<PAGE>
As filed with the Securities and Exchange Commission on January 13, 1998
Registration No. 333-37161
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- ---------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
AMENDMENT NO. 2
to
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
AMERICAN FAMILY HOLDINGS, INC.
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
(Address of principal executive offices)
David G. Lasker, President
American Family Holdings, Inc.
4220 Von Karman Avenue, Suite 110
Newport Beach, California 92660
(Name and address of agent for service)
Copy to:
David R. Decker, Esq.
Arter & Hadden LLP
700 South Flower Street, 30th Floor
Los Angeles, California 90017
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<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
<S> <C>
Item of Form S-4 Prospectus Caption or Location
- ---------------- ------------------------------
A. Information about the Transaction
---------------------------------
1. Forepart of Registration Statement and Outside
Cover Page of Prospectus ..................... Cover of Registration Statement; Cross-Reference
Sheet; Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page of
Prospectus ................................... Prospectus Summary; Reports to Shareholders
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information ................ Prospectus Summary; Risk Factors; Business and
Properties; Background and Reasons for the
Acquisition
4. Terms of The Transaction ..................... Prospectus Summary; Background and Reasons for
the Acquisition; Comparison of Tenancy-in-
Common Interests and Shares; Comparisons of
Programs and Company; Description of Shares;
Shares Eligible for Future Sale; Federal Income Tax
Consequences; Appraisals and Fairness Opinion
5. Pro Forma Financial Information .............. Prospectus Summary; Financial Statements
6. Material Contracts with the Company 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
</TABLE>
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
CROSS-REFERENCE SHEET
(continued)
<TABLE>
<CAPTION>
<S> <C>
Item of Form S-4 Prospectus Caption or Location
- ---------------- ------------------------------
14. Information with Respect to Registrants other
than S-3 or S-2 Registrants .................. Prospectus Summary; Business and Properties;
Selected Financial Information; Management's
Discussion and Analysis of Financial Condition and
Results of Operations
C. Information about the Company Being Acquired
--------------------------------------------
15. Information with Respect to S-3 Companies .... Not Applicable
16. Information with Respect to S-2 or S-3
Companies .................................... Not Applicable
17. Information with Respect to Companies other
than S-3 or S-2 Companies .................... Prospectus Summary; Business and Properties;
Background and Reasons for the Acquisition;
Selected Financial Information; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Financial Statements
D. Voting and Management Information
---------------------------------
18. Information if Proxies, Consents or
Authorizations are being Solicited ........... Prospectus Summary; Voting Procedures; Interests
of Certain Persons in the Acquisition; Principal
Shareholders; Management Following the
Acquisition
19. Information if Proxies, Consents or
Authorizations are Not to be Solicited or
in an Exchange Offer ......................... Not Applicable
</TABLE>
<PAGE>
IF YOU ARE AN INVESTOR IN ANY OF THE FOLLOWING, YOUR VOTE IS VERY IMPORTANT
SACRAMENTO/DELTA GREENS "TRUDY PAT" PROGRAM
OCEANSIDE "TRUDY PAT" PROGRAM
YOSEMITE/AHWAHNEE I "TRUDY PAT" PROGRAM
YOSEMITE/AHWAHNEE II "TRUDY PAT" PROGRAM
MORI POINT "TRUDY PAT" PROGRAM
AMERICAN FAMILY HOLDINGS, INC.
- - PROPOSED ACQUISITION OF PROGRAM PROPERTIES
American Family Holdings, Inc. (the "Company") is offering shares of its
stock in exchange for the assets (including cash on hand), certain
liabilities and business activities owned by investors in five former "Trudy
Pat" programs managed by National Investors Financial, Inc. ("National") For
this proposed acquisition, the company will issue [$21,374,800] in the form
of [2,137,480] shares of common stock arbitrarily valued at $10 per Share.
The stock will be listed for trading on the ___________ under the symbol
"___." The purpose of the transaction is to consolidate the operations of
the programs, improve the ability to sell or obtain financing for development
of the programs' properties, and provide the investors with liquidity for
their investments.
In each of the programs, the investors will vote on whether to approve
the acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH
OF THE FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION IN ORDER FOR IT TO
TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation of votes started on _______, 1998 and expires at 5:00
p.m., pacific time, on __________, 1998 unless extended. Call 1-800-590-7772
with questions.
- - OFFER OF ADDITIONAL STOCK TO INVESTORS
American Family Holdings is also offering $5,000,000 of units (consisting
of one share of common stock and one warrant to purchase two additional
shares) at $10 each exclusively to current investors in the programs. NASD
broker-dealers will receive a commission totalling $0.70 per unit for any
units sold with their help. If all the units are sold with their help, the
proceeds of the sale, net of estimated expenses of $200,000, will be
$4,450,000. None of the proceeds will be allocated to the company management
except to the extent that working capital funds will be used to pay salaries.
If you want to buy units, subscriptions with payments should be returned with
your voting ballot. Subscriptions will be accepted on a FIRST-COME-FIRST-SERVED
BASIS.
SPECIAL RISKS OF THE ACQUISITION:
- - If the acquisition is approved, there will be a fundamental change in the
nature of your investment. You will receive stock in the company and have no
remaining interest in the real estate or business of your program.
- - The value of the shares you receive may be less than you might receive if
the property of your program were sold.
- - If a trading market develops, the initial trading price for the stock
will likely be below $10 per share.
- - Employees of National and the company will hold almost 20% of the
company's stock and will receive compensation as officers and employees.
- - 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.
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
"RED HERRING LEGEND"
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
<PAGE>
TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY.......................................................... 1
The Proposal.......................................................... 1
Exchange Value/Allocation of Shares................................... 1
Risk Factors.......................................................... 4
Current Status of the Programs........................................ 6
The Company........................................................... 8
Experience of Management.............................................. 8
Organization Chart.................................................... 8
Alternatives to the Acquisition....................................... 9
Fairness.............................................................. 10
Fairness Opinion...................................................... 11
National's Recommendation............................................. 11
Summary of Benefits of the Acquisition to Investors................... 11
Benefits to National and Company Founders............................. 12
Summary of Business Plan.............................................. 13
Comparison of the Programs and the Company............................ 14
Tax Consequences of Acquisition....................................... 17
Conflicts of Interest Related to the Acquisition...................... 17
Conditions to Acquisition............................................. 18
Consequences if Acquisition Not Approved.............................. 19
Delivery of Stock Certificates........................................ 19
Supplements........................................................... 19
Consent Solicitation/Summary of Voting Procedures..................... 19
No Dissenters' Rights................................................. 21
No Right to Program Books and Records................................. 21
The Offering/Use of Proceeds.......................................... 21
Summary Financial Information......................................... 22
RISK FACTORS................................................................ 23
Risks of the Acquisition.............................................. 23
The nature of your investment will change...................... 23
There may be differences between exchange values
and sale values............................................... 23
The trading price for the shares is uncertain.................. 24
There may be conflicts of interest in National's structuring
the acquisition............................................... 25
You do not have independent advisors representing you in
structuring this transaction.................................. 25
The transaction may not be tax-free............................ 26
The company has no operating history........................... 26
<PAGE>
TABLE OF CONTENTS
(continued)
Page
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You will have no dissenters' rights in connection with the
acquisition................................................... 27
The company may incur significant additional debt.............. 27
The Board of directors will have the ability to change
investment, financing and other policies of the
company without shareholder consent........................... 27
Distributions will be unpredictable............................ 27
National's reconciliation of Yosemite/Ahwahnee
appraisals may be incorrect.................................... 27
Real Estate Risks..................................................... 28
There are significant delinquent property taxes................ 28
Permits to develop certain properties have lapsed or
have not yet been obtained.................................... 28
Compliance with conditions in existing permits on the
Sacramento/Delta Greens property and approvals
may require changes to development plans...................... 29
Units or certain assets must be sold to raise working capital.. 29
Holding an inventory of residential lots at the Oceanside or
Sacramento/Delta Greens properties may cause the company to
incur substantial carrying costs until the lots can be sold... 29
Federal, state and local environmental and other laws
may require expensive hazardous substance clean-up or
removal as well as expensive public improvements.............. 29
If there is an uninsured loss, the company could lose its
investment, profits or cash flow from a property.............. 29
The development of additional projects may occur............... 30
The California economy has fluctuated broadly in the past
few years..................................................... 30
When the acquisition is completed, National and its
principals will be owed [$1,234,785] by the company........... 30
Risks Affecting Operation of a Golf Course............................ 30
Risks Relating to Residential Development............................. 31
Resort Destination Risks.............................................. 31
Specific Risks Relating to Timeshare........................... 32
Specific Risks Relating to Recreational Vehicle Parks.......... 32
Anti-Takeover Provisions.............................................. 32
The Board's ability to issue preferred shares which
could affect your voting power and to issue additional
ii
<PAGE>
TABLE OF CONTENTS
(continued)
Page
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shares to discourage or impede a merger or other
transaction that may be in your best or financial interest.... 32
The Board is divided into three classes serving staggered
three year terms.............................................. 32
There are restrictions on certain business combinations with
interested parties............................................ 33
The Delaware law, as well as the charter documents, limit the
liability of directors and officers to shareholders........... 33
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.......... 33
BACKGROUND AND REASONS FOR THE ACQUISITION.................................. 33
General............................................................... 33
Management of the Programs Since Foreclosure.......................... 37
Efforts to Dispose of the Properties.................................. 39
Alternatives to Acquisition........................................... 41
Comparison of Alternatives............................................ 44
Terms of the Acquisition.............................................. 45
Calculation of Exchange Value......................................... 47
Allocation of Shares among the Programs............................... 49
Allocation of Shares among Investors.................................. 51
Company Shares Held by Affiliates or Employees of National............ 51
Historical Compensation to National/Effect of Acquisition............. 52
Historical Cash Distributions to Investors............................ 53
Expected Benefits of Acquisition...................................... 53
Conditions to the Acquisition......................................... 54
Fairness in View of Conflicts of Interest............................. 57
Consequences if the Acquisition is Not Approved....................... 56
Accounting Treatment.................................................. 57
Costs and Expenses.................................................... 57
Fairness Opinion and Appraisals....................................... 57
DIVIDEND POLICY............................................................. 58
COMPARISON OF TENANCY-IN-COMMON INTERESTS AND SHARES........................ 58
COMPARISONS OF PROGRAMS AND COMPANY......................................... 64
iii
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
VOTING PROCEDURES........................................................... 71
Time of Voting........................................................ 71
Record Date and Outstanding Votes..................................... 71
Approval Date......................................................... 72
Investor Ballot and Vote Required..................................... 72
Investor Representations on Ballot.................................... 73
Revocability of Consent............................................... 74
Solicitation of Votes; Solicitation Expenses.......................... 74
No Dissenters' Rights................................................. 74
No Right to Program Books and Records................................. 74
Issuance of Certificates for Acquisition Shares....................... 74
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION AND
CONFLICTS OF INTEREST....................................................... 75
Benefits to National.................................................. 75
Company Shares Owned by National's Principals and Other Company
Management........................................................... 76
Other Benefits to Shareholders of National............................ 76
Lack of Independent Representation of Investors....................... 77
Features Discouraging Potential Takeovers............................. 78
Allocation of Services and Expenses................................... 78
Non-Arm's-Length Agreements........................................... 78
Competition with the Company from Other Programs
Organized by National................................................. 78
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION................................ 79
Fiduciary Responsibility of National.................................. 79
Indemnification of Officers and Directors of the Company.............. 79
Officers and Directors Insurance...................................... 80
BUSINESS AND PROPERTIES..................................................... 80
The Company........................................................... 80
Business of the Company............................................... 81
Properties............................................................ 81
Consolidation of the Programs......................................... 83
The Residential Development Industry.................................. 83
The Lodging and Recreation Industry................................... 84
The Business Strategy................................................. 88
The Consolidated Business Plan........................................ 88
iv
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
Employees............................................................. 95
Legal Proceedings..................................................... 96
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................................. 96
Investment Policies................................................... 96
Financing Policies.................................................... 97
Miscellaneous Policies................................................ 98
Working Capital Reserves.............................................. 98
USE OF PROCEEDS............................................................. 98
CAPITALIZATION.............................................................. 99
DILUTION.................................................................... 99
SELECTED FINANCIAL INFORMATION..............................................100
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................103
Overview..............................................................103
Results of Operations - The Oceanside Program.........................103
Results of Operations - The Yosemite/Ahwahnee Programs................104
Results of Operations - The Mori Point Program........................105
Results of Operations - The Sacramento/Delta Greens Program...........106
Liquidity and Capital Resources.......................................107
Historical Cash Flows.................................................109
New Accounting Pronouncements.........................................110
MANAGEMENT FOLLOWING THE ACQUISITION........................................111
Executive Officers and Directors......................................112
Directors and Executive Officers Compensation and Incentives..........116
Stock Incentive Plan..................................................117
401(k) Plan...........................................................119
Employment Agreements.................................................119
Limitation of Liability and Indemnification...........................120
SECONDARY MARKET FOR TENANCY-IN-COMMON INTERESTS............................121
PRINCIPAL SHAREHOLDERS......................................................121
Principal Shareholders................................................121
Director and Officer Stock Ownership..................................122
v
<PAGE>
TABLE OF CONTENTS
(continued)
Page
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DESCRIPTION OF SHARES........................................................123
General................................................................123
Common Stock...........................................................123
Preferred Stock........................................................123
Warrants...............................................................124
Certain Shareholder Voting Requirements................................124
Transfer Agent and Registrar...........................................125
THE OFFERING.................................................................125
Offering of Acquisition Shares.........................................125
Offering of Units......................................................125
SHARES ELIGIBLE FOR FUTURE SALE..............................................127
APPRAISALS AND FAIRNESS OPINION..............................................128
General................................................................128
Experience of Independent Appraisers...................................130
May 1997 Appraisals....................................................130
The Mentor Appraisal...................................................131
Reconciliation of Yosemite/Ahwahnee Properties' Appraisals.............132
On-Going Relationships.................................................133
Updates/Changes........................................................133
Experience of Independent Valuator.....................................133
Fairness Opinion.......................................................133
FEDERAL INCOME TAX CONSEQUENCES..............................................136
Qualification of the Acquisition as a Qualifying Section 351
Transaction............................................................137
Federal Income Tax Consequences of the Acquisition.....................138
Federal Income Tax Consequences to Investors After the
Effective Date.........................................................140
REPORTS TO SHAREHOLDERS......................................................141
LEGAL MATTERS................................................................142
EXPERTS......................................................................142
FURTHER INFORMATION..........................................................142
vi
<PAGE>
TABLE OF CONTENTS
(continued)
Page
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GLOSSARY.....................................................................143
FINANCIAL STATEMENTS.........................................................F-1
APPENDICES
Appendix 1 Fairness Opinion................................................A-1
Appendix 2 Selected Additional Appraisal Information.......................A-2
ACCOMPANYING THE PROSPECTUS
- - PROGRAM SUPPLEMENT
- - OFFICIAL INVESTOR BALLOT
- - SUBSCRIPTION ORDER FORM
- - BROKER/DEALER INFORMATION FORM
- - Instructions to Investors on How to Complete the Official Investor Ballot
and Subscription Order Form
vii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARIZES MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS ELSEWHERE IN THIS PROSPECTUS.
THE PROPOSAL
From 1987 to 1993 National Investors Financial, Inc. ("National")
arranged loans secured by first trust deeds on real estate and sold
fractional, tenancy-in-common interests in such loans to investors. National
coined the term "Trudy Pat" as a shorthand description for the TRUST DEED
LOAN PARTICIPATION programs. Pursuant to servicing agreements with each
investor, National has collected and distributed principal and interest
payments, if any, on the "Trudy Pat" loans, acted to take title on behalf of
the investors where loans have gone into default, and managed the properties
after the defaults.
American Family Holdings, Inc., a Delaware corporation (the "company" or
"we") was founded by the principals of National. It has offered to acquire
the properties and cash reserves of the five "Trudy Pat" programs named on
the cover page of this prospectus for the total acquisition price of
[$21,374,800] in the form of [2,137,480] shares of common stock arbitrarily
valued at [$10] per share. The Sacramento/Delta Greens property is vacant
land to be developed for residential lots. The Oceanside property is vacant
land which has been developed into residential lots. The Yosemite/Ahwahnee
properties include a golf course facility, some developed recreational
vehicle spaces, some developed residential lots, and vacant land to be
developed into additional recreational vehicle spaces and timeshare units.
The Mori Point property is vacant land to be developed into a hotel
conference center facility.
EXCHANGE VALUE/ALLOCATION OF SHARES
The programs' properties have been appraised by the independent
appraisers identified on page __. The exchange value for a program property is
its adjusted appraised value multiplied by the arbitrary price of [$10] per
share. It 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. Such a sale price might be higher or lower than the amount the
company is willing to pay. The exchange value for a property is lower than
the May 1997 appraised value of property in all cases except the Oceanside
property. See "Background and Reasons for the Acquisition -- Calculation of
Exchange Value."
<PAGE>
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 "Trudy Pat" structure. These advantages include
- Certain properties have some cash available from investor
assessments which could be used where most needed.
- Certain properties are able to generate cash which could be used
for development of some of the other properties.
- Opportunities to obtain financing from outside sources would be
greater in the new structure which would provide advantages to all of the
properties held in that structure.
