site Development Costs 0 0 0 0 0 1,875,158 2,833,600 2,854,617 958,597
Developers Overhead and Fee 0 0 0 0 0 56,255 85,008 85,639 28,758
Property Tax 0 4,205 0 4,228 0 0 15,605 0 44,944
-----------------------------------------------------------------------------------------
TOTAL DEVELOPMENT COST 0 4,205 0 4,228 0 1,931,413 2,934,213 2,940,256 1,032,299
-----------------------------------------------------------------------------------------
CONSTRUCTION PERIOD CASH FLOW 0 (4,205) 0 (4,228) 0 (1,931,413) (2,934,213) (2,940,256) 586,117
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
QUARTER ENDING
------------------------------------------------------
Apr-2003 Jul-2003 Oct-2003 Jan-2004 Total
------------------------------------------------------
04-Jan-2004
<S> <C> <C> <C> <C> <C>
I. LOT SALES
Phase III Lots
--------------
Lots Absorped 39.0 39.0 39.0 29.0 172.0
Cumulative Absorption 65.0 104.0 143.0 172.0
Average Sales Price 72,917 73,458 74,002 74,551
Total Revenues 2,843,756 2,864,848 2,886,097 2,161,989 12,638,569
Marketing and Commissions (113,750) (114,594) (115,444) (86,480) (505,543)
Developer Profit (284,376) (286,485) (288,610) (216,199) (1,263,857)
------------------------------------------------------
NET REVENUES 2,445,630 2,463,769 2,482,043 1,859,311 10,869,169
$63,193 per lot
------------------------------------------------------
II. DEVELOPMENT COSTS
ON-Site Development Costs 0 0 0 0 8,521,972
Developers Overhead and Fee 0 0 0 0 255,659
Property Tax 0 27,731 0 4,609 128,230
------------------------------------------------------
TOTAL DEVELOPMENT COST 0 27,731 0 4,609 8,905,861
$51,778 per lot
------------------------------------------------------
CONSTRUCTION PERIOD CASH FLOW 2,445,630 2,436,038 2,482,043 1,854,702 1,963,308
------------------------------------------------------
------------------------------------------------------
</TABLE>
<PAGE>
CASH FLOW ANALYSIS
CYPRESS LAKES - PHASE IV
OAKLEY, CALIFORNIA
<TABLE>
<CAPTION>
QUARTER ENDING
------------------------------------------------------------------------------
Apr-2003 Jul-2003 Oct-2003 Jan-2004 Apr-2004 Jul-2004 Oct-2004
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
I. LOT SALES
Phase IV Lots
Lots Absorped 0.0 0.0 0.0 14.0 42.0 42.0 42.0
Cumulative Absorption 0.0 0.0 0.0 14.0 56.0 98.0 140.0
Average Sales Price 84,422 85,048 85,679 86,314 86,954 87,599 88,249
Total Revenues 0 0 0 1,208,396 3,652,077 3,679,165 3,706,453
Marketing and Commissions 0 0 0 (48,336) (146,083) (147,167) (148,258)
Developer Profit 0 0 0 (120,840) (365,208) (367,916) (370,645)
-----------------------------------------------------------------------------------------------------------------------
NET REVENUES 0 0 0 1,039,221 3,140,786 3,164,082 3,187,550
-----------------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
ON-Site Development Costs 1,370,856 4,143,070 4,173,799 2,803,171 0 0 0
Developers Overhead and Fee 41,126 124,292 125,214 84,095 0 0 0
Property Tax 0 15,480 0 61,763 0 53,384 0
-------------------------------------------------------------------------------
TOTAL DEVELOPMENT COST 1,411,981 4,282,842 4,299,013 2,949,029 0 53,384 0
-------------------------------------------------------------------------------
CONSTRUCTION PERIOD CASH FLOW (1,411,981) (4,282,842) (4,299,013) (1,909,808) 3,140,786 3,110,698 3,187,550
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Quarter Ending
------------------------------------------
Jan-2005 Apr-2005 Jul-2005 Total
------------------------------------------
09-May-2005
<S> <C> <C> <C> <C>
I. LOT SALES
Phase IV Lots
Lots Absorped 42.0 42.0 5.0 229.0
Cumulative Absorption 182.0 224.0 229.0
Average Sales Price 88,903 89,563 90,227
Total Revenues 3,733,944 3,761,639 451,136 20,192,811
Marketing and Commissions (149,358) (150,466)(18,045) (807,712)
Developer Profit (373,394) (376,164)(45,114) (2,019,281)
---------------------------------------------------------------------------------
NET REVENUES 3,211,192 3,235,010 387,977 17,365,817
$75,833 per lot
---------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
ON-Site Development Costs 0 0 0 12,490,896
Developers Overhead and Fee 0 0 0 374,727
Property Tax 23,971 0 884 224,645
-----------------------------------------
TOTAL DEVELOPMENT COST 23,971 0 884 13,090,268
$57,163 per lot
-----------------------------------------
CONSTRUCTION PERIOD CASH FLOW 3,187,221 3,235,010 387,092 4,275,550
-----------------------------------------
-----------------------------------------
</TABLE>
<PAGE>
CASH FLOW ANALYSIS
CYPRESS LAKES - PHASE V
OAKLEY, CALIFORNIA
<TABLE>
<CAPTION>
QUARTER ENDING
----------------------------------------------------------------------------
Oct-2004 Jan-2005 Apr-2005 Jul-2005 Oct-2005 Jan-2006 Apr-2006
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
I. LOT SALES
Phase V Lots
------------
Lots Absorped 0.0 0.0 0.0 42.0 42.0 42.0 42.0
Cumulative Absorption 0.0 0.0 0.0 42.0 84.0 126.0 168.0
Average Sales Price 81,997 82,605 83,218 83,835 84,457 85,083 85,714
Total Revenues 0 0 0 3,521,070 3,547,186 3,573,496 3,600,001
Marketing and Commissions 0 0 0 (140,843) (141,887) (142,940) (144,000)
Developer Profit 0 0 0 (352,107) (354,719) (357,350) (360,000)
------------------------------------------------------------------------------------------------------------------
NET REVENUES 0 0 0 3,028,120 3,050,580 3,073,206 3,096,000
------------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
ON-Site Development Costs 2,664,010 2,683,769 2,703,675 0 0 0 0
Developers Overhead and Fee 79,920 80,513 81,110 0 0 0 0
Property Tax 0 22,145 0 42,965 0 21,833 0
---------------------------------------------------------------------------------
TOTAL DEVELOPMENT COST 2,743,931 2,786,427 2,784,785 42,965 0 21,833 0
---------------------------------------------------------------------------------
CONSTRUCTION PERIOD CASH FLOW (2,743,931) (2,786,427) (2,784,785) 2,985,155 3,050,580 3,051,373 3,096,000
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Quarter Ending
---------------------------
Jul-2006 Oct-2006 Total
--------------------------
02-Aug-2006
<S> <C> <C> <C>
I. LOT SALES
Phase V Lots
------------
Lots Absorped 42.0 2.0 212.0
Cumulative Absorption 210.0 212.0
Average Sales Price 86,350 86,991
Total Revenues 3,626,702 173,981 18,042,435
Marketing and Commissions (145,068) (6,959) (721,697)
Developer Profit (362,670) (17,398)(1,804,244)
--------------------------------------------------------------
NET REVENUES 3,118,964 149,624 15,516,494
$73,191 per lot
--------------------------------------------------------------
II. DEVELOPMENT COSTS
ON-Site Development Costs 0 0 8,051,455
Developers Overhead and Fee 0 0 241,544
Property Tax 510 0 166,648
-----------------------------
TOTAL DEVELOPMENT COST 510 0 8,459,647
$39,904 per lot
----------------------------
CONSTRUCTION PERIOD CASH FLOW 3,118,454 149,624 7,056,847
----------------------------
----------------------------
</TABLE>
<PAGE>
CASH FLOW ANALYSIS
CYPRESS LAKES - PHASE VI
OAKLEY, CALIFORNIA
<TABLE>
<CAPTION>
QUARTER ENDING
------------------------------------------------------------------------------
I. LOT SALES Jan-2006 Apr-2006 Jul-2006 Oct-2006 Jan-2007 Apr-2007
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Phase VI Lots
Lots Absorped 0.0 0.0 0.0 42.0 42.0 42.0
Cumulative Absorption 0.0 0.0 0.0 42.0 84.0 126.0
Average Sales Price 84,946 85,576 86,210 86,850 87,494 88,143
Total Revenues 0 0 0 3,647,697 3,674,752 3,702,008
Marketing and Commissions 0 0 0 (145,908) (146,990) (148,080)
Developer Profit 0 0 0 (364,770) (367,475) (370,201)
-------------------------------------------------------------------------------------------------------------
NET REVENUES 0 0 0 3,137,019 3,160,287 3,183,727
-------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
ON-Site Development Costs 2,471,706 2,490,039 2,508,508 0 0 0
Developers Overhead and Fee 74,151 74,701 75,255 0 0 0
Property Tax 8,056 0 36,972 0 38,514 0
------------------------------------------------------------------------------
TOTAL DEVELOPMENT COST 2,553,914 2,564,740 2,620,735 0 38,514 0
------------------------------------------------------------------------------
CONSTRUCTION PERIOD CASH FLOW (2,553,914) (2,564,740) (2,620,735) 3,137,019 3,121,773 3,183,727
------------------------------------------------------------------------------
------------------------------------------------------------------------------
- ---------------------------------------------------
Jul-2007 Oct-2007 Jan-2008 Total
- ---------------------------------------------------
<C> <C> <C> <C> <C>
16-Jan-2008
42.0 42.0 37.0 247.0
168.0 210.0 247.0
88,797 89,455 90,119
3,729,466 3,757,127 3,334,400 21,845,449
(149,179) (150,285) (133,376) (873,818)
(372,947) (375,713) (333,440) (2,184,545)
- ---------------------------------------------------
3,207,341 3,231,130 2,867,584 18,787,086 $76,061 per lot
- ---------------------------------------------------
0 0 0 7,470,253
0 0 0 224,108
21,081 0 3,909 216,484
- ---------------------------------------------------
--------------
21,081 0 3,909 7,910,845 $32,028 per lot
- ---------------------------------------------------
3,186,260 3,231,130 2,863,675 10,876,241
- ---------------------------------------------------
- ---------------------------------------------------
</TABLE>
<PAGE>
CASH FLOW ANALYSIS
CYPRESS LAKES - GOLF
OAKLEY, CALIFORNIA
<TABLE>
<CAPTION>
QUARTER ENDING
-----------------------------------------------------------------------------------------
I. GOLF SALE Apr-98 Jul-98 Oct-98 Jan-99 Oct-2000 Jan-2001 Apr-2001 Total
-----------------------------------------------------------------------------------------
03-Nov-2000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Golf Course Sale 0.0 0.0 0.0 0.0 0.0 1.0 0.0 1.0
Golf Course Sales Price 8,563,045 8,626,558 8,690,542 8,765,606 9,264,552 9,333,268 9,402,493
Total Revenues 0 0 0 0 0 9,333,268 0 9,333,268
Marketing and Commissions 0 0 0 0 0 (373,331) 0 (373,331)
Developer Profit 0 0 0 0 0 (933,327) 0 (933,327)
-----------------------------------------------------------------------------------------------------------------------
NET REVENUES 0 0 0 0 0 8,026,610 0 8,026,610
-----------------------------------------------------------------------------------------------------------------------
II. DEVELOPMENT COSTS
Course Development Costs 0 0 0 0 1,263,181 0 0 7,439,472
Developers Overhead and Fee 0 0 0 0 37,895 0 0 223,184
Property Tax 0 0 0 0 0 0 0 0
-----------------------------------------------------------------------------------------
-----------
TOTAL DEVELOPMENT COST 0 0 0 0 1,301,076 0 0 7,662,656
-----------------------------------------------------------------------------------------
CONSTRUCTION PERIOD CASH FLOW 0 0 0 0 (1,301,076) 8,026,610 0 363,954
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>
Sources: Chartered Land and Cattle Company; Sedway Group.
<PAGE>
<TABLE>
<CAPTION>
INFLATION SCHEDULES FOR DISCOUNTED CASH FLOW ANALYSIS
-----------------------------------------------------------------------------------------------
I. CONSTRUCTION COSTS Jan-98 Apr-98 Jul-98 Oct-98 Jan-99 Apr-99 Jul-99 Oct-99
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OFF-SITE COSTS
Phase I OFF-Site Costs (total) $12,723,349 12,817,719 12,912,789 13,008,565 13,120,925 13,234,257 13,348,567 13,463,864
ON-SITE COSTS
Predevelopment Cost $105,000 105,779 106,563 107,354 108,281 109,216 110,160 111,111
Phase I ON-Site Costs (total) $8,265,493 8,326,799 8,388,559 8,450,778 8,523,771 8,597,395 8,671,654 8,746,555
Phase II ON-Site Costs (total) $9,231,976 9,300,451 9,369,433 9,438,926 9,520,455 9,602,687 9,685,630 9,769,289
Phase III ON-Site Costs (total) $7,406,093 7,461,025 7,516,364 7,572,113 7,637,517 7,703,485 7,770,024 7,837,137
Phase IV ON-Site Costs (total) $10,513,218 10,591,195 10,669,751 10,748,889 10,841,732 10,935,377 11,029,830 11,125,100
Phase V ON-Site Costs (total) $6,514,825 6,563,146 6,611,825 6,660,866 6,718,399 6,776,428 6,834,959 6,893,996
Phase VI ON-Site Costs (total) $5,825,285 5,868,492 5,912,019 5,955,868 6,007,312 6,059,200 6,111,536 6,164,324
GOLF COURSE COSTS $6,953,625 7,005,201 7,057,159 7,109,502 7,170,910 7,232,848 7,295,322 7,358,335
II. PROPERTY TAX
Residential ONLY
Total Property Tax (Land Only) 33,791 33,791 34,467
------ ------ ------
Phase I Property Tax 4,835 4,835 4,932
Phase II Property Tax 6,209 6,209 6,334
Phase III Property Tax 4,205 4,205 4,289
Phase IV Property Tax 6,482 6,482 6,611
Phase V Property Tax 5,575 5,575 5,687
Phase VI Property Tax 6,485 6,485 6,615
Golf Course 0 0 0
III. LOT PRICING INFLATION SCHEDULE
Phase I Lots $51,958 52,596 53,241 53,895 54,426 54,962 55,504 56,051
Phase II Lots $65,046 65,844 66,652 67,470 68,135 68,806 69,484 70,169
Phase III Lots $60,950 61,698 62,455 63,221 63,844 64,473 65,109 65,750
Phase IV Lots $70,566 71,432 72,309 73,196 73,918 74,646 75,382 76,124
Phase V Lots $65,567 66,372 67,186 68,011 68,681 69,358 70,041 70,731
Phase VI Lots $65,461 66,264 67,078 67,901 68,570 69,246 69,928 70,617
Golf Course Land $8,500,000 8,563,045 8,626,558 8,690,542 8,765,606 8,841,318 8,917,685 8,994,711
</TABLE>
Source: Sedway Group.
<PAGE>
VIEW PREMIUM CALCULATIONS BY NEIGHBORHOOD
CYPRESS LAKES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
KEY PREMIUM
HOME PRICE DIVIDE MULTIPLY APPLICABLE
PREMIUM TYPE PREMIUM BY BY TO LOTS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Golf View/frontage 15% 30% 60% 30%
Water View 10% 30% 60% 20%
Partial Water or Golf View 5% 30% 60% 10%
Lesser Views 2% 30% 60% 4%
Minor Powerline Proximity -5% 30% 60% -10%
Close Powerline Proximity -10% 30% 60% -20%
No Influence 0% 30% 60% 0%
- -------------------------------------------------------------------------------------------------------
TOTAL WEIGHTED
NEIGHBORHOOD # LOTS PREMIUM PREMIUMS AVG. PREMIUM
- -------------------------------------------------------------------------------------------------------
2 6 0% 0%
2 1 4% 4%
2 13 4% 52%
2 10 20% 200%
2 11 30% 330%
-- ----
41 586% 14.29%
3 47 0% 0%
3 19 4% 76%
3 3 4% 12%
3 6 4% 24%
3 2 10% 20%
3 25 20% 500%
3 7 30% 210%
- ----
109 842% 7.72%
14 28 0% 0%
14 1 10% 10%
14 1 4% 4%
14 19 30% 570%
14 13 20% 260%
-- ----
62 844% 13.61%
18 24 0% 0%
18 2 4% 8%
18 1 10% 10%
18 15 20% 300%
18 8 30% 240%
- ----
50 558% 11.16%
21 10 20% 200%
21 9 30% 270%
- ----
19 470% 24.74%
</TABLE>
CONTINUED
<PAGE>
VIEW PREMIUM CALCULATIONS BY NEIGHBORHOOD
CYPRESS LAKES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
TOTAL WEIGHTED
NEIGHBORHOOD # LOTS PREMIUM PREMIUMS AVG. PREMIUM
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PREMIUMS CONTINUED:
4 9 0% 0%
4 9 4% 36%
4 2 4% 8%
4 14 20% 280%
4 20 30% 600%
4 1 10% 10%
- ---
55 934% 16.98%
6 45 0% 0%
6 1 4% 4%
6 1 4% 4%
6 2 4% 8%
6 4 20% 80%
6 10 30% 300%
-- ----
63 396% 6.29%
1 13 0% 0%
1 1 4% 4%
1 1 4% 4%
1 1 10% 10%
1 5 20% 100%
1 3 30% 90%
- ---
24 208% 8.67%
10 8 20% 160%
10 11 30% 330%
-- ----
19 490% 25.79%
13 40 0% 0%
13 1 4% 4%
13 1 4% 4%
13 3 4% 12%
13 4 10% 40%
13 10 30% 300%
-- ----
59 360% 6.10%
11 33 0% 0%
11 1 4% 4%
11 1 4% 4%
11 3 4% 12%
11 4 10% 40%
11 9 30% 270%
11 (One Missing) 1 4% 4%
- --
52 334% 6.42%
</TABLE>
CONTINUED
<PAGE>
VIEW PREMIUM CALCULATIONS BY NEIGHBORHOOD
CYPRESS LAKES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TOTAL WEIGHTED
NEIGHBORHOOD # LOTS PREMIUM PREMIUMS AVG. PREMIUM
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PREMIUMS CONTINUED:
12 18 0% 0%
12 1 4% 4%
12 2 4% 8%
12 12 30% 360%
12 (Two Missing) 2 4% 8%
- --
35 380% 10.86%
8 2 20% 40%
8 37 0% 0%
8 2 4% 8%
8 3 4% 12%
8 3 10% 30%
8 14 30% 420%
-- ----
61 510% 8.36%
9 20 0% 0%
9 1 4% 4%
9 1 4% 4%
9 5 10% 50%
9 8 20% 160%
9 4 30% 120%
- ----
39 338% 8.67%
7 81 0% 0%
7 1 4% 4%
7 1 10% 10%
7 1 20% 20%
7 7 30% 210%
- ----
91 244% 2.68%
5 17 0% 0%
5 4 4% 16%
5 1 4% 4%
5 3 4% 12%
5 1 20% 20%
5 7 30% 210%
5 (Eight Missing) 8 4% 32%
- ---
41 294% 7.17%
17 61 0% 0%
17 7 4% 28%
- ---
68 28% 0.41%
22 2 10% 20%
22 9 20% 180%
22 8 30% 240%
- ----
19 440% 23.16%
</TABLE>
CONTINUED
<PAGE>
VIEW PREMIUM CALCULATIONS BY NEIGHBORHOOD
CYPRESS LAKES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
TOTAL WEIGHTED
NEIGHBORHOOD # LOTS PREMIUM PREMIUMS AVG. PREMIUM
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PREMIUMS CONTINUED:
19 19 0% 0%
19 4 4% 16%
19 17 20% 340%
19 1 30% 30%
- ---
41 386% 9.41%
16 44 0% 0%
-- --
44 0% 0.00%
20 19 0% 0%
20 1 4% 4%
20 2 4% 8%
20 16 20% 320%
20 1 30% 30%
- ---
39 362% 9.28%
24 16 -20% -320%
24 56 0% 0%
24 27 4% 108%
-- ----
99 -212% -2.14%
23 16 -20% -320%
23 6 -10% -60%
23 77 0% 0%
23 34 4% 136%
-- ----
133 -244% -1.83%
15 32 -20% -640%
15 2 -10% -20%
15 31 0% 0%
15 2 4% 8%
- --
67 -652% -9.73%
TOTAL LOTS 1330 5.94%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Premiums were assigned to lots in the 1993 Sedway & Associates
Appraisal. Sedway Group assumed assignments (premium types) were correct but
modified actual premium percentages based upon market data. There were 11
lots unaccounted for in the 1993
Sources: Chartered Land and Cattle; 1993 Cypress Lakes Appraisal by Sedway
and Associates; Sedway Group.
<PAGE>
ADDENDUM G
1998 CURRENTLY SELLING SINGLE-FAMILY HOME PROGRAMS
HISTORICAL RESIDENTIAL PERMIT ACTIVITY
PLANNED AND PROPOSED RESIDENTIAL DEVELOPMENTS
<PAGE>
CURRENTLY SELLING SINGLE-FAMILY HOME DEVELOPMENTS
EASTERN CONTRA COSTA COUNTY
AS OF DECEMBER 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CITY: TOTAL BASE
---- DEVELOPMENT NUMBER UNIT SIZE (SQ. FT.) LOT SIZE PRICE RANGE
DEVELOPER OF UNITS LOW HIGH (SQ. FT.) LOW HIGH
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OAKLEY:
1 Avalon 64 1,120 2,018 6,000 $129,990 $160,990
Porter Homes
BRENTWOOD:
2 Creekside 77 1,605 1,893 6,700 $182,300 $196,420
Pulte Homes
3 Foothills/Brent Lake 207 2,014 2,370 6,000 $211,950 $256,950
Lee Hancock Construction
4 Garin Ranch 72 1,981 2,596 5,000 $203,990 $238,990
Morrison Homes
5 Garin Ranch 971 1,858 2,700 6,500 $203,900 $255,900
Signature Properties
6 Inspiration II 105 1,457 2,932 6,500 $169,950 $249,950
AD Seeno
7 Madison Greens/Apple Hill 70 1,855 2,584 6,000 $200,950 $247,950
Kiper Development
8 Summerset 475 1,084 2,198 4,320 $148,900 $232,900
Blackhawk-Nunn
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
HOA ABSORPTION
CITY: ASSESMENTS TOTAL (UNITS/MO.)
---- DEVELOPMENT MELLO ROOS START UNITS SINCE START OF
DEVELOPER (ALL ANNUAL) MKTNG SOLD MARKETING
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OAKLEY:
1 Avalon - Taking 0 0
Porter Homes - Res.
- Now
BRENTWOOD:
2 Creekside - 01-97 50 4.4
Pulte Homes -
-
3 Foothills/Brent Lake - 05-97 41 5.2
Lee Hancock Construction $8,053/lot
-
4 Garin Ranch - 06-97 40 6
Morrison Homes $1,044
-
5 Garin Ranch - 05-96 70 3.6
Signature Properties $540
-
6 Inspiration II - 03-97 55 5.6
AD Seeno -
7 Madison Greens/Apple Hill $888 08-96 65 4
Kiper Development $1,104
-
8 Summerset $492 06-94 N/AV N/AV
Blackhawk-Nunn -
-
</TABLE>
Sources: Anthony Hurt and Associates; and Sedway Group.
CONTINUED
<PAGE>
CURRENTLY SELLING SINGLE-FAMILY HOME DEVELOPMENTS
EASTERN CONTRA COSTA COUNTY
AS OF DECEMBER 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CITY: TOTAL BASE
---- DEVELOPMENT NUMBER UNIT SIZE (SQ. FT.) LOT SIZE PRICE RANGE
DEVELOPER OF UNITS LOW HIGH (SQ. FT.) LOW HIGH
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BRENTWOOD CONTINUED:
9 Sunrise Town Square 92 1,511 1,730 4,000 $172,950 $180,950
Greystone
10 Town Square 125 1,914 2,228 6,000 $205,950 $237,100
Greystone Homes
BYRON:
11 Country Lane 246 1,487 1,682 4,800 $154,490 $184,490
Centex Homes
DISCOVERY BAY:
12 Miramar 65 1,995 2,068 7,200 $279,990 $289,990
The Hoffman Company
ANTIOCH:
13 California Autumnbrook 161 1,389 2,040 5,000 $143,990 $171,990
Kaufman & Broad
14 California Chapparal 242 Sold Out 1,667 5,000 Sold Out $159,990
Kaufman & Broad
15 California Countrybrook 181 Sold Out 1,625 4,500 Sold Out $152,990
Kaufman & Broad
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
HOA ABSORPTION
CITY: ASSESMENTS TOTAL (UNITS/MO.)
---- DEVELOPMENT MELLO ROOS START UNITS SINCE START OF
DEVELOPER (ALL ANNUAL) MKTNG SOLD MARKETING
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BRENTWOOD CONTINUED:
9 Sunrise Town Square - 07-96 80 4.4
Greystone -
-
10 Town Square - 05-96 81 4
Greystone Homes $840
-
BYRON:
11 Country Lane - 10-96 144 9.6
Centex Homes -
-
DISCOVERY BAY:
12 Miramar - 04-97 58 6.8
The Hoffman Company -
-
ANTIOCH:
13 California Autumnbrook - 08-97 22 4.8
Kaufman & Broad $2,316-$2,712
-
14 California Chapparal - 09-93 241 4.4
Kaufman & Broad $1,788-$2,100
$0.53/SF
15 California Countrybroo - 02-95 180 5.2
Kaufman & Broad -
$1,080
</TABLE>
Sources: Anthony Hurt and Associates; and Sedway Group.
CONTINUED
<PAGE>
CURRENTLY SELLING SINGLE-FAMILY HOME DEVELOPMENTS
EASTERN CONTRA COSTA COUNTY
AS OF DECEMBER 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CITY:
----- TOTAL BASE
DEVELOPMENT NUMBER UNIT SIZE (SQ. FT.) LOT SIZE PRICE RANGE
DEVELOPER OF UNITS LOW HIGH (SQ. FT.) LOW HIGH
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ANTIOCH CONTINUED:
16 California Southbrook 122 1,733 2,275 6,000 $156,990 $185,990
Kaufman & Broad
17 Castellana 48 2,200 2,600 7,000 $186,900 $218,500
Richland
18 Celebrations 86 2,040 2,370 6,000 $179,900 $191,900
Shea Homes
19 Daybreak 142 1,551 2,400 6,000 $166,990 $219,990
Hofmann Company
20 Deer Valley Estates 303 2,024 2,465 6,500 $178,990 $198,990
Porter Homes
21 Diablo Hills/Terraces 73 1,582 1,841 5,500 $169,950 $171,950
Pacwest Development
22 Discovery @ Black Diamond 129 1,511 1,893 6,000 $161,600 $177,400
Pulte Homes
23 Encore 60 1,346 1,668 4,000 $141,950 $155,950
AD Seeno
24 Estates @ Dallas Ranch 79 2,850 3,660 7,000 $251,900 $305,900
Suncrest Homes
25 Generations @ Blk Diamond 89 2,482 3,581 8,500 $239,900 $280,000
Richland Development
<CAPTION>
- -----------------------------------------------------------------------------------------------------
CITY: HOA ABSORPTION
----- ASSESMENTS TOTAL (UNITS/MO.)
DEVELOPMENT MELLO ROOS START UNITS SINCE START OF
DEVELOPER (ALL ANNUAL) MKTNG SOLD MARKETING
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ANTIOCH CONTINUED:
16 California Southbrook - 05-96 80 4
Kaufman & Broad -
$0.58/SF
17 Castellana 11-97 8 6.8
Richland $960
$1,440
18 Celebrations - 06-94 80 1.6
Shea Homes $732
$0.53/SF
19 Daybreak - 01-97 27 2.4
Hofmann Company -
$0.56/SF
20 Deer Valley Estates - 01-97 37 3.2
Porter Homes -
$2,532
21 Diablo Hills/Terraces - 09-94 68 1.6
Pacwest Development -
$0.58/SF
22 Discovery @ Black Diamond - 08-96 40 2.4
Pulte Homes $2,400
-
23 Encore $924 09-95 55 2
AD Seeno -
$0.58/SF
24 Estates @ Dallas Ranch - 05-97 55 7.6
Suncrest Homes $3,000
-
25 Generations @ Blk Diamond - 03-96 63 2.8
Richland Development -
</TABLE>
Sources: Anthony Hurt and Associates; and Sedway Group.
*Included in assessment figure.
CONTINUED
<PAGE>
CURRENTLY SELLING SINGLE-FAMILY HOME DEVELOPMENTS
EASTERN CONTRA COSTA COUNTY
AS OF DECEMBER 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CITY:
----- TOTAL BASE
DEVELOPMENT NUMBER UNIT SIZE (SQ. FT.) LOT SIZE PRICE RANGE
DEVELOPER OF UNITS LOW HIGH (SQ. FT.) LOW HIGH
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ANTIOCH CONTINUED:
26 Lone Tree Estates/Masters 398 2,127 2,886 6,000 $196,490 $237,990
Davidon Homes
27 The Colony 102 2,082 2,600 5,500 $179,990 $206,990
Pacific Valley Housing
PITTSBURG:
28 California Tradewinds 100 1,404 1,839 5,000 $164,990 $194,990
Kaufman & Broad
29 Monterra II @ Oak Hills 55 1,547 2,285 6,000 $179,950 $215,950
Seeno Homes
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
CITY: HOA ABSORPTION
----- ASSESMENTS TOTAL (UNITS/MO.)
DEVELOPMENT MELLO ROOS START UNITS SINCE START OF
DEVELOPER (ALL ANNUAL) MKTNG SOLD MARKETING
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ANTIOCH CONTINUED:
26 Lone Tree Estates/Masters $408 07-94 90 2
Davidon Homes $1,427
$0.55/SF
27 The Colony $12 03-97 12 1.2
Pacific Valley Housing
PITTSBURG:
28 California Tradewinds - 09-95 95 3.2
Kaufman & Broad $804
-
29 Monterra II @ Oak Hills - 04-97 22 2.8
Seeno Homes $1,020
</TABLE>
Sources: Anthony Hurt and Associates; and Sedway Group.
<PAGE>
BUILDING PERMIT TRENDS
SELECTED AREAS OF CONTRA COSTA COUNTY
1985-1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AREA 1985 1986 1987 1988 1989 1990
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NEW SINGLE-FAMILY PERMITS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ANTIOCH 580 1272 538 743 1042 826
BRENTWOOD 292 160 142 114 26 127
PITTSBURG 224 425 3 261 336 202
- -----------------------------------------------------------------------------------------------------------------------------------
SUB-TOTAL 1096 1857 683 1118 1404 1155
CC COUNTY REMAINDER: 3554 4329 4799 4765 4058 1977
---- ---- ---- ---- ---- ----
CONTRA COSTA COUNTY TOTAL: 4650 6186 5482 5883 5462 3132
<CAPTION>
NEW MULTIFAMILY PERMITS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ANTIOCH 728 486 36 156 15 0
BRENTWOOD 0 12 5 4 10 0
PITTSBURG 738 566 264 288 0 3
- -----------------------------------------------------------------------------------------------------------------------------------
SUB-TOTAL 1466 1064 305 448 25 3
CC COUNTY REMAINDER: 3206 5702 2645 1693 2183 1146
---- ---- ---- ---- ---- ----
CONTRA COSTA COUNTY TOTAL: 4672 6766 2950 2141 2208 1149
<CAPTION>
TOTAL SINGLE-FAMILY & MULTIFAMILY PERMITS
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
ANTIOCH 1308 1758 574 899 1057 826
BRENTWOOD 292 172 147 118 36 127
PITTSBURG 962 991 267 549 336 205
- -----------------------------------------------------------------------------------------------------------------------------------
SUB-TOTAL 2562 2921 988 1566 1429 1158
CC COUNTY REMAINDER: 6760 10031 7444 6458 6241 3123
---- ----- ---- ---- ---- ----
CONTRA COSTA COUNTY TOTAL: 9322 12952 8432 8024 7670 4281
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AREA 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NEW SINGLE-FAMILY PERMITS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ANTIOCH 658 795 841 709 506 687 620
BRENTWOOD 206 221 321 675 442 482 623
PITTSBURG 181 214 89 69 105 145 90
- ----------------------------------------------------------------------------------------------------------------------------------
SUB-TOTAL 1045 1230 1251 1453 1053 1314 1333
CC COUNTY REMAINDER: 1642 2049 1763 2229 2001 1780 1772
---- ---- ---- ---- ---- ---- ----
CONTRA COSTA COUNTY TOTAL: 2687 3279 3014 3682 3054 3094 3105
<CAPTION>
NEW MULTIFAMILY PERMITS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ANTIOCH 0 50 82 0 0 2 5
BRENTWOOD 0 0 0 0 0 84 278
PITTSBURG 0 0 0 0 0 79 10
- ----------------------------------------------------------------------------------------------------------------------------------
SUB-TOTAL 0 50 82 0 0 165 293
CC COUNTY REMAINDER: 1268 564 359 230 312 285 88
---- --- --- --- --- --- --
CONTRA COSTA COUNTY TOTAL: 1268 614 441 230 312 450 381
<CAPTION>
TOTAL SINGLE-FAMILY & MULTIFAMILY PERMITS
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
ANTIOCH 658 845 923 709 506 689 625
BRENTWOOD 206 221 321 675 442 566 901
PITTSBURG 181 214 89 69 105 224 100
- ----------------------------------------------------------------------------------------------------------------------------------
SUB-TOTAL 1045 1280 1333 1453 1053 1479 1626
CC COUNTY REMAINDER: 2910 2613 2122 2459 2313 2065 1860
---- ---- ---- ---- ---- ---- ----
CONTRA COSTA COUNTY TOTAL: 3955 3893 3455 3912 3366 3544 3486
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Sources: Economic Sciences Corporation. One Documents; and Sedway Group.