With this in mind, exchange values for the programs were calculated by
adjusting the May 1997 appraised value of each property by adding the book
value of other program assets and amounts due from the program National will
forgive, and reducing that sum by liabilities of the program. In the case of
the Yosemite/Ahwahnee properties, additional adjustments were made to take
into account the results of an October 1996 appraisal. See "Background and
Reasons for the Acquisition -- Calculation of Exchange Value" at page __.
The number of shares to be assigned to each program was determined by
dividing the program's exchange value by the total exchange value of all the
properties and multiplying that fraction by the total number of shares to be
paid by the company.
The following table shows investors (i) the aggregate amount of unpaid
principal balance of loans owed to a program by the original borrower plus
accrued but unpaid interest on such balance as of the date the title to the
underlying property was obtained by National on behalf of the investors plus
all amounts paid by investors pursuant to mandatory assessments plus
voluntary investor advances, (ii) appraised real estate values, (iii)
adjustments to appraised values to arrive at (iv) exchange values, and (v)
the number and percentage of shares allocated to each program if the
acquisition is consummated. The information is as of September 30, 1997.
[to be updated to the month end prior to the final prospectus date]
2
<PAGE>
<TABLE>
<CAPTION>
Adjustments % of Total
to Real Shares to be
Amount Real Estate Estate No. of Outstanding
Owed plus Appraised Appraised Exchange Shares After the
Name of Program Assessments Value(1) Value(2) Value Allocated(3) Acquisition(4)
- -------------------------- ------------ ------------ ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 6,031,903 $ 2,000,000 $ (127,949) $ 1,872,051 187,205 7.02%
Oceanside 27,325,000 2,850,000 2,595,521 5,445,521 544,552 20.42
Yosemite/Ahwahnee I 8,987,163 3,912,454 (318,166) 3,594,287 359,429 13.48
Yosemite/Ahwahnee II 19,338,632 6,253,121 (494,452) 5,758,670 575,867 21.60
Mori Point 12,409,626 5,500,000 (795,729) 4,704,271 470,427 17.64
------------ ------------ ------------ ------------ --------- -----
TOTAL $ 74,092,324 $ 20,515,575 $ 21,374,800 2,137,480 80.16%
------------ ------------ ------------ --------- -----
------------ ------------ ------------ --------- -----
- -------------------
</TABLE>
(1) Appraisals were conducted in May 1997. However, an appraisal of
the Yosemite/Ahwahnee properties was also conducted in October 1996.
National's management reconciled the two appraisals to arrive at the
appraised values for the Yosemite/Ahwahnee properties to arrive at the
appraised values in the above table.
(2) The adjustments were made by the Company to add back to the real
estate appraised values the book value of other program assets at
[September 30, 1997] to reduce that number by program liabilities at
[September 30, 1997], and to add back liabilities to National to be
forgiven by National as part of the Acquisition. See "Background and
Reasons for the Acquisition -- Calculation of Exchange Value" at page __
for details as to the adjustments.
(3) Represents [8.76%], [25.48%], [16.82%], [26.94] and [22.01%],
respectively, of the shares to be issued to investors in the acquisition.
(4) [83.29]% if all units are sold to investors. The other shares will
be held by management and other founders of the company.
Shares will be distributed to you in accordance with your pro rata
investment in a program (including assessments paid and interest accrued to
you through the date you took beneficial ownership of the property) after
adjusting the amounts to account for voluntary advances made by some
investors. For example
<TABLE>
<CAPTION>
If your adjusted You will receive approximately the
outstanding investment is $10,000 in following number of company shares
- ------------------------------------ -----------------------------------
<S> <C>
Sacramento/Delta Greens 310
Oceanside 199
Yosemite/Ahwahnee I 400
Yosemite/Ahwahnee II 298
Mori Point 379
</TABLE>
3
<PAGE>
RISK FACTORS
The following is a summary of the potential disadvantages, adverse
consequences and risks of the acquisition. This summary is qualified in its
entirety by the more detailed discussion in the section entitled "Risk
Factors" contained in this prospectus beginning on page __.
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. If the acquisition is
completed, there will be a change in the nature of the investment of each
investor from holding a tenancy-in-common interest in real estate to holding
shares in an on-going company, the assets of which may be changed from time
to time without approval of investors. If the acquisition is completed,
investors will be able to liquidate their investments only by selling their
shares on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through
property sales. If the acquisition is completed, investors will have an
investment in an entity that is larger than each of the programs and will
thus lose relative voting power.
DIFFERENCES BETWEEN EXCHANGE VALUES AND SALES PRICE. Investors are
subject to the risk that the exchange value of a program does not reflect the
price a program's assets might bring in a sale. If the property of a program
were to be sold, the net proceeds of the sale and the amount finally
distributed to an investor in that program may be more or less than the
exchange value.
UNCERTAINTY REGARDING TRADING PRICE FOR THE SHARES. Shares may trade at
prices substantially below exchange value per share or historical book value
of the company's assets. There is no guaranty that a liquid trading market
will develop for the shares. If a trading market develops for the shares,
the price of shares after the acquisition will likely decrease below the
exchange value per share of $10 due to a potentially large number of shares
that investors may sell immediately after the acquisition.
CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The founders of
the company which included the principal shareholders of National initiated
and structured the acquisition and will own approximately 20% of the company
and be entitled to other substantial economic benefits. Therefore, the
founders of the company are subject to conflicts of interest with respect to
the acquisition.
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS. No independent party
was retained by National to negotiate on behalf of the investors. Therefore,
terms of the acquisition may be less favorable to investors and more
favorable to founders of the company which included the principal
4
<PAGE>
shareholders of National than if the acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of
each program, the terms of the acquisition may have been more favorable to
certain or all of the programs and fewer shares and less favorable employment
contracts may have been received by the founders of the company.
TAX UNCERTAINTIES. The acquisition may not be a tax-free transaction to
investors. Due to uncertainties in the facts of this transaction, tax counsel
is unable to opine conclusively on the taxability of the acquisition to
investors. If the acquisition is a taxable transaction, an investor would
recognize gain or loss in 1998 equal to the difference between the investor's
tax basis in his interest in a program property, and the number of shares of
the company received valued at $10 per share. If the acquisition is treated
as taxable, National believes most investors would recognize a tax loss.
POTENTIAL CHANGE IN THE AMOUNT OF LEVERAGE. After the acquisition, none
of the properties will be subject to any liens other than for property taxes.
The board of directors could authorize borrowing by the company the debt
service for which may adversely affect the company's ability to make
distributions to shareholders. The company may incur full recourse debt which
exposes all of the assets of the company to repayment instead of limited
recourse debt which generally exposes specific properties for the repayment
of debt.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN INVESTMENT,
FINANCING AND CERTAIN OTHER POLICIES. Although the board of directors of the
company intends to implement the business plan set forth herein, the board
will have the ability to change investment, financing and other policies of
the company without the consent of shareholders.
NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS. If you vote
against the acquisition, and it is approved, you will not be able to object
to the acquisition and receive the appraised value of your tenancy-in-common
interest in your program's assets. You will have no choice other than to
accept shares for your interests.
COMPANY HAS NO OPERATING HISTORY. The company was formed within the past
year to take part in the acquisition of your property. It does not have the
benefit of operating for a long time. This means that shares in the company
are much riskier than ownership of shares of established companies. If the
company had been operating as if it owned the properties which it desires to
acquire, it would have experienced losses to date.
5
<PAGE>
HOLDERS OF MAJORITY OF TENANCY-IN-COMMON INTERESTS BIND A PROGRAM.
Approval of the acquisition by investors holding a majority of outstanding
interests in a program will bind all of that program's investors.
CURRENT STATUS OF THE PROGRAMS
Each of the programs began as tenancy-in-common, secured loan
arrangements. EACH OF THE PROPERTIES THAT SECURED THE LOANS WAS INDEPENDENTLY
APPRAISED. Due to the borrowers' defaults on the loans, the investors in each
of the programs are now the beneficial owners of the real estate that secured
the loans. As the servicing agent for the loans, National became the manager
of the programs' assets.
The properties owe a significant amount of delinquent property taxes
totalling over $1,052,000 all together as of September 30, 1997. In addition,
working capital is needed in order to position the properties for sale on
terms that might be approved by a majority of investors. Only the Oceanside
property has been self-sustaining through sales of lots and newly constructed
homes. Other than that, only the golf course and recreational vehicle park
portions of the Yosemite/Ahwahnee properties have any operating cash flow and
that is not enough to cover operating expenses much less provide working
capital needed to conceptually plan, comply with the governmental permitting
requirements and eventually construct other improvements on the land.
Investors have demonstrated a reluctance to provide adequate working capital
through a mandatory assessment process. This reluctance on the part of
investors to provide the necessary funding to position the assets of their
programs for a satisfactory disposition is one of the primary reasons why
National believes that none of the programs are capable of attaining a
maximum return of invested dollars in their present stand-alone status.
While the properties of the Oceanside and Sacramento/Delta Greens
programs may be able to be sold for cash, they cannot be sold for prices
sufficient to return the investors' money at this time. National believes
that those properties should either be built out and sold as single-family
homes or sold in bulk when appropriate.
Without a substantial infusion of capital, the Yosemite/Ahwahnee
properties cannot reach their full economic potential and, cannot be sold for
their aggregate May 1997 appraised value. National believes that failure to
continue to fund an increase in the number of recreational vehicle spaces and
to develop a timeshare facility and sales program at the Yosemite/Ahwahnee
properties will result in a serious deterioration of their aggregate value.
6
<PAGE>
At present, Mori Point is vacant land with a proposal to be developed
into a hotel/conference center. In order to continue the predevelopment
effort, capital is needed to proceed with the real estate permitting process
and to establish a plan to protect the habitat of two endangered species that
are located on the property. Presently, this property cannot be sold for an
amount sufficient to return the investors' money.
Attempts have been made to sell or develop on a joint venture basis all
or portions of each of the properties. However, the offers have been rejected
by investors (in the case of Sacramento/ Delta Greens in 1994 and Mori Point
in 1996) or inadequate (in the case of Oceanside) or not forthcoming at all
(in the case of the Yosemite/Ahwahnee programs). See "Background and Reasons
for the Acquisition -- Efforts to Dispose of the Properties." National
continues to offer the Oceanside property for sale directly to homebuilders
in the area. The Sacramento/Delta Greens property has been presented to
several local area homebuilders as recently as early 1997 without yielding
any significant negotiations toward a sale. National continues to explore the
possibility of selling this property, but, to date, no brokers have been
hired because National has the resources to identify potential buyers for a
project of this type. National has made no significant efforts to interest
potential buyers or joint venture partners in the Yosemite/Ahwahnee
properties because it does not believe the properties are ready for sale
until further development of the recreational vehicle spaces and planned
timeshare program is complete. Currently, the Yosemite/Ahwahnee properties
experience a steady negative cash flow which few, if any, buyers are willing
to accept. No offers have been received. For a period of nine months in 1992
to 1993, the Mori Point property was listed with Grubb & Ellis, a reputable
commercial broker. No offers were received. The brokerage contract was not
renewed, and no recent efforts have been made to sell it because the
investors instructed National to continue to pursue obtaining the necessary
governmental permits to develop a hotel/conference center on the property.
The acquisition has been proposed because National and the company
believe that the properties, when combined, can be sold and/or developed in a
way that will increase their overall value. If the acquisition occurs, the
properties and assets belonging to the programs will all become assets of the
company, and you will be shareholders of the company. The value of the
company will be reflected in the market value of its shares. Thus, through
the market value of the shares, you may receive a higher percentage of your
outstanding investment than you might receive if the properties were operated
or sold within their separate programs. However, it is not known what the
market price for the shares will be and therefore it cannot be known whether
the value of the shares allocated to each program will ever exceed the price
that the properties might bring in
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<PAGE>
a cash sale. See "Background and Reasons for the Acquisition -- Comparison
of Alternatives" at page __.
THE COMPANY
The company was formed on August 6, 1997 to conduct the acquisition. The
founding shareholders of the company are Yale Partnership for Growth and
Development, L.P. and J-Pat, L.P., family partnerships established by David
Lasker and James Orth, respectively, as well as other employees, consultants
of National, or the company. The company has no significant assets or
liabilities and no operating history. The company's principal executive
offices are located at 4220 Von Karman Avenue, Suite 110, Newport Beach,
California 92660, telephone number 1-800-590-7772.
EXPERIENCE OF MANAGEMENT
Messrs. Lasker and Orth have been principally responsible for management
of the programs since title to the properties was obtained from the original
borrowers on behalf of the investors. With regard to the proposed activities
at the Yosemite/Ahwahnee properties, they have been actively involved in
obtaining necessary permits and construction services, recreational vehicle
membership sales and site management, golf course management and marketing,
lot sales and timeshare studies. Messrs. Lasker and Orth are also experienced
in all aspects of traditional real estate finance. L.C. "Bob" Albertson, the
Executive Vice President of the company, has been involved as an executive in
all aspects of the home building industry for over 30 years. In that time, he
has used traditional financing arrangements, as well as options and other
relatively non-capital intensive structures and non-recourse seller
financing, to acquire real estate. Mark Kawanami, Vice President of the
company, has been involved in the financial aspects of the real estate
business for over ten years. To the extent a property needs skills that
members of company management do not possess, consultants will be hired to
provide those skills and services. See "Management Following the Acquisition"
at page __.
ORGANIZATION CHART
After the acquisition, assuming none of the units is sold, 80.16% of the
company's outstanding shares will be owned by the investors and 19.84% will
be owned by the founders of the company. Management of the properties will be
coordinated through a to-be-formed wholly-owned subsidiary to be named
American Family Communities, Inc. Title to the properties will be held by,
and day-to-day operations will be conducted through four separate
wholly-owned subsidiaries of American Family Communities, Inc. The ownership
and organization of the company after the acquisition will be as follows:
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<PAGE>
<TABLE>
<CAPTION>
Yale
All Partnership
Programs' for Growth J-Pat, L.P. Consultants
Investors and (controlled by and other
Development, James Orth, a Employees of
L.P. principal of National or
(controlled by National) Company
David Lasker,
a principal of
National)
- ---------- ----------------- --------------- -------------
<S> <C> <C> <C>
80.16% 8.13% 8.13% 3.58%
(83.29% if (6.85% if all units (6.85% if all units (3.01 all
all units sold) sold) sold) units sold)
- ------------------------------------------------------------------------
American Family Holdings, Inc.
- ------------------------------------------------------------------------
100%
----------------------------------
American Family
Communities, Inc.(1)
----------------------------------
100%
------------------------------------------------------------------
Delta Greens Yosemite Woods Oceanside Mori Point
Homes, Inc.(2) Family Resort, Homes, Destinations,
Inc.(2) Inc.(2) Inc.(2)
- -------------------
</TABLE>
(1) A subsidiary formed to coordinate the management and operation of the
properties.
(2) Subsidiaries formed to hold title to the various properties and to conduct
the day-to-day operations.
ALTERNATIVES TO THE ACQUISITION
The alternatives to the acquisition that National considered were (a)
continuing the operations of each of the programs under their respective
separate business plans, (b) liquidation of each of the programs either
directly or in the context of a bankruptcy, and (c) a bankruptcy
reorganization of the programs. It concluded that none of these alternatives
would be as beneficial to the investors as the acquisition. See "Background
and Reasons for the Acquisition -- Alternatives to the Acquisition" and
"Comparison of Alternatives" at pages __ and __.
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<PAGE>
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 the following factors:
- the shares offer an opportunity for individual investor liquidity while
the tenancy-in-common interests do not;
- while the exchange values offered to investors for their assets differ
from the appraised values, the adjustments to the appraised values, in our
opinion, allow for an equitable allocation of the [2,137,480] shares among
the programs;
- on completion of the acquisition the investors will hold over 80% of
the outstanding stock of the company while principals, employees, and
consultants of National will hold less than 20%. That 20% was purchased for
$.01 per share. National and its principals have forgiven, or will forgive at
the completion of the acquisition, over $3,000,000 of expenses and accrued
fees;
- the opportunity for each of you to vote for or against the acquisition
and, in so doing, judge the financial fairness of the proposed acquisition
for yourself;
- the valuation of the real estate assets of each of the programs by the
independent appraisers;
- the fact 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
and the issuance of shares to the founders of the company, we believe they
have been counterbalanced by your opportunity to vote on the transaction and
the Fairness Opinion; and
- the Fairness Opinion rendered by Houlihan Valuation Advisers, an
independent valuation firm. See "Background and Reasons for the Acquisition"
at page __.
National reviewed the value you will receive in connection with the
acquisition and compared it with what you might receive under the
alternatives to acquisition. Despite the adjustments to appraised value to
arrive at exchange values, National concluded that the likely market value of
the shares of the
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<PAGE>
company would be higher in the long run than the value you would have
received if any of the alternatives to the acquisition had been implemented.
See "Background and Reasons for the Acquisition -- Comparison to
Alternatives" and "Recommendation of National and Fairness Determination" at
pages __ and __. Based on this comparison, National concluded that the
acquisition is financially fair.
FAIRNESS OPINION
National hired Houlihan Valuation Advisers, an independent valuation
firm, to review the fairness of the acquisition. That firm's opinion (the
"Fairness Opinion") concludes that the allocation of the shares in the
transaction (which includes allocation of shares to the programs and
principals, employees and consultants of National and the company) is
financially fair to you. See "Appraisals and Fairness Opinion -- Fairness
Opinion" at page __.
NATIONAL'S RECOMMENDATION
While the acquisition was not negotiated at arms-length and National and
the principals of National will receive substantial benefits from the
acquisition, NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON
THE ACQUISITION. See "Interests of Certain Persons in the Acquisition and
Conflicts of Interest" at page __, "Background and Reasons for the
Acquisition" at page __, and "Appraisals and Fairness Opinion" at page __.
SUMMARY OF BENEFITS OF THE ACQUISITION TO INVESTORS
YOU MAY HAVE A LIQUID TRADING MARKET FOR YOUR SHARES. After the
acquisition, shares will be listed on the ______________. While there can be
no assurance that a trading market will develop or be sustained, if a trading
market develops, you will have the opportunity to liquidate all or some of
those shares at your discretion.
YOU MAY HAVE MORE CONTROL OF THE TIMING OF LIQUIDATION OF YOUR INVESTMENT.
You can control when you choose to take profits or losses. Under the current
programs, you have been subject to a majority vote to sell or retain the
property, regardless of whether or not the timing and decision were favorable
to you.
YOU WILL OWN SHARES IN A POOL OF ASSETS WHOSE DIVERSITY CAN REDUCE RISK.
Your investment will be spread over an initial asset base of four different
real estate projects (the two Yosemite/Ahwahnee programs will be one project
after the acquisition).
11
<PAGE>
YOU WILL BENEFIT FROM EXPERIENCED PROPERTY MANAGEMENT. We have hired
key real estate management professionals who are experienced in real estate
development, operation and construction.
YOU WILL NO LONGER BE LIABLE FOR MANDATORY ASSESSMENTS. Your tenancy-in-
common agreement and servicing agreement will be cancelled by the acquisition,
meaning your exposure to mandatory assessments will cease.
YOUR LIABILITY WILL BE LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the programs, you are not
currently effectively insulated from personal liability based on the operation
of those assets. As shareholders of a corporation, you will be.
See "Risk Factors" in this Prospectus Summary and at page __ for
potential negative aspects of the acquisition.
BENEFITS TO NATIONAL AND COMPANY FOUNDERS
MANAGEMENT AND COMPANY FOUNDERS WILL OWN ALMOST 20% OF THE COMPANY
(ALMOST 16% IF ALL UNITS ARE SOLD). These individuals paid $.01 per share for
their company shares. In addition, over the past several years, National has
forgiven, and as a result of the acquisition will forgive, an aggregate of over
$3,000,000 of fees and expenses due from the programs.
NATIONAL'S PRINCIPAL STOCKHOLDERS WILL OWN FOUNDERS' STOCK IN THE COMPANY
AND WILL RECEIVE SALARIES AS OFFICERS OF THE COMPANY. David Lasker and James
Orth will be President and Chief Executive officer, respectively, of the company
and entities they control will each own 8.13% of the company's outstanding
shares (6.85% if all units are sold). These shares are included in the shares
described above as being owned by management and company founders. Mr. Lasker
and Mr. Orth also will receive annual salaries of $180,000 plus other benefits.
See "Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" at page __.
AS A CONSEQUENCE OF THE ACQUISITION, THE INVESTORS WILL TERMINATE NATIONAL
AS SERVICING AGENT FOR THE PROGRAMS. This will relieve National of its ongoing
servicing obligations which National could unilaterally terminate if it elected
to do so.
THE COMPANY WILL OWE NATIONAL $[1,234,785] OF ACCRUED BUT UNPAID FEES
AND EXPENSES DUE FROM THE PROGRAMS AFTER THE ACQUISITION. If the company is
successful, National will have the opportunity to receive the portion of its
accrued but unpaid fees and expenses which it has not forgiven.
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<PAGE>
SUMMARY OF BUSINESS PLAN
Our objective is to preserve as much of the owners' invested dollars
as is possible and improve the value and performance of the properties
currently held by the programs in the following ways:
- By developing selected properties for their highest and best use;
- By increasing the current cash flow from the operating assets;
- By maximizing the potential profit margins of for-sale products;
- By raising funds for the company's operations through a strategic
combination of sales of units to existing investors and the sale of selected
real estate assets acquired from the programs to outside buyers; and
- By acquiring other projects or assets which are consistent with our
objectives and business plan.
RESIDENTIAL DEVELOPMENTS. We plan to continue to build homes for sale on
the Oceanside Property and seek buyers for the remaining lots. By using the
funds available from the sale of the units or from the sale of certain assets of
the programs, we expect to start construction of single-family lots of the
Sacramento/Delta Greens project. Cash flow from sales of single-family homes
and lots would continue our growth and build value.
RESORT DEVELOPMENTS. We will enhance the value of Yosemite/Ahwahnee
by continuing to develop the project. While the project itself presently has
little cash available for capital improvements, we believe the highest potential
rewards lie in this segment of the company's asset base. By using the funds
available from the sale of the units or from the sale of certain assets of other
programs, we will aggressively seek timeshare approvals at Yosemite/Ahwahnee and
will continue to sell memberships and build recreational vehicle sites. We will
also continue to process the necessary approvals for the Mori Point asset which
we believe has the potential to attract industry-oriented joint venture partners
or purchasers. 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 __.
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<PAGE>
COMPARISON OF THE PROGRAMS AND THE COMPANY
The summary information below highlights a number of significant
differences between the programs and the company. See "Comparison of the
Programs and the Company" at page __.
FORM OF ORGANIZATION. The programs began as tenancy-in-common
investments in "Trudy Pat" loans. The company is a corporation which offers to
investors certain benefits such as limited liability and professional management
which may not be present to the same degree in the present ownership structure.
LENGTH OF INVESTMENT. When you invested in the "Trudy Pat" loan(s), you
expected to receive repayment of your loan in two to four years. After the
acquisition, the company will have no time limit to dispose of any assets, and
you will not receive net asset sales proceeds. Instead, sales proceeds will be
reinvested in the company. Your publicly traded shares will replace the process
of liquidating program assets as your way to receive a return of your capital
and any profits.
DIVERSIFICATION. Each of the programs has real estate assets in a single
location. By contrast, the company will hold the real estate assets of all five
programs and will be more diversified both geographically and by type of
property. By owning shares, you will be invested in an on-going, diversified,
real estate operating company.
ADDITIONAL EQUITY. None of the programs are currently authorized to raise
additional funds, except through mandatory assessments. The company will have
more flexibility to raise capital to finance its business. We may issue
additional stock to raise money or to make new real estate investments. These
are traditional methods of acquiring capital, but this would dilute your
interests. Such stock could have priority in dividends distributions and
liquidation proceeds.
BORROWING POLICIES. Borrowing is difficult under the present program
structure. The company will be able to borrow to improve or expand its asset
base. However, borrowing may also increase the company's risk from leveraged
investments.
COMPENSATION, FEES AND DISTRIBUTIONS. National will stop earning
servicing fees under the program agreements in the aggregate amount of
approximately $650,000 per year. As of September 30, 1997, the Programs have
accrued fees and advances due to National and its principals of $2,180,896. If
the acquisition is approved, National and its principals will cancel $946,111 of
these accrued fees and advances that it has made on behalf of program owners.
National and its principals will continue to be owed $1,234,785 which will be
assumed and paid in the general course of the company's business. In addition,
14
<PAGE>
National also has represented that it was owed fees and made advances to the
programs totalling $2,191,614 which it previously forgave prior to 1994. Since
these fees and advances were incurred and forgiven prior to 1994, they have not
been accrued on the historical balance sheets of the programs presented in this
prospectus. National's principals will own interests in the company and will
also receive salaries as officers of the company. National, itself, will
receive shares in exchange for its interests held as a "Trudy Pat" investor in
each of the programs in the same manner and at the same cost as all other "Trudy
Pat" investors.
MANAGEMENT CONTROL AND RESPONSIBILITIES. Currently, National serves as
your servicing agent. Under its contract, it cannot be removed except by a
majority vote by investors in a particular program, which is generally an
extraordinary event. You will have greater control over the management of the
company than you had over the programs. You will be able to vote for certain
members of your Board of Directors every year. In the beginning, principals and
affiliates of National will control a maximum of 19.84% of the voting shares
(16.71% if all units are sold).
MANAGEMENT LIABILITY AND INDEMNIFICATION. The directors and officers of
the company will be entitled to potentially stronger indemnification from the
company for their actions than is presently the case for National in the program
agreements.
VOTING RIGHTS. Presently, you only have voting rights in the particular
program in which you are an investor. You can vote on matters involving
collection, servicing and administration of your investment as well as
termination of the servicing agreement. As a shareholder, you will have the
right to vote for directors and other matters according to applicable law or the
company's charter documents. When voting as a shareholder, your vote will
affect all of the businesses and properties owned by the company, which will
include the assets owned by all five programs. However, your relative voting
power will be reduced.
LIQUIDITY. The tenancy-in-common interests in the programs constitute
illiquid investments which are very difficult to sell. The shares are expected
to be listed on the _____ and be freely tradable.
TAX TREATMENT. The company will be taxed as a corporation. Currently,
the programs themselves are not taxpayers and file no program tax returns.
Prior to taking title to the properties, when income was allocated to a program
investor that was interest, National, as servicing agent, reported such income
to the IRS and the investors on Form 1099-INT. As tenancy-in-common owners of
the properties, the investors no longer receive Forms-1099 from National, but
are responsible for their pro rata share of any income, gain, loss or deductions
attributable to their program's
15
<PAGE>
properties. If the company makes distributions to shareholders, it will report
the distributions on Form 1099-DIV whether or not they are taxable.
OVERHEAD AND EXPENSES. Overhead and expenses of the programs are the
responsibility of the investors to the extent the applicable program does not
generate sufficient cash flow to cover them. They are billed individually to
investors in the form of assessments. To date, only the Oceanside program has
been completely self-funding. Investors will have no direct responsibility for
company overhead and expenses. Initially, overhead and expenses of the company
will be derived from proceeds of the sale of the units, if any, or the sale of
one or more of the company's assets. Future overhead and expenses will be
funded from cash flow from operations.
DILUTION. Investors in each program have voting power based on their
percentage of the funds contributed to the program. Since five programs will be
consolidated into the company, each investor's voting power will be
substantially reduced.
BUSINESS PLANS. Each of the programs has a separate business plan as
follows:
Sacramento/Delta Greens Finish permitting process, provide for
infrastructure and the first phase of home
construction. Approximately $3,000,000 of
capital needed.
Oceanside Continue to build and sell homes or sell
existing lots in bulk, plus acquire additional
lots. Approximately $700,000 of equity
capital needed plus $3,500,000 of
construction funding.
Yosemite/Ahwahnee I & II Continue to operate golf course, expand
recreational vehicle park, construct
timeshare units, and market these products
and services. Approximately $3,350,000 of
capital needed.
Mori Point Proceed with hotel/conference center
entitlement process which will require the
preparation of a mitigation plan to protect
the habitat of an endangered species.
Approximately $500,000 capital needed.
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<PAGE>
The business plan of the company is to consolidate the programs' plans,
raise some or all of the capital necessary to accomplish those plans through the
sale of units, if possible, as well as build homes on, or sell, the remaining
Oceanside lots and perhaps the Sacramento/Delta Greens property. The total
capital needed is approximately $11,000,000 which exceeds the maximum available
working capital if all of the units are sold. The balance will have to be
derived from debt financing, if available, sale of company assets, or joint
venture partners. The company believes the Yosemite/Ahwahnee properties have
the greatest profit potential. So, if working capital or debt financing were in
short supply, the company will concentrate its efforts on the Yosemite/Ahwahnee
properties.
DISTRIBUTIONS AND DIVIDENDS. As interest and principal was paid by the
borrowers, investors in the programs were entitled to distributions. As the
underlying properties of the programs are sold after title was taken on default
of the borrowers, investors in the programs will be entitled to distributions of
sale proceeds from programs in which they invested. The company has no present
plans to pay dividends to shareholders whether from earnings or for the sale of
properties. Dividends will be paid only when declared by the board of
directors.
TAX CONSEQUENCES OF ACQUISITION
The company intends to treat the acquisition as a tax-free transaction.
However, due to uncertainties about the individual investors' plans for holding
the stock, the company's tax counsel, Arter & Hadden LLP, is unable to opine
that the acquisition will not create a taxable transaction for investors. If
the acquisition is treated as taxable, National believes a significant majority
of the investors will have a tax basis in their tenancy-in-common interest in
the property that is greater than the value of the shares they receive in the
company thus producing tax losses. See "Federal Income Tax Consequences" at page
__.
CONFLICTS OF INTEREST RELATED TO THE ACQUISITION
National and the company will be subject to conflicts of interest
relating to the acquisition and the on-going operation of the properties.
These include
- National will be relieved from its duties and related costs as
servicing agent and asset manager for the programs, thereby reducing its
overhead and allowing it to concentrate on other programs that it manages;
- the amount of [$1,234,785] which will remain owing to National and its
principals after the acquisition;
17
<PAGE>
- if the acquisition is completed, David Lasker and James Orth,
principals of National, will receive some or all of the following benefits:
stock ownership in the company (up to 8.13% each), cash compensation in the
form of salaries ($180,000 per year each subject to annual increases and
potential bonuses, potential incentive compensation, and the right to
participate in company-wide employee benefit programs;
- you did not have independent advisers representing you in structuring
the acquisition;
- neither the acquisition itself nor the employment agreements for the
officers of the company were negotiated at arm's-length;
- some persons will be employees of the company and National and will not
be able to devote 100% of their time to the company;
- certain provisions of the company's certificate of incorporation and
bylaws, as well as Delaware law, could be used by management of the company
to discourage or defeat efforts of third parties to take control of the
company; and
- the services of David Lasker and James Orth will be required by
National in order for National to continue its servicing agent and asset
management responsibilities to other programs not included in the
acquisition.
For a complete discussion of these conflicts, see "Interests of Certain
Persons in the Acquisition and Conflicts of Interest" at page __ and
"Management Following the Acquisition" at page __.
CONDITIONS TO ACQUISITION
The principal non-waivable conditions to the acquisition are
- approval of the acquisition by all of the programs through a majority
vote of the investors in each,
- receipt of a final Fairness Opinion from the independent valuator
regarding the actual allocation of shares,
- approval of the shares for listing on the _______________, and
- the issuance of policies of title insurance to the company.
18
<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
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 as
permitted by the servicing agreements, in not less than three months, then
National will consider resigning as servicing agent. As a last resort,
National may determine that bankruptcy protection and liquidation may be in
the best interest of investors of a particular program.
DELIVERY OF STOCK CERTIFICATES
The company will mail your shares to you shortly after the acquisition
becomes effective.
SUPPLEMENTS
Included with this prospectus is a supplement designed to focus solely on
your program, and the impact of this proposed acquisition on investors in your
program. Please review it prior to completing your ballot.
CONSENT SOLICITATION/SUMMARY OF VOTING PROCEDURES
RECEIPT OF CONSENTS. We must receive your ballot by 11:59 p.m., Pacific
Time, on ____________, 1998 (unless extended by the company) to be counted in
the vote on the acquisition.
VOTING. You are entitled to vote based on the amount you have invested in
a program, on the record date, ___________, 1997. 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:
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<PAGE>
Name of Program Outstanding Investment;
Number of Votes
[9/30/97]
Sacramento/Delta Greens 6,031,903
Oceanside 27,325,000
Yosemite/Ahwahnee I 8,987,163
Yosemite/Ahwahnee II 19,338,632
Mori Point 12,409,626
VOTE REQUIRED. In order for the acquisition to be approved, investors
holding a majority of the outstanding investment/votes in EACH of the programs
must approve the acquisition. Based on amounts of "Trudy Pat" tenancy-in-
common interests purchased in each program, National has the following votes in
each of the programs: 3,118 Sacramento/Delta Greens; 2,082 Oceanside; 2,373
Yosemite/Ahwahnee I; 46,454 Yosemite/Ahwahnee II; and 5,279 in Mori Point.
It will cast all of its votes in favor of the acquisition.
You may vote YES or NO or ABSTAIN on the acquisition. If you do not
submit a ballot or you send a ballot marked ABSTAIN, you will be counted as
having voted AGAINST the acquisition.
You may vote only using the ballot provided, and only during the
solicitation period, which ends __________, 1998 or at a later date the company
may announce. You must return the completed ballot to National before the
solicitation period expires. If we receive your ballot signed but unmarked, it
will be counted as a vote FOR the acquisition.
You may withdraw or change your ballot before the solicitation period
expires. You will need to complete and mail a substitute ballot, and a letter
stating that you are revoking your previous vote.
INVESTOR'S REPRESENTATIONS. When you vote, you will be confirming to the
company that (i) you have received and reviewed the prospectus and the
applicable supplement, (ii) you understand that you will become a shareholder in
the company if the acquisition is completed, (iii) you have the power and
authority to vote as an investor, (iv) you understand that if you sign and send
in the ballot but do not indicate a vote, the ballot will be deemed to have been
voted IN FAVOR of the acquisition, and (v) if the acquisition is completed, to
the best of your knowledge, the company will acquire title to your interest in
the program's property free and clear of all liens and adverse claims other than
property taxes. By voting in favor of the acquisition, you are also voting to
terminate the tenancy-in-common agreement with other investors in your program
and the servicing agreement with National. Termination of the servicing
agreement relieves National of
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<PAGE>
any future liabilities or responsibilities to the program, but all amounts
owing to National under the servicing agreement after the acquisition will be
assumed by the company.