<PAGE>
PLANNED AND PROPOSED BUILDING ACTIVITY
EASTERN CONTRA COSTA COUNTY SINGLE FAMILY HOMES
SELECTED AREAS
APRIL 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
City Developer or Acres Lots Units/Lots Planned
Project Name/Applicant Owner Completed Remainder
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BRENTWOOD
PROJECTS UNDER CONSTRUCTION.
Sub. 8017/8022 Pulte N/AV 77 40
Sub. 6811 Mission Peak Homes " " 82 0
Sub. 6691 (Homecoming) Garrow " " 24 23
Sub. 6848A (Apple Hill Estates) Blackhawk/Nunn " " 180 131
Sub. 7948, 7995, 8011 Greystone " " 291 146
Sub. 7272 (Diablo Estates) Farm Hill " " 26 2
Sub. 7798, 7799, 8009, 7605 Signature " " 408 70
Sub. 7873 Brentwood Country Club " " 29 0
Sub. 7349 (Pheasant Run) Tamayo " " 24 17
Sub. 7816, 7869-72 (Summerset) Blackhawk " " 452 280
Sub. 7705 Hancock " " 940 15
Sub. 7939 Brentwood Country Club " " 511 0
Sub. 7642A (The Fairways) Braddock Logan " " 50 46
Sub. 7642A, 7872 (The Greens) Kiper " " 134 82
Sub. 7703 (Homecoming #2) Garrow " " 27 24
Sub. 7432 (Edgewood III) Seeno " " 96 84
Sub. 7864 (Legacy) Pulte " " 42 40
Sub. 7059/7915 Pulte " " 88 77
Sub. 7433 (Edgewood 4) Seeno " " 61 36
Sub. 8010 Morrison " " 78 24
Sub. 7944 (Edgewood) Seeno " " 4 4
-------------- -----------
SUBTOTAL 3,624 1,141
PROJECTS APPROVED BUT NOT UNDER CONSTRUCTION.
Sub. 6665 Bear Forest 12.5 80 0
Sub. 7940 Brentwood Country Club 357 992 0
Sub. 6888 Citation 42.4 152 0
Sub. 7975 McDonald 11 68 0
Sub. 7474 Chan 50.73 76 0
Sub. 7844 Gerry Properties 24.92 121 0
Sub. 7476 Rural California 15 95 0
Sub. 8048 Birchwood Estates 9.98 52 0
Sub. 7904 Catchings 5 18 0
Sub. 7637 Ospra 5.48 66 0
Sub. 7690 Spanos 576.7 1,031 0
Sub. 8046 Meadows 14.52 71 0
Sub. 7882 Termo 98.4 278 0
Sub. 8033 Hasseltine/Best 114.2 442 0
Sub. 7943 (California Spirit) Kaufman & Broad 1.1 6 0
-------------- -----------
SUBTOTAL 3,548 0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONTINUED
<PAGE>
PLANNED AND PROPOSED BUILDING ACTIVITY
EASTERN CONTRA COSTA COUNTY SINGLE FAMILY HOMES
SELECTED AREAS
APRIL 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
City Developer or Acres Lots Units/Lots Planned
Project Name/Applicant Owner Completed Remainder
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BRENTWOOD (CONTINUED)
PROJECTS BEING PROCESSED.
Sub. 8055 Hofmann 35.3 92 0
Sub. 8066 Nunn/Gangwer 56.2 190 0
Sub. 8069 Bellecci 45.26 181 0
------- -----------
SUBTOTAL 463 0
BRENTWOOD TOTALS 7,635 1,141 6,494
BYRON
Discovery Bay Hofmann Construction N/AV 1,400 N/AV
BYRON TOTAL PLANNED UNITS 1,400
ALL ALLOCATED TO PLANNED)
ANTIOCH
Bear Ridge Bear Forest Properties N/AV 4 4
Bear Ridge (The Overlook) Richmond American " " 46 46
Bear Ridge Pulte Homes " " 43 43
Bear Ridge (Future) Unknown " " 58 0
Black Diamond Estates Richland Development " " 535 67
Black Diamond Knolls Pulte Homes " " 129 53
Black Diamond Knolls Richland Development " " 956 262
California Terrace Kaufman & Broad " " 123 123
Canada Hills Shea Homes " " 649 509
Country Hills Lusk Homes " " 243 243
Country Manor Kaufman & Broad " " 625 625
Dallas Ranch Units I-III Centex Homes " " 138 134
Dallas Ranch Units IV-VII Kaufman & Broad " " 586 283
Dallas Ranch Units VII-VIII Suncrest Homes " " 176 32
Deerpark I & IV Greystone Homes " " 350 350
Deerpark II & III (Montclair) Standard Pacific " " 166 166
Dearfield (Ponderosa Glen) Ponderosa " " 836 646
Diablo East I (Diablo Hills) PacWest Development " " 177 170
Diablo East II & III (Westridge Park) Dale Poe Development " " 64 64
Diablo East IV (Deer Valley Estates) Hal Porter Homes " " 313 54
Diablo West (Laurel Ridge) UDC Homes " " 810 332
Diamond Ridge Warmington " " 347 347
Eagles Ridge Centex Homes " " 554 554
Hidden Glen Arcadia " " 381 0
Hillcrest Citation " " 366 366
Ho-ti-Chien Hofmann Company " " 142 26
Ho-ti-Chien Pacific Valley Housing " " 37 7
Ho-ti-Chien Richland Development " " 280 0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONTINUED
<PAGE>
PLANNED AND PROPOSED BUILDING ACTIVITY
EASTERN CONTRA COSTA COUNTY SINGLE FAMILY HOMES
SELECTED AREAS
APRIL 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
City Developer or Acres Lots Units/Lots Planned
Project Name/Applicant Owner Completed Remainder
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ANTIOCH (CONTINUED)
Lone Tree Estates Davidon " " 488 168
Lone Tree Glen Davidon " " 164 98
Meadow Creek Estates Seeno " " 529 527
Meadow Creek Villages Seeno " " 453 0
Nelson Ranch Unknown " " 415 0
Northwood Downs Northwood Homes " " 188 188
Parkside/Parklands Pulte Homes " " 266 266
Ridgeview Davidon " " 103 103
Shelbourne I & II Citation " " 212 207
Shelbourne II (Brandmere) California Homes " " 66 66
Sterling Gate Warmington " " 156 156
Viera Ranch I (Wildhorse) Centex Homes " " 359 350
Viera Ranch II (Springvale) Hiatt-McAllister " " 178 85
Williamson Ranch Kaufman & Broad " " 647 647
Almondridge McBail Company " " 645 448
Brookside Estates (Casa Blanca) Anden Group " " 80 80
Brookside Estates (Sterling Place) Pulte Homes " " 74 74
Terrace Gardens Trico Construction " " 36 0
-----------------------------
ANTIOCH TOTALS 14,193 8,969 5,224
PITTSBURG
Evergreen Estates Northstate 20 46 N/AV
Stonegate Northstate 6.96 27 " "
Highlands Ranch Northstate 108.91 589 " "
Sky Ranch Kaufman & Broad 160 283 " "
Brickyard Subdivision Patelle of California 43 193 " "
San Marco Northstate 415 1,363 " "
Oak Hills South Northstate 211 459 " "
Village @ New York Landing Hofmann Company 26.99 114 " "
Jubilee Northstate 9.5 51 " "
Rockridge Kaufman & Broad 7.6 56 " "
Oak Hills South West Coast Homebuilders 181 65 " "
-------------
PITTSBURG TOTALS 3,246 N/AV 3,246
(ALL ALLOCATED TO PLANNED)
TOTAL EAST COUNTY PLANNED UNITS 16,364
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Data on planned activity in unincorporated Contra Costa County
was unavailable.
Sources: City Planning and Community Development Departments;
Sedway Group.
<PAGE>
ADDENDUM H
CHARTERED LAND & CATTLE ORIGINAL COST ESTIMATES AND
PRODUCTION PLAN
<PAGE>
CYPRESS LAKES & COUNTRY CLUB
Offsite Cost Summary & Fee Schedule
Rev 2-24-93
<TABLE>
<CAPTION>
Phase Total
-----------
<S> <C> <C> <C> <C>
Phase 1 $ 0
-----------
Phase 2
Water Line - Hwy 4 to Cyp/BIR 1,200,000
Pneumatic tanks & pumps 600,000
Cypress SSFM (See note) 400,000 $ 2,200,000
---------- -----------
Phase 3
Hotchkiss Fire Station (in lieu of fee) $ 635,000
-----------
Phase 4 $ 0
-----------
Phase 5 $ 0
-----------
Phase 6
Cyp/BIR Intersection $ 1,000,000
-----------
Phase 7 $ 0
-----------
Phase 8
1/2 of Cypress Rd (2500' of roadway) $ 850,000
-----------
Phase 9
Expand Sheriff Oakley Substation 200,000
Levee (12' wide) - Major Trails Offstreet (P) 710,000 $ 910,000
---------- -----------
Phase 10
Park #1 $ 1,000,000
-----------
Phase 11
1/2 of Cypress Road (2500' of roadway)
(Cypress/Sellers - signal + intersection)
(Cypress/Knightson - signal + intersection) $ 1,150,000
-----------
Phase 12
Golf cart - Major Trails - Offstreet (P) $ 70,000
-----------
Phase 13 $ 0
-----------
Phase 14
Sandmound Blvd. - half street improvements $ 500,000
-----------
Phase 15 $ 0
-----------
Phase 16 $ 0
-----------
Phase 17 $ 0
-----------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TOTAL OFFSITE COST(3) Per Unit $ 6,257 $ 8,315,000
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fees:
Subregional Road Fee 1,067
Sanitary Sewer Connection Fee 2,940
Water Connection Fee 3,063
School Fee ($2.65/s.f.) 5,300
Affordable/Homeless Housing Fee 3,500
Miscellaneous Fees 1,513
- -----------------------------------------------------------------------------------------------------------------
TOTAL FEES Per Unit $17,383 $23,102,007
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Note: This number reflects only the rehabilitation of the existing SSFM along
Cypress.
Use a value of 1,200,000 for replacement of this same SSFM if replacement
is required.
<PAGE>
CYPRESS LAKES & COUNTRY CLUB - DEVELOPMENT COSTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
ONSITES
# of ---------------------------------------------------------------------------------------------- Total
Units Grading Roadway Int. Roads Storm Sewer Water Onsites
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECLMTN $9,229,550 $0 $0 $0 $0 $9,229,550
PHASE 1 0 0 839,795 131,904 555,530 206,900 1,734,129
PHASE 2 133 143,450 1,220,959 469,861 758,010 503,350 3,095,630
PHASE 3 99 74,100 526,669 237,816 466,600 225,700 1,530,885
PHASE 4 67 86,450 844,783 153,017 606,930 320,700 2,011,880
PHASE 5 69 60,800 470,685 145,821 198,700 184,250 1,060,256
PHASE 6 102 99,750 2,309,854 532,699 653,650 665,900 4,261,853
PHASE 7 44 75,050 894,214 322,334 784,840 315,250 2,391,688
PHASE 8 60 61,750 456,170 124,130 190,550 183,900 1,016,500
PHASE 9 68 66,500 331,760 96,560 157,550 155,150 807,520
PHASE 10 65 69,350 820,315 291,020 536,740 290,750 2,008,175
PHASE 11 109 113,050 923,990 374,698 372,950 626,940 361,600 2,773,228
PHASE 12 55 57,000 997,845 374,697 264,310 487,650 307,700 2,489,202
PHASE 13 100 88,350 622,050 374,698 237,640 477,650 252,250 2,052,638
PHASE 14 77 145,350 1,294,775 480,650 918,720 489,000 3,328,495
PHASE 15 87 33,250 170,027 16,170 78,200 78,200 375,847
PHASE 16 133 40,850 749,840 353,140 461,050 226,650 1,831,530
PHASE 17 62 75,050 1,376,900 374,697 377,190 428,500 418,950 3,051,287
- ----------------------------------------------------------------------------------------------------------------------------------
1,330 $10,519,650 $14,850,631 $1,498,790 $4,607,212 $8,387,810 $5,186,200 $45,050,293
----------------------------------------------------------------------------------------------------------------------
---------------
Cost per lot: $33,872
---------------
</TABLE>
NOTES:
General - This summary does not include fees. See "Offsite Cost
Summary" for fee schedule.
* Offsites - See "Offsite Cost Summary" for detail.
** Does not include cost of construction for golf course or tennis
club.
<PAGE>
CYPRESS LAKES AND COUNTRY CLUB
Estimated Construction Cost
Reclamation
Rev 1-13-93
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ITEM UNIT PRICE UNIT QUANTITY TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
GENERAL GRADING 2,939,000.00
- --------------------------------------------------------------------------------
Clear and Grub 1,000.00 AC 679 679,000.00
Rough Grading 4,000.00 AC 565 2,260,000.00
- --------------------------------------------------------------------------------
LEVEES/LAKES 6,290,550.00
- --------------------------------------------------------------------------------
Levee Subgrade Prep. 2,200.00 AC 52 114,400.00
Grade Levees 0.30 CY 828,000 248,400.00
Levee Roadway (8" AB) 1.00 SF 396,000 396,000.00
Hydroseed Levees 3,500.00 AC 46 161,000.00
Lake Excavation 2.50 CY 910,000 2,275,000.00
Condition Ex'd Material 0.75 CY 910,000 682,500.00
72" Lagoon Cross Piping 200.00 LF 100 20,000.00
54" Lagoon Cross Piping 95.00 LF 1,350 128,250.00
72" Dewater Structure 29,000.00 EA 1 29,000.00
42" Dewater Structure 25,000.00 EA 3 75,000.00
33" Dewater Structure 23,000.00 EA 2 46,000.00
30" Dewater Structure 20,000.00 EA 1 20,000.00
27" Dewater Structure 15,000.00 EA 3 45,000.00
24" Dewater Structure 12,000.00 EA 1 12,000.00
21" Dewater Structure 10,000.00 EA 3 30,000.00
18" Dewater Structure 8,000.00 EA 1 8,000.00
SDPS & Outfall 2,000,000.00 EA 1 2,000,000.00
------------
TOTAL 9,229,550.00
------------
</TABLE>
<PAGE>
CYPRESS LAKES AND COUNTRY CLUB
Estimated Construction Cost
4-06-92
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PHASE 1 PHASE 2
ITEM UNIT PRICE UNIT QUANTITY TOTAL QUANTITY TOTAL
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------- --------- ---------
TOTALS BY PHASE 1,734,129 3,095,630
- --------------- --------- ---------
- ----------------------------------------------------------------------------------------------------------------
GRADING 0 143,450
- ----------------------------------------------------------------------------------------------------------------
Finish Grade Lots 950.00 EA 0 151 143,450
- ----------------------------------------------------------------------------------------------------------------
ROADWAY 839,795 1,220,959
- ----------------------------------------------------------------------------------------------------------------
96' Cypress Right of Way 455.94 LF 1,250 569,925 0
60' ROW (No. of Cypress) 273.75 LF 0 0
60' ROW (So. of Cypress) 269.87 LF 1,000 269,870 260 70,166
40' Right of Way 207.35 LF 0 5,550 1,150,793
Traffic Signal System 150,000.00 EA 0 0
- ----------------------------------------------------------------------------------------------------------------
STORM DRAINAGE 131,904 469,861
- ----------------------------------------------------------------------------------------------------------------
72" Storm Drain 250.00 LF 0 220 55,000
66" Storm Drain 225.00 LF 0 130 29,250
54" Storm Drain 200.00 LF 0 0
48" Storm Drain 175.00 LF 0 373 65,275
42" Storm Drain 155.00 LF 0 280 43,400
36" Storm Drain 140.00 LF 0 40 5,600
33" Storm Drain 120.00 LF 0 200 24,000
30" Storm Drain 105.00 LF 340 35,700 200 21,000
27" Storm Drain 95.00 LF 0 30 2,850
24" Storm Drain 82.00 LF 0 220 18,040
21" Storm Drain 75.00 LF 337 25,275 230 17,250
18" Storm Drain 69.00 LF 331 22,839 463 31,947
15" Storm Drain 53.00 LF 331 17,543 1,360 72,080
12" Storm Drain 57.00 LF 171 9,747 417 23,769
Pump Station 1.00 EA 0 0
Catch Basin 1,600.00 EA 13 20,800 36 57,600
Type I SD Manhole 1,400.00 EA 0 2 2,800
48" Dewater Structure 40,000.00 EA 0 0
42" Dewater Structure 38,000.00 EA 0 0
30" Dewater Structure 32,000.00 EA 0 0
- ----------------------------------------------------------------------------------------------------------------
SANITARY SEWER 555,530 758,010
- ----------------------------------------------------------------------------------------------------------------
15" Sanitary Sewer 200.00 LF 70 14,000 0
12" Sanitary Sewer 175.00 LF 670 117,250 0
10" Sanitary Sewer 120.00 LF 0 0
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PHASE 3 PHASE 4
ITEM UNIT PRICE UNIT QUANTITY TOTAL QUANTITY TOTAL
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------- --------- ---------
TOTALS BY PHASE 1,530,885 2,011,880
- --------------- --------- ---------
- ----------------------------------------------------------------------------------------------------------------
GRADING 74,100 86,450
- ----------------------------------------------------------------------------------------------------------------
Finish Grade Lots 950.00 EA 78 74,100 91 86,450
- ----------------------------------------------------------------------------------------------------------------
ROADWAY 526,669 844,783
- ----------------------------------------------------------------------------------------------------------------
96' Cypress Right of Way 455.94 LF 0 0
60' ROW (No. of Cypress) 273.75 LF 0 0
60' ROW (So. of Cypress) 269.87 LF 0 1,440 388,613
40' Right of Way 207.35 LF 2,540 526,669 2,200 456,170
Traffic Signal System 150,000.00 EA 0 0
- ----------------------------------------------------------------------------------------------------------------
STORM DRAINAGE 237,816 153,017
- ----------------------------------------------------------------------------------------------------------------
72" Storm Drain 250.00 LF 0 0
66" Storm Drain 225.00 LF 0 0
54" Storm Drain 200.00 LF 0 0
48" Storm Drain 175.00 LF 0 0
42" Storm Drain 155.00 LF 370 57,350 0
36" Storm Drain 140.00 LF 33 4,620 0
33" Storm Drain 120.00 LF 210 25,200 0
30" Storm Drain 105.00 LF 0 0
27" Storm Drain 95.00 LF 250 23,750 0
24" Storm Drain 82.00 LF 190 15,580 0
21" Storm Drain 75.00 LF 0 30 2,250
18" Storm Drain 69.00 LF 340 23,460 640 44,160
15" Storm Drain 53.00 LF 750 39,750 1,110 58,830
12" Storm Drain 57.00 LF 258 14,706 361 20,577
Pump Station 1.00 EA 0 0
Catch Basin 1,600.00 EA 20 32,000 17 27,200
Type I SD Manhole 1,400.00 EA 1 1,400 0
48" Dewater Structure 40,000.00 EA 0 0
42" Dewater Structure 38,000.00 EA 0 0
30" Dewater Structure 32,000.00 EA 0 0
- ----------------------------------------------------------------------------------------------------------------
SANITARY SEWER 466,600 606,930
- ----------------------------------------------------------------------------------------------------------------
15" Sanitary Sewer 200.00 LF 0 0
12" Sanitary Sewer 175.00 LF 0 0
10" Sanitary Sewer 120.00 LF 0 480 57,600
</TABLE>
<PAGE>
CYPRESS LAKES AND COUNTRY CLUB
Estimated Construction Cost
4-06-92
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PHASE 1 PHASE 2
ITEM UNIT PRICE UNIT QUANTITY TOTAL QUANTITY TOTAL
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
8" Sanitary Sewer 107.00 LF 0 580 62,060
6" Sanitary Sewer 65.00 LF 0 4,460 289,900
4" SS Lateral 650.00 EA 0 0 151 98,150
10" Sanitary Force Main 58.00 LF 1,520 88,160 0
8" Sanitary Force Main 56.00 LF 320 17,920 0
6" Sanitary Force Main 50.00 LF 220 11,000 920 46,000
4" Sanitary Force Main 45.00 LF 0 50 2,250
Sanitary Sewer Manhole 1,800.00 EA 4 7,200 26 46,800
Sanitary Sewer Lamphole 950.00 EA 0 3 2,850
Major Sewage PS 300,000.00 EA 1 300,000 0
Intermediate Sewage PS 230,000.00 EA 0 0
Minor Sewage PS 210,000.00 EA 0 1 210,000
- ----------------------------------------------------------------------------------------------------------------
DOMESTIC WATER 206,900 503,350
- ----------------------------------------------------------------------------------------------------------------
14" Water Line 85.00 LF 1,300 110,500 0
12" Water Line 60.00 LF 1,050 63,000 200 12,000
10" Water Line 55.00 LF 0 1,650 90,750
6" Water Line 45.00 LF 0 4,380 197,100
14" Butterfly Valve 2,600.00 EA 3 7,800 0
12" Gate Valve 1,600.00 EA 3 4,800 2 3,200
10" Gate Valve 1,350.00 EA 0 6 8,100
6" Gate Valve 950.00 EA 0 11 10,450
Fire Hydrant Assembly 3,500.00 EA 5 17,500 10 35,000
Air Release Valve 1,100.00 EA 3 3,300 0
1-1/2" Blowoff Assembly 1,100.00 EA 0 3 3,300
1" Water Service 950.00 EA 0 0 151 143,450
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PHASE 3 PHASE 4
ITEM UNIT PRICE UNIT QUANTITY TOTAL QUANTITY TOTAL
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
8" Sanitary Sewer 107.00 LF 0 570 60,990
6" Sanitary Sewer 65.00 LF 2,460 159,900 2,230 144,950
4" SS Lateral 650.00 EA 78 50,700 91 59,150
10" Sanitary Force Main 58.00 LF 0 0
8" Sanitary Force Main 56.00 LF 0 440 24,640
6" Sanitary Force Main 50.00 LF 0 50 2,500
4" Sanitary Force Main 45.00 LF 500 22,500 0
Sanitary Sewer Manhole 1,800.00 EA 12 21,600 14 25,200
Sanitary Sewer Lamphole 950.00 EA 2 1,900 2 1,900
Major Sewage PS 300,000.00 EA 0 0
Intermediate Sewage PS 230,000.00 EA 0 1 230,000
Minor Sewage PS 210,000.00 EA 1 210,000 0
- ----------------------------------------------------------------------------------------------------------------
DOMESTIC WATER 225,700 320,700
- ----------------------------------------------------------------------------------------------------------------
14" Water Line 85.00 LF 0 0
12" Water Line 60.00 LF 0 1,450 87,000
10" Water Line 55.00 LF 930 51,150 550 30,250
6" Water Line 45.00 LF 1,730 77,850 1,750 78,750
14" Butterfly Valve 2,600.00 EA 0 0
12" Gate Valve 1,600.00 EA 0 5 8,000
10" Gate Valve 1,350.00 EA 3 4,050 3 4,050
6" Gate Valve 950.00 EA 5 4,750 2 1,900
Fire Hydrant Assembly 3,500.00 EA 3 10,500 6 21,000
Air Release Valve 1,100.00 EA 0 1 1,100
1-1/2" Blowoff Assembly 1,100.00 EA 3 3,300 2 2,200
1" Water Service 950.00 EA 78 74,100 91 86,450
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PHASE 5 PHASE 6 PHASE 7 PHASE 8 PHASE 9 TOTALS PHASES 1-9
QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1,060,256 4,261,853 2,391,688 1,016,500 807,520 17,910,340
- ---------------------------------------------------------------------------------------------------------------------------------
60,800 99,750 75,050 61,750 66,500 667,850
- ---------------------------------------------------------------------------------------------------------------------------------
64 60,800 105 99,750 79 75,050 65 61,750 70 66,500 703 667,850
- ---------------------------------------------------------------------------------------------------------------------------------
470,685 2,389,854 894,214 456,170 331,760 7,894,888
- ---------------------------------------------------------------------------------------------------------------------------------
0 2,300 1,048,662 0 0 0 3,550 1,618,587
0 0 0 0 0 0 0
0 1,600 431,792 1,700 458,779 0 0 6,000 1,619,220
2,270 470,685 4,000 829,400 2,100 435,435 2,200 456,170 1,600 331,760 22,460 4,657,081
0 0 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------------
145,821 532,699 322,334 124,130 96,560 2,214,142
- ---------------------------------------------------------------------------------------------------------------------------------
0 0 0 0 0 220 55,000
0 0 0 0 0 130 29,250
0 0 0 0 0 0 0
0 350 61,250 200 35,000 0 0 923 161,525
0 240 37,200 360 55,800 0 0 1,250 193,750
0 200 28,000 60 8,400 0 0 333 46,620
0 0 300 36,000 0 0 710 85,200
0 0 0 0 0 540 56,700
0 0 30 2,850 0 0 310 29,450
0 260 21,320 230 18,860 0 0 900 73,800
160 12,000 1,100 82,500 0 160 12,000 310 23,250 2,327 174,525
630 43,470 1,620 111,780 350 24,150 370 25,530 330 22,770 5,074 350,106
1,180 62,540 1,550 82,150 1,390 73,670 1,050 55,650 500 26,500 9,221 488,713
123 7,011 507 28,899 372 21,204 150 8,550 120 6,840 2,479 141,303
0 0 0 0 0 0
13 20,800 48 76,800 29 46,400 14 22,400 9 14,400 199 318,400
0 2 2,800 0 0 2 2,800 7 9,800
0 0 0 0 0 0 0
0 0 0 0 0 0 0
0 0 0 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------------
198,700 653,650 784,840 190,550 157,550 4,372,360
- ---------------------------------------------------------------------------------------------------------------------------------
0 0 0 0 0 70 14,000
0 0 0 0 0 670 117,250
0 0 0 0 0 480 57,600
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PHASE 5 PHASE 6 PHASE 7 PHASE 8 PHASE 9 TOTALS PHASES 1-9
QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 0 570 60,990 0 0 1,720 184,040
2,140 139,100 3,700 240,500 2,700 175,500 2,060 133,900 1,530 99,450 21,280 1,383,200
64 41,600 105 66,250 79 51,350 65 42,250 70 45,500 703 456,950
0 0 0 0 0 1,520 88,160
0 1,600 89,600 0 0 0 2,360 132,160
0 60 3,300 690 34,500 0 0 1,940 97,000
0 260 11,700 300 13,500 0 0 1,110 49,950
10 18,000 17 30,600 14 25,200 8 14,400 7 12,600 112 201,600
0 0 4 3,800 0 0 11 10,450
0 0 0 0 0 1 300,000
0 0 0 0 0 1 230,000
0 1 210,000 2 420,000 0 0 5 1,050,000
- ---------------------------------------------------------------------------------------------------------------------------------
184,250 665,900 315,250 183,900 155,150 2,761,100
- ---------------------------------------------------------------------------------------------------------------------------------
0 2,200 187,000 0 0 0 3,500 297,500
0 1,800 108,000 1,700 102,000 0 0 6,200 372,000
0 0 0 0 0 3,130 172,150
2,250 101,250 4,000 180,000 2,100 94,500 2,200 99,000 1,600 72,000 20,010 900,450
0 5 13,000 0 0 0 8 20,800
0 4 6,400 4 6,400 0 0 18 28,800
0 0 0 0 0 12 16,200
4 3,800 11 10,450 10 9,500 5 4,750 3 2,850 51 48,450
4 14,000 15 52,500 7 24,500 4 14,000 3 10,500 57 199,500
0 3 3,300 1 1,100 0 0 8 8,800
4 4,400 5 5,500 2 2,200 4 4,400 3 3,300 26 28,600
64 60,800 105 99,750 79 75,050 65 61,750 70 66,500 703 667,850
</TABLE>
<PAGE>
CYPRESS LAKES AND COUNTRY CLUB
Estimated Construction Cost
4-06-92
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PHASE 10 PHASE 11 PHASE 12 PHASE 13
ITEM UNIT PRICE UNIT QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------- --------- --------- ---------
TOTALS BY PHASE 2,008,175 2,398,530 2,114,505 1,677,940
--------- --------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
GRADING 69,350 113,050 57,000 88,350
- -----------------------------------------------------------------------------------------------------------------------------------
Finish Grade Lots 950.00 EA 73 69,350 119 113,050 60 57,000 93 88,350
- -----------------------------------------------------------------------------------------------------------------------------------
ROADWAY 820,315 923,990 997,845 622,050
- -----------------------------------------------------------------------------------------------------------------------------------
96" Cypress Right of Way 455.94 LF 0 0 0 0
60' ROW (No. of Cypress) 273.75 LF 800 219,000 800 219,000 1,600 438,000 0
60' ROW (So. of Cypress) 269.87 LF 0 0 0 0
40' Right of Way 207.35 LF 2,900 601,315 3,400 704,990 2,700 559,845 3,000 622,050
Traffic Signal System 150,000.00 EA 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
STORM DRAINAGE 291,020 372,950 264,310 237,640
- -----------------------------------------------------------------------------------------------------------------------------------
72" Storm Drain 250.00 LF 0 0 0 0
66" Storm Drain 225.00 LF 0 0 0 0
54" Storm Drain 200.00 LF 0 0 0 0
48" Storm Drain 175.00 LF 0 0 0 0
42" Storm Drain 155.00 LF 0 360 55,800 0 0
36" Storm Drain 140.00 LF 0 310 43,400 0 0
33" Storm Drain 120.00 LF 160 19,200 0 200 24,000 0
30" Storm Drain 105.00 LF 210 22,050 200 21,000 0 140 14,700
27" Storm Drain 95.00 LF 70 6,650 250 23,750 380 36,100 0
24" Storm Drain 82.00 LF 140 11,480 150 12,300 0 320 26,240
21" Storm Drain 75.00 LF 190 14,250 120 9,000 60 4,500 680 51,000
18" Storm Drain 69.00 LF 790 54,510 910 62,790 650 44,850 630 43,470
15" Storm Drain 53.00 LF 1,860 98,580 1,360 72,080 1,400 74,200 620 32,860
12" Storm Drain 57.00 LF 300 17,100 390 22,230 580 33,060 210 11,970
Pump Station 1.00 EA 0 0 0 0
Catch Basin 1,600.00 EA 26 41,600 29 46,400 28 44,800 15 24,000
Type 1 SD Manhole 1,400.00 EA 4 5,600 3 4,200 2 2,800 1 1,400
48" Dewater Structure 40,000.00 EA 0 0 0 0
42" Dewater Structure 38,000.00 EA 0 0 0 0
30" Dewater Structure 32,000.00 EA 0 0 0 1 32,000
- -----------------------------------------------------------------------------------------------------------------------------------
SANITARY SEWER 536,740 626,940 487,650 477,650
- -----------------------------------------------------------------------------------------------------------------------------------
15" Sanitary Sewer 200.00 LF 0 0 0 0
12" Sanitary Sewer 175.00 LF 70 12,250 0 0 0
10" Sanitary Sewer 120.00 LF 0 0 0 0
</TABLE>
<PAGE>
CYPRESS LAKES AND COUNTRY CLUB
Estimated Construction Cost
4-06-92
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PHASE 10 PHASE 11 PHASE 12 PHASE 13
ITEM UNIT PRICE UNIT QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8" Sanitary Sewer 107.00 LF 0 0 300 32,100 0
6" Sanitary Sewer 65.00 LF 2,700 175,500 3,200 208,000 2,400 156,000 2,440 158,600
4" SS Lateral 650.00 EA 73 47,450 119 77,350 60 39,000 93 60,450
10" Sanitary Force Main 58.00 LF 830 48,140 980 56,840 0 0
8" Sanitary Force Main 56.00 LF 0 0 0 0
6" Sanitary Force Main 50.00 LF 0 970 48,500 390 19,500 0
4" Sanitary Force Main 45.00 LF 0 0 170 7,650 640 28,800
Sanitary Sewer Manhole 1,800.00 EA 13 23,400 13 23,400 13 23,400 11 19,808
Sanitary Sewer Lamphole 950.00 EA 0 3 2,850 0 0
Major Sewage PS 300,000.00 EA 0 0 0 0
Intermediate Sewage PS 230,000.00 EA 1 230,000 0 0 0
Minor Sewage PS 210,000.00 EA 0 1 210,000 1 210,000 1 210,000
- -----------------------------------------------------------------------------------------------------------------------------------
DOMESTIC WATER 290,750 361,600 307,700 252,250
- -----------------------------------------------------------------------------------------------------------------------------------
14" Water Line 85.00 LF 0 0 0 0
12" Water Line 60.00 LF 800 48,000 800 48,000 1,200 72,000 0
10" Water Line 55.00 LF 0 0 300 16,500 0
6" Water Line 45.00 LF 3,000 135,000 3,500 157,500 2,700 121,500 3,000 135,000
14" Butterfly Valve 2,600.00 EA 0 0 0 0
12" Gate Valve 1,600.00 EA 2 3,200 2 3,200 2 3,200 0
10" Gate Valve 1,350.00 EA 0 0 1 1,350 0
6" Gate Valve 950.00 EA 8 7,600 9 8,550 9 8,550 6 5,700
Fire Hydrant Assembly 3,500.00 EA 6 21,000 8 28,000 6 21,000 6 21,000
Air Release Valve 1,100.00 EA 1 1,100 1 1,100 1 1,100 0
1-1/2" Blowoff Assembly 1,100.00 EA 5 5,500 2 2,200 5 5,500 2 2,200
1" Water Service 950.00 EA 73 69,350 119 113,050 60 57,000 93 88,350
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PHASE 14 PHASE 15 PHASE 16 PHASE 17 INTERIOR ROADWAY TOTAL PHASES 10-18
QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
560
3,300 3,328,495 375,847 1,831,530 2,678,590 1,498,790 17,910,402
- ---------------------------------------------------------------------------------------------------------------------------------
145,350 33,250 40,850 75,050 0 622,250
- ---------------------------------------------------------------------------------------------------------------------------------
153 145,350 35 33,250 43 40,850 79 75,050 250 0 655 622,250
- ---------------------------------------------------------------------------------------------------------------------------------
1,294,775 170,027 749,840 1,376,900 547,500 7,503,242
- ---------------------------------------------------------------------------------------------------------------------------------
0 0 0 0 0 0 0
1,700 465,375 0 1,300 355,875 2,000 547,500 2,000 547,500 10,200 2,792,250
0 0 0 0 0 0 0
4,000 629,400 820 170,027 1,900 393,965 4,000 829,400 0 22,720 4,710,992
0 0 0 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------------
480,650 16,170 353,140 377,190 438,290 2,831,360
- ---------------------------------------------------------------------------------------------------------------------------------
0 0 0 0 0 0 0
0 0 0 0 0 0 0
0 0 0 0 0 0 0
270 47,250 0 300 52,500 0 50 8,750 620 108,500
640 99,200 0 520 80,600 0 290 44,950 1,810 280,550
0 0 0 0 350 49,000 660 92,400
0 0 0 930 111,600 30 3,600 1,320 158,400
0 0 30 3,150 570 59,850 0 1,150 120,750
170 16,150 0 140 13,300 130 12,350 0 1,140 108,300
220 16,040 0 150 12,300 30 2,460 360 29,520 1,370 112,340
380 28,500 0 290 21,750 330 24,750 30 2,250 2,080 156,000
1,070 73,830 0 560 38,640 1,560 107,640 1,060 73,140 7,230 498,870
1,720 91,160 150 7,950 1,120 59,360 0 930 49,290 9,160 485,480
360 20,520 60 3,420 620 35,340 420 23,940 270 15,390 3,210 182,970
0 0 0 0 0 0 0
27 43,200 3 4,600 20 32,000 19 30,400 29 46,400 196 313,600
2 2,800 0 3 4,200 3 4,200 0 18 25,200
1 40,000 0 0 0 1 40,000 2 80,000
0 0 0 0 2 76,000 2 76,00
0 0 0 0 0 1 32,000
- ---------------------------------------------------------------------------------------------------------------------------------
918,720 78,200 461,050 428,500 199,050 4,214,500
- ---------------------------------------------------------------------------------------------------------------------------------
0 0 0 0 0 0 0
0 0 0 0 0 70 12,250
0 0 0 0 0 0 0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PHASE 14 PHASE 15 PHASE 16 PHASE 17 INTERIOR ROADWAY TOTAL PHASES 10-18
QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL QUANTITY TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
560 59,920 0 0 0 0 860 92,020
3,300 214,500 770 50,050 2,380 154,700 1,500 97,500 0 18,690 1,214,850
153 99,450 35 22,750 43 27,950 79 51,350 0 655 425,750
0 0 0 0 740 42,920 2,550 147,900
0 0 0 0 1,980 110,880 1,980 110,880
1,450 72,500 0 0 760 38,000 680 34,000 4,250 212,500
500 22,500 0 1,080 48,600 0 250 11,250 2,640 118,800
15 27,000 3 5,400 11 19,800 16 28,800 0 95 171,000
3 2,850 0 0 3 2,850 0 9 8,550
0 0 0 0 0 0 0
0 0 0 0 0 1 230,000
2 420,000 0 1 210,000 1 210,000 0 7 1,470,000
- ---------------------------------------------------------------------------------------------------------------------------------
489,000 78,200 226,650 418,950 313,950 2,739,050
- ---------------------------------------------------------------------------------------------------------------------------------
0 0 0 0 0 0 0
1,700 102,000 0 0 0 4,210 252,600 6,710 522,600
0 0 1,220 67,100 1,900 104,500 700 38,500 4,120 226,600
4,000 180,000 830 37,350 1,900 85,500 4,000 180,000 0 22,930 1,031,850
0 0 0 0 0 0 0
3 4,800 0 0 0 9 14,400 18 28,800
0 0 2 2,700 6 8,100 3 4,050 12 16,200
11 10,450 2 1,900 4 3,800 10 9,500 0 59 56,050
12 42,000 1 3,500 7 24,500 11 38,500 0 57 199,500
2 2,200 0 0 0 4 4,400 9 9,900
2 2,200 2 2,200 2 2,200 3 3,300 0 23 25,300
153 145,350 35 33,250 43 40,850 79 75,050 0 655 622,250
</TABLE>
<PAGE>
CYPRESS LAKES & COUNTRY CLUB - PRODUCT PLAN
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Average Unit Size Unit Price Price Per
Product Description Total Lot Size Range Unit Price Price Per Range Square Foot
Type Target Market Number Percent (sq ft) (sq ft) Range Square Foot (w/premium)* (w/premium)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A Production Unit - Standard 232 17% 5,000-6,000 1,400 $185,000 $132.14
Singles, First Time Buyers (50x100) 1,800 $215,000 $119.44
Retirees, Empty Nesters (50x120)
B Production Unit - Upgrade 169 13% 5,000-6,000 1,600 $210,000 $131.25 $252,000 $157.50
Professional Couples, Young (47x110) 2,000 $235,000 $117.50 $282,000 $141.00
Families, Move-Ups (55x100)
C Production Unit - Move-Up 303 23% 6,000-7,000 1,800 $230,000 $127.78 $276,000 $153.33
Move-Up Families (50x120) 2,400 $265,000 $110.42 $318,000 $132.50
(60x120)
D Production Unit - Move-Up 284 21% 7,000-8,000 2,200 $260,000 $118.18 $312,000 $141.82
Move-Up and Mature Families (60x120) 3,000 $305,000 $101.67 $366,000 $122.00
E Semi-Custom Unit 186 14% 8,000-10,000 2,600 $290,000 $111.54 $348,000 $133.85
Mature Families, Professionals (68x125) 3,300 $310,000 $93.94 $372,000 $112.73
(80x120)
F Custom Lot 156 12% 11,000-12,000 11,000 $125,000 $11.36 $150,000 $13.64
Mature Families, Professionals (100x110)
---------------
1,330 100%
</TABLE>
Notes:
* Premium for Golf View or
Lake View lots: 20.00%
18-Mar-93
<PAGE>
COMPLETE, SELF-CONTAINED
APPRAISAL
VALUATION OF
ESPERANZA AT VICTORVILLE
6.12 ACRES OF COMMERCIALLY ZONED LAND
EAST SIDE OF HESPERIA ROAD APPROXIMATELY
350 FEET NORTH OF SENECA ROAD
VICTORVILLE, CA
PREPARED FOR
MR. MARK KAWANAMI
NATIONAL INVESTORS FINANCIAL, INC.