NO DISSENTERS' RIGHTS
If you vote "NO" on the acquisition, and the acquisition is approved,
you will have no choice other than to take shares in the company. You will
not be entitled to object to the transaction and receive a cash payment for
your interest under the tenancy-in-common agreements governing the programs
or applicable law. See "Voting Procedures -- No Dissenters' Rights" at page
__.
NO RIGHT TO PROGRAM BOOKS AND RECORDS
You have no rights under your program's tenancy-in-common agreement or
your servicing agreement, or under federal or state law, to obtain a list of
the names and addresses of the other investors in your program or to inspect
other books and records of your program. If you wish to communicate with the
other investors in your program, upon receipt of the material you wish mailed
together with the amount of postage necessary to make such mailing, National
will promptly mail such communications to your program's investors.
THE OFFERING/USE OF PROCEEDS
The company is offering up to 500,000 units at $10 per unit to be issued
exclusively to existing program investors. The offering is a "best efforts"
offering with no minimum number of units which must be sold. There is no
assurance that any proceeds will be received. No sales can be completed
unless the acquisition is approved. Each unit consists of one share and a
warrant. For a period of two years, each warrant entitles the holder to
purchase two shares of common stock at a per share purchase price equal to
80% of the closing price for the company's common stock on the ______ on the
trading date before the warrant exercise date. NASD broker-dealers will
receive an aggregate of $0.70 per unit commission from the company for any
units sold with their help.
If any funds are raised by the offering, they will be used to pay
offering expenses, acquisition expenses, property taxes due, and for working
capital, as detailed in the company's business plan. Any funds raised on
exercise of warrants will be used for working capital.
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<PAGE>
SUMMARY FINANCIAL INFORMATION
We are providing the following summary financial information to aid you
in your analysis of the financial aspects of the acquisition. This
information was derived from our pro forma and historical financial
statements (and related notes) found later in this prospectus and should be
read in conjunction with that information. See "Financial Statements"
beginning on page F-1. The historical financial statements for the full year
were audited; those for interim periods and those showing pro forma
information were not audited. The unaudited financial information reflects
all adjustments (consisting only of normal recurring accruals) which are
considered necessary to present fairly the financial information for the
periods. The results of any interim period are not necessarily indicative of
results for a full year, and historical and pro forma results do not predict
future results.
<TABLE>
<CAPTION>
Company Pro Forma The Acquisition Historical
------------------------------------------ ---------------------------------------------
Nine Months Ended Nine Months
September 30, Year Ended Ended Years Ended
1997 December 31, 1996 September 30 December 31
------------------ ----------------- --------------- --------------------------
The Acquisition The Acquisition 1997 1996 1995
------------------ ----------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 5,129,774 $ 6,675,718 $ 5,129,774 $ 6,675,718 $ 6,333,143
Cost of sales 3,585,345 5,327,856 3,585,345 5,327,856 5,346,735
------------ ------------ ------------ ------------ ------------
Gross profit 1,544,429 1,347,862 1,544,429 1,347,862 986,408
Expenses:
Selling, general and
administrative 3,251,026 4,017,227 2,988,526 3,667,227 2,033,496
Land write-down 983,143 845,000 983,143 845,000 -
Management fees 0 0 487,500 650,000 650,000
Acquisition expenses - - 800,544 - -
------------ ------------ ------------ ------------ ------------
Total expenses 4,234,169 4,862,227 $ 5,259,713 $ 5,162,227 $ 2,683,496
Net interest income 39,542 63,518 39,542 63,518 135,875
------------ ------------ ------------ ------------ ------------
Net loss (2,650,198) (3,450,847) $ (3,675,742) $ (3,750,847) $ (1,561,213)
Net loss per share (0.99) (1.29) N/A N/A N/A
Average number of
shares outstanding [2,666,517] [2,666,517] N/A N/A N/A
Balance Sheet Data:
Cash and cashequivalents 455,409 N/A 451,506 863,373 N/A
Total real estate 19,138,668 N/A 19,138,668 19,283,472 N/A
Total assets 23,021,022 N/A 23,284,119 25,535,082 N/A
Total debt 375,681 N/A 375,681 424,767 N/A
Total liabilities 3,356,245 N/A 4,302,356 3,952,822 N/A
Stockholders'/
owners' equity 19,664,777 N/A 18,981,763 21,582,260 N/A
Other Data:
Cash provided by
operating activities (952,142) (765,447) (1,169,642) (616,257) 652,473
Cash used in
investing activities (268,433) (186,211) (268,433) (186,211) (436,545)
Cash provided by
financing activities 1,026,158 642,815 1,026,158 642,815 115,311
</TABLE>
[Note that the average number of shares outstanding will change as we
recalculate exchange values until we go effective. That's why they are
bracketed.]
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<PAGE>
RISK FACTORS
THE ACQUISITION INVOLVES CERTAIN RISKS. YOU COULD LOSE ALL, OR A
SIGNIFICANT AMOUNT OF THE REMAINING VALUE, OF YOUR INVESTMENT IF THE COMPANY
IS NOT SUCCESSFUL, IF THE STOCK MARKET DECLINES OR IF REAL ESTATE VALUES IN
CALIFORNIA DECLINE FURTHER. YOU SHOULD READ THIS ENTIRE PROSPECTUS, INCLUDING
ANY SUPPLEMENTS. 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. 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. 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.
THERE MAY BE DIFFERENCES BETWEEN EXCHANGE VALUES AND SALE VALUES. The
exchange value of the programs may not be what the properties would sell for
in a cash sale transaction. Appraisals reflect conditions in the second
quarter of 1997 (plus, for the Yosemite/Ahwahnee I and II properties only,
October 1996), and do not reflect subsequent events. Exchange values reflect
adjustments to appraised values described in "Background and Reasons for the
Acquisition -- Calculation of Exchange Value" at page __. This means that,
as part of this transaction, you could wind up with less money in the
long-term than if your program's property is sold for cash. The exchange
value of the shares the owners of Sacramento/Delta Greens, Yosemite/Ahwahnee
I and II and Mori Point will receive will be less than the appraised values
of the properties used to calculate exchange values. At any
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<PAGE>
point in time, the value of those shares might not exceed the appraised
values of the properties used to calculate exchange values at any particular
time in the future. Because of the program's cash position, the owners of
the Oceanside property will receive shares whose exchange values are greater
than the most recent appraised value. However, there is no assurance that
the future value of the shares will continue to be greater than the most
recent appraised value of the property.
In addition to the differences in the exchange value to appraised value
comparisons described in the last paragraph, there are different risks
relating to each of the properties. While these risks presently exist for
the investors in those properties, the acquisition could result in all
investors being subject to all of these risks. The material on-going risks
for each property are as follows:
SACRAMENTO/DELTA GREENS: There is a risk that adequate funds will not
be available to (i) finance engineering and endangered species studies and
planning for final approvals, (ii) finance utilities and roads and (iii) pay
property taxes. 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 question whether the development and sale of lots or homes will be
profitable.
YOSEMITE/AHWAHNEE I AND II: 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, (ii) construct an additional planned 100 recreational
vehicle sites, (iii) fulfill approvals and construction for the first group
of timeshare units and (iv) pay property taxes. There are also questions
about the profitability of recreational vehicle memberships, timeshares and
golf course activities.
OCEANSIDE: There is a risk that enough investment money may not be
available to begin construction of the next tract of homes. There are
questions whether lots or homes will be marketable and home financing
available. There is also strong nearby competition.
MORI POINT: There is a risk that the city government will not approve
the property for its intended use. Capital to build roads and utilities will
be needed. Finally, there is a question regarding the marketability of the
final product.
THE TRADING PRICE FOR THE SHARES IS UNCERTAIN. The shares have never
been sold in a public securities market. There is no guaranty that a liquid
trading market will develop for the shares. If the shares trade, the trading
price may be less than the $10 issuance price or the book value of the
company's assets. The
24
<PAGE>
market price of the shares would likely be less after the acquisition if
investors decide to sell a large number of the shares shortly after the
acquisition. Therefore, the shares may be worth less than $10 in the open
market.
THERE MAY BE CONFLICTS OF INTEREST IN NATIONAL'S STRUCTURING THE
ACQUISITION. The programs are not partnerships and, thus, National does not
have the fiduciary duties of a general partner in dealing with the programs.
However, as servicing agent for each of the programs, National has the
specific duties to investors set forth in the various servicing agreements.
In addition, under California law, as an agent, National is under a fiduciary
duty to investors (i) to use reasonable care, diligence and skill in its
work, (ii) not to compete with the investors' interests without full
disclosure to, and agreement from, the investors, and (iii) not to obtain an
interest adverse to the investors without full disclosure to, and consent
from, the investors.
After the acquisition, the founders of the company and principals of
National will own almost 20% of the company's stock and receive compensation
as officers. Shares and compensation to be held or received after the
acquisition by National, and by principals, employees and consultants of
National, the programs and the company have been determined by National and
its principals. This means that such persons may not always have the ability
to make decisions for the company without thinking of the consequences to
themselves. For additional information concerning the potential conflicts
between National, its principals and the investors and the procedures adopted
to mitigate the impact of these conflicts on the acquisition, see "Interests
of Certain Persons in the Acquisition and Conflicts of Interest" at page __,
"Background and Reasons for the Acquisition -- Recommendation of National and
Fairness Determination" at page __, and "-- Terms of the Acquisition" at page
__.
Despite the potential conflicts of interest, none of National, the
company or their controlling persons, believe that such conflicts had any
material affect on their recommendation to investors on the acquisition.
YOU DO NOT HAVE INDEPENDENT ADVISORS REPRESENTING YOU IN STRUCTURING
THIS TRANSACTION. The terms of the acquisition were not negotiated at
arm's-length and, therefore, may be less favorable to you and more favorable
to National and its principals. If the acquisition had been negotiated by
independent parties at arm's length, the principals of National and the
company might have been given fewer shares. Additionally, the allocation of
shares might have been more favorable to one program than another. National
did not retain an unaffiliated representative to act on your behalf because
it, as your agent, has attempted to take action to protect your interests in
the property. Once the loans you made to the original developers defaulted,
National could have resigned or ceased acting on your behalf to obtain some
value from your failed loan. However, National has continued to act as
25
<PAGE>
servicing agent for several years, and, in fact, has not taken all the fees
to which it was entitled. It even advanced money as needed on occasion to
protect your interests. Neither National nor the programs had additional
funds to hire a separate representative for you.
THE TRANSACTION MAY NOT BE TAX-FREE. The Federal income tax consequences
of the acquisition will depend primarily on whether the acquisition qualifies
as a Section 351 transaction under the Internal Revenue Code of 1986, as
amended. If the acquisition qualifies under Section 351, generally no gain
or loss will be recognized by the investors upon the receipt of shares in
exchange their interest in the properties. If the acquisition does not
qualify under Section 351, investors generally will recognize gain or loss.
See "Federal Income Tax Consequences" at page __. Among other requirements
to qualify the acquisition under Section 351, investors must be treated as
owning 80% or more of the outstanding shares of the company "immediately
after the exchange." As discussed in "Federal Income Tax Consequences -
Qualification of the Acquisition as a Section 351 Transaction - 1. General
Rules," this determination depends on whether investors who subsequently
dispose of shares are subject to the "step transaction doctrine" with respect
to such dispositions and their initial acquisition of the shares.
Neither the company nor counsel to the company is in a position to make
a determination as to whether investors who will acquire more than 80% of the
outstanding shares of the company will or will not be subject to the step
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 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.
26
<PAGE>
YOU WILL HAVE NO DISSENTERS' RIGHTS IN CONNECTION WITH THE ACQUISITION.
See "Voting Procedures -- No Dissenter's Rights" at page __.
THE COMPANY MAY INCUR SIGNIFICANT ADDITIONAL DEBT. After the
acquisition, the properties will not be subject to any liens other than
possible mechanics' liens and liens imposed as a result of an aggregate of
approximately $1,052,000 in property taxes owed as of September 30, 1997.
However, the Board of Directors could allow the company to borrow using the
company's real estate assets as security. The more debt a company has, the
more of its cash flow is necessary to be used to pay down such debt. If cash
flow cannot cover debt repayment, the company could lose those assets to
creditors. 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 __.
DISTRIBUTIONS WILL BE UNPREDICTABLE. After the acquisition, you will not
receive any regular distributions. Instead, in at least the first two years,
the Board intends to accumulate cash for working capital or other uses.
After that time, at the end of each quarter of operations, the Board will
consider whether distributions to shareholders is financially feasible. The
company will not use the proceeds from the sale of units to pay amounts owing
to National. National will be paid only from company operating revenue or
from proceeds of the sale of assets.
NATIONAL'S RECONCILIATION OF THE YOSEMITE/AHWAHNEE APPRAISALS MAY BE
INCORRECT. As discussed in "Background and Reasons for the Acquisition --
Exchange Values and Allocation of Shares to the Programs" at page __,
National had to reconcile the May 1997 appraisal of the Yosemite/Ahwahnee
properties which reflected an aggregate "as is" appraised value of
$20,916,000 ($8,050,000 for the Yosemite/Ahwahnee I property and $12,866,000
for the Yosemite/ Ahwahnee II property) with an October 1996 appraisal which
reflected an "as is" aggregate appraised value of $4,000,000 (adjusted by
National to be $1,134,375 for the Yosemite/Ahwahnee I property and $2,864,625
for the Yosemite/ Ahwahnee II property). National reconciled the two
appraisals as described on page __ and concluded that the Yosemite/Ahwahnee I
and II properties had values of $3,912,454 and $6,253,121, respectively.
National believes its approach to the reconciliation
27
<PAGE>
of the two appraisals was reasonable and has received an opinion from an
independent valuation company that the allocation of the shares among the
programs is fair. However, if National's reconciled value was too low for
either program, the program's exchange value would be too low and would
result in too few shares being allocated to that program in the acquisition.
Conversely, if National's reconciled value was too high for either program,
that program would receive too large an allocation of shares in the
acquisition to the detriment of the investors in the other programs.
REAL ESTATE RISKS
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 September 30, 1997:
Sacramento/Delta Greens - approximately $54,000; Oceanside - approximately
$10,000; Yosemite/Ahwahnee (combined) - approximately $640,000; and Mori
Point - approximately $294,000. Annual payments required for all the
properties for current taxes (including amounts currently due on five-year
payment plans) total approximately $431,000. In the case of Sacramento/Delta
Greens and Mori Point, National has entered into 5-year payment plans with
the applicable taxing authorities. It plans to do the same with
Yosemite/Ahwahnee shortly.
PERMITS TO DEVELOP CERTAIN PROPERTIES HAVE LAPSED OR 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 other governmental
agencies is expensive and time consuming.
Construction of the Sacramento/Delta Greens property will require the
filing of a final map and obtaining building permits. The existing tentative
map approval does not entitle the property owner to build on the property.
The Yosemite/Ahwahnee property has a final map on 45 remaining single family
estate lots and a use permit for a 600 space recreational vehicle park.
Additional planned usage such as timeshare will require extensive county and
state approvals. 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.
28
<PAGE>
Such reinstatement will be complicated by the existence of two endangered
species living on the property.
COMPLIANCE WITH CONDITIONS IN EXISTING PERMITS ON THE SACRAMENTO/DELTA
GREENS PROPERTY AND APPROVALS MAY REQUIRE CHANGES TO DEVELOPMENT PLANS. The
tentative tract map for the Sacramento/Delta Greens property requires that
studies must be conducted to identify any endangered species' habitat which
may exist on the property. If any are identified, changes to the tentative
development plans will have to be made and approved that will reduce or
eliminate any damage to the habitat. The longer this process takes, the
longer it will be until the company can make money from the property.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO RAISE WORKING CAPITAL. Unless
funds from sale of the units or from sale of certain assets of the programs
become available, the company will not be able to proceed with its business
plan and properties might be lost to tax sales before sales to third parties
can be arranged. The company will also need financing from other sources to
complete its plan. Completion of its business plan is necessary for the
company to be successful. Financing sources are not predictable and interest
rates or other costs of financing may be prohibitive. Other than a
construction loan source for the Oceanside project, neither the projects nor
the company have received any commitment from other sources.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE OR
SACRAMENTO/DELTA GREENS PROPERTIES 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.
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
29
<PAGE>
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. While economic
conditions are improving 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 [$1,234,785] 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.
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.
30
<PAGE>
The Yosemite/Ahwahnee golf course can be an important amenity which
may attract potential timeshare purchasers in the future. At this time, the
project does not rely on the golf course for its revenue. National estimates
that the value of the golf course will be less than 5% of the assets of the
company.
RISKS RELATING TO RESIDENTIAL DEVELOPMENT
MARKET RISKS AND COMPETITION WILL AFFECT THE OPERATIONS OF THE COMPANY.
The market for residential real estate is cyclical and the residential lot
development industry is highly competitive. If the demand for new lots does
not keep pace with competitive supply, our properties may be sold at a loss.
The location of the company's lots, the presence of other competition,
customer acceptance and pricing are all factors affecting success.
Competitors may have better financial, managerial and other resources,
affecting our ability to successfully compete.
Oceanside and Sacramento/Delta Greens are proposed residential
developments and represent over 25% and 6% of the assets of the company,
respectively. Although there can be no assurances, net revenues generated
from Oceanside are expected to be in excess of only $5,000,000 over the
following 36 months and net revenues from Sacramento/Delta Greens may equal
or exceed $3,600,000 during a similar period.
RESORT DESTINATION RISKS
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. In the resort and hotel/conference
center property at Mori Point, we may be competing against well-known chains
and extended-stay inns.
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. Mori Point
represents over 20% of the assets of the company and, assuming it is operated
as a hotel/conference center, its revenues may exceed 20% of the total
revenues of the company upon completion of the project.
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<PAGE>
SPECIFIC RISKS RELATING TO TIMESHARE.
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, there are relatively more defaults among timeshare owners
when they borrow to buy timeshares compared to 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%.
SPECIFIC RISKS RELATING TO RECREATIONAL VEHICLE PARKS.
Risks relating to recreational vehicle parks are substantially the same
as those described above for timeshare projects.
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. Some of these provisions include:
THE BOARD'S ABILITY TO ISSUE PREFERRED SHARES WHICH COULD AFFECT YOUR
VOTING POWER AND TO ISSUE ADDITIONAL SHARES TO DISCOURAGE OR IMPEDE A MERGER
OR OTHER TRANSACTION THAT MAY BE IN YOUR BEST OR FINANCIAL INTEREST. See
"Description of Shares" at page __ and "Shares Eligible for future Sale" at
page __.
THE BOARD IS DIVIDED INTO THREE CLASSES SERVING STAGGERED THREE YEAR
TERMS. You may not be able to efficiently change control of the company if
you believe that change would be in your best interests. See "Comparisons of
Programs and Company -- Anti-Takeover Provisions" at page __.
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<PAGE>
THERE ARE RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS WITH INTERESTED
PARTIES. There are restrictions on what interested parties can do for three
years, without the approval of the Board of Directors. See "Comparison of
Programs and Company -- Restrictions on Related Party Transactions and
Business Combinations" at page __.
THE DELAWARE LAW, AS WELL AS THE CHARTER DOCUMENTS, LIMIT THE LIABILITY
OF DIRECTORS AND OFFICERS TO SHAREHOLDERS. See "Fiduciary Responsibility and
Indemnification -- Limitation on Liability of Directors and Officers of the
Company" at page __.
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. See "Comparisons of the Programs and the Company --
Anti-Takeover Provisions" at page __.
33
<PAGE>
CAPITALIZED TERMS USED THROUGHOUT THE REST OF THIS PROSPECTUS AND IN THE
ACCOMPANYING SUPPLEMENT ARE DEFINED IN THE GLOSSARY LOCATED AT THE END
OF THE PROSPECTUS, JUST BEFORE THE FINANCIAL STATEMENTS.
BACKGROUND AND REASONS FOR THE ACQUISITION
GENERAL
National is a California corporation that was formed in 1986. National
is a licensed real estate broker in the State of California. Pursuant to a
series of permits issued by the California Department of Corporations,
National offered fractionalized interests in loans secured by deeds of trusts
to investors who satisfied the suitability standards set forth in the
applicable offering materials and who could invest a minimum of $2,000. The
fractionalized interests were commonly referred to as trust deed
participation or "Trudy Pat" investments.
From 1988 through 1993, National arranged a number of loans for various
builders and land developers. In return, these borrowers offered promissory
notes and the security of a first deed of trust on their real estate
project(s) as collateral for a loan, normally at 50% or less loan-to-value
ratio (the ratio of the cumulative amount of the notes divided by the value
of the property as appraised by an independent qualified real estate
appraiser) for unimproved property and up to 85% loan-to-value of the
completed property (determined by independent appraisers) for property under
construction. The notes generally were short-term (two years), often with
extensions for one or two years at the option of the borrower and provided
interest to investors which was significantly higher than yields of other
types of investments available at the time. Pursuant to each servicing
agreement executed by each Investor, National was to receive a servicing fee
of one-twelfth of one percent of the initial amount of the note amount per
month.
34
<PAGE>
The following table sets forth for each of the programs the servicing
fees National is entitled to receive pursuant to the servicing agreements:
Initial Loan Annual Monthly
Program Amount Fee (1%) Fee (1/12 of 1%)
--------- ------------ --------- ----------------
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
Each "Trudy Pat" offering was independent of another and extensive
disclosure documents were provided to each Investor. The disclosure
documents provided investors with specific details of the investment
opportunity including: the nature of the investment as a tenancy-in-common
interest, a description of the property used as security for the loan, type
of property, value as appraised by an independent qualified appraiser at the
time of the initial funding of the loan, terms of the loan, loan amount,
loan-to-value ratio, interest rate, borrower resume and experience, borrower
financial statements, other appraisal information, as well as a full
disclosure of the risks involved with the investment.
"Trudy Pat" interests were sold exclusively through participating NASD
member broker-dealers. At the time of purchase through their broker, all
Investors executed documents which included an acknowledgment of receipt of
the offering circular, a servicing agreement and a tenancy-in-common
agreement, as well as representations of their suitability as participants
according to the standards set forth in the offering documents and an
acknowledgment, confirmed by their broker, of their understanding of the
pertinent facts relating to the liquidity and marketability of their
interests. The servicing agreement provided for National to collect payments
from the borrower on behalf of the Investors and distribute the proceeds of
the collection net of National's servicing fees. The servicing agreements
also authorized National to take various remedial actions on behalf of
Investors in the event of a borrower default, subject to broad discretionary
powers and authorities. 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.
In 1989, National completed the funding of a real estate loan for the
Sacramento/Delta Greens Program in an aggregate amount of $5,000,000 by
selling undivided tenant-in-common interests in such loan to 332 Investors.
National completed the funding of similar real estate loans for the
Yosemite/Ahwahnee I Program (1989) in an aggregate amount of $6,500,000 with
426 Investors; for the Mori Point Program (1990) in an aggregate amount of
$10,000,000 with 486 Investors; for the Yosemite/Ahwahnee II Program (1992)
in an aggregate amount of $13,500,000 with 837 Investors; and for the
Oceanside Program (1993) in an aggregate amount of $30,000,000 with 1,755
Investors. All of such offerings were sold pursuant to permits issued by the
California Department of Corporations and interests were sold only to persons
who were residents of the State of California.
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<PAGE>
Each Program has served as a separate investment vehicle for Investors.
Underwriting of a loan was based on an appraisal by an independent real
estate appraiser. In the case of each of the Programs, the borrowers have
defaulted on their loans and National has obtained title to the real property
securing the loans as the agent of and for the benefit of the Investors in
each of the Programs. The interests which each of the Investors held in the
real estate loans have been converted through the foreclosure process into
tenant-in-common interests in the underlying real estate that formerly
secured the loans. (For purposes of this discussion, the term "foreclosure"
includes, but is not limited to, taking title to real estate constituting
security for the applicable loans through exercise of a power of sale under a
deed of trust or through accepting a deed from the applicable borrower.)
The following table sets forth for each of the Programs the date title
was obtained on behalf of Investors to the underlying real estate ("Ownership
Date"), the amount of unpaid principal at the Ownership Date, the amount of
unpaid interest at the Ownership Date, the appraised value of such real
estate at the Ownership Date, and the appraised value of the Property used
for purposes of calculating exchange values:
<TABLE>
<CAPTION>
Unpaid Unpaid Appraised Value Appraised Value
Ownership Principal Accrued as of the For Exchange
Program Date Balance Interest Ownership Date(1) Value Calculations
------- ----- ------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Sacramento/Delta . . . . 3/93 $ 5,000,000 $ 425,000 $ 3,075,000 $ 2,000,000
Greens
Oceanside. . . . . . . . 11/93 27,600,000 0(2) 6,484,000 2,850,000
Yosemite/Ahwahnee I. . . 9/95 6,500,000 1,867,470 9,325,000 3,912,454
Yosemite/Ahwahnee II . . 9/95 13,500,000 4,067,007 10,816,000 6,253,121
Mori Point . . . . . . . 8/92 10,000,000 1,570,834 4,100,000 5,500,000
</TABLE>
- -------------------
(1) Each Property was appraised in the Spring of 1997 to determine its value
as of the Ownership Date.
(2) No delinquent interest.
In the case of each of the Programs, current appraisals indicate that
the value of the Properties is significantly lower than the unpaid principal
and interest on the loans due principally to the deteriorating market
conditions for real estate which occurred throughout California. Despite the
limited additional funding available from Investors or otherwise, National
has attempted to maximize the value of the real estate assets while seeking
ways to convert them to distributable cash for Investors. See "-- Management
of Programs Since Foreclosure."
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
36
<PAGE>
its Common Stock arbitrarily valued at $10 per share. See "-- Calculation of
Exchange Value" and "Allocation of Shares Among the Programs."
Except as described in this Prospectus, no contacts have been received
from any third parties regarding an acquisition of the assets of any of the
Programs, or a combination or merger of any of the Programs.
MANAGEMENT OF THE PROGRAMS SINCE FORECLOSURE
SACRAMENTO/DELTA GREENS PROGRAM. As the agent of and on behalf of the
Sacramento/Delta Greens Program Investors, National took title to the
Property of the Sacramento/Delta Greens (formerly "North Shores") Program in
March 1993. An appraisal of the Property's value was not obtained at the
time title was taken; however, in May 1997, National obtained appraisals to
determine the Property's value as of May 1997 and as of the date title to the
Property was taken. The Property is located in Sacramento, California, and
is held for the benefit of the Sacramento/Delta Greens Investors by National
Investors Land Holding Trust IV. Subsequent to the foreclosure, on behalf of
the Sacramento/Delta Greens Investors, National hired consultants and
engineers to determine the economic, political and environmental issues
surrounding the Property. It was determined that there was considerable
resistance to developing the Property into any duplex housing and, so, it was
redesigned to include over 500 lots to be developed in multiple phases as a
single-family detached, entry-level housing product and the revised tentative
map has been accepted by the City of Sacramento. Attempts have been made to
find joint venture partners to assist in the financial requirements for
processing the final tract map, as well as to provide capital for
infrastructure. However, because of market conditions through 1996, most
builders in the area were attracted to real estate projects that already had
finished lots. National has not sought financing from third party sources
for the pre-construction costs, as such a loan would have exposed the
Investors to loss of the Property unless a builder could be found to become
financially involved in the Property's development. National believes that
the Sacramento market for entry-level single-family residential housing has
improved. National is in the process of obtaining engineering for the final
subdivision map for the initial phase of the project and it is anticipated
that, subject to the availability of financing, the Property will be
developed and homes will be constructed in successive phases. See "--
Efforts to Dispose of the Properties" and "-- Alternatives to Acquisition"
for a discussion of alternatives considered for this Program by National.
OCEANSIDE PROGRAM. Funding for the Oceanside Program was completed in
stages commencing in November 1991. The final stage of funding (amounting to
approximately $6,374,000) was completed in April 1993. In November 1993, due
to a default in the loan determined by the borrower's admission that funds
intended to be used to pay subcontractors had been diverted to corporate
overhead, National succeeded in obtaining the borrower's agreement to grant
the ownership of the Oceanside Properties to Oceanside Development, Inc.
("ODI"), a corporation formed to hold title to, and manage, the Oceanside
Property on behalf of the Oceanside Investors. An appraisal of the
Property's value was not obtained at the time title was taken; however, in
May 1997, National obtained appraisals to
37
<PAGE>
determine the Property's value as of May 1997 and as of the date title to the
Property was taken. An experienced and reputable homebuilder was hired and,
since 1993, a total of 116 homes in the Encore tract have been built and
sold. An additional 23 lots were recently sold to that homebuilder for
approximately $593,000 net of selling expenses plus a $50,000 unsecured note
due in October 1998. Principal and interest in the aggregate amount of
approximately $7,000,000 have also been returned to Investors.
There are an additional 111 lots available on which homes can be built
on the Symphony tract, but an estimated $700,000 of equity is needed to
qualify for a traditional construction loan. National does not believe that
equity is available from the Investors. National has attempted to sell, and
will continue its efforts to sell, the Symphony tract to homebuilders in the
area. If a satisfactory sale of the Symphony tract does not occur, National
believes that the remaining lot inventory of the Program can be built-out
within a two to three year time frame based on current absorption rates and
prices. However, without significant increases in prices and sales velocity,
Investors would not likely receive a full return of their investment from the
completion of the construction and sales of homes on the remaining lots.
Since the original projections by the borrower were based on the construction
of a number of homes which exceeded the number of lots initially acquired
with loan proceeds, the Program has anticipated that more lots would be
acquired so that a sufficient number of homes could be constructed and sold
to provide for an acceptable monetary return to Investors. See "-- Efforts
to Dispose of the Properties" and "-- Alternatives to Acquisition" for a
discussion of alternatives considered for this Program by National.
YOSEMITE/AHWAHNEE PROGRAMS. Title to the Yosemite/Ahwahnee Programs'
Properties was obtained in September 1995. An appraisal of the Property's
value was not obtained at the time title was taken; however, in May 1997,
National obtained appraisals to determine the Property's value as of May 1997
and as of the date title to the Property was taken. The properties are
located in Madera County, California, approximately 46 miles northeast of
Fresno and 15 miles south of Yosemite National Park. Title to the 660-acre
portion of the project is held by National Investors Land Holding Trust VIII
for the benefit of the Yosemite/Ahwahnee II Program Investors and title to
the 990-acre parcel is held by National Investors Land Holding Trust IX as
the agent of and for the benefit of the Yosemite/Ahwahnee I Program Investors.
Upon completion of funding of the Yosemite/Ahwahnee II loan, the
Yosemite/Ahwahnee I Investors were secured by a first deed of trust on the
660-acre portion and by a second deed of trust on the 990-acre portion. The
Yosemite/Ahwahnee II Investors were secured by a first deed of trust on the
990-acre portion and a second deed of trust on the 660-acre portion. After
the borrower's default, National foreclosed on the second deeds of trust as
the agent of and on behalf of the Investors in each Program. The first deeds
of trust were left in place to protect the Investors against subsequent
creditors. These will be "extinguished" as a part of the Acquisition.
Since taking over the operation of these Properties, National has
operated them as the agent of and on behalf of the Investors through a
corporation known as Ahwahnee Golf Course
38
<PAGE>
and Resort, Inc. Approximately $3,000,000 has been funded by Investors'
assessments in these Programs to provide working capital to maintain, improve
and further develop the project, and to fund the negative cash flow from
operations. National has attempted to obtain conventional financing for the
project without success due to the fact that no title company would provide a
lender's policy of title insurance for the loan because of the
tenancy-in-common relationship among the Investors holding beneficial
ownership of the Property. National has also explored the possibility of a
sale of the entire project; however, no offers were forthcoming. National
has continued its efforts to enhance the revenue production from the golf
course, club house and restaurant facilities, to market and develop
recreation vehicle sites, and to pursue additional entitlements required to
develop the remainder of the project, potentially as a timeshare facility.
The project is expected to experience negative cash flow until and unless
additional recreational vehicle sites are constructed or until timeshare
sales can commence. See "-- Efforts to Dispose of the Properties" and "--
Alternatives to Acquisition" for a discussion of alternatives considered for
this Program by National.
MORI POINT PROGRAM. The Mori Point Program Property was foreclosed on
in August 1992 after National, on behalf of the Investors, received relief
from the borrower's bankruptcy stay from the Bankruptcy Court. An appraisal
of the Property's value was not obtained at the time title was taken;
however, in May 1997, National obtained appraisals to determine the
Property's value as of May 1997 and as of the date title to the Property was
taken. Title is held by National Investors Land Holding Trust as the agent
of and for the benefit of the Investors. The Property was originally to be
developed into a hotel/conference center in Pacifica, California, which is
approximately 15 miles southwest of San Francisco on the coast. National has
endeavored to negotiate alternative uses for the Property which would be
supported by the community and be more economically feasible than a
hotel/conference center. However, improvements in economic conditions in the
Bay Area have recently revived the potential for and are encouraging to
segments of the hotel industry. Reinstating the specific plan and tentative
tract map that expired under the original borrower's ownership will require
substantial funds in order to conduct the necessary environmental studies and
mitigation for two endangered species, as well as to complete the required
land planning, engineering and preliminary architectural plans. Such funds
are not currently available and would have to come from additional capital
submitted by the Program's Investor group or by an industry joint venture
partner. Since funds are not available to further define the use to which
the Property may be put, National has not attempted to obtain
pre-construction financing. There would be no potential source for repayment
of such loan other than the Investors. An offer from a potential joint
venture partner was received in early October 1996, but such offer was
rejected by Investors holding a majority of the interests. See "-- Efforts
to Dispose of the Properties" and "-- Alternatives to Acquisition" for a
discussion of alternatives considered for this Program by National.