4220 VON KARMAN AVENUE, SUITE NO. 110
NEWPORT BEACH, CA 92660
PREPARED BY
DAVID J. LIKAS, MAI &
NOBLE R. TUCKER JR., SRA
LIKAS & ASSOCIATES
20101 SW BIRCH ST., SUITE 150B
NEWPORT BEACH, CA 92660
DATES OF VALUE
DECEMBER 21, 1990 AND MARCH 31, 1998
<PAGE>
LIKAS & ASSOCIATES
REAL ESTATE APPRAISERS & CONSULTANTS
March 31, 1998
Our File No. 19.1
National Investors Financial, Inc.
4220 Von Karman Avenue, Suite No. 110
Newport Beach, CA 92660
Attn: Mr. Mark Kawanami
RE: Complete, Self Contained Appraisal
Esperanza at Victorville
6.12 Acres of Commercially Zoned Land
East side of Hesperia Road approximately 350
feet north of Seneca Road
Victorville, CA
Dear Mr. Kawanami:
Pursuant to your request and authorization, We have conducted the
investigations and analyses necessary to form opinions of market value. The
values reported within this appraisal are of the above referenced property's
fee simple estate. The function of this appraisal is for use in making
financial decisions in regards to the property.
It is our understanding that the purpose and intended use of the appraisal
will be to be referenced in an audit of your company to register it under the
Securities Act with the SEC and to provide necessary information for the
offering circular which will be distributed to investors. However, the
report, including all market surveys and related data, conclusions, exhibits
and supporting documentation may not be reproduced or references made to the
report or to Likas & Associates/David J. Likas, MAI in any sale offering,
prospectus, public or private placement memorandum, proxy statement or other
document ("Offering Material") in connection with a merger, liquidation or
other corporate transaction unless Likas & Associates/David J. Likas, MAI has
approved in writing the text of such reference or reproduction prior to the
distribution and filing thereof.
20101 SW BIRCH STREET, SUITE 150B
NEWPORT BEACH, CA 92660
(714) 752-6122 * FAX (714) 752-7509
<PAGE>
National Investors Financial Inc. March 31, 1998
RE: Our File No. 19.1 Page Two
Based on the investigations undertaken, the analyses made, and on our
experience as a real estate analysts and appraisers, and subject to the
Assumptions and Limiting Conditions set forth in the report which follows,
the subject property has market value estimates as follows:
MARKET VALUE AS OF DECEMBER 21, 1990
FIVE HUNDRED THIRTY THOUSAND DOLLARS
$ 530,000
MARKET VALUE AS OF MARCH 31, 1998
TWO HUNDRED SEVENTY THOUSAND DOLLARS
$ 270,000
The narrative report which follows sets forth the data and analyses upon
which our opinions of value are, in part, predicated.
Respectfully submitted,
/s/ David J. Likas, MAI
David J. Likas, MAI
State Cert. #AG003694
/s/ Noble R. Tucker Jr., SRA
Noble R. Tucker Jr., SRA
State Cert. # AG001532
<PAGE>
<TABLE>
<CAPTION>
EXECUTIVE SUMMARY
-----------------------------------------
<S> <C>
Property Location: Esperanza at Victorville
East side of Hesperia Rd.,
approximately 350' north of Seneca Rd.
Victorville, CA
Thomas Guide: Page 4296-E/7, San Bernardino County
Property Type: Commercial Land
Date of Values: December 21, 1990 & March 31, 1998
Date of Report: March 31, 1998
Property Rights: Fee Simple Estate
Site Size: 6.12 Acres
Zoning: Commercial (C2-T)
City of Victorville, CA
Highest & Best Use: Retail Development
VALUATION
MARKET VALUE AS OF
DECEMBER 21, 1990: $ 530,000 ($2.00/SF OF SITE AREA)
MARKET VALUE AS OF
MARCH 31, 1998: $ 270,000 ($1.00/SF OF SITE AREA)
EXPOSURE PERIOD: 10-TO-12 MONTHS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
------------------
<S> <C>
ASSUMPTIONS AND LIMITING CONDITIONS..............................1
CERTIFICATION....................................................3
INTRODUCTION.....................................................6
AREA DESCRIPTION.................................................9
THE LAND........................................................23
ASSESSED VALUATION AND TAXES....................................30
HIGHEST AND BEST USE............................................31
VALUATION METHODOLOGY...........................................33
SALES COMPARISON APPROACH.......................................35
VALUATION.......................................................61
</TABLE>
ADDENDA
Qualifications of Appraisers
<PAGE>
ASSUMPTIONS & LIMITING CONDITIONS
The analyses and opinions set forth in this appraisal are subject to the
following assumptions and limiting conditions:
1. No responsibility is assumed for matters which are legal in nature. A
current title report was requested from the client but was not
received. The client is recommended to review a preliminary title
report.
There are easements which are assumed to be typical utility easements
and do not negatively impact the value of the property. We assume that
none of these easements would adversely effect the subject property.
Should this later be found to be not the case, we reserve the right to
change our value estimate as stated herein. No responsibility is
assumed by us for matters which are legal in nature. No opinion of
title is rendered, and the property is appraised as though free of all
easements, liens, or encumbrances and the title is assumed to be
marketable. No survey of the boundaries of the property was undertaken
by us. All areas and dimensions furnished to us are presumed to be
correct. We recommend at the reader's discretion that a formal survey
be commissioned to confirm the legal description, land areas and that
no encroachments or adverse liens exist. We assume all taxes are
current.
2. Information contained in this appraisal has been gathered from sources
that are believed to be reliable, and, where feasible, has been
verified. No responsibility is assumed for the accuracy of information
supplied by others.
3. We assume no responsibility for economic or physical factors occurring
subsequently to the date of value that effect the opinions stated
herein.
4. We reserve the right to make such adjustments to the valuation herein
reported as may be required by the consideration of additional data or
more credible data that may become available.
5. Forecasts of future events that influence the valuation process are
predicated on the continuation of historic and current trends in the
market.
6. The property is appraised assuming it to be under responsible ownership
and competent management and available for its highest and best use.
7. No engineering survey has been made. Except as specifically stated,
data relative to sizes and areas were taken from sources considered
reliable.
8. Maps, plats and exhibits included herein are for illustration only, as
an aid in visualizing matters discussed within the appraisal. They
should not be considered as surveys nor relied
-1-
<PAGE>
upon for any other purpose, nor should they be removed from,
reproduced, or used apart from this report.
9. No opinion is expressed as to the value of sub-surface oil, gas, or
mineral rights, or whether the property is subject to surface entry for
the exploration or removal of such materials except as is expressly
stated.
10. No opinion is intended to be expressed on matters which require legal
expertise or specialized investigation or knowledge beyond that
customarily employed by real estate appraisers.
11. The appraiser has inspected, as far as possible, by observation, the
land; however, it was impossible to personally inspect the entire
parcel. Therefore, no representations are made as to the site
conditions unless specifically considered in the appraisal.
12. We shall not be required, by reason of this appraisal, to give
testimony or to be in attendance in court or any governmental or other
hearing in reference to the subject property without prior arrangements
having first been made with the appraiser relative to such additional
employment.
13. David Likas, MAI, and Noble R. Tucker Jr, SRA, the signatories of this
appraisal, are members of the Appraisal Institute. The Bylaws and
Regulations of the Appraisal Institute require each member and/or
candidate to control the use and distribution of each appraisal by such
member or candidate. Therefore, except as may hereinafter be provided,
the party for whom this appraisal was prepared may distribute copies of
this appraisal, in its entirety, to such third parties as may be
selected by the party for whom this appraisal was prepared; however,
selected portions of this appraisal shall not be given to third parties
without the prior written consent of the signatories of this appraisal.
14. Neither all nor any part of the contents of this shall be conveyed to
any person or entity, without written consent and approval of the
signatories of this appraisal, particularly as to valuation
conclusions, or to any reference to the Appraisal Institute or the MAI
designation.
Furthermore, this report is for the sole use of our client.
15. No environmental site assessment report was provided for our review. It
is assumed that there are no hidden or unapparent conditions or
substances in the soil or subsoil that may be hazardous or toxic. Our
inspection of the subject property revealed no obvious problems. The
appraisers are not qualified to detect such substances or conditions
and are not responsible for arranging any engineering or research
studies that may be necessary to discover such conditions or
substances.
16. It is assumed that there are no deed restrictions to a single use of
the subject. The presence of such restrictions could adversely impact
site value.
-2-
<PAGE>
17. No consideration has been given in this appraisal to personal property
(if any) located on the site; only the real estate has been considered
unless otherwise specified. This appraisal excludes the value of any
items of a historical, archaeological or biological nature.
-3-
<PAGE>
CERTIFICATION
We, the undersigned, certify that, to the best of our knowledge and belief:
- - the statements of fact contained in this report are true and correct
and subject to the Assumptions and Limiting Condition herein set forth.
- - the reported analyses, opinions, and conclusions are limited only by
the reported Assumptions and Limiting Conditions, and are our personal,
unbiased professional analyses, opinions and conclusions.
- - we have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
- - our compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause of the
client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event.
Furthermore, the appraisal assignment was not based on a requested
minimum valuation, a specific valuation or the approval of a loan.
- - our reported analyses, opinions and conclusions were developed, and
this report has been prepared, in conformity with the Uniform Standards
of Professional Appraisal Practice, USPAP, as published by the
Appraisal Foundation, and the federal regulating agencies.
- - we are competent to preform this appraisal assignment, by virtue of
previous experience with similar assignments and/or appropriate
research and education regarding the specific property type being
appraised.
- - David Likas, MAI, and Noble R. Tucker Jr, SRA,, have made a personal
inspection of the property that is the subject of this report. We have
considered pertinent facts affecting the value thereof.
- - no one has provided significant professional assistance to the persons
signing this report.
- - the reported analyses, opinions, and conclusions were developed, and
this report has been prepared in conformity with the requirements of
the Code of Professional Ethics and the Standards of Professional
Practices of the Appraisal Institute.
- - market data pertaining to the value estimate has been accumulated from
various sources and where possible examined and verified as to details,
motivation and validity.
- - the use of this report is subject to the requirements of the Appraisal
Institute relating to
-4-
<PAGE>
review by its duly authorized representatives.
- - the Appraisal Institute conducts a program of continuing professional
education for its designated members. David Likas, MAI, is currently
certified under the continuing education program of the Appraisal
Institute.
- - the Appraisal Institute conducts a program of continuing professional
education for its designated members. Noble R. Tucker Jr., SRA, is
currently certified under the continuing education program of the
Appraisal Institute.
/s/ David Likas, MAI
-------------------------------------------
David Likas, MAI
"Certified General Real Estate Appraiser"
California State Certification No.:AG003694
/s/ Noble R. Tucker Jr, SRA
-------------------------------------------
Noble R. Tucker Jr, SRA
"Certified General Real Estate Appraiser"
California State Certification No.: AG001532
-5-
<PAGE>
INTRODUCTION
PURPOSE OF THE REPORT
The purpose of this report is to set forth the data, analyses and conclusions
relative to our opinion of market value of the commercial land located on the
east side of Hesperia Rd., approximately 350' north of Seneca Rd.,
Victorville, CA. The valuation of the subject is provided as of the following
dates:
MARKET VALUE AS OF DECEMBER 21, 1990
MARKET VALUE AS OF MARCH 31, 1998
The opinions set forth in this report are subject to the Assumptions &
Limiting Conditions set forth within.
FUNCTION OF THE APPRAISAL
The function of this appraisal is for use in making financial decisions in
regards to the property.
It is our understanding that the purpose and intended use of the appraisal
will be to be referenced in an audit of your company to register it under the
Securities Act with the SEC and to provide necessary information for the
offering circular which will be distributed to investors. However, the
report, including all market surveys and related data, conclusions, exhibits
and supporting documentation may not be reproduced or references made to the
report or to Likas & Associates/David J. Likas, MAI, in any sale offering,
prospectus, public or private placement memorandum, proxy statement or other
document ("Offering Material") in connection with a merger, liquidation or
other corporate transaction unless Likas & Associates/David J. Likas, MAI has
approved in writing the text of such reference or reproduction prior to the
distribution and filing thereof.
SCOPE OF THE APPRAISAL
The scope of this appraisal includes the process of collecting primary and
secondary data (Comps Inc., TRW, etc. for sale data) relative to the subject
property along with the supporting market data. This data has been analyzed
and confirmed, whenever possible, leading to the value conclusions set forth.
All of the approaches to value, the Cost, Income, and Sales Comparison
Approaches, were considered in this report.
-6-
<PAGE>
EFFECTIVE DATE OF THE APPRAISAL
The opinions expressed in this report are stated as of March 31, 1998, which
coincides with the date of our property inspection. We have also rendered an
opinion of value as of December 21, 1990.
DATE OF APPRAISAL PREPARATION
The appraisal was prepared on March 31, 1998.
INTEREST APPRAISED
This report pertains to a valuation of the fee simple estate.
MARKET VALUE DEFINED
The term "market value"(1) is defined as follows:
"MARKET VALUE" MEANS THE MOST PROBABLE PRICE WHICH A PROPERTY SHOULD BRING IN
A COMPETITIVE AND OPEN MARKET UNDER ALL CONDITIONS REQUISITE TO A FAIR SALE,
THE BUYER AND SELLER EACH ACTING PRUDENTLY AND KNOWLEDGEABLY, AND ASSUMING
THE PRICE IS NOT AFFECTED BY UNDUE STIMULUS. IMPLICIT IN THIS DEFINITION IS
THE CONSUMMATION OF A SALE AS OF A SPECIFIED DATE AND THE PASSING OF TITLE
FROM SELLER TO BUYER UNDER CONDITIONS WHEREBY:
1. BUYER AND SELLER ARE TYPICALLY MOTIVATED;
2. BOTH PARTIES ARE WELL INFORMED OR WELL ADVISED, AND ACTING IN WHAT
THEY CONSIDER THEIR OWN BEST INTERESTS;
3. A REASONABLE TIME IS ALLOWED FOR EXPOSURE IN THE OPEN MARKET;
4. PAYMENT IS MADE IN TERMS OF CASH IN U.S. DOLLARS OR IN TERMS OF
FINANCIAL ARRANGEMENTS COMPARABLE THERETO; AND
5. THE PRICE REPRESENTS THE NORMAL CONSIDERATION FOR THE PROPERTY SOLD
UNAFFECTED BY SPECIAL OR CREATIVE FINANCING OR SALES CONCESSIONS
GRANTED BY ANYONE ASSOCIATED WITH THE SALE.
THIS APPRAISAL IS PREDICATED ON AN ALL CASH TO THE SELLER TRANSACTION.
- -----------------------------
(1)Title XI of the Federal Financial Institutions Reform, Recovery and
Enforcement Act of 1989(FIRREA), Section 34.42(f)
-7-
<PAGE>
HIGHEST AND BEST USE DEFINED
"Highest and Best Use"(2) is an appraisal concept which has been defined as
follows:
THAT REASONABLE AND PROBABLE USE THAT WILL SUPPORT THE HIGHEST PRESENT
VALUE, AS DEFINED, AS OF THE EFFECTIVE DATE OF THE APPRAISAL.
ALTERNATIVELY, THAT USE, FROM AMONG REASONABLY PROBABLE AND LEGAL
ALTERNATIVE USES, FOUND TO BE PHYSICALLY POSSIBLE, APPROPRIATELY
SUPPORTED, FINANCIALLY FEASIBLE, AND WHICH RESULTS IN HIGHEST LAND
VALUE.
FEE SIMPLE ESTATE DEFINED
The term "fee simple estate"(3) is defined as follows:
ABSOLUTE OWNERSHIP UNENCUMBERED BY ANY OTHER INTEREST OR ESTATE;
SUBJECT ONLY TO THE LIMITATIONS IMPOSED BY THE GOVERNMENTAL POWERS OF
TAXATION, EMINENT DOMAIN, POLICE POWER, AND ESCHEAT.
OWNERSHIP
The subject's current vesting is:
EVANS, HELEN D ETAL
PROPERTY HISTORY
The subject has not transferred within the last three years. Furthermore, it is
not listed for sale.
- --------------------------
(2)Real Estate Appraisal Terminology, Byrl N. Boyce, Ph.D., Ed.,
Ballinger Publishing Company, Cambridge, Massachusetts, 1981.
(3)The Dictionary of Real Estate Appraisal,m 3rd Edition, The Appraisal
Institute, Chicago Illinois, 1993, p 140.
-8-
<PAGE>
AREA DESCRIPTION
PHYSICAL CHARACTERISTICS
The subject property is located in the city of Victorville, San Bernardino
County, California. San Bernardino County, Southern California's third most
populated county, encompasses about 12,800 square miles. Together with
Riverside County, San Bernardino County comprises the San
Bernardino-Riverside-Ontario Metropolitan Statistical Area (MSA), or commonly
known as the Inland Empire region of Southern California which encompasses
20,065 square miles. A location map is presented for reference on the
following page.
The most intensely developed portion of the MSA is located in the western
portions of the counties of Riverside and San Bernardino. The general
boundaries are the San Gabriel Mountains to the north, the San Bernardino
Mountains to the east, the Santa Ana Mountains to the south, and the Chino
and La Puente Hills on the west. The County of San Bernardino is situated
immediately to the east of Los Angeles County and north of Riverside County.
San Bernardino County is composed of several distinct geographic/economic
regions. The city of San Bernardino has an economic base comprised of the
financial, services, and government sectors and is located in the east valley
area of western San Bernardino County. The City of Victorville is located in
the High Desert region, also known as the Victor Valley portion of San
Bernardino County. This region is bounded by the Mojave Desert to the north,
Adelanto and the Los Angeles County line to the west, the San Bernardino
Mountains to the south, and the Lucerne Valley to the east.
Riverside and San Bernardino Counties extend about 200 miles easterly to the
Colorado River on the Arizona Border, to within 50 miles of the Pacific
Ocean. The majority of the population resides within the metropolitan area
surrounding the cities of Riverside and San Bernardino, both situated near
the westerly end of their respective counties. Since 1950, population in the
area has rapidly risen to its current level of just over 2.8 million people.
This trend is expected to continue as less expensive commercial, industrial,
and residential land attracts residents and businesses from the more
expensive and intensely developed Los Angeles and Orange County regions.
The varied county topography includes level land areas, mountains, valleys,
dry lake beds, the Colorado River Valley, the San Gabriel and San Bernardino
Mountains, several lakes and a large valley which forms a part of Southern
California's citrus belt.
-9-
<PAGE>
REGIONAL MAP
-10-
<PAGE>
All modes of transportation are available to Inland Empire. A well-integrated
freeway system serves the general area. Freeways which link the Inland Empire
to business centers of Southern California include Interstate Highways 10,
15, and 215, and CA state Highways 60 and 91. The subject property is located
approximately 2 miles east of Interstate 15 and has adequate local and
regional access.
The Inland Empire has excellent rail service, with the largest switching yard
west of Chicago located in the cities of Colton and Rialto. The area is
serviced by the Santa Fe, Southern Pacific, and Union Pacific Railroads.
Commuter rail service has been instituted between San Bernardino and downtown
Los Angeles as well as Riverside and downtown Los Angeles. This service is
provided by the Metrolink commuter train system which connects to the Los
Angeles subway system at Union Station northeast of the Los Angeles downtown
area.
Overall, the region's natural and man-made physical environment provides
adequate resources for commercial development.
POPULATION
The San Bernardino-Riverside Counties area is one of the fastest growing
regions in the nation. This is attributable to a desirable physical
environment, low housing costs, and a diverse mixture of industry
experiencing expansion. As of 1988, the Riverside-San Bernardino MSA was the
17th most populous region in the country. For metropolitan areas over one
million people, the MSA grew at a faster rate between 1980 and 1985 then any
other in the United States. Migration to the region by industrial and service
businesses, families searching for more affordable housing, and the natural
growth of a relatively young population have all added to the positive
changes that have taken place. Inland Empire population has grown by 231,500
since 1990. At 2,820,274 as of January 1, 1997, the region would be the 30th
largest "state" just ahead of Oregon.
According to the California Demographic Research Unit, the population of San
Bernardino has grown by an annual growth rate of 4.7% from 1993 to 1997, or
from approximately 1,320,000 to 1,587,400. The city of Victorville has
experienced substantial growth since 1980, with the population growing from
14,229 people in 1980 to 40,674 residents in 1990, an increase of 11%
annually. According to the City of Victorville's Chamber of Commerce, the
city is estimated to have reached 60,400 residents, as of January 1, 1997, a
6% annual increase from 1990.
This population trend should have a positive impact on the subject property
with an increased demand for housing in the area. This is evidenced by the
number of housing units in the city, which has also grown significantly since
6,108 units in 1980 to 23,143 units in January of 1996, or an annual growth
rate of 9%.
-11-
<PAGE>
ECONOMY
The following table summarized key economic indicators within the Inland Empire
for 1998.
<TABLE>
<CAPTION>
ITEM 1997 1998 FORECAST
- --------------------------------- ---------------------------- -------------------------
- --------------------------------- ---------------------------- -------------------------
<S> <C> <C>
Job Growth 4.1% 4.0%
Unemployment Rate 7.1% 6.8%
Taxable Sales $25.8 Billion $26.7 Billion
No of Homes Permitted 13,000 14,000
- --------------------------------- ---------------------------- -------------------------
No of Homes Sold 53,000 55,000
- --------------------------------- ---------------------------- -------------------------
- --------------------------------- ---------------------------- -------------------------
</TABLE>
Source: Inland Empire Economic Databank and Forecasting Center/U.C. Riverside
The preceding table portrays the strengthening job growth market, declining
unemployment rates, increasing retail sales, and increased demand for housing
in the region. This is attributed to the diverse labor pool, abundance of
affordable land available for development, and the increasing population base.
The following table portrays the labor force and unemployment rates within
San Bernardino and Riverside County from 1990 to 1998.
-12-
<PAGE>
RIVERSIDE-SAN BERNARDINO COUNTIES
LABOR FORCE, UNEMPLOYMENT RATES
<TABLE>
<CAPTION>
Item 1990 1991 1992 1993 1994 1995 1996 1997 1998
- -------------------- ----------- ----------- ----------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RIVERSIDE
COUNTY
Employment 430,300 424,700 459,900 508,700 526,900 546,000 574,150 597,116 600,000f
Unemployment 35,900 51,100 64,700 67,200 62,500 57,900 43,635 42,992 40,800f
Unemployment 7.7% 10.7% 12.3% 11.7% 10.6% 9.6% 7.6% 7.2% 6.8%f
Rate
SAN
BERNARDINO
COUNTY
Employment 530,700 563,000 552,500 605,500 626,700 626.600 641,600 643,500 645,000f
Unemployment 34,700 49,600 60,500 63,800 57,200 53,700 44,270 46,332 43,860f
Unemployment 5.7% 8.1% 9.9% 9.5% 8.4% 7.9% 6.9% 7.2% 6.8%f
Rate
- -------------------- ----------- ----------- ----------- ---------- ---------- ---------- ---------- ---------- ------------
</TABLE>
Source: Los Angeles Economic Development Committee, Jack Kyser, Chief
Economist January 1998.
According to a recent study by the Los Angeles Economic Development
Committee, the employment base within San Bernardino County has increased
from 530,700 in 1990 to approximately 645,000 in 1998. This reflects an
average annual growth rate of 2.5%.
According to the Inland Empire Business Journal, as of January 1, 1998
Stater's Brothers Markets is the largest local employer in the Inland Empire
with over 10,600 employees followed closely by United Parcel Service with
their HUB at Ontario airport. The largest employers within the Inland Empire
are summarized in the forthcoming table:
-13-
<PAGE>
<TABLE>
<CAPTION>
EMPLOYER NO. EMPLOYEES LOCALLY TYPE OF BUSINESS
- --------------------------------------- -------------------------------------- ----------------------------------
<S> <C> <C>
Stater Brothers Markets 10,600 Grocery Retailer
United Parcel Service 6,500 Package delivery
Loma Linda University Medical Center 5,450 Health Care
Kaiser Permanente Medical CenterCty 5,100 Health Care
San Bernardino Unified School 5,000 Education-Public
District
Ralphs Grocery Store 4,022 Grocery
March Air-Force Reserve Base 4,000 Military
Corona/Norco Unified School District 3,593 Public Education
Pomonoa Unified School District 3,283 Public Education
National Training Center 3,247 Military
Riverside Unified School District 3,203 Public Education
UC Riverside 3,191 University
GTE California 2,600 Telecommunications
Chino Valley Unified School District 2,400 Public Education
Lucky Stores 2,395 Grocery and Drug Retailer
Fleetwood Enterprises 2,300 Manufactured Housing and RV's
Pomona Valley Hospital Medical 2,166 Health Care
Center
Valley Health Center 2,065 Health care
Cal Poly University 2,000 University
Colton Joint Unified School District 1,940 Public Education
- --------------------------------------- -------------------------------------- ----------------------------------
</TABLE>
As cited in the above table, the Inland Empire has a diversified employment base
ranging from bureaucratic employers to large corporate entities. Due to the
strong employment base, and myriad of employment entities as cited in the above
table, demand for housing has escalated. The Inland Empire has had some it's
largest employment gains since 1990 and should continue to outperform the rest
of Southern California, according to data published by the Inland Empire
Economic Databank and Forecasting Center at U.C. Riverside.