EFFORTS TO DISPOSE OF THE PROPERTIES
SACRAMENTO/DELTA GREENS PROGRAM. Subsequent to foreclosure on the
Property in 1993, the project manager presented the Property to several small
and medium sized builders in the Sacramento area. No significant interest
was shown by such builders at that time. However,
39
<PAGE>
approximately a year later, a purchase offer and joint venture proposal were
received, both of which were rejected by the Investors. 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, ODI began the process
of marketing the Symphony tract lots on an "as-is" basis. Those efforts
resulted in a preliminary offer from a major homebuilder to buy the Symphony
tract in bulk for approximately $41,000 per lot, subject to due diligence. A
sale escrow was opened but the details of the offer were not submitted to the
Oceanside Investors pending completion of the buyer's due diligence. A sale
at that price would not have yielded an amount sufficient to return the
Investors' capital. After conducting due diligence, the potential buyer
asserted that the cost to finish the lots would be about $42,000 per lot
instead of its original estimate of approximately $26,000 per lot for such
costs and attempted to negotiate the price down to approximately $25,500 per
lot, $15,000 less than the preliminary offer. Before selling expenses and
closing costs, that price per lot would have yielded $2,830,500,
approximately $20,200 less than the May 1997 appraised value. Based on
advice from consultants, National believed the potential buyer's estimate of
costs to finish the lots was too high. Thereafter, the sale escrow was
cancelled. Subsequent to the Acquisition of the assets of the Oceanside
Program, the Company may then attempt to complete a sale of the Symphony
tract, if appropriate.
YOSEMITE/AHWAHNEE I AND II PROGRAMS. The foreclosures took place in
September 1995. At that time, the Programs' Properties also included 47
finished one-to-three-acre estate lots available for sale. Two of those lots
were sold. Although the estate lots were listed with local brokers, no
further offers were forthcoming and the listings have been allowed to expire.
After the foreclosure, National contacted several of the former borrowers'
potential joint venture partners and possible purchasers of the Properties,
but no offers were forthcoming. There have been no other recent sales
efforts.
MORI POINT PROGRAM. After foreclosing, the Property was listed for sale
with a large commercial brokerage firm to no avail. In January 1996, the
Investors were offered a joint venture opportunity that National solicited on
their behalf. Holders of a majority of the tenancy-in-common interests voted
to turn down the proposal because they did not want to risk losing the
Property which the partner had proposed be put up as collateral for a loan to
further develop the Property. There have been no recent efforts to sell the
Property because of the entitlement work that needs to be done before the
Property's appraised value could be realized through an orderly liquidation.
------------------
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
40
<PAGE>
current real estate market in their respective present conditions for an
amount sufficient to return the investment to any of the Programs' Investors.
National is aware of no alternative which would yield such a return. While
some Investors in one or more of the Programs may be willing to sell at a
substantial loss, based on National's contacts with the Investors in each of
a Programs, National believes that a majority of such Investors are not
willing to sell at a substantial loss.
National has determined that, if the assets of the Programs are
consolidated, the funds that can be generated from the sale of units and one
or more of the Properties can be used to finance the continued development
and expansion of the Company. National believes the Company can be operated
in such a way as to permit the possibility of a greater return to all of the
Investors in the various Programs than they could receive on liquidation at
the present time. Cash from the sale of some of the Company's assets may
also be utilized to acquire other assets that are suitable for the Company's
plans for growth and increased value.
ALTERNATIVES TO ACQUISITION
Before deciding to recommend the Acquisition, National considered
alternatives in an effort to achieve the most favorable cash flow
distribution and the maximum Investor return. These alternatives were (i)
continued operation of each of the Programs under their respective business
plans under the existing tenancy-in-common structure, (ii) liquidation of
each of the Programs in an orderly manner or in a bankruptcy liquidation, and
(iii) a reorganization of the Programs in a bankruptcy proceeding. In the
context of analyzing a continuation of each Program, National considered the
difficulties involved in selling the Properties described above in "--
Efforts to Dispose of the Properties," and the difficulties in obtaining
outside financing described above in "-- Management of the Properties Since
Foreclosure."
Set forth below are the conclusions of National regarding its belief that
the Acquisition is more beneficial to the Investors than the alternatives
considered. At this time, National is unable to quantify the consideration
that would be received by Investors pursuant to any of the alternatives.
However, neither National nor the Company is aware of any factors not
discussed in this Prospectus that materially and adversely affect the value
of the Shares to be received in the Acquisition for purposes of comparisons
to the alternatives.
CONTINUATION OF THE PROGRAMS. An alternative to the Acquisition would be
to continue the Programs. The Programs would remain separate groups of
tenancy-in-common investors, with their own assets and liabilities, governed
by their existing servicing agreement and tenancy-in-common agreement.
Although National would still be entitled to servicing fees on an on-going
basis, as well as accrued fees and expenses, National could discern no
advantages to Investors in achieving their objectives from the continued
operation of the Programs under their respective existing business plans.
National rejected this alternative because it was concluded that maintaining
the Programs separately would likely have the following negative results when
compared with the benefits that National
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<PAGE>
perceived may be derived from the Acquisition: (i) a less efficient and cost
effective exit strategy for Investors wishing to liquidate their investment
at a future date; (ii) inability of individual Investors to control the
timing of the tax impact of the liquidation of their particular investment;
(iii) illiquidity of individual investments on a current basis due to the
lack of any established secondary market; (iv) difficulty in valuing the
individual investments due to the virtual non-existence of a secondary market
for the interests; (v) less flexibility and control in actively managing the
real estate underlying each of the Programs; (vi) access to capital for the
Programs would be limited primarily to Investor assessments; and (vii)
without further infusions of funds from Investors, each of the Properties
could be lost in tax sales for delinquent property taxes.
The capital needed to finish lots and provide for the infrastructure is
necessary for the Sacramento/Delta Greens Program. Continuing to build homes
and potentially acquiring additional lots are requirements for the Oceanside
Program. With respect to Yosemite/Ahwahnee, the business plan for those
Programs assumes that there will be a large infusion of additional capital to
support the expansion of the recreational vehicle park, construction of
timeshare units and very aggressive marketing of these and other products.
The Mori Point project needs funds to continue with the hotel/conference
center entitlement process. Unfortunately, there are limited sources of
outside capital to fund the financial demands of any of these business plans
independently. Absent the Acquisition which may provide the Company with
more traditional financing alternatives and which, through the sale of
certain portions of some of the real estate assets, could generate internal
capital, THE MOST LIKELY SOURCE OF CAPITAL TO COMPLETE THE BUSINESS PLANS OF
THE RESPECTIVE PROGRAMS IS MANDATORY ASSESSMENTS AND VOLUNTARY ADVANCES FROM
"TRUDY PAT" INVESTORS. ANY DELAY ON THE PART OF INVESTORS IN PROVIDING SUCH
CAPITAL WOULD HAVE A SIGNIFICANT NEGATIVE EFFECT ON THE SUCCESS OF ANY OF
SUCH BUSINESS PLANS, AND COULD RESULT IN THE LOSS OF SOME OF THE PROPERTIES
IN TAX SALES FOR DELINQUENT PROPERTY TAXES.
LIQUIDATION OF THE PROGRAMS. Another alternative available to National
is to proceed with a liquidation of each of the Programs and distribute the
net liquidation proceeds to the "Trudy Pat" Investors. National concluded
that there would be several disadvantages to using this strategy. A complete
liquidation of the Programs would deprive those Investors who do not desire
to liquidate their investment from participating in the benefits of future
performance and possible property value improvements. In the case of each of
the Programs, a sale in bulk in the near future of the applicable Properties
would yield a significant loss to each of the Investors.
The following table sets forth the appraised values used to calculate
Exchange Values, estimated liabilities and closing costs at ten percent of
appraised values, net cash from a sale of appraised values, unpaid principal
and unrepaid assessments and advances (out-of-pocket cash), and the cash loss
that would result from a sale at appraised values.
42
<PAGE>
<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(3) from Sale(4)
- --------------- ----------------- ---------------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta $2,000,000 $200,000 $1,800,000 $ 5,606,903 $ (3,806,903)
Greens
Oceanside 2,850,000 285,000 2,565,000 27,325,000 (24,700,000)
Yosemite/Ahwahnee I 3,912,454 391,245 3,571,209 7,119,693 (3,598,484)
Yosemite/Ahwahnee II 6,253,121 625,312 5,627,509 15,271,625 (9,644,116)
Mori Point 5,500,000 550,000 4,950,000 10,838,792 (5,888,792)
- ------------------
</TABLE>
(1) Appraisals were conducted in May 1997. However, an appraisal of the
Yosemite/Ahwahnee properties was also conducted in October 1996. National's
management reconciled the two appraisals to arrive at the appraised values
for the Yosemite/Ahwahnee properties to arrive at the appraised values in
the above table.
(2) Includes estimated brokerage commissions; estimated escrow, title policy,
legal and other closing costs; plus amounts due to National for unpaid
servicing fees and/or expenses advanced.
(3) Reflects unpaid principal at Ownership Date plus assessments and advances
paid through [September 30], 1997.
(4) If the Yosemite/Ahwahnee Properties could be sold for their May 1997
appraised values of $8,050,000 and $12,866,000, respectively (which National
believes to be unlikely in the near future due to the time and costs
required to develop the Properties), net of estimated liabilities and
closing costs of ten percent, the sale of the Yosemite/Ahwahnee I Property
would yield approximately $125,000 in excess of cash advanced by Investors
in that Program, and the sale of the Yosemite/Ahwahnee II Property would
yield a cash loss of approximately $3,692,000.
A sale at such discounts would be contrary to the original objectives of
the Programs and those of the Investors as confirmed through surveys,
questionnaires and conversations National has conducted. While a liquidation
might be accomplished in a bankruptcy proceeding, the complexities involved
due to the "Trudy Pat" format of the Programs, as well as the administrative
and other costs, made bankruptcy liquidation particularly unattractive. In
addition, liquidation of the Programs' Properties does not have certain other
benefits of the Acquisition, including (i) permitting Investors to hold their
investment until the time when liquidation is appropriate for their
individual investment and tax strategy, (ii) the opportunity to participate
in acquisition and financing opportunities existing in the real estate market
through equity ownership in the Company, (iii) the transaction costs and time
associated with the Acquisition are expected to be significantly less than
those which would be incurred in an orderly liquidation of the Programs'
assets, and (iv) the complete liquidation of the Programs would assure the
recognition of capital gains or losses by Investors depending on whether the
selling price of the Properties is more or less than their tax basis. See
"-- Expected Benefits of Acquisition -- Control of Timing of Liquidation" for
the estimated total capital loss that would be recognized for each of the
Programs if their respective Properties were sold in bulk for their appraised
value.
43
<PAGE>
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
its estimation of the consideration to be received by Investors in each of
the Programs in the Acquisition to (i) value to Investors if the Programs are
operated "as is," (ii) 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, and (iii)
liquidation of the applicable Program's assets outside of bankruptcy. 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 following
table. Investors should consider that the estimated values assigned to the
alternate forms of consideration are based on a variety of assumptions that
have been made by National. These assumptions relate, among other things, to
securities market conditions and factors affecting the value of securities of
real estate companies, the value of the Properties if they continue to be
operated "as is," and National's estimate of the liquidation value of each of
the Properties assuming a sale had to be completed in three months or less.
No assurance can be given that estimated value would be realized through
any of the designated alternatives, and INVESTORS SHOULD CAREFULLY CONSIDER
THAT THE ESTIMATED VALUES PRESENTED IN THE FOLLOWING TABLE ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, AS AMENDED. These estimated values are based
on certain assumptions that relate, among other things, to (i) securities
market conditions and factors affecting the value of securities of real
estate companies, (ii) National's estimate of the value of the Properties if
they continue to be operated "as is," (iii) National's estimates of the
selling price of each of the Program's Properties, assuming a
44
<PAGE>
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 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 forward-looking statements as a result
of a variety of factor, including those discussed in "Risk Factors."
<TABLE>
<CAPTION>
Operated "As
Is" and 75% of 50% of
Exchange Liquidation Exchange Exchange
Value per Value per Value for Value per
$10,000 $10,000 $10,000 $10,000
Program Investment Investment(1)(2) Investment(3) Investment(3)
------- ---------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Sacramento/Delta Greens $3,104 $1,658 $2,328 $1,552
Oceanside 1,993 1,043 1,495 967
Yosemite/Ahwahnee I 3,999 2,177 2,999 2,000
Yosemite/Ahwahnee II 2,978 1,617 2,234 1,489
Mori Point 3,791 2,216 2,843 1,896
- ---------------
</TABLE>
(1) For this purpose, except for the Oceanside Property, National assumed that
the Properties could be sold within three months at a value equal to 50% of
the appraised value used to compute Exchange Values. Except for the
Oceanside Property, National believed it would take that sort of discount to
attract a buyer in three months. Based on recent experience, National
believed it could sell the Oceanside Property at its May 1997 appraised
value in three months.
(2) The Operated "As Is" value assumes that Investors in each Program would put
up only sufficient additional funds to avoid losing the Property for
property tax delinquencies. Since none of the Properties other than the
Oceanside Property have 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.
(3) There are no real estate companies which are publicly-traded with an asset
base similar to that which the Company will have if the Acquisition is
completed. Thus, there is no comparable market information from which to
extrapolate a possible market value for the Company's stock at any period
after the completion of the Acquisition. Therefore, solely for purposes of
the comparison, National arbitrarily assumed that, for a period of six
months after the Acquisition, the Company's stock would trade at 75% to
Exchange Value (or $7.50 per Share) and at 50% of Exchange Value (or $5.00
per Share).
TERMS OF THE ACQUISITION
45
<PAGE>
STRUCTURE OF THE ACQUISITION. If the Acquisition is approved, it will
take the form of a purchase of the Properties and assets of each of the
Programs by the Company from the Investors using the Shares of the Company as
consideration for the purchase. As a part of the Acquisition, remaining
"Trudy Pat" encumbrances on any of the Properties will be released by
Investors so that the Company, through subsidiaries, will own the Properties
free and clear of all mortgage liens.
Each purchase is proposed to be effected pursuant to a purchase agreement
with each Program (acting through National as the agent) and the Company.
Pursuant to the purchase agreements, the Properties will be purchased "as is"
with no warranties, other than title, surviving the closing of the sale. The
Company will receive a deed to each of the Properties and new policies of
title insurance will be included with each transfer.
The transactions described below will have occurred or will take place
simultaneously with, or shortly after, the closing of the Acquisition.
- The Company was formed as a Delaware corporation with family
partnerships of the principals of National (David Lasker and James Orth),
along with certain affiliates, consultants and employees of National and the
Company, as the founders. American Family Communities, Inc. will be formed
as a WHOLLY-OWNED subsidiary of the Company to oversee all of the Programs'
Properties. Also, Delta Greens Homes, Inc., Oceanside Homes, Inc., Yosemite
Woods Family Resort, Inc., and Mori Point Destinations, Inc. will be formed
as second-tier subsidiary corporations of the Company to hold the Properties
of each of the Programs with the two Yosemite/Ahwahnee Programs being
combined into one subsidiary. Upon completion of the Acquisition, the
founders will hold 19.84% of the Company's outstanding Shares assuming that
no units are purchased pursuant to this Prospectus. See "Appraisals and
Fairness Opinion" for a discussion of the fairness of the transaction.
- The Shares of the Company issued pursuant to the Acquisition, as
well as those sold as part of the units pursuant to this Prospectus, will
have been approved for listing, upon notice of issuance, by the ____________.
- Certificates for the Shares will be mailed to Investors after the
Acquisition is completed.
- Shares and warrants underlying the units purchased pursuant to this
Prospectus will be mailed to the Investors who purchase them and the funds in
the Escrow representing the purchase price of such units will be released to
the Company after the Acquisition is completed.
As a result of the Acquisition, the Investors will cease to own
interests in the Properties of the respective Programs in which they have
invested. After the Acquisition, through subsidiaries, the Company will own
all of the Properties, as well as the business and operations, owned by the
Programs prior to the Acquisition.
46
<PAGE>
National may decide not to pursue the Acquisition at any time before it
becomes effective, whether before or after approval by the Investors.
EFFECTIVE TIME. If approved, the Acquisition is expected to be completed
(with title to the real estate being transferred to the applicable
subsidiary) on __________, 1998 (approximately five business days after the
planned date for tabulation of the votes of Investors in each Program (the
"Effective Time").
CALCULATION OF EXCHANGE VALUE
GENERAL. Shares in the Company will be allocated among the Programs pro
rata in accordance with Exchange Values. The Exchange Value of a Program is
its appraised value plus the book value of other assets at
[September 30, 1997] minus liabilities at [September 30, 1997] and plus the
amount of accrued fees and expenses to be forgiven by National as part of the
Acquisition in the form of Company Shares arbitrarily valued at $10 per
Share. For purposes of the Sacramento/Delta Greens, Oceanside and Mori Point
Programs, the appraised value is at May 1997. For purposes of the
Yosemite/Ahwahnee I and II Programs, appraised values were derived by
National through a reconciliation of the May 1997 appraisal and the October
1996 appraisal. See "Appraisals and Fairness Opinion -- Reconciliation of
Yosemite/Ahwahnee Properties' Appraisals."
National also considered allocating the Shares among the Programs in
accordance with only May 1997 appraised values, and pursuant to an adjustment
to May 1997 appraised values system designed to reflect the greater liquidity
of the Oceanside Property, the need for, and availability of, working capital
to accomplish the business plans of the Programs, and the expected resistance
of Investors in the various Programs to assessments to provide working
capital that could not be borrowed. Allocating the Acquisition Shares based
exclusively on May 1997 appraised values was deemed inappropriate because (i)
the Yosemite/Ahwahnee Properties had an October 1996 appraisal with a
significantly lower valuation, causing National, the Company's auditors and
the Independent Valuator to conclude that the May 1997 appraisal was too high
and (ii) considering only the appraised values of the real estate did not
take into account other assets, liabilities and fees due to National for the
Programs. The adjusted May 1997 appraised value system was discarded as
being too subjective and too difficult to explain to Investors. Further, it
did not produce results materially different from the method selected.
Exchange Values were determined as of [September 30, 1997].
[Ultimately, as of a date within 30 days of the Prospectus date.] The
Exchange Values of the Programs do not necessarily reflect the aggregate
price at which Company Shares received in the Acquisition may be sold, nor
are they based solely on the Appraised Value of the real estate assets of
each Program. See "Risk Factors." The number of Shares to be issued to each
Program upon consummation of the Acquisition will equal the Exchange Value of
the Program divided by $10, an arbitrary amount chosen for the sole purpose
of allocating Shares and which is not intended to imply that such Shares will
trade at a price of $10 per Share.
47
<PAGE>
The adjusted appraised value was selected for purposes of allocating the
Company's Shares offered for the Properties because National and the Company
believe that it most accurately reflects the relative values of the Programs
to each other. The following table summarizes the calculation of the
Exchange Value of each of the Programs:
<TABLE>
Appraised Value of Net Other Assets
Name of Program Real Estate(1) + and Liabilities(1)(2) = Exchange Value(3)
--------------- ------------------ --------------------- -----------------
<S> <C> <C> <C>
Sacramento/Delta Greens $2,000,000 $ (127,949) $1,872,051
Oceanside 2,850,000 2,595,521 5,445,521
Yosemite/Ahwahnee I 3,912,454 (318,166) 3,594,287
Yosemite/Ahwahnee II 6,253,121 (494,452) 5,758,670
Mori Point 5,500,000 (795,729) 4,704,271
- --------------
</TABLE>
(1) Reflects independent appraisals as of May 1997. However, an appraisal of
the Yosemite/Ahwahnee Properties was also conducted in October 1996.
National's management reconciled the two appraisals to arrive at the
appraised values for the Yosemite/Ahwahnee Properties to arrive at the
appraised values in the above table.
(2) The following table quantifies the asset and liabilities adjustments to
appraised values made in determining a Property's Exchange Value as of
[September 30, 1997].
<TABLE>
Book To Be Net Other
Book Assets Liabilities Forgiven Assets and
Name of Program (9/30/97)* - (9/30/97)* + Amounts = Liabilities
--------------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Sacramento/Delta Greens $ 65,675 $ (330,735) $137,111 $ (127,949)
Oceanside 2,796,980 (905,459) 704,000 2,595,521
Yosemite/Ahwahnee I 459,703 (812,869) 35,000 (318,166)
Yosemite/Ahwahnee II 734,725 (1,299,177) 70,000 (494,452)
Mori Point 158,387 (954,116) 0 (795,729)
</TABLE>
* See balance sheets of each Program in the accompanying financial
statements for details of book assets and book liabilities. There is no
mortgage debt on the Properties of the Sacramento/Delta Greens and Mori
Point Programs, and, after the Acquisition, there will be no mortgage debt
on the other Programs' Properties.
(3) Rounding may result in sums not adding.
As of the date of this Prospectus, neither National nor the Company knows
of any material change in the prospects or financial performance of any of
the Programs which will materially affect the value of the Shares to be
received by Investors in the Acquisition, the values assigned to the Programs
for purposes of comparison to the alternatives, or the fairness of the
Acquisition to the Investors.
No fractional Shares will be issued by the Company in connection with the
Acquisition. Each Investor who would otherwise be entitled to a fractional
Share will receive one Share for each fractional Share of 0.5 or greater. No
Shares will be issued for fractional Shares of less than 0.5.
48
<PAGE>
ALLOCATION OF SHARES AMONG THE PROGRAMS
The total number of Shares issued in the Acquisition will be equal to the
aggregate Exchange Value of the Programs divided by the arbitrary price of
$10. The number of Shares allocable to each Program will be determined by
multiplying the number of Shares allocable among all of the Programs by a
fraction, the numerator of which is the Exchange Value of the Program and the
denominator of which is the total Exchange Value of all of the Programs.
As of ___________, 1998, the following table shows Investors (i) the
Amount Owed Plus Assessments which is the aggregate amount of the unpaid
balance of the loan owed to a Program by the original borrower plus accrued
but unpaid interest on such balance as of the Ownership Date of a Property
plus all amounts paid by Investors pursuant to mandatory assessments plus
voluntary advances, (ii) appraised real estate values, (iii) Exchange Values
and (iv) the number and percentage of Shares allocated to each Program are:
<TABLE>
<CAPTION>
% of Total
Adjustments Shares to be
Amount Real Estate to Real Estate No. of Outstanding
Owed plus Appraised Appraised Exchange Shares After the
Name of Program Assessments(1) Value(2) Value(3) Value Allocated(4) Acquisition(5)(6)
--------------- -------------- ----------- -------------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $ 6,031,903 $ 2,000,000 $ (127,949) $ 1,872,051 187,205 7.02%
Oceanside 27,325,000 2,850,000 2,595,521 5,445,521 544,552 20.42
Yosemite/Ahwahnee I 8,987,163 3,912,454 (318,166) 3,594,287 359,429 13.48
Yosemite/Ahwahnee II 19,338,632 6,253,121 (494,452) 5,758,670 575,867 21.60
Mori Point 12,409,626 5,500,000 (795,729) 4,704,271 470,427 17.64
TOTAL $74,092,324 $20,515,575 $21,374,800 2,137,480 80.16%
</TABLE>
(1) The tenancy-in-common agreements for each of the Programs provide that the
servicing agent for the loan (National) may make mandatory assessments on
the Investors to cover the operational costs of the Program. Investors may
also make voluntary advances under the tenancy-in-common agreements to make
up for mandatory assessments which have not been paid by other Investors.
As of November 30, 1997, the following mandatory assessments and voluntary
advances have been paid to the Programs and are included in Amount Owed Plus
Assessments.
Mandatory Voluntary
Name of Program Assessments Advances
--------------- ----------- ---------
Sacramento/Delta Greens 535,353 71,550
Oceanside -0- -0-
Yosemite/Ahwahnee I 959,878 127,387
Yosemite/Ahwahnee II 1,928,798 163,860
Mori Point 693,562 145,230
(2) Appraisals were conducted in May 1997. However, an appraisal of the
Yosemite/Ahwahnee properties was also conducted in October 1996.
National's management reconciled the two appraisals to arrive at the
appraised values for the
49
<PAGE>
Yosemite/Ahwahnee Properties to arrive at the appraised values in the
above table. See "Appraisals and Fairness Opinion -- Reconciliation
of 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 [September 30,
1997] to reduce that number by program liabilities at [September 30,
1997], and to add back liabilities to National to be forgiven by National
as part of the Acquisition. See " -- Calculation of Exchange Value" at
page __ for details as to the adjustments.
(4) Represents [8.76%], [25.48%], [16.82%], [26.94%] and [22.01%], respectively,
of the shares to be issued in the Acquisition.
(5) 83.29% if all units are sold to investors. The other shares will be held
by management and other founders of the company.
(6) The founders of the Company include members of Company management, as well
as certain employees of National and consultants to the Company and the
Programs. The Company was formed, and shares were purchased by the
founders, prior to making the Acquisition proposed. The total number of
shares to be retained by the founders was determined by reviewing the fees
cancelled and to be cancelled, as well as the additional value being brought
to the Investors through the Acquisition. A total of [529,037] shares of
Company common stock has been issued prior to the date of this Prospectus
at $0.01 per share. See "Dilution" at page __ of the Prospectus. If the
Acquisition is completed, the following table sets forth the fees which
National and its principals have cancelled, or will cancel:
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------------- --------- --------- ---------
Sacramento/Delta Greens(a) $ 137,111 $ 500,000 $ 637,111
Oceanside(a) 704,000 -0- 704,000
Yosemite/Ahwahnee I(a) 35,000 72,158 107,158
Yosemite/Ahwahnee II(a) 70,000 1,157,867 1,227,867
Mori Point(a) -0- 461,589 461,589
---------- ----------- -----------
TOTAL $ 946,111 $ 2,191,614 $ 3,137,725
---------- ----------- -----------
---------- ----------- -----------
- ----------------
(a) The shares to be retained by the founders were not allocated to the founders
based on cancelled fees. However, if they had been so allocated from the
Programs based on cancelled fees,
(i) 20.30% of the total shares to be owned by the founders after
Acquisition ([107,395] shares) which will be held by the founders of
the Company would have been deemed allocated from the Sacramento/Delta
Greens Program.
(ii) 22.44% of the total shares to be owned by the founders after the
Acquisition ([118,716] shares) which will be held by the founders of
the Company would have been deemed allocated from the Oceanside
Program.
50
<PAGE>
(iii) 3.42% of the total shares to be owned by the founders after the
Acquisition ([18,093] shares) which will be held by the founders of the
Company would have been deemed allocated from the Yosemite/Ahwahnee I
Program.
(iv) 39.13% of the total shares to be owned by the founders after the
Acquisition ([207,012] shares) which will be held by the founders of the
Company would have been deemed allocated from the Yosemite/Ahwahnee II
Program.
(v) 14.71% of the total shares to be owned by the founders after the
Acquisition ([77,821] shares) which will be held by the founders of
the Company would have been deemed allocated from the Mori Point Program.
ALLOCATION OF SHARES AMONG INVESTORS
The method utilized to allocate shares to the Investors will involve
two steps. The Shares will first be allocated among the Programs based upon
the Exchange Value of each of the Programs relative to the aggregate Exchange
Value of all of the Programs. National believes that the Exchange Values of
the Programs constitute a reasonable basis for allocating the Shares among
all of the Programs.
Next, the Shares allocable to a particular Program will be allocated
among the Investors pro rata in relation to each Investor's Adjusted
Outstanding Investment in a particular Program. An Investor's Adjusted
Outstanding Investment is calculated by adding the unpaid principal balance
of the Investor's original loan, the accrued but unpaid interest on the
unpaid principal balance to the Ownership Date, mandatory assessments paid,
voluntary advances made, plus interest at 10% per annum through the Record
Date on voluntary advances made, and deducting therefrom interest at 10% per
annum through the Record Date on mandatory assessments NOT paid. The basis
for such adjustments is found in Section 2.3 of each of the Programs'
tenancy-in-common agreements.
Once each Investor's Adjusted Outstanding Investment has been
calculated, that amount is divided by the aggregate Adjusted Outstanding
Investment for all Investors, and the resulting fraction is multiplied by the
number of Shares allocated the Program to determine the number of shares
allocated to each Investor.
All Shares allocated to Investors will be exactly equal to each other,
that is, they will all be part of a single class of common stock. As of the
date of this Prospectus, neither National nor the Company knows of any
material change in the prospects or financial performance of any of the
Programs which will materially affect the value of the Shares to be received
by Investors in the Acquisition, the values assigned to the Programs for
purposes of comparison to the alternatives, or the fairness of the
Acquisition to the Investors.
COMPANY SHARES HELD BY AFFILIATES OR EMPLOYEES OF NATIONAL
None of the Acquisition Shares or units described in this Prospectus are
allocable to National or any of its shareholders except to the extent of any
of National's investments in
51
<PAGE>
the Programs. At September 30, 1997, such investments are $3,118 in the
Sacramento/Delta Greens Program; $2,082 in the Oceanside Program; $2,373 in
the Yosemite/Ahwahnee I Program; $46,454 in the Yosemite/Ahwahnee II Program;
and $5,279 in the Mori Point Program. In the Acquisition, National will
receive an aggregate of 1,817 Shares, reflecting 97 Shares, 41 Shares, 95
Shares, 1,383 Shares and 200 Shares, respectively, for its investments in the
Sacramento/Delta Greens Program, Oceanside Program, Yosemite/Ahwahnee I
Program, Yosemite/Ahwahnee II Program and Mori Point Program. As described
in "Terms of the Acquisition" above, the principal founders of the Company
were the family partnerships of David Lasker and James Orth, the principals
of National. Upon completion of the Acquisition, they will retain, in the
aggregate, [433,734] Shares, or [16.26]% of the outstanding Shares of the
Company assuming none of the units are sold or [13.7]% of the outstanding
Shares of the Company if all of the units are sold. National and the
management of the Company believe that this is a fair allocation of the
outstanding Shares of the Company after the Acquisition because it fairly
reflects the management efforts that have been brought to bear to accomplish
the Acquisition. The fairness of the allocation of shares to the founders of
the Company is included in the Fairness Opinion described later in this
Prospectus.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National,
its officers, employees or affiliates, as well as actually paid to National,
during the years ended December 31, 1996, 1995 and 1994, and for the nine
month capitalization period ending September 30, 1997.
<TABLE>
<CAPTION>
Actually
Actually Actually Actually Incurred Paid for
Incurred Paid for Incurred Paid for Incurred Paid for for Nine Nine
for Year Year for Year Year for Year Year Months Months
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 9/30/97 9/30/97
- --------------- -------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta
Greens $ 50,000 $ -0- $ 50,000 $ -0- $ 50,000 $ -0- $ 37,500 $ 4,167
Oceanside $492,000 $300,000 $492,000 $300,000 $ 492,000 $300,000 $369,000 $225,000
Yosemite/Ahwahnee I $ 65,000 $ 10,000 $ 84,051 $ -0- $ 150,800 $101,626 $133,243 $ 50,570
Yosemite/Ahwahnee II $135,000 $ -0- $174,569 $ -0- $ 313,200 $211,069 $214,757 $107,281
Mori Point $100,000 $ -0- $100,000 $ -0- $ 100,000 $ -0- $ 75,000 $ -0-
-------- -------- -------- -------- ---------- -------- -------- --------
Totals $842,000 $310,000 $906,620 $300,000 $1,106,000 $618,696 $829,500 $387,018
-------- -------- -------- -------- ---------- -------- -------- --------
-------- -------- -------- -------- ---------- -------- -------- --------
</TABLE>
If the Acquisition had been completed during the above periods,
National would not have been entitled to receive any further servicing fees.
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. In the case of the Oceanside Program, compensation
to National or any of its affiliates would have been from accrued salaries
payable to the officers and employees of Oceanside Development, Inc. and
general and administrative overhead costs. In the case of the
Yosemite/Ahwahnee I and II Programs, compensation to National or any of its
affiliates would have been from accrued salaries payable to the officers and
employees of Ahwahnee Golf Course and Resort, Inc. or as
52
<PAGE>
current salaries payable to officers and employees of the Company and general
and administrative overhead costs. No cash would have been available to pay
bonuses or dividends.
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 nine months ended September 30, 1997:
<TABLE>
<CAPTION>
Prior to September
Name of Program 1992 1992 1993 1994 1995 1996 30, 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 $450,000 $2,625,000
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 $ 4,756 $ 0 $ 0 $ 0 $ 287,841
Interest $1,903,306 $ 920,794 $ 335,557 $ 0 $ 0 $ 0 $ 0 $3,159,657
Yosemite/Ahwahnee II
Principal $ 20,000 $ 60,000 $ 68,264 $ 10,273 $ 0 $ 0 $ 0 $ 158,537
Interest $ 592,498 $1,153,352 $ 688,303 $ 0 $ 0 $ 0 $ 0 $2,434,153
Mori Point
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $1,354,705 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $1,354,708
</TABLE>
EXPECTED BENEFITS OF ACQUISITION
National believes that the Acquisition is the best way to obtain a
maximum recovery by Investors in each of the Programs for the following
reasons:
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."
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
53
<PAGE>
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.
DIVERSITY OF INVESTMENT. The Acquisition will allow Investors to
participate in an investment portfolio of four properties rather than one
property. These Properties are in diverse geographic locations in California
and have different development orientation. The diversity of the Company's
portfolio spreads the risk of an investment in the Company over a broader
group of assets and reduces the dependence of the investment upon the
performance of any particular asset.
LIQUIDITY THROUGH LISTING OF SHARES. The Company has applied for
listing of the Shares on the ______________. Listing the Shares is a
condition to the Acquisition. Thus, the Acquisition offers liquidity to the
Investors for all or some of their Shares if a market develops. There is no
guaranty that a liquid trading market will develop for the shares. Although
the Acquisition is not the only means by which Investors could achieve
liquidity in their investments in the Programs, National believes that the
Acquisition is preferable to the alternatives (described below in "--
Alternatives to Acquisition") even though an indefinite period of time may be
required before the value of the Shares is stabilized and there is an
adequate demand from buyers for the Shares. National believes that a sale of
the Properties in the current market would result in unnecessary losses to
Investors.
EXPERIENCED MANAGEMENT. The Company has employed key management
professionals that have expertise in real estate development, operation and
construction. See "Management Following the Acquisition."
ELIMINATION OF MANDATORY ASSESSMENTS. Completion of the Acquisition
will result in the cancellation of the servicing agreement and the
tenancy-in-common agreement for each of the Programs and National will no
longer be a Servicing Agent for the Investors. There will be no further
assessments of Investors of any kind pursuant to those agreements.