Overall economic trends are positive, retail sales are increasing, and real
estate values are beginning to climb. Unemployment rates are at their lowest
levels since 1993. These trends should positively impact the region.
-14-
<PAGE>
AREA CONCLUSION
San Bernardino County is experiencing a relatively rapid expansion of its
population and economic base precipitated by affordable housing and direct
access to major employment centers via the area's network of freeways. The
growth of the local housing market is due to the area's relatively abundant
supply of affordable land and direct access to employment. There is a growing
trend of younger families who work in the Orange-Los Angeles Counties
metropolitan area and moving to the San Bernardino-Riverside area to find
affordable housing. New commercial and industrial businesses are also attracted
to the area by an available labor pool, relatively close proximity to major
metropolitan areas and lower land costs. In summary, this combination of social
and economic forces will continue to generate demand for residential property
such as the subject.
-15-
<PAGE>
VICTORVILLE CITY DESCRIPTION
PHYSICAL CHARACTERISTICS
The City of Victorville is located in the high desert area known as Victor
Valley which has a trade area population of approximately 300,000. The city
of Barstow is located 30 miles to the northeast along the Barstow Freeway
(Interstate 15). A location map is provided for reference on the following
page.
Victorville, which was incorporated in 1962, is located 97 miles northeast of
Los Angeles, and 35 miles north of downtown San Bernardino. Victorville
encompasses a 59.79 square mile area and is situated in the center of Victor
Valley. Victor Valley includes the bedroom communities of Hesperia, Apple
Valley, Lucerne Valley and the newly developing Adelanto. Victorville is
extensively laid out with several community commercial centers interspersed
with the continuing residential development. Interstate Hwy. 15 and CA State
Highway 18 intersect near the heart of the city.
Victorville is regarded as a secondary desert location within the Southern
California Region offering lower residential and commercial real estate
prices. This is due in part, to it's somewhat remote location and hot summer
climate.
POPULATION
The residential population of Victorville is currently 60,400, according to
the Victorville Chamber of Commerce. Estimates suggest that this figure more
than doubles during business hours to serve the commercial needs of the more
than 300,000 people who call the Victor Valley home.
Victorville has experienced substantial growth since 1980, with the
population growing from 14,229 people in 1980 to 40,674 residents in 1990, an
increase 11% annually. According to the City of Victorville's Chamber of
Commerce, the city is estimated to have reached 60,400 residents as of
January 1, 1997, a 6% annual increase from 1990.
The number of housing units in the city have grown from 6,108 units in 1980
to 23,143 units in January of 1996, an annual growth of 9%. The driving force
behind Victorville's rapid population and employment growth during the 1980s
and 1990s is Victorville's lower land prices and housing costs relative to
other parts of Southern California. This lower land basis helped draw
residents looking for more affordable housing options, as well as businesses
to serve this growing population base. The affordability of housing in
Victorville is demonstrated by the price differential between homes in
Victorville and other parts of Southern California (from which the bulk of
new residents are drawn).
Overall, these population statistics, which indicate a rapidly increasing
trend, bode well for the subject property.
-16-
<PAGE>
VICTORVILLE CITY MAP
-17-
<PAGE>
ECONOMY
Most of Victorville's employment opportunities fall into service-related
businesses, with approximately 40% of businesses in the City of Victorville in
the retail sales category. Local manufacturing companies are primarily related
to mining and the production of cement.
The major non-manufacturing employers within the city of Victorville are as
follows:
<TABLE>
<CAPTION>
EMPLOYER NO.OF EMPLOYEES
-------- ---------------
<S> <C>
Victorville School District 1,020
Desert Valley Hospital/Medical Group 950
Victor Valley Community Hospital 790
Victor Valley Community College 650
City of Victorville 450
GTE 600
County of San Bernardino 379
Wal-Mart 350
Southern California Edison 205
Southwest Portland Cement 200
Southwest Gas Corporation 180
</TABLE>
Major manufacturing employers within the city of Victorville are as follows:
<TABLE>
<CAPTION>
EMPLOYER NO. OF EMPLOYEES
-------- ----------------
<S> <C>
AFG Industries (glass manufacturing) 241
Riverside Cement Company (Oro Grande) 212
Southdown Victorville Cement Plant 200
Mitsubishi Cement (Lucerne Valley) 183
</TABLE>
Within the City of Victorville there are approximately 3,250 acres zoned for
commercial use of which 60% remains available for development. Victorville is
home to the largest enclosed regional shopping center between San Bernardino
and Las Vegas which is known as The Mall of Victor Valley. This center is
anchored by four major department stores: Harris Company, J.C. Penny,
Mervyns, and Sears.
There are in excess of 5,400 acres within the city limits of Victorville
zoned for light and heavy industrial use. Nearly 90% of this land is vacant
and is available in parcels ranging in size from one half to five hundred
acres.
The number of wage and salary jobs in Victorville has increased considerably
since the 5,285 jobs in 1980, to 14,822 jobs in 1990, and to an estimated
19,407 jobs in 1996, reflecting an estimated annual
-18-
<PAGE>
increase of 8% over the 16-year period.
The bulk of jobs in Victorville are in the Trade sector accounting for 24% of
jobs, followed by the manufacturing sector (11%), and the
business/Personal/Entertainment sector (11%). The most substantial job growth
since 1991 has been in the Health Services sector which has experienced a 8%
annual increase over the past six years.
CITY CONCLUSION
Victorville is experiencing a relatively rapid expansion of its population
and economic base precipitated by affordable housing and direct access to
major employment centers via the area's network of freeways. The growth of
the local housing market is due to the area's relatively abundant supply of
affordable land and direct access to employment. There is a trend of younger
families who work in the Orange-Los Angeles Counties metropolitan area and
moving to the Victorville area to find affordable housing. New commercial and
industrial businesses are also attracted to the area by an available labor
pool, relatively close proximity to major metropolitan areas and lower land
costs.
In summary, this combination of social and economic forces will continue to
generate demand for residential land such as the subject.
-19-
<PAGE>
NEIGHBORHOOD OVERVIEW
The subject property is located on the east side of Hesperia Road,
approximately 350 feet north of Seneca Road, an east/west traffic artery
serving the eastern portion of the city of Victorville. A location map is
located on the next page for reference.
The subject property is comprised of vacant land within the city limits.
Community shopping centers are located on 7th Street to the west, and on the
Palmdale/Lancaster Road 18. Area wide commercial development is concentrated
along 7th Street and further west of the Freeway serve the area. There is
strong competition along Palmdale Boulevard with many vacant inline spaces.
Residential tracts characterize areas immediately to the east. The uses
immediately surrounding the subject property are as follows:
NORTH: Vacant Land and a Metal Butler Industrial Building utilized
for manufacturing and storage.
WEST: School, vacant land, housing tracts, single-family dwellings
SOUTH: Small mom and pop retail stores and vacant land
EAST: Vacant undeveloped land.
The initial growth of the subject's neighborhood can be attributed to its
proximity to the freeway, and arterial streets. The neighborhood is partially
built-out with areas of vacant land zoned for residential developments and
supporting commercial projects. A post office, fire station, elementary
schools, junior high school, and a public library are situated within the
neighborhood.
The area is considered to be in a slow-to-moderate growth mode with land
available for development. The area reflects average maintenance and is
influenced by its proximity to the Interstate 15 Freeway and surface
corridors. The subject site is located approximately 2 miles east of the
intersection of 7th Street and Interstate 15 Freeway.
For a retail center to be feasible within the subject neighborhood, the
potential population growth of the area must be considered. Population growth
has been somewhat flat as of late. However, the trend is for increased growth
in the future.
Schools, police protection, medical facilities, retail shopping facilities,
freeways, recreational facilities, and other consumer supporting facilities
are in close proximity to the neighborhood. There is a residential
subdivision site located immediately west of Hesperia Road which could
accomodate 160 potential housing units which would significantly increase the
residential population base. In addition, the city's general plan recommends
commercial development within the subject neighborhood to accommodate the
increased demand.
Overall, the subject neighborhood is considered to be adequately suited for
commercial development such as a retail center to serve the growing
population.
-20-
<PAGE>
NEIGHBORHOOD MAP
[MAP]
-21-
<PAGE>
VICTORVILLE RETAIL MARKET OVERVIEW
Despite a strong economy, rents and values for many retail properties will
remain soft in 1998. Pressure on rents brought about by over-building,
weakness in demand for space and store closures caused by lagging profits are
the forces causing a soft market.
In 1997, within the City of Victorville there was approximately 3,250 acres
zoned for commercial use and nearly 60% remains available for development.
Rental rates typically range from $0.50 to $1.50 per square foot on a
modified gross basis. According to a study prepared by the Atkins/Odonnel
Company, the vacancy level within the city is approximately 15%.
According to the Chamber of Commerce, in 1997 there were approximately 740
retail outlets with a total of approximately $700 million in retail sales.
According to the California Retail Survey, Retail establishments have grown
from 348 in 1985 to 717 in 1995, an annual growth rate of 7%. Retail sales
increased from $267 million to $665 million over the same period reflecting
an annual growth rate of 10%. In the past five years, the fastest growing
retail sectors, in terms of sales, have been general merchandise stores and
retail stores.
Overall, although market conditions are somewhat soft, the underlying
population growth of the area has supported expansion within the area's
retail market. The current forecast is for improving market conditions which
should positively impact the subject commercial site.
-22-
<PAGE>
THE LAND
LOCATION
The subject site is located on the east side of Hesperia Road approximately
350 feet north of Seneca Road, in the northwestern portion of the city of
Victorville. It is bounded by the Hesperia Road on the west, and Seneca Road
approximately 350 feet to the south.
A plat map indicating the subject is set forth on the following page. Subject
photographs are included at the end of this section.
SIZE AND SHAPE
The property consists of 6.12 acres, or 266,568 sf, of unimproved raw land with
varying terrain and topography. The site is triangular in configuration and has
approximately 1,000 feet of frontage along Hesperia Road.
TOPOGRAPHY & DRAINAGE
Approximately 75% of the subject site is characterized by slopes of less than
20%. Site drainage is directed toward Hesperia Road and the Oro Grande Wash
and appears adequate. Drainage is assumed to be adequate. The site would need
to be graded in order to be developed.
UTILITIES
The subject site has all utilities except sewer to the site. Sewer is
presently located in Seneca Road to the south, according to Helen Wilson at
the Victorville City Engineering Office. Water mains are located in Seneca
and Hesperia Roads, with laterals needed.
FLOOD MAP/PANEL/ZONE/DATE
The community participates in the National Flood Insurance Program. The map
number is 06071 and the panel number is 5820. The property is located within
a flood zone X, which would not require flood insurance. The map is dated
March 18, 1996.
-23-
<PAGE>
PLAT MAP-SUBJECT PROPERTY
[MAP]
-24-
<PAGE>
SOILS & GEOLOGY
No soils or environmental reports were uncovered or made available for the
appraiser's review. We explicitly assume that a soils report would not reveal
any unusual conditions and that there are no adverse soil conditions at the
subject site. We also assume that the subject's soils conditions will not
negatively affect the value of the subject property.
EASEMENTS & RESTRICTIONS
No title report reflecting the subject lot was made available for your
appraiser's review. Within this appraisal, it is explicitly assumed that the
only easements are normal street, utility and access easements which do not
adversely affect the value of the subject property. In our valuation analysis of
the subject property, we have assumed that the subject has clear and marketable
title.
NUISANCES & HAZARDS
Based on a visual inspection of the subject site and the surrounding areas, the
subject site does not appear to be impacted with hazards or nuisances. The
subject site is reportedly not located within a designated flood hazard area. It
is not located in a earthquake fault zone. No responsibility is assumed for any
expertise/knowledge in uncovering such hazard, and the client is urged to retain
an expert in this field, if desired.
ZONING
We interviewed Mr. Dan Liudahl, at the Victorville City Planning Department, on
March 19, 1998 and again on March 27,1998. He informed us that the property is
zoned C2-T. The "T" is a transitional use zoning.
The purpose of the C2-T district is to provide suitable locations and lands for
various commercial activities. This district accommodates most commercial
activities that are neighborhood, community, and regional in scale including
retail and office buildings. The following table provides a brief overview of
the zoning requirements.
Building site Area: Minimum 10,000 sf
Lot Coverage: 60 percent
Building Height: 45 Feet
Parking: Varies dependent upon the type of use
-25-
<PAGE>
The provisions of a Transitional District (T) may be added to any district.
Basically, the Transitional District standards are less restrictive then the
provisions of the district to which it is applied, allowing for broader uses
within that district.
STREETS AND ACCESS
Hesperia Road is a two-lane arterial street traversing the west side of the
subject property in a north/south direction. There are no concrete curbs,
gutters, or sidewalks to the perimeter of the subject site. It is an asphalt
paved street which is approximately 64 feet wide.
CONCLUSION
The subject has modestly sloped topography and has all the necessary and normal
utilities available. The subject site is currently raw, commercial acreage,
triangular in shape, with substantial frontage along Hesperia Road. There is
approximately 1,000 feet of frontage along Hesperia Road which offers good
visibility and enhances the possibilities of the site. The subject site provides
for adequate functional utility.
-26-
<PAGE>
SUBJECT PHOTOGRAPHS
-27-
<PAGE>
[PICTURE]
View of the subject looking in a southeast direction.
[PICTURE]
View of the subject looking in an easterly direction.
-28-
<PAGE>
[PICTURE]
Street Photo of Hesperia Road looking in a northerly direction with the
subject being to the right.
[PICTURE]
Street Photo of Hesperia Road looking southerly direction with the
subject being to the left.
-29-
<PAGE>
ASSESSED VALUATION AND TAXES
Real property taxes in California are limited to 1% of market value of the
property, as of a specified base year. The base year valuation is the 1975
Assessor's market value estimate, or market value indicated by a sale, or
market value based upon reappraisal of the property which is triggered by new
construction or long term leasing of the property. In addition to the taxes
at 1% of the base year market value, there is an additional tax to amortize
any previous voter-approved bonded indebtedness. To provide for inflation, if
there is no sale, lease, or new construction, there is a maximum 2% per year
increase allowed in the assessed values assigned to land and improvements.
The subject's 1997/98 effective tax rate, inclusive of special assessments,
is approximately 1.21%. Tax rates in the subject area have remained fairly
constant over the past two years and are expected to remain stable in the
near future. The subject's tax rate is line with those at competing sites.
The subject property currently has the following assessed values:
<TABLE>
<CAPTION>
ASSESSOR PARCEL NO ASSESSED/LAND ASSESSED BLDG. 1997/1998 TAXES
- ------------------ ------------- -------------- ---------------
<S> <C> <C> <C>
0477-541-21 $291,264 $0 $3,534
</TABLE>
The property taxes are past due and delinquent in the amount of $15,542.25 as
indicated by the San Bernardino County Tax Assessor. Please note that this does
not include the 1997 tax year and the amount is only good until April 30, 1998.
Based upon the final market value in the report, property taxes would most
likely increase if the property was sold. Within this valuation analysis, we
explicitly assume that taxes are current.
-30-
<PAGE>
HIGHEST AND BEST USE
The Highest and Best Use is that use which is most likely to produce the
greatest net return over a given period of time. Net return refers to the
residual left over from gross yield after all costs have been deducted. Only
those uses which are natural, probable, and legally permissible may be
considered tenable. Thus, Highest and Best Use may be defined as the available
use and program of future utilization that produces the highest present land
value.
We have investigated and analyzed the Highest and Best Use of the subject site
in regard to the following four considerations.
PHYSICALLY POSSIBLE
The physical characteristics of the subject site, such as its size, frontage,
topography, accessibility, and utility availability are sufficient for a variety
of commercial and residential uses. However, the subject is situated on a street
which lends itself to commercial development, as evidenced by similar type sites
having been improved with this usage. Physically possible uses would include
retail and office uses.
LEGALLY PERMITTED
The subject site is zoned C2-T, which allows for a variety of commercial uses
including retail and office uses. Residential and industrial uses are not
permitted. Therefore, of the physically possible and legally permissible uses,
retail or office uses are the most likely.
ECONOMICALLY FEASIBLE
Our research within the subject's market has revealed strengthening market
conditions. The subject site is best suited for retail usage, due to it's
commercial street location within a residential neighborhood. Furthermore, it's
C2-T zoning restricts the site to commercial usage. Overall, the most practical
use of the subject site would be that of a retail center serving the local
population. This is evidenced by similar type properties developed along
Hesperia Road.
The subject's local market, however, is experiencing soft conditions, as so
evidenced by the market's current vacancy level of 15%. Rental rates are at only
moderate levels and there is significant land available for retail development.
Overall, it is our opinion that the most economical use of the subject site
would be to hold for future retail development.
-31-
<PAGE>
MOST PROFITABLE
As discussed above, and based on the tests of availability, adaptability and
demand, the indicated highest and best use of the site would be to hold the site
for future retail development.
CONCLUSION OF HIGHEST & BEST USE
After having applied the tests of availability, adaptability, and demand, we
have concluded that the highest and best use of the subject site would be to
hold the site for future retail development.
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<PAGE>
VALUATION METHODOLOGY
BASIS OF VALUATION
Valuation is based upon general and specific background experience, opinions of
qualified informed persons, consideration of all data gathered during the
investigative phase of the appraisal, and analysis of all market data available
to the appraiser.
VALUATION APPROACHES
Three basic approaches to value are available to the appraiser: the Cost
Approach, the Income Approach, and the Sales Comparison Approach.
COST APPROACH
This approach entails the preparation of a replacement or reproduction cost
estimate of the subject property improvements new and then deducting for losses
in value sustained through age, wear and tear, functionally obsolescent
features, and economic factors affecting the property.
The land value is then added to the depreciated cost and entrepreneurial profit
to arrive at a value estimate.
INCOME APPROACH
This approach is based upon the theory that the value of property tends to be
set by the expected net income to the owner. It is in effect the capitalization
of expected further income into present worth.
This approach requires an estimate of net income, an analysis of all expense
items, the selection of a capitalization technique, and the processing of the
net income stream into a value estimate.
SALES COMPARISON APPROACH
This approach is based upon the principle that the value of a property tends to
be set by the price at which comparable properties have recently been sold or
for which they can be acquired.
This approach requires a detailed comparison of sales of comparable properties
with the subject property. One of the main requisites, therefore, is that
sufficient transactions of comparable properties be available to provide an
accurate indicator of value and that accurate information regarding price,
terms, property description and use be obtained through interview and
observation.
-33-
<PAGE>
CONCLUSION
Since the subject property consists of vacant land, the Sales Comparison
Approach was utilized to estimate value on an all cash basis. This is one of the
most frequently utilized methods of valuing vacant commercial sites.
Furthermore, there were adequate direct land sales of similar sites which made
the Sale Comparison Approach a reliable indicator of value. Since the subject
consists of only land, neither the Cost or Income Approaches to value were
utilized.
We will commence with the December 1990 valuation of the subject property via
The Sales Comparison Approach, followed by the March 1998 valuation.
-34-
<PAGE>
SALES COMPARISON APPROACH
GENERAL
The Sales Comparison Approach to Value consists of a comparison of the entire
property being appraised or various portions thereof with other similar
properties which have sold or which are offered for sale. The indication of
market value is the price at which an equally desirable property has recently
sold, or can be purchased in the open market. The value found by the study of
comparable sales yields market value directly in accordance with its legal
definition. This approach is based on the principle of substitution which
asserts that, when a property is replaceable, its value tends to be set by
the cost of acquisition of an equally desirable substitute property, assuming
no costly delay is encountered in making the substitutions.
VALUATION
A search of the San Bernardino County public records and a market investigation
were conducted in order to uncover sales of comparable sites with similar
highest & best uses. Our investigation uncovered several meaningful sales. A
summary sheet, location map, and sale data sheets followed by an analysis of the
sales and a conclusion of value for the subject's respective dates of values are
presented forthcoming.
As noted within the valuation methodology section, we will commence with the
December 1990 valuation of the subject followed by its March 1998 valuation.
-35-
<PAGE>
COMMERCIAL LAND SALES SUMMARY
DECEMBER 21, 1990 - DATE OF VALUE
<TABLE>
<CAPTION>
DATA NO. SALE SIZE LOT SALEPRICE PROPOSED
LOCATION DATE ZONING $/SF USE
- ------------ ----- ------ ---- ---
<S> <C> <C> <C> <C>
Land Sale No.1 12-93 4.30 Acres $384,000 Office
NEC Midtown & C2 $2.05
Amargosa Rd.
Victorville, CA
Land Sale No.2 09-93 3.20 Acres $350,000 Retail
SE Cnr of 7th & Merril C2 $2.51
Victorville, CA
Land Sale No.3 12-90 9.00 Acres $1,176,120 Commercial
E Side of Hesperia Rd Listing C2T $3.00 SF
N of Seneca Rd.
Victorville, CA
Land Sale No.4 03-90 13.17 Acres $2,300,000 Retail
NEC Cottonwood & C2T $4.01 SF
Pahute
Victorville, CA
Land Sale No.5 1-90 2.6 Acres $285,000 Retail/Offices
N Side of Green Tree C2 $2.52
E of Rodeo
Victorville, CA
</TABLE>
-36-
<PAGE>
LOCATION MAP COMPARABLES 1, 2, 3, AND 5
DECEMBER 21, 1990 DATE OF VALUE
[MAP]
-37-
<PAGE>
LOCATION MAP COMPARABLE NO. 4
DECEMBER 21, 1990 DATE OF VALUE
[MAP]
-38-
<PAGE>
LAND SALE NO. 1
<TABLE>
<S> <C>
Location: Northeast Corner of Midtown Drive & Amargosa Road in
Victorville, California
Assessors Parcel Number: 395-311-15
Grantor: Fu Mai, Limited Partnership
Grantee: Delatore, John A.
Thomas Brothers Guide: 316-A6
Document Number: #570184
Date of Sale: December 30, 1993 closed
Shape: Irregular
Frontage: 437 Feet on Amargosa Road
Utilities: All to the site
Topography: Level
Size: 187,317 sf or 4.30 Acres
Zoning: C2, Victorville
Sales Price: $ 384,000
Sales Terms: All cash
Sales Price per Sq.Ft. $ 2.05
Verified by: Dataquick, Comps Incorporated
John Delatore, A. Owner (760)-241-7348 or 243-1622
Comments: This Parcel is located in a developing commercial
neighborhood with a Stater Brothers shopping center having
been developed to the South at Roy Rogers Drive and
Amargosa Roads. This site does not have curbs and gutters
to the site with the site development being the responsibility of
the developer. There are no special assessments against the
property. The owner is holding the Property as an investment.
The property is currently listed with an asking price of
approximately $400,000 being entertained.
</TABLE>
-39-
<PAGE>
LAND SALE NO. 2
<TABLE>
<S> <C>
Location: Southeast Comer of 7th and Merril Streets in Victorville,Califomia
Assessors Parcel Number: 477-042-27; 477-093-04
Grantor: West Coast Realty Finance
Grantee: Scott, Fred & Nassif, Susan H.
Thomas Brothers Guide: 316-D6
Document Number: #401159
Date of Sale: September 17, 1993 closed
Shape: Irregular
Frontage: 200 Feet on 7th Street
Utilities: All to the site
Topography: Level
Size: 139,442 sf or 3.20 acres
Zoning: C2, Victorville
Sales Price: $ 350,000
Sales Terms: $ 200,000 down payment with seller carrying the balance at prime
plus 8.5% amortized over 20 years and due in 10 years.
Sales Price per Sq.Ft. $ 2.51
Verified by: Dataquick,Comps Incorporated
Bradco Development, Broker Joe Brady (619)-951-5111
Comments: This was a purchase of 2-commercially zoned sites located on a comer
lot. The buyers have built a 10,000 square foot block retail building
on the site for a Napa Auto Parts Store.
</TABLE>
-40-
<PAGE>
LAND SALE NO. 3
<TABLE>
<S> <C>
Location: East side of Hesperia Road, north of Seneca Rd.
Assessors Parcel Number: 474-174-2,4,5,6,7
Grantor: N/A
Grantee: N/A
Thomas Brothers Guide: 4296-E7
Document Number: Listed in 1990
Date of Sale: Current Listing 1990
Shape: Irregular
Frontage: On Hesperia Road
Utilities: All to the site
Topography: Rolling Topography
Size: 392,040 sf or 9.00 acres
Zoning: C2T
Sales Price: $ 1,176,120 List Price
Sales Terms: All cash
Sales Price per Sq.Ft. $ 3.00
Verified by: Grubb and Ellis (619)-243-1080
Comments: This Parcel is located in close proximity to the subject property and is
a current listing which was available for sale during 1990. The
property has sloping topography with an interior lot location. It is
similar relative to location.
</TABLE>
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<PAGE>
LAND SALE NO. 4
<TABLE>
<S> <C>
Location: NEC Cottonwood and Pahute, Victorville, CA
Assessors Parcel Number: 475-162-25
Grantor: Equity Clear
Grantee: Vision Heritage, L.P.
Thomas Brothers Guide: 4386-A5
Document Number: #90-103670
Date of Sale: March 20, 1990 closed
Shape: Irregular
Frontage: On Cottonwood and Pahute
Utilities: All to the site
Topography: Level
Zoning: C2,Victorville
Size: 573,566 sf or 13.17 acres
Sales Price: $ 2,300,000
Sales Terms: All cash
Sales Price per Sq.Ft. $ 4.01
Verified by: Dataquick,Comps Incorporated
Historical Appraisal Report Submit.
Comments: This is a neighborhood shopping center site within a growing area.
</TABLE>
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<PAGE>
LAND SALE NO. 5
<TABLE>
<S> <C>
Location: North Side of Green Tree, Approximately 750 East of Rodeo
Victorville
Assessors Parcel Number: 477-251-16,68
Grantor: Harold J. Mort
Grantee: Victor Valley Board of Realtors
Thomas Brothers Guide: 4386-E2
Document Number: #34313
Date of Sale: January 26, 1990 closed
Shape: Irregular
Frontage: On Green Tree
Utilities: All to the site
Topography: Level
Zoning: C2, Victorville
Size: 2.6 acres net or 113,256 sf
Sales Price: $ 285,000
Sales Terms: All cash
Sales Price per Sq.Ft. $ 2.52
Verified by: Dataquick,Comps Incorporated
Victor Valley Board of Realtors (760)-244-8841
Comments: This was a of an interior lot purchased to construct the board of
Realtors office in Victorville. The site was vacant with all utilities to
the site.
</TABLE>
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<PAGE>
ANALYSIS OF THE SALES
The unit of comparison utilized within this analysis is the price square foot
which is one of the most frequently utilized by purchasers of similar sites.
Adjustments to the comparables were considered for financing, condition of
sale, date of sale, location, size, topography, utilities, and other factors
such as configuration and site improvements at the date of sale.
Adjustments to the sales were based on analysis of the subject data set to
establish matched pair adjustments, from our past appraisal experience with
similar commercial properties, interviews with developers and land brokers
active in the market, and general market and economic trends.
A discussion of the various adjustments considered both the December 1990 and
March 1998 dates of value.
FINANCING
Typically when seller carried financing is part of a sale transaction, it is
considered to be beneficial to the buyer, since it enables ownership with a
lower degree of capital outlay. Although a buyer may be able to achieve
market financing, the terms of the seller financing are frequently favorable
and granted by a party who is partial to the transaction. Factors that need
be examined are loan to value (LTV), interest rate, term and loan expedition.
Most of the sales were all cash transactions, however some of the sales
required consideration for financing terms.
CONDITION OF SALE
The sales were all reportedly arms-length transactions between buyer & seller
which sold for fair-market prices. Some of the historic sales were real
estate owned (REO) transactions. However, they reportedly sold near fair
market prices. Consequently, no adjustments will therefore be applied for
this factor in the "historic" date of valuation. However, current Land Sale
No. 1 was an REO, sold by Brentwood Mortgage, and required an upward
adjustment for condition of sale, as the seller needed a quick sale.
Current Land Sale No. 3 was a current listing and required a downward
adjustment for negotiations. Historic Land Sale No.3 also required a downward
adjustment for negotiation for it too was a listing.
DATE OF SALE
In estimating time adjustments, we have made various comparisons within the data
set to in order to establish a difference attributable to date of sale. We have
also considered changes in the supply of
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<PAGE>
land, commercial land prices, rents, vacancies, and market trends as
previously discussed within the RETAIL MARKET OVERVIEW section of this
report. This information is supportive of price changes for both the current
and historic date of valuation. Adjustments for date of sale were also
estimated via making all of the indicated adjustments to the sales, expect
for time, and then comparing the results. Secondary sources, such as opinions
of area developers and builders, have also been considered. We utilized
adjustment factors of approximately 5% per year.
When analyzing the historic sales for the December 1990 date of value, all
sales prior to December of 1990 warranted upward adjustments as the market
was strengthening during this period. Sales which occurred, after the date
such as comparable numbers one and two, however, required upward adjustments
as they sold in inferior markets.
In considering this adjustment for the current date of valuation, we also
made time adjustments of 5% per year. Sales two and three both required
upward adjustments as the market has strengthened since these sales occurred.
LOCATION
Location adjustments were applied to the sales. Consideration was given to
surrounding land uses, area amenities such as schools, retail & recreational
facilities, local & regional access, highway proximity and the overall
commercial appeal. Visibility is a key factor in commercial site selection
and the subject was compared to the competing sites in terms of this factor.
In addition, we considered the traffic flows of competing sites. Ingress and
egress was also a consideration in the commercial sites selected as
comparables.
In considering this adjustment for the historic date of valuation, Land Sale
No. 2 on 7th Street, which is an intervehicular artery with good exposure,
warranted a downward adjustment. Land Sale No. 4 also warranted a downward
adjustment as it was adjacent to Interstate 15 Freeway.
In considering this adjustment for the current date of valuation Land Sale
No. 2, on 7th Street, which is an intervehicular artery with good exposure,
warranted a downward adjustment. In contrast, Land Sales 1 and 4 in Hesperia
warranted upward adjustments due to their inferior locations in areas of
lower rents and property values.
SIZE
Smaller parcels tend to sell for a higher price per square foot than larger
parcels in theory (The Law of Diminishing Utility).
In considering this adjustment for the historic date of valuation, Land Sale
No.5 was 2.60 acres and
-45-
<PAGE>
sold for $2.52 per square foot, while Land Sale No. 4 was significantly
larger and sold for a higher price per square foot. Land Sale No. 2 was 3.20
acres and sold for $2.51 per square foot, and Land Sale No. 1 was larger
selling for $2.05 per square foot with market conditions declining during
this period. After consideration, we felt that size adjustments were not
warranted. In considering this adjustment for the current date of valuation,
the transactions sold from March of 1995 to March of 1998, with market
conditions strengthening during this period. When matching these
transactions, little support was found for size adjustments and again, none
have here therefore applied.
TOPOGRAPHY
Topography is often a key element in purchasing commercial sites as earth
moving costs can be substantial. In considering this adjustment for the
historic date of valuation, Sale Numbers 1, 2, 4, and 5 were superior in
topography warranting downward adjustments. In considering this adjustment
for the current date of valuation, Sale No.2 was found to be superior and was
therefore adjusted downwards.
UTILITIES/PAD STATUS
Proximity to and availability of utilities is a key element in the
development of commercial sites. To bring laterals to the site can be costly,
and dependent upon the proximity of the utilities to the site it can add
significantly to the value of the parcel. This adjustment category also
considers the degree of infrastructure in place.
In considering this adjustment for the historic date of valuation, Land Sales
Nos. 2, 4, and 5 were superior in this respect. In determining the
appropriate adjustment, we interviewed primary data sources in these
transactions, city engineers, and city planners to best determine the
offsites which were available to the specific parcels at the time which they
sold. If the pads were fully engineered, we adjusted downwards.
In considering this adjustment for the current date of valuation, we followed
the same basic steps. Sale No. 2 was a fully engineered pad with all
utilities to the site warranting significant downward adjustment. The
remaining sales were found to be fairly similar in this regards, respectively.
OTHER FACTORS
This category accounts for such factors as configuration and overall
functional utility. Current Land Sale No.2 was located on 7th Street and was
superior in configuration due to it's superior street design offering
superior ingress and egress. Current Land Sale No.3 was a corner lot
location, which would be a likely candidate for a service-station site, and
has corner lot configuration which is superior.
-46-
<PAGE>
DISCUSSION OF COMPARABLE SALES-DATE OF VALUATION DECEMBER 21, 1990
LAND SALE NO. 1 sold in December of 1993 for a cash sale price of $384,000,
or $2.05 per square foot. The property sold approximately 36 months after the
date of valuation and during this period values were declining dramatically,
therefore we made an upward adjustment as 1990 was a superior market. We have
utilized positive time adjustments of 5% per year for all sales occurring
after the subject time period, to approximately 1995 when the market began to
show signs of recovering. This property was a good indicator of state of
development as it is raw commercial acreage without improvements, similar to
the subject property. However, the property has superior topography and would
require less grading, warranting a downward adjustment. The property is
similar in the proximity to utilities, has paved roads similar to the subject
property, and is located on streets with similar traffic counts. After
adjustments were applied, an indicated price per square foot of $2.12 came
into focus.
LAND SALE NO. 2 sold in September of 1993 for a cash equivalent sale price of
$350,000, or $2.51 per square foot. The property was purchased to construct a
Napa Automotive Parts store which has since been constructed. West Coast
Realty Finance sold the property as an REO. According to Joe Brady at Bradco
Development, it sold for market price and the seller financing did not impact
the price. The seller carried paper in this transaction at 8.5%, amortized
over 20 years, which was considered to be cash equivalent. The property sold
approximately 33 months after the date of valuation and during this period
values were declining. Therefore we made an upward adjustment as 1990 was a
superior market. This site was highly improved and therefore we made a
downward adjustment of 15% within the utilities category. The property has
superior topography and would require less grading, thus warranting a further
downward adjustment. Furthermore, the property is located on streets with
superior traffic counts warranting a downward adjustment for location. After
adjustments were applied an indicated price square foot of $1.73 came into
focus.
LAND NO. 3 was listed in December of 1990 for a cash price of $1,176,120, or
$3.00 per square foot. The property is in close proximity to the subject, as
it is located on Hesperia Road. It has similar topography, similar
visibility, was in a similar state of development, and had similar utilities.
However, a downward adjustment for listing status is warranted. After
adjustments were applied, an indicated price per square foot of $2.10 came
into focus.
LAND SALE NO. 4 sold in March of 1990 for a cash price of $2,300,000, or
$4.01 per square foot. The property was purchased to construct a neighborhood
shopping center and was purchased on a finished pad basis. This arm's length
transaction sold approximately 9 months prior to the date of valuation and
during this period, values were increasing. We considered an adjustment for
conditions of sale as Equity Clear is an REO selling entity. However,
according to the agents the property was exposed to the market for a
reasonable period of time and no adjustment was made. This property had a
finished pad and therefore we made a downward adjustment of 20%. The property
also has superior topography and required less grading, warranting a further
downward adjustment. The
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<PAGE>
property is located on streets with similar traffic counts. However, a
downward adjustment for location was made as the property had good visibility
from Interstate 15. After adjustments were applied, an indicated price square
foot of $2.07 came into focus.
LAND SALE NO. 5 sold in January of 1990 for a cash price of $285,000, or
$2.52 per square foot. The property was purchased to construct the Victor
Valley Board of Realtors Office. The property sold approximately 11 months
prior to the date of valuation and during this period values were increasing,
therefore we made an upward adjustment. This property had superior utilities
and therefore we made a downward adjustment. The property also has superior
topography and would require less grading, thus warranting a further downward
adjustment. The property is similar relative to location. After adjustments
were applied, an indicated price per square foot of $2.12 came into focus.
Please see the forthcoming adjustment grid for historic comparables 1 through
5.
-48-
<PAGE>
- -------------------------------------------------------------------------------
LAND SALE ADJUSTMENT GRID-DECEMBER 21, 1990 DATE OF VALUE
6.12 ACRES OF COMMERCIAL LAND
VICTORVILLE, CA
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
DATA LOCATION $/SF Financing Sub Cond Of Sub Time Sub Location
No. Total Sale Total Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NEC of Midtown Drive
1 & Amargosa Road
Victorville, CA $2.05 0% $2.05 0% $2.05 15.0% $2.36 0%
- -----------------------------------------------------------------------------------------------------------------
SEC of 7th
2 and Merril
Victorville, CA $2.51 0% $2.51 0% $2.51 15.0% $2.89 -20%
- -----------------------------------------------------------------------------------------------------------------
East side of Hesperia Rd
3 North of Seneca Rd.
Victorville, CA $3.00 0% $3.00 -30% $2.10 0.0% $2.10 0%
- -----------------------------------------------------------------------------------------------------------------
NEC of Cottonwood and
4 Pahute
Victorville, CA $4.01 0% $4.01 0% $4.01 3.0% $4.13 -20%
- -----------------------------------------------------------------------------------------------------------------
North side of Green Tree
5 East of Rodeo Drive
Victorville, CA $2.52 0% $2.52 0% $2.52 5.0% $2.65 0%
- -----------------------------------------------------------------------------------------------------------------
Unadjusted $/SF $2.05 to $4.01
Adjusted $/SF $1.73 to $2.12
- -----------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<CAPTION>
DATA LOCATION Size Topo Utilities Other TOTAL ADJUSTED
No. ADJ. $/SF
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NEC of Midtown Drive
1 & Amargosa Road
Victorville, CA 0% -10% 0% 0% -10% $2.12
- -------------------------------------------------------------------------------------------
SEC of 7th
2 and Merril
Victorville, CA 0% -5% -15% 0% -40% $1.73
- -------------------------------------------------------------------------------------------
East side of Hesperia Rd
3 North of Seneca Rd.
Victorville, CA 0% 0% 0% 0% 0% $2.10
- -------------------------------------------------------------------------------------------
NEC of Cottonwood and
4 Pahute
Victorville, CA 0% -10% -20% 0% -50% $2.07
- -------------------------------------------------------------------------------------------
North side of Green Tree
5 East of Rodeo Drive
Victorville, CA 0% -10% -10% 0% -20% $2.12
- -------------------------------------------------------------------------------------------
CONCLUDED $/SF
CONCLUDED VALUE: 266,568 $2.00 = $533,136
ROUNDED $530,000
- -------------------------------------------------------------------------------------------
</TABLE>
-49-
<PAGE>
CONCLUSION- MARKET VALUE AS OF DECEMBER 21, 1990
Prior to adjustments, the prices per square foot ranged from $2.05 to $4.01.
After applying the foregoing adjustments, a price per square foot of $1.73 to
$2.12 came into focus. Comparable Nos. 1 and 3 were found to be the most
meaningful indicators of value, due to their fairly similar characteristics
and minimal adjustments. Overall, based on the preceding analysis, we have
reasonably concluded to a unit value of $2.00 per square foot for the
subject. THIS EQUATES TO A VALUE OF APPROXIMATELY $530,000 (266,568 sq.ft. X
$2.00/sf ).
-50-
<PAGE>
COMMERCIAL LAND SALES SUMMARY
MARCH 31, 1998 - DATE OF VALUE
<TABLE>
<CAPTION>
DATA NO. SALE SIZE LOT SALEPRICE PROPOSED
LOCATION DATE ZONING $/SF USE
- ------------ ----- ------ ---- ---
<S> <C> <C> <C> <C>
Land Sale No.1 11-97 2.64 Acres $85,000 Retail
On Juniper Street C-3 $0.74 SF
Between Smoke Tree & Main St.
Hesperia, CA
Land Sale No.2 05-96 1.4 Acres $469,155 Retail
14475 7th Street C2 $7.69 SF
Victorville, CA
Land Sale No.3 03-98 1.37 Acres $300,000 Retail
NW Cnr Seneca Rd & Listing C2-T $5.03 SF
Hesperia Rd.
Victorville, CA
Land Sale No.4 03-95 9.57 Acres $300,000 Retail
E of Mariposa Rd. C2 $0.72 SF
On PhelanRd
Hesperia, CA
</TABLE>
-51-
<PAGE>
LOCATION MAP COMPARABLES 2 & 3
MARCH 31, 1998 DATE OF VALUE
[MAP]
-52-
<PAGE>
LOCATION MAP COMPARABLES 1 & 4
MARCH 31, 1998 DATE OF VALUE
[MAP]
-53-
<PAGE>
LAND SALE NO. 1
<TABLE>
<S> <C>
Location: On Juniper Street between Smoke Tree and Main Street
Hesperia, CA
Assessors Parcel Number: 410-135-12
Grantor: Brentwood Mortgage, Inc.
Grantee: Maria L. Martinez
Thomas Brothers Guide: 4476-G6
Document Number: 97-407139
Date of Sale: November 5,1997 closed
Shape: Irregular
Frontage: On Main Street
Utilities: All to the site
Topography: Raw Land, rolling
Zoning: C-3, Hesperia
Size: 114,865 sf or 2.64 acres
Sales Price: $ 85,000
Sales Terms: $20,000 down payment, 1st TD seller
Sales Price per Sq.Ft. $0.74
Verified by: Dataquick, Comps Incorporated, Ed Mustafa @ Brentwood
Mortgage (760)-241-3011
Comments: This Parcel is raw land located in the city of Hesperia. The property
has rolling topography, similar to the subject, and is in a similar state
of development.
</TABLE>
-54-
<PAGE>
LAND SALE NO. 2
<TABLE>
<S> <C>
Location: 14475 7th Street, Victorville, CA
Assessors Parcel Number: 396-201-16
Grantor: Jorad, Ltd.
Grantee: Pep Boys of California
Thomas Brothers Guide: 4386-C1
Document Number: 96-159607
Date of Sale: May 6, 1996 closed
Shape: Irregular
Frontage: On 7th Street
Utilities: All to the site
Topography: Level
Zoning: C2, Victorville
Size: 60,984 sf or 1.4 acres
Sales Price: $ 469,155
Sales Terms: All cash
Sales Price per Sq.Ft. $ 7.69
Verified by: Dataquick, Comps Incorporated, Vicki Donkin @ Grubb and Ellis
(909)-605-1100
Comments: The parcel was purchased by Pep Boys to construct a new 22,500
retail building. This parcel is in a superior location and is a finished
pad superior to the subject property.
</TABLE>
-55-
<PAGE>
LAND SALE NO. 3
<TABLE>
<S> <C>
Location: NW Corner of Seneca Road and Hesperia Road
Assessors Parcel Number: 0477-321-21
Grantor: Owner
Grantee: N/A
Thomas Brothers Guide: 4296-E7
Document Number: N/A-Current Listing
Date of Sale: March 1998 - Listing
Shape: Irregular
Frontage: On Seneca Road and Hesperia Road
Utilities: All to the site
Topography: Level
Zoning: C2-T, Hesperia
Size: 59,677 SF or 1.37 Acres
Sales Price: $ 300,000
Sales Terms: All cash
Sales Price per Sq.Ft. $ 5.03/SF
Verified by: Agent
Comments: This parcel is a current listing located immediately southwest of the
subject property on the west side of Hesperia Road and the north side
of Seneca Road. The parcel is zoned C2-T and is currently listed at
$5.03 per square foot. The agent indicated that the property had
been off of the market for a time and that it is still technically for sale.
This property has a superior corner location.
</TABLE>
-56-
<PAGE>
LAND SALE NO. 4
<TABLE>
<S> <C>
Location: On Phelan Road, East of Mariposa, Hesperia, CA
Assessors Parcel Number: 405-062-56
Grantor: Georgia B. Alvarez
Grantee: Christopher M. and Andrea C Lehman (et al)
Thomas Brothers Guide: 4475-G5
Document Number: 95-062158
Date of Sale: March 1, 1995
Shape: Irregular
Frontage: On Phelan Road
Utilities: All to the site
Topography: Level
Zoning: C2, Hesperia
Size: 416,667 sf or 9.57 acres
Sales Price: $ 300,000
Sales Terms: $ 50,000 down payment (17%), 1st Td seller $250,000 interim
financing.
Sales Price per Sq.Ft. $ 0.72
Verified by: Dataquick, Comps Incorporated
Carl Van Bergen @ Home Real Estate (619)-241-6581
Comments: This Parcel is located in a developing
commercial neighborhood with a Stater
Brothers shopping center having been
developed to the South at Roy Rogers Drive
and Amargosa Roads. This site does not have
curbs and gutters to the site.
</TABLE>
-57-
<PAGE>
DISCUSSION OF COMPARABLE SALES
CURRENT DATE OF VALUATION MARCH 31, 1998
LAND SALE NO. 1 sold in November of 1997 for a cash equivalent sale price of
$85,000, or $0.74 per square foot. The property is a recent sale transaction.
The seller carried a 2nd TD at a market rate and therefore no financing
adjustment was made. This property is a good indicator of state of
development as it is raw commercial acreage without improvements, similar to
the subject property. The property is similar in the proximity to utilities,
topography, and has paved roads similar to the subject property. Hesperia is
regarded as an inferior market due to lower rents and we have applied an
upward adjustment for location. It was an REO (Brentwood Mortgage) sale
transaction, and we made an upward adjustment for condition of sale. After
adjustments were applied, an indicated price per square foot of $1.06 came
into focus.
LAND SALE NO. 2 sold in May of 1996 for a cash equivalent sale price of
$469,155, or $7.69 per square foot. The property has an older date of sale,
with values having increased. Therefore, we applied an upward 10% time
adjustment. This property was in a superior state of development as it is was
a finished pad with all offsites, superior to the subject property, and a
downward adjustment is applied. The property has superior topography and
would require less grading, warranting a further downward adjustment. The
property was purchased by Pep Boys to construct a new 22,500 square foot
retail building. The location was superior to the subject property with
superior visibility and traffic flow. Reportedly, engineering and
architectural was also included in the sale price. The property was superior
in configuration, which warranted a further downward adjustment. After
adjustments were applied, an indicated price per square foot of $1.69 came
into focus.
LAND SALE NO. 3 is a current listing of a 1.37 acre parcel of land located on
the northwest corner of Hesperia Road and Seneca Road, immediately southwest
of the subject property and it's location is similar. This data was useful in
determining the upper limit of the value spectrum. This parcel is superior in
topography, similar in proximity to utilities. We made a downward adjustment
for negotiations as it was a listing. In addition, we made a downward
adjustment for configuration (in the other category) as this corner lot
location offered excellent ingress and egress potential. After adjustments
were applied, an indicated price per square foot of $1.81 came into focus.
LAND SALE NO. 4 sold in March of 1995 for a cash equivalent sale price of
$300,000, or $0.72 per square foot. Due to it's older date of sale, an upward
adjustment is applied. This property was a good indicator of state of
development, as it is raw commercial acreage without improvements, similar to
the subject property. Hesperia is regarded as an inferior market due to lower
rents and we have applied an upward adjustment for location. The property has
similar topography. After adjustments were applied, an indicated price per
square foot of $0.91 came into focus.
Please see the forthcoming adjustment grid for current comparables 1 through 4
-58-
<PAGE>
LAND SALE ADJUSTMENT GRID-MARCH 31, 1998 DATE OF VALUE
6.12 ACRES OF COMMERCIAL LAND
VICTORVILLE, CA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
DATA LOCATION $/SF Financing Sub Cond Of Sub Time Sub Location
No. Total Sale Total Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
On Juniper St. Between
1 Smoke St. & Main St.
Hesperia, CA $0.74 0.00% $0.74 30% $0.96 0.0% $0.96 10%
- ----------------------------------------------------------------------------------------------------------------------
2 14475 7th Street
Victorville, CA $7.69 0.00% $7.69 0% $7.69 10.0% $8.46 -20%
- ----------------------------------------------------------------------------------------------------------------------
NW Cnt of Hesperia Road
3 and Seneca Road $5.03 0.00% $5.03 -40% $3.02 0.0% $3.02 0%
Victorville, CA Listing
- ----------------------------------------------------------------------------------------------------------------------
On Phelan Road
4 East of Mariposa Road
Hesperia, CA $0.72 0.00% $0.72 0% $0.72 15.0% $0.83 10.0%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Unadjusted $/SF $0.72 to $7.69
Adjusted $/SF $0.91 to $1.81
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Data Location Size Topo Utilities Other TOTAL ADJUSTED
No. ADJ. $/SF
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
On Juniper St. Between
1 Smoke St. & Main St.
Hesperia, CA 0% 0% 0% 0% 10% $1.06
- -------------------------------------------------------------------------------------------
2 14475 7th Street
Victorville, CA 0% -10% -40% -10% -80% $1.69
- -------------------------------------------------------------------------------------------
NW Cnt of Hesperia Road
3 and Seneca Road
Victorville, CA 0% -10% 0% -30% -40% $1.81
- -------------------------------------------------------------------------------------------
On Phelan Road
4 East of Mariposa Road
Hesperia, CA 0% 0% 0% 0% 10% $0.91
- -------------------------------------------------------------------------------------------
</TABLE>
CONCLUDED $/SF
CONCLUDED VALUE: 266,568 $1.00 = $266,568
ROUNDED $270,000
- --------------------------------------------------------
-59-
<PAGE>
CONCLUSION- MARKET VALUE AS OF MARCH 31, 1998
Prior to adjustments, the prices per square foot ranged from $0.72 to $7.69.
After applying the foregoing adjustments, a price per square foot of $0.91 to
$1.81 came into focus. Comparable No.3, which was the current listing, helped
us in defining the upper end of the value spectrum. Sale No.1 and 4 were the
best indicators of value as they required the least adjustments. Overall,
based on the preceding analysis, we have reasonably concluded to a unit value
of $1.00 per square foot for the subject. THIS EQUATES TO A VALUE OF
APPROXIMATELY $270,000 (266,568 sq.ft. X $1.00/sf )
ADDITIONAL MARKET DATA SUPPORT
HISTORIC LAND SALE NO. 1 sold in December of 1993 for a cash equivalent sale
price of $384,000, or $2.05 per square foot. This property is also currently
listed for $400,000, or $2.14 per square foot. When compared to the subject,
based upon the March 25, 1998 date of value, a downward adjustment for
negotiations is warranted. This property was a good indicator of state of
development as it is raw commercial acreage without improvements, similar to
the subject property. The property has superior topography and would require
less grading warranting a downward adjustment. The property is similar in the
proximity to utilities, has paved roads similar to the subject property, and
is located on streets with similar traffic counts.
After adjustments were applied, an indicated price per square foot of $1.00
to $1.25 came into focus. Overall, this data provides for secondary value
support.
-60-
<PAGE>
VALUATION
Based on the investigations undertaken, the analyses made, and on our
experience as a real estate analysts and appraisers, and subject to the
Assumptions and Limiting Conditions set forth within this report, the subject
property has market value estimates as follows:
MARKET VALUE AS OF DECEMBER 21, 1990
FIVE HUNDRED THIRTY THOUSAND DOLLARS
$ 530,000
MARKET VALUE AS OF MARCH 31, 1998
TWO HUNDRED SEVENTY THOUSAND DOLLARS
$ 270,000
-61-
<PAGE>
EXPOSURE PERIOD
Our research regarding the current exposure period for the subject property
consisted of an analysis of the submitted sale comparables and interviews
with area real estate brokers. The surveyed sales were found to range from
6-24 months. A review of additional sale data has indicated ranges typically
at the 10-to-12 month level.
Based upon this research, we have concluded to a exposure period 10-to-12
months for the subject, which is the same as its Marketing Period.
-62-
<PAGE>
ADDENDA
<PAGE>
QUALIFICATIONS OF APPRAISERS
<PAGE>
QUALIFICATIONS OF
DAVID J. LIKAS, MAI
PROFESSIONAL BACKGROUND
Actively engaged in the real estate profession since 1983. Principal of Likas
& Associates, a real estate appraisal firm with offices located at:
20101 SW BIRCH STREET, SUITE 150B
NEWPORT BEACH, CA 92660
Before starting Likas & Associates, Mr. Likas was employed as Senior
Appraiser at Pacific Real Estate Consultants, Newport Beach, California.
Prior to that, was employed as associate appraiser with Joseph J. Blake and
Associates, San Francisco, California. Additional real estate experience
includes three years of mortgage banking with Citicorp Savings and First
Interstate Mortgage Company, Orange County, California.
PROFESSIONAL AFFILIATIONS
Member of the Appraisal Institute, with MAI designation (No. 8807).
LICENSES
Certified General Real Estate Appraiser, State of California Office of Real
Estate Appraisers (No. AG003694).
EDUCATIONAL ACTIVITIES
University of Southern California, Los Angeles, California. B.S., Business
Administration, 1983.
Courses sponsored by the Appraisal Institute:
<TABLE>
<S> <C>
Course 1A-1 Real Estate Appraisal Principals
Course 1A-2 Basic Valuation Procedures
Course 1B-A Capitalization Theory and Techniques, Part A
Course 1B-B Capitalization Theory and Techniques, Part B
Course 2-1 Case Studies in Real Estate Valuation
Course 2-2 Valuation Analysis and Report Writing
Course S-PP Standards of Professional Practice
</TABLE>
Numerous seminars and courses on real estate appraisal and other related
topics on a continuing basis.
<PAGE>
SCOPE OF EXPERIENCE
VACANT LAND
Single-family residential sites, multi-family residential sites, commercial
and industrial sites, acreage, master planned communities.
RESIDENTIAL
Residential subdivisions, single-family residences, apartments, condominiums,
planned unit developments.
COMMERCIAL
Shopping centers, retail stores, general office buildings, medical office
buildings, office and retail condominiums, car dealerships.
INDUSTRIAL
Single and multi-tenant warehouses and manufacturing buildings, distribution
buildings, business parks, R & D buildings, mini- warehouses.
SPECIAL PURPOSES
Hotels, master planned communities, dormitories, senior housing facilities,
bowling alleys, health clubs, marinas, timeshares, restaurants, theaters,
churches, schools, mixed-use developments, and condemnation appraisals.
<PAGE>
QUALIFICATIONS OF NOBLE R.TUCKER JR., SRA
EXPERIENCE
Mr. Tucker has extensive experience in appraisal and consulting
projects consisting of investment-quality office buildings, shopping
centers, industrial planned communities, residential subdivisions,
multi-family housing, single family homes, and vacant land
throughout the Southwestern United States. Mr. Tucker is also an
expert in the valuation of businesses.
Mr.Tucker has performed valuations on proposed, partially completed,
renovated, and existing structures. Mr. Tucker has qualified as an
expert witness before various judicial and quasi-judicial bodies and
has testified in Superior Court, Bankruptcy Court, and Municipal
Court, on matters involving real estate in civil cases.
A large portion of Mr. Tucker's real estate appraisal experience
involves real estate and business consulting. Mr. Tucker also
assists clients in attaining real estate and business related
financing through debt offerings. In addition he assists clients in
equity financing through public offerings and private placements,
debt offerings, loans, mergers acquisitions and divestitures,
accounts receivable financing, factoring, lease/buy-back financing,
real estate portfolio sales assistance. Mr. Tucker has been involved
in negotiations regarding real estate portfolios in excess of
$125,000,000.
PREVIOUS EXPERIENCE
Prior to working for Likas and Associates, Mr. Tucker was Chief
Appraiser at Traditional Mortgage in Woodland Hills, California.
Duties included overseeing major loan appraisals on apartments and
high dollar single family residences (1984-1985).
From 1980-1996 Mr.Tucker was an independent fee appraiser working
for firms such as Steve Smith and Associates in Canoga Park, Kennedy
Appraisal Service in Los Angeles, Chua Bailey and Associates in
Glendale, Southland Appraisal Services in Anaheim, Lenders
Technology Service in Santa Ana, Lenders Service in Pittsburgh, and
several other firms.
Prior to working the Real Estate Appraisal Profession Mr.Tucker was
involved in the construction industry. From 1975 to 1980 duties
included project management, sales, job-site supervision, and
construction superintendent.
PROFESSIONAL ASSOCIATIONS
S.R.A. Designated member of The Appraisal Institute. Designated in
August of 1991 Member #549981735.
PROFESSIONAL AFFILIATIONS
MAI CANDIDATE with The Appraisal Institute.
STATE LICENSES/CERTIFICATIONS
CERTIFIED GENERAL REAL ESTATE APPRAISER with the State of
California. This allows Mr. Tucker to appraise any type of property
(within his capabilities) within the State of California. License
Number AG001532. Expires January 31, 2001.
EDUCATION
Western Illinois University, Board of Governors Bachelor of Arts
Degree
<PAGE>
COURT EXPERIENCE/EXPERT WITNESS TESTIMONY
Mr. Tucker has testified as an expert witness numerous times over the past 15
years. He has testified in Superior Court, Bankruptcy court, and testified at
Fair Value hearings in Los Angeles County, Orange County, Riverside County,
San Diego County, Ventura County, and San Bernardino County. In addition to
expert witness testimony Mr. Tucker has been hired as an arbitrator to
resolve real estate disputes between parties.
APPRAISAL COURSES SUCCESSFULLY COMPLETED -THE APPRAISAL INSTITUTE
1) Capitalization Theory and Techniques Part A/Course 1ba The Appraisal
Institute-The Conference Center in San Diego (October 31 to November
09, 1991)
2) Capitalization Theory and Techniques Part B/Course 1bb The Appraisal
Institute-The Conference Center in San Diego (November 14, to
November 23, 1991)
3) Principals of Income Property Appraising/Course 201 The Appraisal
Institute-Glendale College of Law (April 09 to June 25, 1988)
4) Standards of Professional Practice part A/Course SPPA The Appraisal
Institute-San Diego Chapter(May 10 to May 11, 1991)
5) Standards of Professional Practice part b/Course SPPB The Appraisal
Institute-San Diego Chapter (May 17 to May 18, 1991)
6) Real Estate Appraisal Principles/Course 1a1 The Appraisal
Institute-University of Southern California (January 04 to February
08, 1986)
7) Residential Valuation/Course 8-2 The Appraisal Institute-University
of Southern California (June 16 to June 22, 1985)
8) Standards of Professional Practice/Course 2-3-Southern California
Chapter (July 14 to July 17, 1985)The Appraisal Institute
9) Basic Valuation Procedures/Course 1a2 The Appraisal Institute-Biola
University (August 01 to September 19, 1987)
10) Report Writing and Valuation Analysis Course 540 The Appraisal
Institute-Orange County Chapter (September 01 through September 09,
1994)
11) Advanced Applications Course 550 The Appraisal Institute-Pepperdine
University (November 10 through November 19, 1994)
12) Course 120-Basic Income Capitalization The Appraisal
Institute-University of San Diego June 08 through June 16, 1995)
13) Case Studies in Real Estate Valuation The Appraisal
Institute-Glendale College of Law (June 1-9 1984)
14) Standards of Professional Appraisal Practice Part A and B-University
of San Diego (June 1996)
15) Advanced Income Approach-Southern California Chapter May-June 1997,
Tustin, California
16) Highest and Best Use and Market Analysis, Course 520, Montrose
California AG97
SEMINARS ATTENDED:
1) State License Preparation-Certified General Appraiser
2) State License Preparation-Certified Residential Appraiser
3) California OREA License Seminar (1996)
4) Demonstration Appraisal Report-Non Income Producing Property.
5) Demonstration Appraisal Report--Income Producing Properties.
6) Valuation of Leasehold Interests
7) HP 12/C Seminar
8) Easement Valuation
9) The Appraisers Complete Review Seminar
10) Legal Workshop
11) Business Valuation
12) Personal Property Valuation
13) Easement Valuation
14) Ted Whitmere's Reveiw Seminar
<PAGE>
UNIVERSITY REAL ESTATE COURSES SUCCESSFULLY COMPLETED
1) Real Estate Foundation
2) Residential Appraisal
3) Selected Topics in Real Estate-Nursing Homes
4) Selected Topics in Real Estate-Gasoline Service Stations
5) Selected Topics in Real Estate-Residential Subdivisions
6) Selected Topics in Real Estate-R.V. Resorts
7) Contemporary Issues in Real Estate
8) Income Property Appraising
9) Advanced Real Estate Evaluation
10) Real Estate Law Portfolio
11) Land Development Regulations
12) Report Writing
13) Land Development Regulations
14) Computer Applications in Real Estate Analysis
15) Residential Property Development
16) Real Estate Property Management
17) Real Estate Finance
18) Narrative Report Writing
BROKERAGE COURSES
Completed All the necessary courses to qualify to take the California
State Real Estate Brokerage Exam (8 courses total)
<PAGE>
LOCATION MAP - COMMERCIAL LAND SALES
<PAGE>
COMPLETE, SELF-CONTAINED
APPRAISAL
VALUATION OF
STACEY ROSE AT VICTORVILLE
32 ACRES OF RESIDENTIALLY ZONED LAND
NORTH SIDE OF SENECA RD., APPROXIMATELY 300 FEET WEST OF HESPERIA ROAD
VICTORVILLE, CA
PREPARED FOR
Mr. Mark Kawanami
National Investors Financial, Inc.
4220 Von Karman Avenue, Suite No. 110
Newport Beach, CA 92660
PREPARED BY
David J. Likas, MAI
Noble R. Tucker Jr., SRA
LIKAS & ASSOCIATES
20101 SW Birch St., Suite 150B
Newport Beach, CA 92660
DATE OF VALUES
November 4, 1992 and March 31, 1998
<PAGE>
LIKAS & ASSOCIATES
REAL ESTATE APPRAISERS & CONSULTANTS
March 31, 1998
Our File No. 19.1
National Investors Financial, Inc.
4220 Von Karman Avenue, Suite No. 110
Newport Beach, CA 92660
Attn: Mr. Mark Kawanami
RE: Complete, Self Contained Appraisal
Stacey Rose at Victorville
32 Acres of Residentially Zoned Land
North Side of Seneca Rd., approximately 300 feet west of Hesperia Road
Victorville, CA
Dear Mr. Kawanami:
Pursuant to your request and authorization, We have conducted the investigations
and analyses necessary to form opinions of market value as of two different
dates of value. The values reported within this appraisal are of the above
referenced property's fee simple estate. The function of this appraisal is for
use in making financial decisions in regards to the property.
It is our understanding that the purpose and intended use of the appraisal will
be to be referenced in an audit of your company to register it under the
Securities Act with the SEC and to provide necessary information for the
offering circular which will be distributed to investors. However, the report,
including all market surveys and related data, conclusions, exhibits and
supporting documentation may not be reproduced or references made to the report
or to Likas & Associates/David J. Likas, MAI in any sale offering, prospectus,
public or private placement memorandum, proxy statement or other document
("Offering Material") in connection with a merger, liquidation or other
corporate transaction unless Likas & Associates/David J. Likas, MAI has approved
in writing the text of such reference or reproduction prior to the distribution
and filing thereof.
20101 SW BIRCH STREET, SUITE 150B
NEWPORT BEACH, CA 92660
(714) 752-6122 * FAX (714) 752-7509
<PAGE>
National Investors Financial, Inc. March 31, 1998
RE: Our File No. 19.1 Page Two
Based on the investigations undertaken, the analyses made, and on our experience
as real estate analysts and appraisers, and subject to the Assumptions and
Limiting Conditions set forth in the report which follows, the subject property
has market value estimates as follows:
MARKET VALUE, AS OF NOVEMBER 4, 1992
ONE MILLION SIX HUNDRED THOUSAND DOLLARS
$1,600,000
MARKET VALUE, AS OF MARCH 31, 1998
THREE HUNDRED TWENTY THOUSAND DOLLARS
$ 320,000
The narrative report which follows sets forth the data and analyses upon which
our opinions of value are, in part, predicated.
Respectfully submitted,
/s/ David J. Likas
- ---------------------------
David J. Likas, MAI
State Cert. #AG003694
/s/ Noble R. Tucker Jr.
- ---------------------------
Noble R. Tucker Jr., SRA
State Cert. # AG001532
<PAGE>
EXECUTIVE SUMMARY
Property Location: Stacey Rose at Victorville
North Side of Seneca Rd.
Approximately 300 feet west of Hesperia Rd.
Victorville, CA
Thomas Guide: Page 4296-E7, San Bernardino County
Property Type: Residential Land with a density allowance
of approximately 5 Dwelling Units Per Acre
Date of Values: November 4, 1992 and March 31, 1998
Date of Report: March 31, 1998
Property Rights: Fee Simple Estate
Site Size: 32 acres of land capable of being developed with
approximately 160 SFD lots
Zoning: Single Family Residential (R-1T)
City of Victorville, CA
Highest & Best Use: Single-Family Development
VALUATION
<TABLE>
<S> <C>
MARKET VALUE AS OF
NOVEMBER 4, 1992: $1,600,000 ($10,000/LOT)
MARKET VALUE AS OF
MARCH 31, 1998: $ 320,000 ($2,000/LOT)
EXPOSURE PERIOD: 10-TO-12 MONTHS
</TABLE>
DISCUSSION OF THE CONCLUDED VALUES
The subject's current value is significantly lower than its historic value.
Although the region's economy has improved over the past several years, and
although real estate prices in most Southern California markets have increased,
real estate prices within the subject's High Desert area have not responded yet
to the improved economy. This is evidenced by the Sale Comparables submitted
for analysis within this report.
Factors creating this trend include the High Desert being a secondary location
within the Los Angeles Basin. The High Desert area is a relatively remote
location as compared with most other sub-regions within the basin, and is
situated relatively far from the region's CBD, as well as other major employment
centers. Additionally, the area proposes physical challenges due to its hot, dry
desert
<PAGE>
climate with summer month temperatures frequently exceeding 100 degrees.
As the economy has improved over the past 3 years, there has been a population
trend towards more centrally located markets where higher paying jobs are
provided. It is these factors combined, which have held down real estate prices
within the subject's market.
In conclusion, relative to more centrally located real estate markets, which
have appreciated over the past 6-to-24 months, the subject is situated within a
secondary market where prices have remained soft. This holds particularly true
for vacant land, of which there is an abundance in the high desert region.
However, the current forecast is that of increasing prices within the subject's
market area.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ASSUMPTIONS AND LIMITING CONDITIONS. . . . . . . . . . . . . . . . . . . . . 1
CERTIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
AREA DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
THE LAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
ASSESSED VALUATION AND TAXES . . . . . . . . . . . . . . . . . . . . . . . .32
HIGHEST AND BEST USE . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
VALUATION METHODOLOGY. . . . . . . . . . . . . . . . . . . . . . . . . . . .35
SALES COMPARISON APPROACH. . . . . . . . . . . . . . . . . . . . . . . . . .37
VALUATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
</TABLE>
ADDENDA
Qualifications of Appraisers
<PAGE>
ASSUMPTIONS & LIMITING CONDITIONS
The Analyses and opinions set forth in this appraisal are subject to the
following assumptions and limiting conditions:
1. Based upon our review of the subject's plat map, and according to Ms. Helen
Wilson with the City of Victorville Engineering Department (Phone No.
760-955-5135), the Oro Grande wash traverses over an approximate 10,000
square foot section of the subject site at it's southeastern section. The
wash seperates a 2.96 acre triangular section of the subject from the
primary parcel. Based on our interviews with Ms. Wilson, the flood channel
section of the subject and it's cut-off triangular portion could be
utilized as open area, thus not restricting the density of developing.
Within this appraisal, we have explicitly assumed this to be true.
2. No responsibility is assumed for matters which are legal in nature. A
current title report was requested from the client but was not received.
The client is recommended to review a preliminary title report.
There are easements which are assumed to be typical utility easements and
do not negatively impact the value of the property. We assume that none of
these easements would adversely effect the subject property. Should this
later be found to be not the case, we reserve the right to change our value
estimate as stated herein. No responsibility is assumed by us for matters
which are legal in nature. No opinion of title is rendered, and the
property is appraised as though free of all easements, liens, or
encumbrances and the title is assumed to be marketable. No survey of the
boundaries of the property was undertaken by us. All areas and dimensions
furnished to us are presumed to be correct. We recommend at the reader's
discretion that a formal survey be commissioned to confirm the legal
description, land areas and that no encroachments or adverse liens exist.
We assume all taxes are current.
3. Information contained in this appraisal has been gathered from sources that
are believed to be reliable, and, where feasible, has been verified. No
responsibility is assumed for the accuracy of information supplied by
others.
4. We assume no responsibility for economic or physical factors occurring
subsequently to the date of value that effect the opinions stated herein.
5. We reserve the right to make such adjustments to the valuation herein
reported as may be required by the consideration of additional data or more
credible data that may become available.
6. Forecasts of future events that influence the valuation process are
predicated on the continuation of historic and current trends in the
market.
7. The property is appraised assuming it to be under responsible ownership and
competent management and available for its highest and best use.
8. No engineering survey has been made. Except as specifically stated, data
relative to sizes and
-1-
<PAGE>
areas were taken from sources considered reliable.
9. Maps, plats and exhibits included herein are for illustration only, as an
aid in visualizing matters discussed within the appraisal. They should not
be considered as surveys nor relied upon for any other purpose, nor should
they be removed from, reproduced, or used apart from this report.
10. No opinion is expressed as to the value of sub-surface oil, gas, or mineral
rights, or whether the property is subject to surface entry for the
exploration or removal of such materials except as is expressly stated.
11. No opinion is intended to be expressed on matters which require legal
expertise or specialized investigation or knowledge beyond that customarily
employed by real estate appraisers.
12. The appraiser has inspected, as far as possible, by observation, the land;
however, it was impossible to personally inspect the entire parcel.
Therefore, no representations are made as to the site conditions unless
specifically considered in the appraisal.
13. We shall not be required, by reason of this appraisal, to give testimony or
to be in attendance in court or any governmental or other hearing in
reference to the subject property without prior arrangements having first
been made with the appraiser relative to such additional employment.
14. David Likas, MAI, and Noble R. Tucker Jr, SRA, the signatories of this
appraisal, are members of the Appraisal Institute. The Bylaws and
Regulations of the Appraisal Institute require each member and/or candidate
to control the use and distribution of each appraisal by such member or
candidate. Therefore, except as may hereinafter be provided, the party for
whom this appraisal was prepared may distribute copies of this appraisal,
in its entirety, to such third parties as may be selected by the party for
whom this appraisal was prepared; however, selected portions of this
appraisal shall not be given to third parties without the prior written
consent of the signatories of this appraisal.
15. Neither all nor any part of the contents of this shall be conveyed to any
person or entity without written consent and approval of the signatories of
this appraisal, particularly as to valuation conclusions, or to any
reference to the Appraisal Institute or the MAI designation. Furthermore,
this report is for the sole use of our client. Further, the appraisers or
firm assumes no obligation, liability, or accountability to any third
party. If this report is placed in the hands of anyone but the client, the
client shall make such party aware of all the assumptions and limiting
conditions of the assignment.
16. No environmental site assessment report was provided for our review. It is
assumed that there are no hidden or unapparent conditions or substances in
the soil or subsoil that may be hazardous or toxic. Our inspection of the
subject property revealed no obvious problems. The appraisers are not
qualified to detect such substances or conditions and are not responsible
for arranging any engineering or research studies that may be necessary to
discover such conditions or substances.
17. It is assumed that there are no deed restrictions to a single use of the
subject. The presence of such restrictions could adversely impact site
value.
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<PAGE>
18. No consideration has been given in this appraisal to personal property (if
any) located on the site; only the real estate has been considered unless
otherwise specified. This appraisal excludes the value of any items of a
historical, archaeological or biological nature.
-3-
<PAGE>
CERTIFICATION
We, the undersigned, certify that, to the best of our knowledge and belief:
- - the statements of fact contained in this report are true and correct and
subject to the Assumptions and Limiting Condition herein set forth.
- - the reported analyses, opinions, and conclusions are limited only by the
reported Assumptions and Limiting Conditions, and are our personal,
unbiased professional analyses, opinions and conclusions.
- - we have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
- - our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, or the
occurrence of a subsequent event. Furthermore, the appraisal assignment
was not based on a requested minimum valuation, a specific valuation or the
approval of a loan.
- - our reported analyses, opinions and conclusions were developed, and this
report has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice, USPAP, as published by the Appraisal
Foundation, and the federal regulating agencies.
- - we are competent to preform this appraisal assignment, by virtue of
previous experience with similar assignments and/or appropriate research
and education regarding the specific property type being appraised.
- - David Likas, MAI, and Noble R. Tucker Jr, SRA, have made a personal
inspection of the property that is the subject of this report. We have
considered pertinent facts affecting the value thereof.
- - no one has provided significant professional assistance to the persons
signing this report.
- - the reported analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the requirements of the Code of
Professional Ethics and the Standards of Professional Practices of the
Appraisal Institute.
- - market data pertaining to the value estimates have been accumulated from
various sources and where possible examined and verified as to details,
motivation and validity.
- - the use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
- - the Appraisal Institute conducts a program of continuing professional
education for its designated members. David Likas, MAI is currently
certified under the continuing education program of the Appraisal
Institute.
-4-
<PAGE>
- - the Appraisal Institute conducts a program of continuing professional
education for its designated members. Noble R. Tucker Jr., SRA, is
currently certified under the continuing education program of the Appraisal
Institute.
/s/ Noble R. Tucker Jr.
-------------------------------------------
Noble R. Tucker Jr, SRA
"Certified General Real Estate Appraiser"
California State Certification No.: AG001532
/s/ David Likas
-----------------------------------------
David Likas, MAI
"Certified General Real Estate Appraiser"
California State Certification No.:AG003694
-5-
<PAGE>
INTRODUCTION
PURPOSE OF THE REPORT
The purpose of this report is to set forth the data, analyses and conclusions
relative to our opinion of market value of the residential land located on
the north side of Seneca Road, approximately 300 feet west of Hesperia Road,
Victorville, California. The valuation of the subject is provided under the
following two dates:
MARKET VALUE AS OF NOVEMBER 4, 1992
MARKET VALUE, AS OF MARCH 31, 1998
The opinions set forth in this report are subject to the Assumptions &
Limiting Conditions set forth within.
FUNCTION OF THE APPRAISAL
The function of this appraisal is for use in making financial decisions in
regards to the property.
It is our understanding that the purpose and intended use of the appraisal
will be to be referenced in an audit of your company to register it under the
Securities Act with the SEC and to provide necessary information for the
offering circular which will be distributed to investors. However, the
report, including all market surveys and related data, conclusions, exhibits
and supporting documentation may not be reproduced or references made to the
report or to Likas & Associates/David J. Likas, MAI, in any sale offering,
prospectus, public or private placement memorandum, proxy statement or other
document ("Offering Material") in connection with a merger, liquidation or
other corporate transaction unless Likas & Associates/David J. Likas, MAI has
approved in writing the text of such reference or reproduction prior to the
distribution and filing thereof.
SCOPE OF THE APPRAISAL
The scope of this appraisal includes the process of collecting primary and
secondary data (Comps Inc., TRW, etc. for sale data) relative to the subject
property along with the supporting market data. This data has been analyzed
and confirmed, whenever possible, leading to the value conclusions set forth.
All of the approaches to value, the Cost, Income, and Sales Comparison
Approaches, were considered within this report.
EFFECTIVE DATE OF THE APPRAISAL
The opinions expressed in this report are stated as of March 31, 1998, which
coincides with the date of our property inspection. We have also rendered an
opinion of value as of November 4, 1992.
-6-
<PAGE>
DATE OF APPRAISAL PREPARATION
The appraisal was prepared on March 31, 1998.
INTEREST APPRAISED
This report pertains to a valuation of the fee simple estate.
FINISHED LOT DEFINED
As utilized within this appraisal, the term "Finished Lot" is defined as
follows:
FINAL GRADED LOTS WITH ASPHALT PAVED STREETS IN PLACE AND UTILITIES
AVAILABLE TO EACH LOT. CURBS, GUTTERS AND PERIMETER WALLS ARE IN PLACE AND
FEES HAVE BEEN PAID, EXCLUSIVE OF THE BUILDING PLAN CHECK AND PERMIT FEE.
SCHOOL FEES ARE INCLUDED IN THE FINISHED LOT COST.
MARKET VALUE DEFINED
The term "market value"is defined as follows:
"MARKET VALUE" MEANS THE MOST PROBABLE PRICE WHICH A PROPERTY SHOULD BRING IN
A COMPETITIVE AND OPEN MARKET UNDER ALL CONDITIONS REQUISITE TO A FAIR SALE,
THE BUYER AND SELLER EACH ACTING PRUDENTLY AND KNOWLEDGEABLY, AND ASSUMING
THE PRICE IS NOT AFFECTED BY UNDUE STIMULUS. IMPLICIT IN THIS DEFINITION IS
THE CONSUMMATION OF A SALE AS OF A SPECIFIED DATE AND THE PASSING OF TITLE
FROM SELLER TO BUYER UNDER CONDITIONS WHEREBY:
1. BUYER AND SELLER ARE TYPICALLY MOTIVATED;
2. BOTH PARTIES ARE WELL INFORMED OR WELL ADVISED, AND ACTING IN WHAT THEY
CONSIDER THEIR OWN BEST INTERESTS;
3. A REASONABLE TIME IS ALLOWED FOR EXPOSURE IN THE OPEN MARKET;
4. PAYMENT IS MADE IN TERMS OF CASH IN U.S. DOLLARS OR IN TERMS OF FINANCIAL
ARRANGEMENTS COMPARABLE THERETO; AND
5. THE PRICE REPRESENTS THE NORMAL CONSIDERATION FOR THE PROPERTY SOLD
UNAFFECTED BY SPECIAL OR CREATIVE FINANCING OR SALES CONCESSIONS GRANTED BY
ANYONE ASSOCIATED WITH THE SALE.
THIS APPRAISAL IS PREDICATED ON AN ALL CASH TO THE SELLER TRANSACTION.
- -----------------------------
(1) Title XI of the Federal Financial Institutions Reform, Recovery and
Enforcement Act of 1989(FIRREA), Section 34.42(f)
-7-
<PAGE>
HIGHEST AND BEST USE DEFINED
"Highest and Best Use" is an appraisal concept which has been defined as
follows:
THAT REASONABLE AND PROBABLE USE THAT WILL SUPPORT THE HIGHEST PRESENT
VALUE, AS DEFINED, AS OF THE EFFECTIVE DATE OF THE APPRAISAL.
ALTERNATIVELY, THAT USE, FROM AMONG REASONABLY PROBABLE AND LEGAL
ALTERNATIVE USES, FOUND TO BE PHYSICALLY POSSIBLE, APPROPRIATELY SUPPORTED,
FINANCIALLY FEASIBLE, AND WHICH RESULTS IN HIGHEST LAND VALUE.
FEE SIMPLE ESTATE DEFINED
The term "fee simple estate" is defined as follows:
ABSOLUTE OWNERSHIP UNENCUMBERED BY ANY OTHER INTEREST OR ESTATE; SUBJECT
ONLY TO THE LIMITATIONS IMPOSED BY THE GOVERNMENTAL POWERS OF TAXATION,
EMINENT DOMAIN, POLICE POWER, AND ESCHEAT.
OWNERSHIP
According to Dataquick Information Systems, the subject's current vesting is:
NATIONAL INVESTORS FINANCIAL
PROPERTY HISTORY
The subject has not transferred within the last three years. Furthermore, it
is not officially listed for sale.
- ------------------------------
(2) Real Estate Appraisal Terminology, Byrl N. Boyce, Ph.D., Ed., Ballinger
Publishing Company, Cambridge, Massachusetts, 1981.
(3) The Dictionary of Real Estate Appraisal, m 3rd Edition, The Appraisal
Institute, Chicago Illinois, 1993, p 140.
-8-
<PAGE>
AREA DESCRIPTION
PHYSICAL CHARACTERISTICS
The subject property is located in the city of Victorville, San Bernardino
County, California. San Bernardino County, Southern California's third most
populated county, encompasses about 12,800 square miles. Together with
Riverside County, San Bernardino County comprises the San
Bernardino-Riverside-Ontario Metropolitan Statistical Area (MSA), or commonly
known as the Inland Empire region of Southern California which encompasses
20,065 square miles. A location map is presented for reference on the
following page.
The most intensely developed portion of the MSA is located in the western
portions of the counties of Riverside and San Bernardino. The general
boundaries are the San Gabriel Mountains to the north, the San Bernardino
Mountains to the east, the Santa Ana Mountains to the south, and the Chino
and La Puente Hills on the west. The County of San Bernardino is situated
immediately to the east of Los Angeles County and north of Riverside County.
San Bernardino County is composed of several distinct geographic/economic
regions. The city of San Bernardino has an economic base comprised of the
financial, services, and government sectors and is located in the east valley
area of western San Bernardino County. The City of Victorville is located in
the High Desert region, also known as the Victor Valley portion of San
Bernardino County. This region is bounded by the Mojave Desert to the north,
Adelanto and the Los Angeles County line to the west, the San Bernardino
Mountains to the south, and the Lucerne Valley to the east.
Riverside and San Bernardino Counties extend about 200 miles easterly to the
Colorado River on the Arizona Border, to within 50 miles of the Pacific
Ocean. The majority of the population resides within the metropolitan area
surrounding the cities of Riverside and San Bernardino, both situated near
the westerly end of their respective counties. Since 1950, population in the
area has rapidly risen to its current level of just over 2.8 million people.
This trend is expected to continue as less expensive commercial, industrial,
and residential land attracts residents and businesses from the more
expensive and intensely developed Los Angeles and Orange County regions.
The varied county topography includes level land areas, mountains, valleys,
dry lake beds, the Colorado River Valley, the San Gabriel and San Bernardino
Mountains, several lakes and a large valley which forms a part of Southern
California's citrus belt.
-9-
<PAGE>
REGIONAL MAP
[GRAPHIC]
-10-
<PAGE>
All modes of transportation are available to Inland Empire. A
well-integrated freeway system serves the general area. Freeways which link
the Inland Empire to business centers of Southern California include
Interstate Highways 10, 15, and 215, and CA state Highways 60 and 91. The
subject property is located approximately 2 miles east of Interstate 15 and
has adequate local and regional access.
The Inland Empire has excellent rail service, with the largest switching yard
west of Chicago located in the cities of Colton and Rialto. The area is
serviced by the Santa Fe, Southern Pacific, and Union Pacific Railroads.
Commuter rail service has been instituted between San Bernardino and downtown
Los Angeles as well as Riverside and downtown Los Angeles. This service is
provided by the Metrolink commuter train system which connects to the Los
Angeles subway system at Union Station northeast of the Los Angeles downtown
area.
Overall, the region's natural and man-made physical environment provides
adequate resources for residential development.
POPULATION
The San Bernardino-Riverside Counties area is one of the fastest growing
regions in the nation. This is attributable to a desirable physical
environment, low housing costs, and a diverse mixture of industry
experiencing expansion. As of 1988, the Riverside-San Bernardino MSA was the
17th most populous region in the country. For metropolitan areas over one
million people, the MSA grew at a faster rate between 1980 and 1985 then any
other in the United States. Migration to the region by industrial and service
businesses, families searching for more affordable housing, and the natural
growth of a relatively young population have all added to the positive
changes that have taken place. Inland Empire population has grown by 231,500
since 1990. At 2,820,274 as of January 1, 1997, the region would be the 30th
largest "state" just ahead of Oregon.
According to the California Demographic Research Unit, the population of San
Bernardino has grown by an annual growth rate of 4.7% from 1993 to 1997, or
from approximately 1,320,000 to 1,587,400. The city of Victorville has
experienced substantial growth since 1980, with the population growing from
14,229 people in 1980 to 40,674 residents in 1990, an increase of 11%
annually. According to the City of Victorville's Chamber of Commerce, the
city is estimated to have reached 60,400 residents, as of January 1, 1997, a
6% annual increase from 1990.
This population trend should have a positive impact on the subject property
with an increased demand for housing in the area. This is evidenced by the
number of housing units in the city, which has also grown significantly since
6,108 units in 1980 to 23,143 units in January of 1996, or an annual growth
rate of 9%.
-11-
<PAGE>
ECONOMY
The following table summarized key economic indicators within the Inland Empire
for 1998.
<TABLE>
<CAPTION>
ITEM 1997 1998 FORECAST
--------------------- -------------- --------------
<S> <C> <C>
Job Growth 4.1% 4.0%
--------------------- -------------- --------------
Unemployment Rate 7.1% 6.8%
--------------------- -------------- --------------
Taxable Sales $25.8 Billion $26.7 Billion
--------------------- -------------- --------------
No of Homes Permitted 13,000 14,000
--------------------- -------------- --------------
No of Homes Sold 53,000 55,000
--------------------- -------------- --------------
--------------------- -------------- --------------
</TABLE>
Source: Inland Empire Economic Databank and Forecasting Center/U.C.
Riverside
The preceding table portrays the strengthening job growth market, declining
unemployment rates, increasing retail sales, and increased demand for housing
in the region. This is attributed to the diverse labor pool, abundance of
affordable land available for development, and the increasing population base.
The following table portrays the labor force and unemployment rates within
San Bernardino and Riverside County from 1990 to 1998.
-12-
<PAGE>
RIVERSIDE-SAN BERNARDINO COUNTIES
LABOR FORCE, UNEMPLOYMENT RATES
<TABLE>
<CAPTION>
ITEM 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------------------ ------- ------- ------- -------- ------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RIVERSIDE COUNTY
Employment 430,300 424,700 459,900 508,700 526,900 546,000 574,150 597,11 600,000f
- ------------------ ------- ------- ------- -------- ------- ------- ------- ------ --------
Unemployment 35,900 51,100 64,700 67,200 62,500 57,900 43,635 42,992 40,800f
- ------------------ ------- ------- ------- -------- ------- ------- ------- ------ --------
Unemployment 7.7% 10.7% 12.3% 11.7% 10.6% 9.6% 7.6% 7.2% 6.8%f
Rate
- ------------------ ------- ------- ------- -------- ------- ------- ------- ------ --------
SAN
BERNARDINO
COUNTY
- ------------------ ------- ------- ------- -------- ------- ------- ------- ------ --------
Employment 530,700 563,000 552,500 605,500 626,700 626.600 641,600 643,500 645,000f
- ------------------ ------- ------- ------- -------- ------- ------- ------- ------ --------
Unemployment 34,700 49,600 60,500 63,800 57,200 53,700 44,270 46,332 43,860f
- ------------------ ------- ------- ------- -------- ------- ------- ------- ------ --------
Unemployment 5.7% 8.1% 9.9% 9.5% 8.4% 7.9% 6.9% 7.2% 6.8%f
Rate
- ------------------ ------- ------- ------- -------- ------- ------- ------- ------ --------
- ------------------ ------- ------- ------- -------- ------- ------- ------- ------ --------
</TABLE>
Source: Los Angeles Economic Development Committee, Jack Kyser, Chief
Economist January 1998.
According to a recent study by the Los Angeles Economic Development, the
employment base within San Bernardino County has increased from 530,700 in
1990 to approximately 645,000 in 1998. This reflects an average annual growth
rate of 2.5%.
According to the Inland Empire Business Journal, as of January 1, 1998
Stater's Brothers Markets is the largest local employer in the Inland Empire
with over 10,000 employees followed closely by United Parcel Service with
their HUB at Ontario airport. The largest employers within the Inland Empire
are summarized in the forthcoming table:
-13-
<PAGE>
<TABLE>
<CAPTION>
EMPLOYER NO. EMPLOYEES LOCALLY TYPE OF BUSINESS
- ---------------------------------------- --------------------------- -----------------
<S> <C> <C>
Stater Brothers Markets 10,600 Grocery Retailer
- ---------------------------------------- --------------------------- -----------------
United Parcel Service 6,500 Package delivery
- ---------------------------------------- --------------------------- -----------------
Loma Linda University Medical Center 5,450 Health Care
- ---------------------------------------- --------------------------- -----------------
Kaiser Permanente Medical CenterCty 5,100 Health Care
- ---------------------------------------- --------------------------- -----------------
San Bernardino Unified School District 5,000 Education-Public
- ---------------------------------------- --------------------------- -----------------
Ralphs Grocery Store 4,022 Grocery
- ---------------------------------------- --------------------------- -----------------
March Air-Force Reserve Base 4,000 Military
- ---------------------------------------- --------------------------- -----------------
Corona/Norco Unified School District 3,593 Public Education
- ---------------------------------------- --------------------------- -----------------
Pomonoa Unified School District 3,283 Public Education
- ---------------------------------------- --------------------------- -----------------
National Training Center 3,247 Military
- ---------------------------------------- --------------------------- -----------------
Riverside Unified School District 3,203 Public Education
- ---------------------------------------- --------------------------- -----------------
UC Riverside 3,191 University
- ---------------------------------------- --------------------------- -----------------
GTE California 2,600 Telecommunications
- ---------------------------------------- --------------------------- -----------------
Chino Valley Unified School District 2,400 Public Education
- ---------------------------------------- --------------------------- -----------------
Lucky Stores 2,395 Grocery and Drug Retailer
- ---------------------------------------- --------------------------- -----------------
Fleetwood Enterprises 2,300 Manufactured Housing and RV's
- ---------------------------------------- --------------------------- -----------------
Pomona Valley Hospital Medical Center 2,166 Health Care
- ---------------------------------------- --------------------------- -----------------
Valley Health Center 2,065 Health care
- ---------------------------------------- --------------------------- -----------------
Cal Poly University 2,000 University
- ---------------------------------------- --------------------------- -----------------
Colton Joint Unified School District 1,940 Public Education
- ---------------------------------------- --------------------------- -----------------
- ---------------------------------------- --------------------------- -----------------
</TABLE>
As cited in the above table, the Inland Empire has a diversified employment
base ranging from bureaucratic employers to large corporate entities. Due to
the strong employment base, and myriad of employment entities as cited in the
above table, demand for housing has escalated. The Inland Empire has had some
it's largest employment gains since 1990 and should continue to outperform
the rest of Southern California, according to data published by the Inland
Empire Economic Databank and Forecasting Center at U.C. Riverside.
Overall economic trends are positive, retail sales are increasing, and real
estate values are beginning to climb. Unemployment rates are at their lowest
levels since 1993. These trends should positively impact the region.
-14-
<PAGE>
AREA CONCLUSION
San Bernardino County is experiencing a relatively rapid expansion of its
population and economic base precipitated by affordable housing and direct
access to major employment centers via the area's network of freeways. The
growth of the local housing market is due to the area's relatively abundant
supply of affordable land and direct access to employment. There is a
growing trend of younger families who work in the Orange-Los Angeles Counties
metropolitan area and moving to the San Bernardino-Riverside area to find
affordable housing. New commercial and industrial businesses are also
attracted to the area by an available labor pool, relatively close proximity
to major metropolitan areas and lower land costs.
In summary, this combination of social and economic forces will continue to
generate demand for residential property, such as the subject.
-15-
<PAGE>
VICTORVILLE CITY DESCRIPTION
PHYSICAL CHARACTERISTICS
The City of Victorville is located in the high desert area known as Victor
Valley which has a trade area population of approximately 300,000. The city
of Barstow is located 30 miles to the northeast along the Barstow Freeway
(Interstate 15). A location map is provided for reference on the following
page.
Victorville, which was incorporated in 1962, is located 97 miles northeast of
Los Angeles, and 35 miles north of downtown San Bernardino. Victorville
encompasses a 59.79 square mile area and is situated in the center of Victor
Valley. Victor Valley includes the bedroom communities of Hesperia, Apple
Valley, Lucerne Valley and the newly developing Adelanto. Victorville is
extensively laid out with several community commercial centers interspersed
with the continuing residential development. Interstate Hwy. 15 and CA State
Highway 18 intersect near the heart of the city.
Victorville is regarded as a secondary desert location within the Southern
California Region offering lower residential and commercial real estate
prices. This is due in part, to it's somewhat remote location and hot summer
climate.
POPULATION
The residential population of Victorville is currently 60,400, according to
the Victorville Chamber of Commerce. Estimates suggest that this figure more
than doubles during business hours to serve the commercial needs of the more
than 300,000 people who call the Victor Valley home.
Victorville has experienced substantial growth since 1980, with the
population growing from 14,229 people in 1980 to 40,674 residents in 1990, an
increase 11% annually. According to the City of Victorville's Chamber of
Commerce, the city is estimated to have reached 60,400 residents as of
January 1, 1997, a 6% annual increase from 1990.
The number of housing units in the city have grown from 6,108 units in 1980
to 23,143 units in January of 1996, an annual growth of 9%. The driving
force behind Victorville's rapid population and employment growth during the
1980s and 1990s is Victorville's lower land prices and housing costs relative
to other parts of Southern California. This lower land basis helped draw
residents looking for more affordable housing options, as well as businesses
to serve this growing population base. The affordability of housing in
Victorville is demonstrated by the price differential between homes in
Victorville and other parts of Southern California (from which the bulk of
new residents are drawn).
Overall, these population statistics, which indicate a rapidly increasing
trend, bode well for the subject property.
-16-
<PAGE>
VICTORVILLE CITY MAP
[GRAPHIC]
-17-
<PAGE>
ECONOMY
Most of Victorville's employment opportunities fall into service-related
businesses, with approximately 40% of businesses in the City of Victorville
in the retail sales category. Local manufacturing companies are primarily
related to mining and the production of cement.
The major non-manufacturing employers within the city of Victorville are as
follows:
<TABLE>
<CAPTION>
EMPLOYER NO. OF EMPLOYEES
----------- -----------------
<S> <C>
Victorville School District 1,020
Desert Valley Hospital/Medical Group 950
Victor Valley Community Hospital 790
Victor Valley Community College 650
City of Victorville 450
GTE 600
County of San Bernardino 379
Wal-Mart 350
Southern California Edison 205
Southwest Portland Cement 200
Southwest Gas Corporation 180
</TABLE>
Major manufacturing employers within the city of Victorville are as follows:
<TABLE>
<CAPTION>
EMPLOYER NO. OF EMPLOYEES
----------- -----------------
<S> <C>
AFG Industries (glass manufacturing) 241
Riverside Cement Company (Oro Grande) 212
Southdown Victorville Cement Plant 200
Mitsubishi Cement (Lucerne Valley) 183
</TABLE>
Within the City of Victorville there are approximately 3,250 acres zoned for
commercial use of which 60% remains available for development. Victorville
is home to the largest enclosed regional shopping center between San
Bernardino and Las Vegas which is known as The Mall of Victor Valley. This
center is anchored by four major department stores: Harris Company, J.C.
Penny, Mervyns, and Sears.
There are in excess of 5,400 acres within the city limits of Victorville
zoned for light and heavy industrial use. Nearly 90% of this land is vacant
and is available in parcels ranging in size from one half to five hundred
acres.
The number of wage and salary jobs in Victorville has increased considerably
since the 5,285 jobs in 1980, to 14,822 jobs in 1990, and to an estimated
19,407 jobs in 1996, reflecting an estimated annual
-18-
<PAGE>
increase of 8% over the 16-year period.
The bulk of jobs in Victorville are in the Trade sector accounting for 24% of
jobs, followed by the manufacturing sector (11%), and the
business/Personal/Entertainment sector (11%). The most substantial job
growth since 1991 has been in the Health Services sector which has
experienced a 8% annual increase over the past six years.
CITY CONCLUSION
Victorville is experiencing a relatively rapid expansion of its population
and economic base precipitated by affordable housing and direct access to
major employment centers via the area's network of freeways. The growth of
the local housing market is due to the area's relatively abundant supply of
affordable land and direct access to employment. There is a trend of younger
families who work in the Orange-Los Angeles Counties metropolitan area and
moving to the Victorville area to find affordable housing. New commercial
and industrial businesses are also attracted to the area by an available
labor pool, relatively close proximity to major metropolitan areas and lower
land costs. In summary, this combination of social and economic forces will
continue to generate demand for residential land such as the subject.
-19-
<PAGE>
NEIGHBORHOOD OVERVIEW
The subject property is located on the north side of Seneca Rd.,
approximately 300 feet west of Hesperia Road, Victorville, California. A
location map is located on the next page for reference.
The subject property is comprised of vacant land within the city limits.
Community shopping centers are located on 7th Street to the west, and on the
Palmdale/Lancaster Road 18. Area wide commercial development are
concentrated along 7th Street and further west of the Freeway. Single Family
dwellings characterize areas immediately to the west, north, and south of the
subject. The uses immediately surrounding the subject property are as follows:
<TABLE>
<CAPTION>
<S> <C>
NORTH: Single-Family Dwellings
WEST: Single-Family Dwellings and
a Department of Motor Vehicles facility
SOUTH: Single Family Dwellings
EAST: Elementary school, vacant commercial land and
miscellaneous retail buildings.
</TABLE>
The initial growth of the neighborhood can be attributed to its proximity to
the freeway, and arterial streets. The neighborhood is partially built-out.
However, there is ample vacant land for residential and commercial
development. A post office, fire station, elementary school, junior high
school, and a public library are situated within the subject's neighborhood.
The area is considered to be in a slow-to-moderate growth mode with land
available for development. The area reflects average maintenance and is
influenced by its proximity to the Interstate 15 Freeway and surface
corridors. The subject site is located approximately 2 miles east of the
intersection of 7th Street and Interstate 15 Freeway and has adequate local
and regional access.
Schools, police protection, medical facilities, retail shopping facilities,
freeways, recreational facilities, and other consumer supporting facilities
adequately serve the neighborhood. The city's general plan recommends
single-family development within the subject neighborhood.
Overall, the subject neighborhood is considered adequately suited for
residential development.
-20-
<PAGE>
NEIGHBORHOOD MAP
[GRAPHIC]
-21-
<PAGE>
RESIDENTIAL MARKET OVERVIEW
The following housing market overview is based on a study performed by The
Meyers Group, Real Estate Information & Consultation Services, dated February
24, 1998. Furthermore, we have also conducted numerous interviews with
developers and land brokers active within the subject's market area.
In the analysis of market trends, the most recent 1997 quarter will be discussed
in relationship to the same quarter in the previous year. Since the subject's
housing market is seasonal in nature, this quarterly analysis is a meaningful
method of comparison relative to gauging the current direction of the market.
The figures reported within this discussion are of new, "single-family"
subdivisions of 10 units or more.
SAN BERNARDINO COUNTY
The subject is situated within the San Bernardino County Housing Market. This
regional market reported sales of 901 units in the 4th Qtr. 1997 ending February
1998. This is a 24% increase from the same Qtr. in 1996. Forth Qtr. 1997's
inventory stood at 984 units, or 23% lower than that of the same Qtr. in 1996.
In regards to price, the average home price increased by 13% to $169,990 from
the 4th Qtr. 1996. The average square footage as of February 1998 was 2,005 SF,
a 3% increase from the same time in 1996.
Applying the region's 4th Qtr. 1997's sales rate of 300 (901/3) units per month
to its inventory (984) would indicate there to be an approximate 3 (984/300)
month supply of product, if sales continued at 4th Qtr. 1997's pace and no new
product was introduced.
Overall, these trends are indicative of a healthy market, as so evidenced by the
increase in sales and a declining inventory. Prices have also increased over
the past year. The current profile of the market is that of healthy supply &
demand conditions.
DESERT EAST (DE) SUBMARKET
The subject is situated within what is known as the Desert East (DE)
Submarket. Of the county's 5 defined submarket areas, the DE Submarket
represent a lower-end market within the region. This is due to its fairly
remote location and hot summer climate relative to more central markets.
The DE Submarket reported sales of 68 units in the 4th Qtr. 1997. This
represents a 24% decrease from the same Qtr. in 1996. However, 4th Qtr. 1997
inventory stood at 78 units, 71% lower than that of the same Qtr. in 1996.
In regards to price, the average unit price increased by 10% from the
-22-
<PAGE>
same Qtr. in 1996, or to $119,990. The average square footage as of November
1997 was 1,743 SF, a 5% increase from the same time in 1996.
Applying the DE Submarket's 4th Qtr. 1997's sales rate of 23 (68/3) units per
month to its inventory (78) would indicate there to be an approximate 3
(78/23) month supply of product, if sales continued at 4th Qtr. 1997's pace
and no new product was introduced.
Unlike the regional market, the subject's local market is demonstrating soft
conditions, as so evidenced by the decrease in sales. However, prices have
increased and inventory (supply) is at a reasonable ratio with sales (demand).
Overall, the current forecast for the submarket is that of only moderate supply
& demand conditions.
Within the DE Submarket, the subject is situated within the City of Victorville
which comprises the bulk of the submarket. There are currently 14 tracts
selling product within Victorville. Lot sizes typically range from 5,000 SF to
8,000 SF, with 7,200 SF being the most common size. Prices typically range from
$80,000 to $140,000, with most project's averaging near $110,000. However,
resales of older, existing homes within Victorville average only approximately
$95,000. New tract home product typically ranges in size from 1,200 SF to 2,500
SF.
The demand to live in Victorville is largely driven by prices which are
significantly lower than more centrally located markets within the region. With
a recent population trend toward more central county areas, the subject's area
has experienced slower sales. However, as prices in these more centrally
located markets have now substantially increased, sales within the subject's
market should begin to improve in 1998, and proposed product will remain in
check with demand.
HOUSING MARKET CONCLUSION
San Bernardino County reported a substantial increase in sales from the 4th Qtr.
1996 to the 4th Qtr. in 1997 and its inventory declined. Prices have also
increased over the past year. Overall, the current profile of the market is
that of healthy supply & demand conditions.
Unlike the regional market, the subject's local market is demonstrating somewhat
soft conditions, as so evidenced by the decrease in sales. However, prices have
increased and inventory (supply) is at a reasonable ratio with sales (demand).
The current forecast for the submarket is that of moderate supply & demand
conditions.
-23-
<PAGE>
THE LAND
LOCATION
The site is comprised of 32 Acres of Residentially Zoned Land located on the
north side of Seneca Rd., approximately 300 feet west of Hesperia Road,
Victorville, California. A Plat Map indicating the subject is set forth on the
page after next. Subject photographs are included at the end of this section.
SIZE, SHAPE & VIEWS
The subject site is a 32 acre parcel of land which is comprised of three
separate parcels. The topography of the site slopes moderately upward from
Hesperia Road, to the northwest, and if single-family residences were
constructed, they would most likely have views. The overall parcel is basically
rectangular in configuration.
Assessor Parcel Number 0477-541-01 is a 27.98 acre parcel which is rectangular
in shape and adjoins Seneca Road at the southwestern portion of the site. This
parcel is immediately north of the Oro Grande Wash which traverses the southern
portion of the site in a diagonal northeast/southwest direction. Assessor Parcel
Number 0477-541-03 is a 2.96 acre triangular site which is located on the north
side of Seneca Road, immediately south of the Oro Grande Wash. Assessor Parcel
Number 0477-541-02 is a 1.25 acre triangular site which is located immediately
north of the Oro Grande Wash, approximately 300 feet west of Hesperia Road.
According to Ms. Helen Wilson with the City of Victorville Engineering
Department (Phone No. 760-955-5135), the Oro Grande wash traverses over an
approximate 10,000 square foot section of the subject site at it's southeastern
section. The wash seperates the 2.96 acre triangular section of the subject
from the primary parcel. Based on our interviews with Ms. Wilson, the flood
channel section of the subject and it's cut-off triangular portion could be
utilized as open area, thus not restricting the density of developing. Within
this appraisal, we have explicitly assumed this to be true.
We also interviewed Mr. Dan Liudahl with the Victorville City Planning
Department. He informed us that if a developer planned to build single-family
residences, the allowable density of 5.0 units per acre would be based upon the
total gross acreage of 32 acres. The total number of units allowable would
therefore be "approximately" 160 units (32 acres x 5). The subject lots are
forecast to be 7,200 sf in typical pad size, as consistent with zoning and
market trends within the subject's area.
According to Ms. Wilson, a developer of the subject project would have to have
an engineer study to determine what velocity the wash has. If it was determined
to be low velocity, then rip-rap (i.e. rocks with concrete mixture as adhesive
utilized for siding on flood control channels) could most
-24-
<PAGE>
likely be installed. However if the velocity was higher, then a concrete
channel would likely have to be installed.
It need be noted that Mojave Road traverses the east side of the subject site.
However this road is a paper street (not yet existing) where it abuts the
subject, and is not a dedicated easement on the city's master circulation plan,
according to Ms. Wilson. Mojave Road may be vacated and never
improved.(4)
- ------------------
(4)Victorville Planning Department Phone Number (760-955-5135).
-25-
<PAGE>
PLAT MAP-SUBJECT PROPERTY
-26-
<PAGE>
TOPOGRAPHY & DRAINAGE
The property consists of 32 acres of unimproved raw land with varying terrain
and topography. Geographically, the land occupies a portion of three separate
parcels located immediately north of Seneca Road, to the west of Hesperia Road.
Approximately 75% of the land is characterized by slopes of less than 20
percent. Site drainage will be directed toward both on and off-site gutters
and the local flood control system which would have to be designed. (I.E. the
Oro Grande Wash). Drainage is assumed to be adequate.
As previously discussed, there is a wash which runs through the subject
property. This flood control channel, which is known as the Oro Grande Wash,
traverses across portions of the subject site. This is a necessary means of
diverting flood waters in the community and this channel is a necessity.
UTILITIES
The subject site has all utilities available to the parcel, including water to
the site. Sewer is presently located in Seneca Road to the south, according to
Helen Wilson at the Victorville City Engineering Office. Water mains are
located in Seneca and Hesperia Roads, with laterals needed.
FLOOD MAP/PANEL/ZONE/DATE
The community participates in the National Flood Insurance Program. The map
number is 06071 and the panel number is 5820. The property is located within a
flood zone AE, which would require flood insurance. The map is dated March 18,
1996. It is important to note that not all of the site is within the flood zone
AE and no specific maps were available to indicate the portion of the site which
is outside of the zone AE.
SOILS & GEOLOGY
No soils or environmental reports were uncovered or made available for the
appraiser's review. We explicitly assume that a soils report would not reveal
any unusual conditions and that there are no adverse soil conditions at the
subject site. We also assume that the subject's soils conditions will not
negatively affect the value of the subject property.
EASEMENTS & RESTRICTIONS
No title report reflecting the subject lots was made available for your
appraiser's review. Within this appraisal, it is explicitly assumed that the
only easements are normal street, utility and access
-27-
<PAGE>
easements which do not adversely affect the value of the subject property.
In our valuation analysis of the subject property, we have assumed that the
subject has clear and marketable title.
NUISANCES & HAZARDS
Based on a visual inspection of the subject site and the surrounding areas, the
subject site does not appear to be impacted with hazards or nuisances. The
subject site is reportedly located within a designated flood hazard area. It is
not located in a earthquake fault zone. No responsibility is assumed for any
expertise/knowledge in uncovering such hazard, and the client is urged to retain
an expert in this field, if desired.
ZONING
The subject is zoned (R-1). The single-family residential districts are intended
to protect established neighborhoods of single-family dwellings and to provide
space for suitable locations for additional developments with appropriate
community facilities. R-1 districts may be divided into several density
categories, and the suffix number shall indicate a minimum lot area in each
density class. Single family residential districts are intended to correlate
with the low density residential designation expressed by the general plan which
allows up to five dwelling units per gross residential acre.
Except as otherwise specified in the case of density classes, every building
site in an R-1 district shall have an area not less than seven thousand two
hundred square feet. The minimum width of a lot shall be 60 feet. The
following zoning constraints apply to the subject.
<TABLE>
<S> <C>
Minimum Lot Size: 7,200 SF
Front Yard Setback: 20 Feet
Rear Yard Setback: 20 Feet
Side Yard Setback: 5 Feet
Building Height: 2 1/2 stories or 35 feet
Lot Coverage: 50% of the total lot area
General Plan Overlay: R-1T - Conforming with the current zoning
Parking: 2 garage spaces per dwelling unit
</TABLE>
The subject property has a T, or transitional, overlay. The provisions of a
Transitional District (T) may be added to any other district. Basically, the
Transitional District standards are less restrictive than the provisions of the
district to which it is applied, allowing for broader uses within that district.
-28-
<PAGE>
STREETS & ACCESS
Seneca Road is an east/west street bordering the southern portion of the subject
site. The road is an asphalt paved road which is approximately 64 feet wide.
There are no concrete curbs, gutters, or sidewalks to the perimeter of the
subject site.
SUMMARY
The subject site is basically rectangular in configuration, currently in a raw
unmapped state, and would require substantial off-sites and earthwork in order
to develop. If developed, it could be developed with a single-family
subdivision with a maximum density of approximately 160 units. There is a wash
which runs through the subject property, known as the Oro Grande Wash.
-29-
<PAGE>
SUBJECT PHOTOGRAPHS
-30-
<PAGE>
View of the subject looking in a northwest direction.
View of the subject parcel looking in a southwest direction
-31-
<PAGE>
ASSESSED VALUATION AND TAXES
Real property taxes in California are limited to 1% of market value of the
property, as of a specified base year. The base year valuation is the 1975
Assessor's market value estimate, or market value indicated by a sale, or market
value based upon reappraisal of the property which is triggered by new
construction or long term leasing of the property. In addition to the taxes at
1% of the base year market value, there is an additional tax to amortize any
previous voter-approved bonded indebtedness. To provide for inflation, if there
is no sale, lease, or new construction, there is a maximum 2% per year increase
allowed in the assessed values assigned to land and improvements.
The subject's 1997/98 effective tax rate, inclusive of special assessments, is
reported to be approximately 1.301%. Tax rates in the subject area have
remained fairly constant over the past two years and are expected to remain
stable in the near future. The subject's tax rate is line with those at
competing sites.
The subject property currently has the following assessed values:
<TABLE>
<CAPTION>
ASSESSOR PARCEL NO ASSESSED/LAND ASSESSED BLDG. 1997/1998 TAXES
- ------------------ ------------- -------------- ---------------
<S> <C> <C> <C>
0477-541-01 $279,004 $0 $3,621
0477-541-02 $ 10,644 $0 $ 148
0477-541-03 $ 47,263 $0 $ 613
-------- -- ------
Total $336,911 $0 $4,382
</TABLE>
The property taxes are past due and delinquent in the amount of $36,440, as
indicated by the San Bernardino County Tax Assessor. Please note that this does
not include the 1997 tax year and the amount is good only until April 30, 1998.
Based upon the final "current" market value in the report, property taxes would
most likely remain the same if the property was sold. Within this valuation
analysis, we explicitly assume that taxes are current.
-32-
<PAGE>
HIGHEST AND BEST USE
The Highest and Best Use is that use which is most likely to produce the
greatest net return over a given period of time. Net return refers to the
residual left over from gross yield after all costs have been deducted. Only
those uses which are natural, probable, and legally permissible may be
considered tenable. Thus, Highest and Best Use may be defined as the available
use and program of future utilization that produces the highest present land
value.
We have investigated and analyzed the Highest and Best Use of the subject site
in regard to the following four considerations.
PHYSICALLY POSSIBLE
The physical characteristics of the subject site, such as its size, frontage,
topography, accessibility, and utility availability are sufficient for a variety
of uses. However, the subject is situated in a neighborhood which lends itself
to single-family development, as evidenced by similar type sites having been
improved with this usage within the neighborhood. Physically possible uses
would include residential and commercial uses.
LEGALLY PERMITTED
The subject site is zoned for single-family usage, which allows for
single-family dwellings. Commercial uses are not permitted. Therefore, of
the physically possible and legally permissible uses, residential is the most
likely.
ECONOMICALLY FEASIBLE
As previously discussed within the RESIDENTIAL MARKET OVERVIEW section of this
report, San Bernardino County reported a substantial increase in sales from the
4th Qtr. 1996 to the 4th Qtr. in 1997 and its inventory declined. Prices have
also increased over the past year, and the current profile of the regional
market is that of healthy supply & demand conditions. Unlike the regional
market, however, the subject's local market is demonstrating somewhat soft
market conditions, as so evidenced by the decrease in sales. However, prices
have increased and inventory (supply) is at a reasonable ratio with sales
(demand). Overall, the current forecast for the submarket is that of only
moderate supply & demand conditions.
The demand to live in Victorville is largely driven by prices, which are
significantly lower than more centrally located markets within the region.
However, with a recent population trend towards more central county areas, the
subject's area has experienced slower sales.
-33-
<PAGE>
Overall, based on our market investigations, it is our opinion that the most
economically feasible use would be to hold the subject site for future
single-family development.
CONCLUSION OF HIGHEST & BEST USE
After having applied the tests of availability, adaptability, and demand, we
have concluded that the highest and best use of the subject would be to hold the
site for future single-family development, or possibly develop it today.
-34-
<PAGE>
VALUATION METHODOLOGY
BASIS OF VALUATION
Valuation is based upon general and specific background experience, opinions of
qualified informed persons, consideration of all data gathered during the
investigative phase of the appraisal, and analysis of all market data available
to the appraiser.
VALUATION APPROACHES
Three basic approaches to value are available to the appraiser: the Cost
Approach, the Income Approach, and the Sales Comparison Approach.
COST APPROACH
This approach entails the preparation of a replacement or reproduction cost
estimate of the subject property improvements new and then deducting for losses
in value sustained through age, wear and tear, functionally obsolescent
features, and economic factors affecting the property.
The land value is then added to the depreciated cost and entrepreneurial profit
to arrive at a value estimate.
INCOME APPROACH
This approach is based upon the theory that the value of property tends to be
set by the expected net income to the owner. It is in effect the capitalization
of expected further income into present worth.
This approach requires an estimate of net income, an analysis of all expense
items, the selection of a capitalization technique, and the processing of the
net income stream into a value estimate.
SALES COMPARISON APPROACH
This approach is based upon the principle that the value of a property tends to
be set by the price at which comparable properties have recently been sold or
for which they can be acquired.
This approach requires a detailed comparison of sales of comparable properties
with the subject property. One of the main requisites, therefore, is that
sufficient transactions of comparable properties be available to provide an
accurate indicator of value and that accurate information regarding price,
terms, property description and use be obtained through interview and
observation.
-35-
<PAGE>
CONCLUSION
Since the subject property consists of vacant land, the Sales Comparison
Approach was utilized to estimate value on an all cash basis. This is one of
the most frequently utilized methods of valuing residential sites. Furthermore,
there were adequate direct land sales of similar sites which made the Sale
Comparison Approach a reliable indicator of value.
Since the subject consists of only land, neither the Cost or Income
Approaches to value were utilized. In addition to the Cost and Income
Approaches to value, there is also the Developmental Approach which is
frequently utilized by purchasers of development properties. The
Developmental Approach, or Discounted Cash Flow Analysis, involves the direct
comparison of a development's proposed housing units to similar product
selling within the market. In addressing value via this technique, various
selling & holding costs associated with the sell-out of the housing units are
deducted. The estimated net proceeds are then discounted to a present value.
However, since the subject has no tentative tract map or approvals, and since
no site completion costs, unit mix, floor/building plans, or unit completion
costs exist, this approach to value was not utilized.
We will commence with the November of 1992 valuation of the subject property via
the Sales Comparison Approach, followed by the March 1998 valuation.
-36-
<PAGE>
SALES COMPARISON APPROACH
GENERAL
The Sales Comparison Approach to Value consists of a comparison of the entire
property being appraised or various portions thereof with other similar
properties which have sold or which are offered for sale. The indication of
market value is the price at which an equally desirable property has recently
sold, or can be purchased in the open market. The value found by the study of
comparable sales yields market value directly in accordance with its legal
definition. This approach is based on the principle of substitution which
asserts that, when a property is replaceable, its value tends to be set by the
cost of acquisition of an equally desirable substitute property, assuming no
costly delay is encountered in making the substitutions.
VALUATION
A search of the San Bernardino County public records and a market investigation
were conducted in order to uncover sales of comparable sites with similar
highest & best uses. Our investigation uncovered several meaningful sales. A
summary sheet, location map, and sale data sheets followed by an analysis of the
sales and a conclusion of value for the subject's respective dates of value are
presented forthcoming.
We will commence with the November 1992 valuation of the subject followed by
it's March 1998 valuation.
-37-
<PAGE>
VALUATION DATE NOVEMBER 4, 1992
<TABLE>
<CAPTION>
DATA NO. SALE NO. OF LOTS "AS-IS"
LOCATION DATE TYPICAL PAD SIZE PRICE PER LOT
- -------- ---- ---------------- -------------
<S> <C> <C> <C>
LAND SALE 1 3/92 148 Lots $12,000
NEC Northstar & 7,200 sf
Petaluma Rd.
Victorville, CA
LAND SALE 2 12/91 59 Lots $13,000
SWC Mojave Dr & 7,200 sf
Amethyst Rd.
Victorville, CA
LAND SALE 3 12/91 157 Lots $15,000
SEC La Mesa & 6,000 sf
Mesa Linda Rds.
Victorville, CA
LAND SALE 4 2/92 148 Lots $9,000
E side of Cobalt 7,200 sf
Between Mojave & Hook
Victorville, CA
</TABLE>
-38-
<PAGE>
LOCATION MAP - SALES NO.1 THROUGH 4
NOVEMBER 4, 1992 - DATE OF VALUE
-39-
<PAGE>
SALE ONE
<TABLE>
<CAPTION>
<S> <C>
Location: Northeast corner of Northstar Ave. And Petaluma Road
City: Victorville
Grantor/Seller: Costain Home
Grantee/Buyer: Acacia Construction
Sale Date: March 27, 1992
Document No. 131994
Sale Price/Consideration: $1,776,000
Price Per Lot: $12,000
Terms: Specific terms were not disclosed. However, paper
was carried back by the seller.
Time on Market: 1 year
Escrow Period: 90 days
Number of Lots: 148 Lots
Zoning: R1 - 7,200 minimum square foot lots
Approvals: Final map
Typical Pad: 7,200 SF
Topography: Level
Utilities: All are to the site area
Verification: Gene Fuller, VP Land Acquisitions, Acacia
Constructions (714))-282-5800
Bob Wells, VP Land Acquisition Costain Homes
(714)-760-1455
</TABLE>
-40-
<PAGE>
SALE TWO
<TABLE>
<S> <C>
Location: SouthWest corner Mojave Drive and Amethyst Road.
City: Victorville
Grantor/Seller: Sterling Builders
Grantee/Buyer: WDS Development
Sale Date: December 27,1991
Document No. Not Available
Sale Price/Consideration: $767,000
Price Per Lot: $13,000
Terms: Specific terms were not disclosed. However, paper
was carried back by the seller.
Time on Market: N/A
Escrow Period: N/A
Number of Lots: 59 Lots
Zoning: R1 - 7,200 minimum square foot lots
Approvals: Final map
Typical Pad: 7,200 SF
Topography: Level
Utilities: All are to the site area
Verification: Roger Wilson, VP Land Acquisition, WDS Development
(714)-625-2473
Joe Sebelia, Selling broker (714) 683-3600
</TABLE>
-41-
<PAGE>
SALE THREE
<TABLE>
<S> <C>
Location: SouthEast Corner of La Mesa Linda Roads
City: Victorville
Grantor/Seller: Inco Homes
Grantee/Buyer: Van Daele Development
Sale Date: December 4, 1991
Document No. 458694
Sale Price/Consideration: $2,355,000
Price Per Lot: $15,000
Terms: Seller to receive 50% down less deposit and carry
back remainder at 10% interest
Time on Market: 3-4 months
Escrow Period: 180 days
Number of Lots: 157 Lots
Zoning: R1 - 6,000 minimum square foot lots
Approvals: Final map
Typical Pad: 6,000 SF
Topography: Level
Utilities: All are to the site area
Verification: Steve Ludwig, VP Land Development, Inco Homes
(714)-981-8989
Steven King, Project Manager, Van Daele Development
(714)-354-2121
</TABLE>
-42-
<PAGE>
SALE FOUR
<TABLE>
<S> <C>
Location: East side of Cobalt Road between Mojave Drive and
Hook Boulevard.
City: Victorville
Grantor/Seller: Guardian Savings
Grantee/Buyer: Mojave 148 LTD
Sale Date: February 14,1992
Document No. Not Available
Sale Price/Consideration: $1,332,000
Price Per Lot: $9,000
Terms: All Cash
Time on Market: N/A
Escrow Period: N/A
Number of Lots: 148 Lots
Zoning: R1 - 7,200 minimum square foot lots
Approvals: Approved Tentative
Typical Pad: 7,200 SF
Topography: Level
Utilities: All are to the site area
Verification: Scott Lisks, Broker
(714)-824-0477
</TABLE>
-43-
<PAGE>
ANALYSIS OF THE SALES
The unit of comparison utilized within this analysis is the price per lot which
is one of the most frequently utilized by purchasers of similar sites.
Adjustments to the comparables were considered for financing, condition of sale,
date of sale, location, project/development size, typical pad size, topography,
views, Offsites, Entitlements, and other factors such as site configuration &
utility.
Adjustments to the sales were based on analysis of the subject data set to
establish matched pair adjustments, from our past appraisal experience with
similar subdivision land data sets, interviews with developers and land brokers
active in the market, and general market and economic trends.
A discussion of the various adjustments considered is a follows:
FINANCING
Typically when seller carried financing is part of a sale transaction, it is
considered to be beneficial to the buyer, since it enables ownership with a
lower degree of capital outlay. Although a buyer may be able to achieve market
financing, the terms of the seller financing are frequently favorable and
granted by a party who is partial to the transaction. Factors that need be
examined are loan to value (LTV), interest rate, term and loan expedition.
Historic Sale No.1 involved the seller carrying back paper. Specific terms on
Historic Sale No.1 were not disclosed as they were confidential, but the
verifying party (Mr. Bob Wells) did indicate that the terms were cash
equivalent. Accordingly, no adjustment was made. Historic Sale No.2 also
involved the seller carrying back paper. Specific terms on Historic Sale No.2
were also not disclosed as they were also confidential, but according to the
verifying party (Mr. Joe Sebelia), the terms were effectively cash equivalent.
In Historic Sale No.3, the seller received 50% down less deposit and carried
back the remainder at 10% interest only. At the date of sale, the interest rate
and loan to value rate were at a market level and no adjustment was warranted.
Historic Sale 4 and all of the Current Sales were all cash transactions and no
adjustments were therefore applied, respectively.
CONDITION OF SALE
Historic Sales No.1, 2, 3, and Current Sales Nos. 1 through 5 were all
arms-length transactions between buyer & seller which sold at fair-market
prices. Consequently, no adjustments will therefore be applied for condition
of sale. However, Historic Land Sale No. 4 was a transaction which was sold
by Guardian Savings and Loan. According to the verifying party, Mr. Scott
Lisk, the property sold below market. A 20% upward adjustment was reasonably
estimated and applied for this factor.
-44-
<PAGE>
DATE OF SALE
In estimating time adjustments, we have made various comparisons within the data
set to in order to establish a difference attributable to date of sale. We have
also made various paired sales comparisons similar market sales not included in
the data set. Our research has indicated that over the past 12 months there has
been only moderate appreciation in prices. In determining time adjustments, we
have also considered changes in housing prices and overall market trends as
previously discussed within the RESIDENTIAL MARKET OVERVIEW section of this
report. Secondary sources, such as opinions of area developers and builders,
have also been considered.
When applying this adjustment for the historic date of valuation, periods prior
to November of 1992 were from superior markets as the market was declining, and
warranted downward adjustments. Sales 2, 3, and 4 all required downward
adjustments. Only one of the current sales (Sale 5) required a slight 3%
adjustment to account for difference in date of sale.
LOCATION
Location adjustments were considered for the sales. Consideration was given to
surrounding land uses, home prices, sales volumes, area amenities such as
schools, retail & recreational facilities, local & regional access, highway
proximity and overall residential appeal.
Historic Sale Nos. 1 and 3, and Current Sales Nos. 1, 2, and 3 were all found to
be relatively similar in regards to location, and no adjustments will therefore
be applied, respectively. However, Historic Sale Nos. 2 and 4 and Current Sales
Nos. 4 and 5 were all found to be situated in superior, more established
neighborhoods which are better served via amenities and surrounding
infrastructure.
After having made various comparisons within the data set in order to estimate
differences attributable to location, and considering the value impact on the
final product and correlating this difference to a purchase of land in bulk, and
based on our past appraisal experience with similar land sale data sets, we have
estimated and applied downward adjustments at the 5% level in order to account
for differences in location, when warranted.
PROJECT SIZE
Inclusive of both Land Sale Data Sets utilized for the 1992 and 1998 dates of
values, the sale comparables range in total lots sold from 43-to-1,686. The
subject consists of possibly 160 lots.
In development properties, such as the subject, discounts for large size
purchasers are sometimes granted. However, based upon our various parid sales
comparisons made within the submitted data sets, and based upon our market
investigations, there was found to be no significant differences due
-45-
<PAGE>
to project size within the submitted data sets. Further support of this
conclusion is provided in the March 1998 sale of 787 lots to 2 builders
within masterplan community of Fairfield Ranch, Chino Hills, California.
Additionally, 1,228 lots are currently being purchased by one builder within
the masterplan community of Corona Farms, Riverside County, California.
Based upon our interviews with the buying entities involved in these
transactions, the prices being paid are effectively the same "per lot" as
would be paid for a smaller 100 plus or minus lot tract.
Overall, the subject was found to be effectively similar to the comparables
relative to Project Size and no adjustments will therefore be applied.
TYPICAL PAD SIZE
The comparables range in typical pad size from 4,000 to 7,200 SF. The subject
development, at it's highest and best use, has been estimated to have an average
pad size of 7,200 SF which will be utilized for comparisons. Larger pads almost
always sell for more than smaller ones in balanced markets, assuming all other
factors are similar. The opposite relationship exists for smaller size pads.
Based upon our analysis of the data set to establish matched pair adjustments,
from our past appraisal experience with similar subdivision land data sets, and
considering the value impact on the final product and correlating this
difference to a purchase of land in bulk, it is our opinion that adjustments
ranging from 5% to 10% be applied for differences in pad size, depending on the
magnitude of the difference.
TOPOGRAPHY
The subject has sloping topography. However, all of the sale comparables have
superior level topography. The subject's rolling topography was found to be an
inferior factor due to higher grading and development costs involved in
preparing the site for housing development.
Overall, based upon our analysis of the data set, we have estimated and applied
downward adjustments of 5% to account for differences relative to this factor.
VIEWS
Sales that have a higher ratio of lots with views typically sell for a higher
price, assuming all other factors are similar. This is attributable to the
higher premiums achievable on the final product. In order to account for
differences in views, the subject's intensity of views will need be compared
with those of the comparables.
-46-
<PAGE>
As discussed within The Land section of this appraisal, the subject lots will
provide for some views. However, none of the comparables were found to provide
for views. Consequently, the subject is sightly superior and the datas need be
adjusted upwards. Slight adjustments of 3% were considered reasonable for this
factor.
OFFSITES
This adjustment category accounts for the degree of utilities available to the
site at time of sale as well as its development status. That is, site which
were superior relative to utility availability and infrastructure development
will received downward adjustments. If a site was found to be superior, it
would require less costs to reach finished lot basis. As such, this category
considered the intensity of construction that need be made in order to reach a
finished lot condition.
Historic Sale Nos. 1 through 4 were all in similar states of development,
requiring all offsites. Therefore no adjustment were made, respectively.
However, Current Land Sale No.1 was graded with storm drains installed and
utilities at the boundary of the site, warranting a downward adjustment. Based
upon our analysis of the data set to establish matched pair adjustments, and
from our past appraisal experience with similar subdivision land data sets, we
have estimated and applied an adjustment of 10% to current Sale No.1 which was
found to be slightly superior in this regard. The remaining Current Sales were
found similar in this regard and no adjustments were therefore applied.
ENTITLEMENTS
This adjustment category accounts for approvals at time of sale. The subject
does not have any approvals and represents land with only zoning, and all of the
sales were found to be superior in this regard as they had either approved
tentative tract maps or final maps which significantly increases value. If a
site was found to be superior, it would require less costs to reach a finished
lot basis, and would therefore require to be adjusted downward.
Based upon our analysis of the data set to establish matched pair adjustments,
and from our past appraisal experience with similar subdivision land data sets,
we have estimated and applied adjustments ranging from 10% to 20% to compensate
for this factor.
OTHER FACTORS
This category accounts for such factors as site configuration and overall
functional utility. The submitted sales were found to be fairly similar in
these regards and no adjustments have therefore been applied.
-47-
<PAGE>
DISCUSSION OF COMPARABLE SALES
DATE OF VALUATION NOVEMBER 4, 1992
SALE NO. 1 included seller carried financing. However, based upon our
analysis of the financing and our interview with the verifying party, the
financing did not measurably impact the price paid. Consequently, no
adjustment was applied. This property is fairly similar relative to date of
sale, location, and typical pad size, respectively. Although similar in
overall project size, this property has level topography as opposed to the
subject's sloping topography and a downward adjustment is therefore
indicated. Due to its having an inferior degree of views, slight upward
adjustment is made. This property was in a similar state of development at
the time of sale. However, it sold with a final map and a downward adjustment
is warranted. It is fairly similar in regards to most other factors.
SALE NO. 2 also included seller carried financing. However, the financing
did not measurably impact the price paid. Consequently, no adjustment was
applied. This property is superior relative to date of sale, as it sold in a
superior market, and a downward adjustment is therefore applied. It is
slightly superior in location as it is very close to the Brentwood
master-planned community, and we have applied a further downward adjustment.
It is similar in regards to typical pad size. Although similar in overall
project size, this property has level topography as opposed to the subject's
sloping topography and a downward adjustment is therefore indicated. Due to
its having an inferior degree of views, and upward adjustment is made. This
property was in a similar state of development at the time of sale. However,
it sold with a final map in place and a further downward adjustment is
applied. It is fairly similar in regards to most other factors.
SALE NO. 3 included seller carried financing. However, based upon our
analysis of the financing and our interview with the verifying party, the
financing did not measurably impact the price paid. Consequently, no
adjustment was applied. This property is superior relative to date of sale,
as it sold in a superior market and a downward adjustment is therefore
applied. This property is fairly similar relative to location. However, the
typical pad size is inferior in comparison to the subject, warranting an
upward adjustment. Although similar in overall project size, this property
has level topography and a downward adjustment is applied. Due to its having
an inferior degree of views, a slight upward adjustment is made. This
property was in a similar state of development at the time of sale. However,
it sold with a final map and a further downward adjustment is warranted.
SALE NO. 4 was an all cash sale. However, the transaction was an REO sale
sold by Guardian Bank, and an upward Condition of Sale adjustment has been
applied. This property is slightly superior relative to date of sale as it
sold in a superior market, and a downward adjustment has therefore been
applied. It is superior in location, as it is very close to the Brentwood
master-planned community, and we have therefore applied a further downward
adjustment. The typical pad size is similar in comparison to the subject.
Although similar in overall project size, this property has level topography
and a downward adjustment is indicated. Due to its having an inferior degree
of views, a slight upward adjustment is made. This property was in a similar
state of development at the time
-48-
<PAGE>
of sale. However, it sold with an approved tentative tract map in place and a
downward adjustment is therefore applied. It is fairly similar in regards to
most other factors.
The adjustments for the preceding noted factors are summarized on the
following adjustment grid.
-49-
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
LAND SALE ADJUSTMENT GRID-NOV 4, 1992 VALUE
32.19 ACRES RESIDENTIAL LAND
VICTORVILLE, CA
- -------------------------------------------------------------------------------------------------------------------------------
DATA Sale Price Financing Sub Cond Of Sub Date of Sub Location Project
No. LOCATION $/Lot Total Sale Total Sale Total Size
- -------------------------------------------------------------------------------------------------------------------------------
<C><S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NEC of Northstar Ave and
1 Petaluma Road
Victorville, CA $12,000 0% $12,000 0% $12,000 0.0% $12,000 0% 0%
- -------------------------------------------------------------------------------------------------------------------------------
2 SW Cnr Mojave & Amethyst Rd.
Victorville, CA $13,000 0% $13,000 0% $13,000 -5.0% $12,350 -5% 0%
- -------------------------------------------------------------------------------------------------------------------------------
3 SE Cnr of La Mesa & Linda Rds
Victorville, CA $15,000 0% $15,000 0% $15,000 -5.0% $14,250 0% 0%
- -------------------------------------------------------------------------------------------------------------------------------
East Side of Cobalt Road
4 Between Mojave & Hook
Victorville $9,000 0% $9,000 20% $10,800 -3.0% $10,476 -5% 0%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Typical
DATA Pad Topography Views Offsites Entitle- Other TOTAL ADJUSTED
No. LOCATION Size ments Factors ADJ. $/Lot
- -------------------------------------------------------------------------------------------------------------------------------
NEC of Northstar Ave and
1 Petaluma Road
Victorville, CA 0% -5% 3% 0% -20% 0% -22% $9,360
- -------------------------------------------------------------------------------------------------------------------------------
2 SW Cnr Mojave & Amethyst Rd.
Victorville, CA 0% -5% 3% 0% -20% 0% -27% $9,016
- -------------------------------------------------------------------------------------------------------------------------------
3 SE Cnr of La Mesa & Linda Rds
Victorville, CA 5% -5% 3% 0% -20% 0% -17% $11,828
- -------------------------------------------------------------------------------------------------------------------------------
East Side of Cobalt Road
4 Between Mojave & Hook
Victorville 0% -5% 3% 0% -20% 0% -27% $7,647
- -------------------------------------------------------------------------------------------------------------------------------
Unadjusted $/Unit $9,000 to $15,000 CONCLUDED $/UNIT
Adjusted $/Unit $7,647 to $11,828 CONCLUDED VALUE: $10,000 X 100 = $1,000,000
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONCLUSION- MARKET VALUE AS OF NOVEMBER 4, 1992
Prior to adjustments, the prices per unit ranged from $9,000 to $15,000.
After applying the foregoing adjustments to Land Sale Nos. 1 through 4, a
price per unit of $7,647 to $11,828 came into focus. Sale Numbers 1 and 3
were given primary consideration, for they were found to be the most similar,
thus best indicators of value.
Overall, based on the preceding analysis, we have reasonably concluded a unit
value of $10,000 per lot for the subject. THIS EQUATES TO A VALUE OF
APPROXIMATELY $1,600,000 (160 units x $10,000 per unit).
-51-
<PAGE>
VALUATION DATE MARCH 1998
<TABLE>
<CAPTION>
DATA NO. SALE NO. OF LOTS "AS-IS"
LOCATION DATE TYPICAL PAD SIZE PRICE PER LOT
- ---------- ---- ---------------- -------------
<S> <C> <C> <C>
LAND SALE 1 03/98 185 Lots $5,000
S of Hook Blvd. Escrow 7,200 sf
at Indian Wells
Victorville, CA
LAND SALE 2 03/98 43 Lots $4,000
Cnr of Hook & Escrow 6,000 sf
Rosemary
Victorville, CA
LAND SALE 3 03/98 193 Lots $4,000
South of Hook Dr Escrow 4,000 sf
at Karen Drive
Victorville, CA
LAND SALE 4 01/98 1,686 Lots $1,483
Between Amethyst Rd. 6,000 sf
& El Evado Rd.,
N of Seneca Rd.
Victorville, CA
LAND SALE 5 10/97 440 Lots $2,400
Between Amethyst Rd. 7,200 sf
& El Evado Rd.
N of Seneca Rd.
Victorville, CA
</TABLE>
-52-
<PAGE>
LOCATION MAP - SALES NO.1 THROUGH 5
MARCH 31, 1998 DATE OF VALUE
[MAP]
-53-
<PAGE>
<TABLE>
<CAPTION>
SALE ONE
- --------
<C> <S>
Location: South of Hook Boulevard, at Indian Wells Drive
City: Victorville
Grantor/Seller: Seyen Investments
Grantee/Buyer: Confidential
Sale Date: 03/98 Escrow
Document No. N/A
Sale Price/Consideration: $925,000
Sale Price/$Lot: $5,000
Time on Market: 1 year
Terms: All cash
Escrow Period: 120 days
Number of Lots: 185 Lots
Zoning: R1, Victorville
Approvals: Approved Tentative Map
Typical Pad: 7,200 SF
Topography: Level
Utilities: All are to the site
Verification: Bill Korek @ Korek Land Company
(818)-905-1450
-54-
<PAGE>
<CAPTION>
SALE TWO
- --------
<C> <S>
Location: Corner of Hook Boulevard and Rosemary Drive
City: Victorville
Grantor/Seller: Seyen Investments
Grantee/Buyer: Confidential
Sale Date: 03/98 Escrow
Document No. N/A
Sale Price/Consideration: $ 172,000
Sale Price/$Lot: $4,000
Time on Market: 1 year
Terms: All cash
Escrow Period: 120 days
Number of Lots: 43 Lots
Zoning: R1, Victorville
Approvals: Approved Tentative Map
Typical Pad: 6,000 sf
Topography: Level
Utilities: All are to the site
Verification: Bill Korek @ Korek Land Company
(818)-905-1450
-55-
<PAGE>
<CAPTION>
SALE THREE
- ----------
<C> <S>
Location: South of Hook at Karen Drive
City: Victorville
Grantor/Seller: Seyen Investments
Grantee/Buyer: Confidential
Sale Date: 03/98 Escrow
Document No. N/A
Sale Price/Consideration: $772,000
Sale Price/$Lot: $4,000
Time on Market: 1 year
Terms: All cash
Escrow Period: 120 days
Number of Lots: 193 Lots
Zoning: R1, Victorville
Approvals: Approved Tentative Map
Typical Pad: 4,000 sf
Topography: Level
Utilities: All are to the site
Verification: Bill Korek @ Korek Land Company
(818)-905-1450
-56-
<PAGE>
<CAPTION>
SALE FOUR
- ---------
<C> <S>
Location: East of Amethyst Road, West of El Evado Road, North of Seneca Road
City: Victorville
Grantor/Seller: Pacific Bay Homes
Grantee/Buyer: Highpointe Communities
Sale Date: January 30,1998
Document No.: 98-343503
Sale Price/Consideration: $2,500,000
Sale Price/$Lot: $1,483/Lot
Time on Market: 18 Months
Terms: All Cash
Escrow Period: 150 days
Number of Lots: 1,686 Lots
Zoning: R-1,Victorville
Approvals: Tentative Map
Typical Pad: 6,000 SF
Topography: Level
Utilities: All are to the site
Verification: Will Pruett at Odonnel Atkins In Newport Beach
(714)-966-1394
-57-
<PAGE>
<CAPTION>
SALE FIVE
- ---------
<C> <S>
Location: East of Amethyst Road, West of El Evado Road, North of Seneca Road
City: Victorville
Grantor/Seller: TMP Inland-Empire
Grantee/Buyer: Stowe Communities
Sale Date: October 28, 1997
Document No.: 97-394135
Sale Price/Consideration: $1,056,000
Sale Price/$ Lot: $2,400
Time on Market: 12 Months
Terms: All Cash
Escrow Period: 150 days
Number of Lots: 440 Lots
Zoning: R-1,Victorville
Approvals: Tentative Map
Typical Pad: 7,200 SF
Topography: Level
Utilities: All are to the site
Verification: Will Pruett at Odonnel Atkins In Newport Beach
(714)-966-1394
</TABLE>
-58-
<PAGE>
DISCUSSION OF COMPARABLE SALES
DATE OF VALUATION MARCH 31, 1998
SALE NO. 1 is an all cash sale (escrow). This property is similar relative to
date of sale, location, overall project size, and it has a similar typical pad
size. However, this property has level topography as opposed to the subject's
sloping topography and a downward adjustment is therefore indicated. Due to its
having an inferior degree of views, a slight upward adjustment is made. This
property was in a higher state of development at the time of sale and a downward
adjustment is applied for superior infrastructure status. Furthermore, it sold
with an approved tentative tract map in place and a further downward adjustment
is applied. It is fairly similar in regards to most other factors.
SALE NO. 2 is an all cash sale (escrow). This property is similar relative to
date of sale, location, and in overall project size. However, it has a smaller
typical pad size and an upward adjustment is therefore applied. This property
has level topography as opposed to the subject's sloping topography and a
downward adjustment is indicated. Due to its having an inferior degree of
views, a further upward adjustment is made. Is is similar regarding offsites.
However, it sold with an approved tentative tract-map and a downward adjustment
is therefore warranted. It is fairly similar in regards to most other factors.
SALE NO. 3 is an all cash sale (escrow) and is similar relative to date of sale.
It is similar relative to location and project size. However, this sale had
inferior pad size of 4,000 square feet for which we adjusted upwards. It has
level topography and a downward adjustment is therefore indicated. Due to its
having an inferior degree of views, an upward adjustment is made. It was
similar relative to state of development. However, it sold with an approved
tentative tract map in place and a downward adjustment is warranted. It is
fairly similar in regards to most other factors.
SALE NO. 4 was an all cash sale. This property is similar relative to date of
sale. However, it has a superior location, for it is located within the
Brentwood Master-planned community, warranting a downward adjustment. The
project was large in size, however, as previously discussed, it is our opinion
that project size adjustments are not warranted. This sale has inferior pad
sizes of 6,000 square feet for which we adjusted upwards. It has level
topography and a downward adjustment is indicated. Due to its having an
inferior degree of views, a slight upward adjustment is made. Although fairly
similar in regard to infrastructure status, this property was superior in
entitlements and a downward adjustment is applied. It is fairly similar in
regards to most other aspects.
SALE NO. 5 was also an all cash sale. This property is slightly inferior
relative to date of sale and we have applied a slight upward adjustment. It has
a superior location, as it is located within the Brentwood Master-planned
community, warranting a downward adjustment. It is similar in regards to
overall project size and typical pad size. However, it has level topography as
opposed to the subject's sloping topography and a downward adjustment is made.
Due to its having an inferior
-59-
<PAGE>
degree of views, a slight upward adjustment is made. It is similar in
regards to infrastructure status. However, it sold with a tentative tract
map in place and a downward adjustment is applied. It is fairly similar in
regards to most other factors.
The adjustments for the preceding noted factors are summarized on the following
adjustment grid.
-60-
<PAGE>
LAND SALE ADJUSTMENT GRID - MARCH 31, 1998 DATE OF VALUE
32.19 ACRES RESIDENTIAL LAND
VICTORVILLE, CA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Typical
DATA Sale Price Financing Sub Cond Of Sub Date of Sub Location Project Pad
No. LOCATION $/Lot Total Sale Total Sale Total Size Size
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 S of Hook at Indian Wells
Victorville, CA $5,000 0% $5,000 0% $5,000 0.0% $5,000 0% 0% 0%
- ---------------------------------------------------------------------------------------------------------------------------------
2 Cnr of Hook & Rosemary
Victorville, CA $4,000 0% $4,000 0% $4,000 0.0% $4,000 0% 0% 5%
- ---------------------------------------------------------------------------------------------------------------------------------
3 South of Hook Drive at Karen Dr
Victorville, CA $4,000 0% $4,000 0% $4,000 0.0% $4,000 0% 0% 10%
- ---------------------------------------------------------------------------------------------------------------------------------
4 Between Amethyst Rd. &
El Evado Rd., N of Seneca Rd.
Victorville, CA $1,483 0% $1,483 0% $1,483 0.0% $1,483 -5% 0% 5%
- ---------------------------------------------------------------------------------------------------------------------------------
5 Between Amethyst Rd. &
El Evado Rd., N of Seneca Rd.
Victorville, CA $2,400 0% $2,400 0% $2,400 3.0% $2,472 -5% 0% 0%
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
DATA Topography Views Offsites Entitlements Other TOTAL ADJUSTED
No. LOCATION Factors ADJ. $/Lot
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 S of Hook at Indian Wells
Victorville, CA -5% 3% -10% -20% 0% -32% $3,400
- -----------------------------------------------------------------------------------------------------------
2 Cnr of Hook & Rosemary
Victorville, CA -5% 3% 0% -20% 0% -17% $3,320
- -----------------------------------------------------------------------------------------------------------
3 South of Hook Drive at Karen Dr
Victorville, CA -5% 3% 0% -20% 0% -12% $3,520
- -----------------------------------------------------------------------------------------------------------
4 Between Amethyst Rd. &
El Evado Rd., N of Seneca Rd.
Victorville, CA -5% 3% 0% -10% 0% -12% $1,305
- -----------------------------------------------------------------------------------------------------------
5 Between Amethyst Rd. &
El Evado Rd., N of Seneca Rd.
Victorville, CA -5% 3% 0% -10% 0% -17% $2,052
- -----------------------------------------------------------------------------------------------------------
Unadjusted $/Unit $1,483 to $11,482 CONCLUDED $/UNIT
Adjusted $/Unit $1,305 to $3,520 CONCLUDED VALUE $2,000 x 180 = $320,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
-61-
<PAGE>
CONCLUSION - MARKET VALUE AS OF MARCH 31, 1998
Prior to adjustments, the prices per unit ranged from $1,483 to $5,000. After
applying the foregoing adjustments to Sales No. 1 through 5, a price per unit
of $1,305 to $3,520 came into focus. Due to it's similar characteristics,
Comparable No.5 was considered to be the best indicator of value, and was thus
given primary consideration in our analysis.
Overall, based on the preceding analysis, we have reasonably concluded a unit
value of $2,000 per lot for the subject. THIS EQUATES TO A VALUE OF
APPROXIMATELY $320,000 (160 units x $2,000 per unit).
-62-
<PAGE>
VALUATION
Based on the investigations undertaken, the analyses made, and on our experience
as a real estate analysts and appraisers, we have formed the opinions, and
subject to the Assumptions and Limiting Conditions set forth within this report,
that the subject property has market value estimates as follows:
MARKET VALUE, AS OF NOVEMBER 4, 1992
ONE MILLION SIX HUNDRED THOUSAND DOLLARS
$1,600,000
MARKET VALUE, AS OF MARCH 31, 1998
THREE HUNDRED TWENTY THOUSAND DOLLARS
$ 320,000
EXPOSURE PERIOD
Our research regarding the current exposure period for the subject property
consisted of an analysis of the submitted sale comparables and interviews with
area real estate brokers. The surveyed sales were found to range from 3-18
months. A review of additional sale data has indicated ranges typically at the
10-to-12 month level.
Based upon this research, we have concluded to a exposure period 10-to-12 months
for the subject, which is the same as its Marketing Period.
DISCUSSION OF THE CONCLUDED VALUES
The subject's current value is significantly lower than its historic value.
Although the region's economy has improved over the past several years, and
although real estate prices in most Southern California markets have increased,
real estate prices within the subject's High Desert area have not responded yet
to the improved economy. This is evidenced by the Sale Comparables submitted
for analysis within this report.
Factors creating this trend include the High Desert being a secondary location
within the Los Angeles Basin. The High Desert area is a relatively remote
location as compared with most other sub-regions within the basin, and is
situated relatively far from the region's CBD, as well as other major employment
centers. Additionally, the area proposes physical challenges due to its hot, dry
desert
-63-
<PAGE>
climate with summer month temperatures frequently exceeding 100 degrees.
As the economy has improved over the past 3 years, there has been a population
trend towards more centrally located markets where higher paying jobs are
provided. It is these factors combined, which have held down real estate prices
within the subject's market.
In conclusion, relative to more centrally located real estate markets, which
have appreciated over the past 6-to-24 months, the subject is situated within a
secondary market where prices have remained soft. This holds particularly true
for vacant land, of which there is an abundance in the high desert region.
However, the current forecast is that of increasing prices within the subject's
market area.
-64-
<PAGE>
ADDENDA
<PAGE>
QUALIFICATIONS OF APPRAISERS
<PAGE>
QUALIFICATIONS OF
DAVID J. LIKAS, MAI
PROFESSIONAL BACKGROUND
Actively engaged in the real estate profession since 1983. Principal of Likas &
Associates, a real estate appraisal firm with offices located at:
20101 SW BIRCH STREET, SUITE 150B
NEWPORT BEACH, CA 92660
Before starting Likas & Associates, Mr. Likas was employed as Senior Appraiser
at Pacific Real Estate Consultants, Newport Beach, California. Prior to that,
was employed as associate appraiser with Joseph J. Blake and Associates, San
Francisco, California. Additional real estate experience includes three years
of mortgage banking with Citicorp Savings and First Interstate Mortgage Company,
Orange County, California.
PROFESSIONAL AFFILIATIONS
Member of the Appraisal Institute, with MAI designation (No. 8807).
LICENSES
Certified General Real Estate Appraiser, State of California Office of Real
Estate Appraisers (No. AG003694).
EDUCATIONAL ACTIVITIES
University of Southern California, Los Angeles, California. B.S., Business
Administration, 1983.
Courses sponsored by the Appraisal Institute:
Course 1A-1 Real Estate Appraisal Principals
Course 1A-2 Basic Valuation Procedures
Course 1B-A Capitalization Theory and Techniques, Part A
Course 1B-B Capitalization Theory and Techniques, Part B
Course 2-1 Case Studies in Real Estate Valuation
Course 2-2 Valuation Analysis and Report Writing
Course S-PP Standards of Professional Practice
Numerous seminars and courses on real estate appraisal and other related topics
on a continuing basis.
<PAGE>
SCOPE OF EXPERIENCE
VACANT LAND
Single-family residential sites, multi-family residential sites, commercial and
industrial sites, acreage, master planned communities.
RESIDENTIAL
Residential subdivisions, single-family residences, apartments, condominiums,
planned unit developments.
COMMERCIAL
Shopping centers, retail stores, general office buildings, medical office
buildings, office and retail condominiums, car dealerships.
INDUSTRIAL
Single and multi-tenant warehouses and manufacturing buildings, distribution
buildings, business parks, R & D buildings, mini-warehouses.
SPECIAL PURPOSES
Hotels, master planned communities, dormitories, senior housing facilities,
bowling alleys, health clubs, marinas, timeshares, restaurants, theaters,
churches, schools, mixed-use developments, and condemnation appraisals.
<PAGE>
QUALIFICATIONS OF NOBLE R.TUCKER JR., SRA
EXPERIENCE
Mr. Tucker has extensive experience in appraisal and consulting projects
consisting of investment-quality office buildings, shopping centers,
industrial planned communities, residential subdivisions, multi-family
housing, single family homes, and vacant land throughout the Southwestern
United States. Mr. Tucker is also an expert in the valuation of
businesses.
Mr. Tucker has performed valuations on proposed, partially completed,
renovated, and existing structures. Mr. Tucker has qualified as an expert
witness before various judicial and quasi-judicial bodies and has testified
in Superior Court, Bankruptcy Court, and Municipal Court, on matters
involving real estate in civil cases.
A large portion of Mr. Tucker's real estate appraisal experience involves
real estate and business consulting. Mr. Tucker also assists clients in
attaining real estate and business related financing through debt
offerings. In addition he assists clients in equity financing through
public offerings and private placements, debt offerings, loans, mergers
acquisitions and divestitures, accounts receivable financing, factoring,
lease/buy-back financing, real estate portfolio sales assistance. Mr.
Tucker has been involved in negotiations regarding real estate portfolios
in excess of $125,000,000.
PREVIOUS EXPERIENCE
Prior to working for Likas and Associates, Mr. Tucker was Chief Appraiser
at Traditional Mortgage in Woodland Hills, California. Duties included
overseeing major loan appraisals on apartments and high dollar single
family residences (1984-1985).
From 1980-1996 Mr.Tucker was an independent fee appraiser working for firms
such as Steve Smith and Associates in Canoga Park, Kennedy Appraisal
Service in Los Angeles, Chua Bailey and Associates in Glendale, Southland
Appraisal Services in Anaheim, Lenders Technology Service in Santa Ana,
Lenders Service in Pittsburgh, and several other firms.
Prior to working the Real Estate Appraisal Profession Mr. Tucker was
involved in the construction industry. From 1975 to 1980 duties included
project management, sales, job-site supervision, and construction
superintendent.
PROFESSIONAL ASSOCIATIONS
S.R.A. Designated member of The Appraisal Institute. Designated in August
of 1991 Member #549981735.
PROFESSIONAL AFFILIATIONS
MAI Candidate with The Appraisal Institute.
STATE LICENSES/CERTIFICATIONS
CERTIFIED GENERAL REAL ESTATE APPRAISER with the State of California. This
allows Mr. Tucker to appraise any type of property (within his
capabilities) within the State of California. License Number AG001532.
Expires January 31, 2001.
<PAGE>
EDUCATION
Western Illinois University, Board of Governors Bachelor of Arts Degree
COURT EXPERIENCE/EXPERT WITNESS TESTIMONY
Mr. Tucker has testified as an expert witness numerous times over the past
15 years. He has testified in Superior Court, Bankruptcy court, and
testified at Fair Value hearings in Los Angeles County, Orange County,
Riverside County, San Diego County, Ventura County, and San Bernardino
County. In addition to expert witness testimony Mr. Tucker has been hired
as an arbitrator to resolve real estate disputes between parties.
APPRAISAL COURSES SUCCESSFULLY COMPLETED - THE APPRAISAL INSTITUTE
1) Capitalization Theory and Techniques Part A/Course 1ba
The Appraisal Institute-The Conference Center in San Diego (October 31
to November 09, 1991)
2) Capitalization Theory and Techniques Part B/Course 1bb
The Appraisal Institute-The Conference Center in San Diego (November
14, to November 23, 1991)
3) Principals of Income Property Appraising/Course 201
The Appraisal Institute-Glendale College of Law (April 09 to June 25,
1988)
4) Standards of Professional Practice part A/Course SPPA
The Appraisal Institute-San Diego Chapter(May 10 to May 11, 1991)
5) Standards of Professional Practice part b/Course SPPB
The Appraisal Institute-San Diego Chapter (May 17 to May 18, 1991)
6) Real Estate Appraisal Principles/Course 1a1
The Appraisal Institute-University of Southern California (January 04
to February 08, 1986)
7) Residential Valuation/Course 8-2
The Appraisal Institute-University of Southern California (June 16 to
June 22, 1985)
8) Standards of Professional Practice/Course 2-3-Southern California
Chapter (July 14 to July 17, 1985) The Appraisal Institute
9) Basic Valuation Procedures/Course 1a2
The Appraisal Institute-Biola University (August 01 to September 19,
1987)
10) Report Writing and Valuation Analysis Course 540
The Appraisal Institute-Orange County Chapter (September 01 through
September 09, 1994)
11) Advanced Applications Course 550
The Appraisal Institute-Pepperdine University (November 10 through
November 19, 1994)
12) Course 120-Basic Income Capitalization
The Appraisal Institute-University of San Diego June 08 through June
16, 1995)
13) Case Studies in Real Estate Valuation
The Appraisal Institute-Glendale College of Law (June 1-9 1984)
14) Standards of Professional Appraisal Practice Part A and B-University
of San Diego (June 1996)
Advanced Income Approach-Southern California Chapter May-June 1997, Tustin,
California
Highest and Best Use and Market Analysis, Course 520, Montrose California
August 1997
SEMINARS ATTENDED:
1) State License Preparation-Certified General Appraiser
2) State License Preparation-Certified Residential Appraiser
3) California OREA License Seminar (1996)
4) Demonstration Appraisal Report-Non Income Producing Property.
5) Demonstration Appraisal Report--Income Producing Properties.
6) Valuation of Leasehold Interests
7) HP 12/C Seminar
Easement Valuation
The Appraisers Complete Review Seminar
Legal Workshop
Business Valuation
Personal Property Valuation
UNIVERSITY REAL ESTATE COURSES SUCCESSFULLY COMPLETED
<PAGE>
1) Real Estate Foundation
2) Residential Appraisal
3) Selected Topics in Real Estate-Nursing Homes
4) Selected Topics in Real Estate-Gasoline Service Stations
5) Selected Topics in Real Estate-Residential Subdivisions
6) Selected Topics in Real Estate-R.V. Resorts
7) Contemporary Issues in Real Estate
8) Income Property Appraising
9) Advanced Real Estate Evaluation
10) Real Estate Law Portfolio
11) Land Development Regulations
12) Report Writing
13) Land Development Regulations
14) Computer Applications in Real Estate Analysis
15) Residential Property Development
16) Real Estate Property Management
17) Real Estate Finance
Narrative Report Writing
<PAGE>
9851 Horn Road, Suite 140 Telephone
Old Mills Winery Office Park 916/368-1032
Sacramento, California 95827-1949 Fax
916/368-1080
DAVID E. LANE, INC.
Real Estate Appraisers & Counselors
June 18, 1998
Mr. Mark Kawanami
National Investors Financial
4220 Von Karman Avenue, Suite 110
Newport Beach, CA 92660
Dear Mr. Kawanami:
I have made an investigation and analysis relative to updating the appraisal
of the proposed "Delta Greens" subdivision project in Sacramento, California.
This property, consisting of 121.4 acres of unimproved residential land, was
appraised for $2,000,000 as of May 9, 1997, on the basis of having an
approved tentative map for 534 detached single family lots. This map has been
changed to include a wetlands/habitat area, which reduces the number of lots
to 465, a reduction of 69 lots.
It is my opinion that the market value of this property, now with an assumed
tentative map approval for 465 lots, as delineated on the revised map
prepared by Psomas and Associates (copy attached), dated January 26, 1998,
subject to the LIMITING CONDITIONS contained in the prior report, as of March
31, 1998, was:
ONE MILLION SEVEN HUNDRED
FORTY-FIVE THOUSAND DOLLARS
($1,745,000)
This is based on the same value per paper lot assigned in the previous
appraisal. The scope of the current investigation included researching the
market for new sales data, and no sales were found that would indicate any
change in the value reported a year ago.
There has been evidence of better overall market conditions in the sacramento
metropolitan area, but this is primarily in the commercial investment field
and in an improved market for move-up and resale housing. The residential
market for entry-level housing is basically unchanged.
<PAGE>
Mr. Kawanami........................June 18, 1998.........................Page 2
This report incorporates by this reference APPRAISAL REPORT OF "DELTA GREENS"
RESIDENTIAL SUBDIVISION transmitted by letter dated May 28, 1997, addressed
to David G. Laskes and signed by David E. Lane, MAI, and Michael E. Vogt,
SRPA.
An additional limiting condition of this updated appraisal is that the latest
map showing 465 lots constitutes a tentative map approved by the City of
Sacramento.
Respectfully submitted,
DAVID E. LANE, INC.
/s/ DAVID E. LANE
------------------------------------
David E. Lane, MAI
Certified General Real Estate
Appraiser
California Certificate No. AG003106
<PAGE>
[LOGO] ARNOLD
ASSOCIATES
Real Estate Appraisers and Consultant
L.P. ARNOLD S.W. ARNOLD
MAI, ARA MAI, ARA
July 3, 1998
Mr. David G. Lasker, President
National Investors Financial, Inc.
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
Dear Mr. Lasker:
This is an update of our June 26, 1997 appraisal with a valuation date
of May 1, 1997 on the Yosemite Woods Family Resort property previously known
as Ahwahnee Golf Course and Resort. We incorporate all data in said report
with only changes stated herein superseding same.
Outlot "A" - Ahwahnee Golf Course.
Further improvements to the course were made during 1997. With the heavy
rains in 1997-98, these improvements made limited play possible.
However, these same rains, double the annual average, have slowed the
courses development -- as all of California's courses. No major additions
to the course or supporting buildings were made in 1997.
The changes made to the subject from 1995 to 1997 have created a
dramatic change in the opinion of local individuals and guests of the
course. The total number of rounds played increased from 1996 to 1997 by
69.71% (10,910 to 18,515) and reported revenue increased per round of
public player from $24.79 to $31.09, or 25.41%. In addition, scheduled
promotions and tournaments increased in 1997 from previous levels,
including over 25 non-member hosted activities. Had not the El Nino
rains of winter/spring 1997/1998 hampered play on the course, the upward
trend of the facilities use would have likely continued through the
early months of 1998. Because, however, the rains affected the overall
playability of the course, a temporary setback has occurred, slowing
down the operation's climb towards stabilized market levels. Overall, the
outlook for the future is very bright as long as operations and
management continue in the same direction, and weather patterns remain
closer to normal.
<PAGE>
Page -2-
Mr. David G. Lasker, President
National Investors Financial, Inc.
Only two additional sales were found since May 1997, one vastly superior
and the other much inferior. However, the general interpretation of the
golf industry is that values have declined since May 1997. This is in
keeping with the lost playing rounds anticipated for 1998 due to the
heavy rains.
Based on the perceived downward trend in golf course values, we estimate
the stabilized market value is $4,450,000 with income lost during
stabilization to be $640,000, i.e. three years hence. Thus:
Fee simple stabilized market value $4,450,000
Lost income 3 years -640,000
----------
$3,810,000
Market value "as is" March 31, 1998:
THREE MILLION EIGHT HUNDRED TEN THOUSAND DOLLARS
($3,810,000)
Outlot "B" -- Ahwahnee Recreational Vehicle Park
No significant changes have occurred to the park structurally. Use of the
park has increased as more memberships have been sold. Sale 3 fell
through as reported but did record May 23, 1997 for $1,296,000 which
amounts to $6,513 per space. The park was in financial distress at time
of sale. While the original transaction i.e. pending sale, was
considered a market indicator, the final sale is not. Our research
indicates no change in the RV park industry.
Market value of Outlot "B" is, as of March 31, 1998:
THREE MILLION EIGHT HUNDRED EIGHTY SIX THOUSAND DOLLARS
($3,886,000)
Phase I -- Ahwahnee County Club Estates
No changes have been made with these lots. Marketing has not been
active, however, one additional lot was closed at $52,500 in March. Lots
in other subdivisions cited have been selling at similar price ranges.
Our research reveals no change in value is warranted.
<PAGE>
Page -3-
Mr. David G. Lasker, President
National Investors Financial, Inc.
Market value of Phase I is as of March 31, 1998:
TWO MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS
($2,250,000)
Phases II, III & IV -- Outlots "F", "G" & "H", Outlots "C", "D" & "E"
No changes have been made. Sale 2 in our report has resold June 19, 1997
for $3,680,000. This is an increase of $560,000 in six years. The
previous sale was for $9,873 per acre while the current sale is $11,646
per acre. These transactions lend support to our previous value estimate
and no change is necessary.
Market value of Outlots "F", "G" & "H" is, as of March 31, 1998:
FIVE MILLION EIGHT HUNDRED THOUSAND DOLLARS
($5,800,000)
Market value of Outlots "C", "D" & "E" is, as of March 31, 1998:
FOUR MILLION FIVE HUNDRED THOUSAND DOLLARS
($4,500,000)
Time share sales is the most dynamic element in the resort development
industry. The concept is replacing the recreation lot sale program. Time
share sales ("intervals") are a separate business from real estate
sales. We have read various documents and, particularly the report
completed by RCI Consulting on Yosemite Woods Family Resort dated
November 1996 (the subject property).
Construction of accomodations and subsequent sale of intervals, will
increase rounds played on the golf course. Continued sale of RV
membership will do likewise. Both are revenue generators to the project
as a whole but not to the real estate. However, assuming Yosemite Woods
Family Resort is as successful as projected by RCI Consulting,
additional real estate value will be created.
<PAGE>
Page -4-
Mr. David G. Lasker, President
National Investors Financial, Inc.
Summary of market values as of March 31, 1998:
<TABLE>
<CAPTION>
ACREAGE VALUE
------- -----
<S> <C> <C>
Outlet "A" -- Ahwahnee Country Club 141.53 $3,810,000
Outlet "U" -- Ahwahnee RV Park 367.31 3,886,000
Phase I -- Ahwahnee Country Club Estates 123.29 2,250,000
Phase II, III & IV -- Outlots "F", "G" & "H" 483.50 5,800,000
Outlots "C", "D" & "E" +532.16 +4,500,000
-------- -----------
1,647.79 $20,246,000
</TABLE>
Respectfully submitted,
/s/ R. W. Arnold
----------------------------------
R. W. Arnold, MAI, ARA
CA #AG005595