CONDITIONS TO THE ACQUISITION
The principal conditions to the Acquisition are: (i) approval of the
Acquisition by holders of a majority of the tenancy-in-common interests in
each of the Programs; (ii) commitment of a reputable title company to issue
to the Company an extended coverage policy of title insurance on each of the
parcels of real property owned by each of the Programs; (iii) receipt of the
Fairness Opinion from the Independent Valuator regarding the allocation of
the Shares among the Programs; and (iv) approval of the Shares for listing on
the _______________. No federal or state regulatory requirements must be
complied with or approval obtained in connection with the Acquisition. These
conditions may not be waived.
54
<PAGE>
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.
National believes that the likely market value of the Shares will
ultimately be higher than the expected proceeds from liquidation, but, of
course, there can be no assurance that that will be true. In proposing the
Acquisition, National examined the alternatives discussed in "-- Alternatives
to Acquisition." Maintaining the current structure of each of the Programs,
as well as a prompt liquidation of each of the Programs, were outweighed by
the Company's (i) potential to provide improved liquidity to the Investors
through ownership of the Company's Shares; (ii) potential for growth; (iii)
Investors' increased control over the timing of the tax consequences of
liquidation; and (iv) the possibility of increasing the value of the Company
to permit the Investors who elect not to sell their Shares promptly a chance
to obtain a better return than a liquidation of their Property would yield
today.
Based on its analysis of the Acquisition, National believes that (i)
the terms of the Acquisition when considered as a whole are fair to the
Investors; (ii) the Shares offered to the Investors constitute fair
consideration for the Properties and other assets held in tenancy-in-common
by the Investors; and (iii) after comparing the potential benefits and
detriments of the Acquisition with those of the earlier described
alternatives, the Acquisition is more attractive to the Investors than such
alternatives. These beliefs are based upon National's analysis of the terms
of the Acquisition, an assessment of its potential economic impact upon the
Investors, a consideration of the amount of the equity of the Company which
will be held by consultants and employees of National, the Company and the
Programs, a comparison of the potential benefits and detriments of the
Acquisition and alternatives to the Acquisition, a review of the financial
condition and performance of the Programs and the terms of the servicing
agreements and the tenancy-in-common agreements for each of the Programs.
National also believes that the Acquisition is procedurally fair for
the following reasons. First, the Acquisition is required to be approved by
Investors holding a majority of each Program's outstanding tenancy-in-common
interests in compliance with the provisions of the tenancy-in-common
agreement of each of the Programs, and is subject to certain non-waivable
conditions set forth under "Conditions to the Acquisition" above. Second,
National believes that the Exchange Values of the Programs have been
determined according to a process that is fair, because the process involved
appraisals of all of the Programs' Properties by independent appraisers. See
"-- Calculation of Exchange Value" and "Appraisals and Fairness Opinion."
Other than as described in this Prospectus, for purposes of determining
fairness to Investors, neither National nor the Company is aware of any
factor or uncertainty that may materially affect the value of the Shares to
be received by Investors in the acquisition.
55
<PAGE>
All of the above factors were deemed important by National in
concluding 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 Program.
FAIRNESS IN VIEW OF CONFLICTS OF INTEREST
Although National reasonably believes the terms of the Acquisition are
fair to the Investors, the principals of National have conflicts of interest
with respect to the Acquisition. These conflicts include, among others, (i)
the determination not to retain independent parties to act on behalf of the
Investors or the Programs (see "Risk Factors -- Risks of the Acquisition"),
(ii) the principal shareholders of National may realize substantial economic
benefits upon completion of the Acquisition (see "Management Following the
Acquisition -- Directors and Executive Officers Compensation and Incentive"),
and (iii) National's relief from on-going obligations under the servicing
agreements with respect to each of the Programs (such relief is not
susceptible to meaningful quantification except to the extent that National
may be able to reduce its overhead allocated to the asset management for the
Programs). It should be noted that, prior to 1994, National forgave
$2,191,614 of fees for the performance of servicing agent and other project
management-related activities under the applicable servicing agreements, and
will forgive an additional $946,111 of similar fees upon the successful
completion of the Acquisition. It should be further noted that, at $10 per
Share, the amount of fees cancelled by National and its principals would be
equal to over 300,000 Shares. Additionally, National will not be entitled to
any further servicing fee with respect to the Properties which amounts, in
the aggregate, to $650,000 annually. To help mitigate the potential
conflicts, National obtained the independent appraisals and the Fairness
Opinion. For a further discussion of the conflicts of interest and potential
benefits of the Acquisition to National and its principal shareholders, see
"Interests of Certain Persons in the Acquisition and Conflicts of Interest --
Substantial Benefits to Affiliates of National."
CONSEQUENCES IF THE ACQUISITION IS NOT APPROVED
If the Acquisition is not consummated for any reason, National will be
unable to continue to manage the Programs without receiving contracted-for
fees and expenses. Thus, National will seek Investors' approval to sell each
of the Programs' Properties for the highest amount then available and
distribute the proceeds, net of selling expenses and fees due to National, to
the Investors in the respective Programs. If the Acquisition is not
approved, National will likely resign as servicing agent for each of the
Programs unless a sale can be consummated in less than three months. As a
last resort, National may determine that bankruptcy protection and
liquidation may be in the best interests of one or more of the Programs. No
other transaction is currently being actively considered as an alternative to
the Acquisition. The Programs will, however, pay the expenses of the
Acquisition even if it is not approved.
56
<PAGE>
ACCOUNTING TREATMENT
Because the Acquisition involves a transaction to be accounted for as a
combination of entities under common control, which is accounted for as if
the transaction was a pooling of interests, the assets and liabilities of the
Programs will be transferred to the Company at their pre-Acquisition,
historical cost basis.
COSTS AND EXPENSES
All costs and expenses incurred by the Company or the Programs in
connection with the Acquisition will be paid by the Programs from cash on
hand pro rata in accordance with Exchange Values, whether or not the
Acquisition is consummated. The following is a statement of certain
ESTIMATED costs and expenses that have been or will be incurred by the
Programs and the Company in connection with the Acquisition.
[TO BE COMPLETED WITH FINAL AMENDMENT]
Securities and Exchange Commission Registration Fee $
[STOCK EXCHANGE] Fee
Fairness Opinion and Appraisals
Appraisals
Legal Fees and Expenses
Accounting Fees and Expenses
Solicitation Fees and Expenses
Printing and Engraving Expenses
Miscellaneous ----------
Total $[ ]
FAIRNESS OPINION AND APPRAISALS
National engaged separate independent real estate appraisal firms named
at page __ to provide independent appraisals of the value of the real estate
in each Program. The appraisers were selected for their knowledge of the
real estate conditions in the four areas in which the Programs' Properties
are located. See "Appraisals and Fairness Opinion" for information about the
appraisers and the appraisals. The Exchange Value for each of the Programs
is based primarily on the appraised values of the Properties. See "--
Calculation of Exchange Value."
National also engaged Houlihan Valuation Advisers, a well-known and
reputable independent valuation company (the "Independent Valuator"), to
review 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
57
<PAGE>
Company, is fair to Investors from a financial point of view. See
"Appraisals and Fairness Opinion -- Fairness Opinion."
DIVIDEND POLICY
The Company has no plans to pay dividends in the foreseeable future.
Funds otherwise available for dividends will be utilized to potentially
increase Share value through acquisition and development. The effect of this
policy will be that, as Company real estate assets are sold, unlike in the
Programs, no cash distributions will be made to Investors.
COMPARISON OF TENANCY-IN-COMMON INTERESTS AND SHARES
The following summary compares a number of differences between the
ownership of tenancy-in-common interests in the Programs and Shares of the
Company and the effect relating thereto.
<TABLE>
<CAPTION>
Differing Factor Tenancy-in-Common Interests Shares
- ---------------- --------------------------- ------
<S> <C> <C>
GENERAL BUSINESS Each of the Programs commenced as The business of all five of the
opportunities to participate in a Programs will be consolidated
loan secured by to-be-improved real into the Company. The Company
property. The Programs are not has broader investment
seeking to make additional loans or objectives which will include
purchase new properties. the sale or 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 perpetual
structured to have the loans life. It intends to operate
repaid over two to four years. indefinitely and it has no plans
to liquidate assets to make
returns of capital to Investors.
58
<PAGE>
DISTRIBUTIONS AND The Programs were initially The initial policy of the
DIVIDENDS designed to yield regular Company will be to preserve its
interest payments to the cash resources for growth and
Investors and to have the internal development and, thus,
principal of the various loans the Company does not plan to
repaid in accordance with their make dividend distributions in
respective terms, usually two the foreseeable future. The
to four years. Board of Directors has the
discretion to determine whether
or not and when to declare and
pay dividends and the amount
thereof.
TAXATION The Programs are not tax payers The Company will be taxed as a
and file no tax returns. Prior corporation and file corporate
to the Ownership Date, interest income tax returns.
income distributed to Investors Distributions to shareholders
was reported to the IRS and will be reported to the IRS and
applicable state taxing applicable state taxing
authorities on Form 1099-INT. authorities on Form 1099-DIV
As tenancy-in-common owners of whether or not such
the Properties, the Investors distributions are taxable.
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 direct
EXPENSES Programs are the responsibility responsibility for company
of the Investors to the extent overhead and expenses.
the applicable Program does not Initially, overhead and
generate sufficient cash flow expenses of the Company will be
to cover them. They are billed derived from proceeds of the
individually to investors in sale of the units, if any, and
the form of assessments. To the sale of one or more of the
date, only the Oceanside Company's assets. Future
program has been self-funding. overhead and expenses will be
funded from cash flow from
operations.
59
<PAGE>
MANAGEMENT The business and affairs of The business and affairs of the
each of the Programs are Company are managed by the
managed by National pursuant to officers of the Company under
the applicable servicing the direction of the Board of
agreement. National may be Directors. The Board of
terminated as the servicing Directors will ultimately be
agent by the vote of holders of divided into three classes
a majority of the interests of serving staggered three year
a particular Program. terms. One-third of the Board
of Directors will be elected
annually by holders of the
Shares to serve for three year
terms. Directors can be
removed from office by the
affirmative vote of the holders
of at least a majority of the
then-outstanding Shares.
FIDUCIARY DUTIES None of the Programs are Officers and Directors of the
partnerships and, thus, Company are subject to the
National does not have the Delaware common law which
common law fiduciary duties imposes fiduciary duties of
that it would have if it were care, loyalty, good faith and
the general partner of a fair dealing on the officers
partnership. However, as an and directors of the Company.
agent, National has
fiduciary-like duties to
Investors to use reasonable
care, skill and diligence in
its work, not to compete with
Investors' interests without
consent, and not to take
adverse interests to Investors
without consent.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
VOTING RIGHTS Under the tenancy-in-common Under the Charter Documents of
agreements of each of the the Company, the Shareholders
Programs, the Investors have have voting rights with respect
voting rights with respect to (i) election of Directors;
to collection, servicing and (ii) the sale or disposition of
administration of the all or substantially all of the
Outstanding Investment of assets of the Company at any one
the Programs, as well as time; (iii) the merger or
termination of the consolidation of the Company;
applicable servicing (iv) the dissolution of the
agreement. Each holder of a Company; and (v) certain
tenancy-in-common interest anti-takeover provisions.
is entitled to vote on each Each Share entitles its holder
matter presented to the to cast one vote on each matter
Investors of a particular presented to holders of Shares.
Program. Approval of any Approval of any matter submitted
matter submitted to the to holders of Shares generally
Investors in a particular requires the affirmative vote of
Program requires approval of holders of a majority of the
holders of a majority of the outstanding shares, however,
tenancy-in-common interests amendments to the anti-takeover
of that Program. provisions of the Certificate of
Incorporation of the Company
require a two-thirds vote.
SPECIAL MEETINGS None A special meeting of
Shareholders may by called by
the Board of Directors of the
Company, the Chairman of the
Board or the President only.
REDEMPTION The tenancy-in-common The Shares are not redeemable.
interests are not The Shares can be sold on the
redeemable. Investors in a ________________ if an active
particular Program may trading market exists.
only receive a return of
their investment upon the
repayment of the
applicable note or other
liquidation of all or part
of the assets of the
Program.
VOTING DILUTION Investors in each Program Since five programs will be
have voting power based on consolidated into the Company,
their percentage of the each investor's voting power
funds contributed to the will be substantially reduced.
Program.
61
<PAGE>
LIQUIDATION RIGHTS In the event of the Upon liquidation of the Company,
liquidation of a the Shareholders will be
particular Program, the entitled to share ratably in any
assets of the Program assets remaining after the
remaining after satisfaction of obligations to
satisfaction of all creditors and any liquidation
debts and liabilities preferences on any Preferred
of the Program, the Stock that may be then
satisfaction of outstanding.
expenses of liquidation
of the assets of the
Program and the
establishment of a
reasonable reserve in
connection therewith
are distributed to the
Investors pro rata in
accordance with their
respective percentage
interests in the
applicable Program.
RIGHT TO COMPEL Holders of a majority The vote of Shareholders owning
DISSOLUTION of the tenancy-in- at least a majority of the
common interests in a outstanding shares in the
particular Program may Company is sufficient to cause
vote to compel the sale the dissolution of the Company.
of the Program's assets
with the result that
the Program will be
dissolved.
LIMITED LIABILITY As tenancy-in-common Shareholders are not generally
owners of the assets of liable for obligations of the
the Programs, the Company.
Investors are NOT
effectively insulated
from personal liability
based on operation of
those assets.
LIQUIDITY AND There is no organized The Shares will be freely
MARKETABILITY secondary market for transferable and it is a
the tenancy-in-common condition to the consummation of
interests held by the Acquisition that the Shares
Investors. Thus, be approved for listing on the
trading in the tenancy- ________________.
in-common interests is
sporadic and occurs
solely through private
transactions.
RESTRICTIONS ON There are certain None.
TRANSFER restrictions on transfer
of the tenancy-in-common
interests.
CONTINUITY OF None of the Programs The Charter Documents
EXISTENCE are designed to have provide for perpetual
perpetual existence. existence.
62
<PAGE>
FINANCIAL REPORTS None of the Programs The Company will be
are subject to the subject to the reporting
reporting requirements requirements of the
of the Exchange Act. Exchange Act and will
However, National, file annual and
without obligation to quarterly reports.
do so, has endeavored The Company currently
to provide the intends to provide
Investors in each of annual and quarterly
the Programs with reports to its Shareholders.
regular reports about
such Programs'
respective activities.
PAYMENTS TO National is entitled to While National and its
NATIONAL AND ITS fees and reimbursement of Affiliates will hold
AFFILIATES expenses for services it Shares of the Company,
renders to each of the the only form of
Programs pursuant to compensation paid to some
the servicing agreements. of such persons will be
pursuant to their
employment agreements or
otherwise. ONLY
[$1,234,785] 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 Delaware law affords
RIGHTS the Outstanding shareholders rights to bring
Investment in a Program derivative actions when
must vote to terminate the officers or Directors of
the servicing agreement the Company have failed to
between National and the institute an action to recover
Program Investors. damages and class actions to
recover damages. Shareholders
may also have rights to bring
actions in federal court to
enforce federal rights.
63
<PAGE>
INSPECTION OF BOOKS Holders of tenancy-in- Under Delaware law, each
AND RECORDS common interests in a Shareholder has the right,
Program have no subject to certain reasonable
contractual right to standards, to obtain from the
inspect books and Company from time to time upon
records maintained by reasonable written demand for
National with regard any purpose reasonably
to a Program. However, related to the Shareholder's
as the servicing agent interest as a Shareholder of
for the Investors, the Company, certain
National permits them to information regarding the
review such books and status of the business,
records on reasonable affairs and financial condition
notice. 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.
64
<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 Dateof 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.
65
<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.
66
<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.
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<PAGE>
MANAGEMENT CONTROL AND RESPONSIBILITY
PROGRAM
National acts as servicing agent for each of the Programs pursuant to
servicing agreements entered into with each of the Investors in each Program.
Pursuant to the servicing agreements, National is essentially invested with
management authority to conduct the business of each of the Programs. The
servicing agreements are terminable on 30 days' written notice, provided that
the Investors do not have the power to terminate the servicing agreements
unless and until all amounts owed to National thereunder have been paid in
full. National does not need to seek re-election but instead serves unless
removed by the Investors, which is generally an extraordinar event. Pursuant
to the tenancy-in-common agreements for each of the Programs, matters
concerning the collection, servicing and administration of the Outstanding
Investment for each of the Programs is governed by the will of Investors
holding more than 50% of the Outstanding Investment. As servicing agent,
National is accountable as a fiduciary to each of the Programs and is
required to exercise good faith and integrity in its dealings in conducting
the affairs of each of the Programs. See Fiduciary Responsibility.
COMPANY
The Board of Directors has exclusive control over the Company's business and
affairs subject only to the restrictions in the Charter Documents.
Shareholders have the right to elect members of the Board of Directors. The
Directors are accountable to the Company as fiduciaries and are required to
exercise good faith and integrity in conducting the Company's affairs. See
Fiduciary Responsibility. The Shareholders have greater control over the
management of the Company than the Investors have over the Programs because
members of the Company's Board of Directors are elected by the Shareholders.
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MANAGEMENT LIABILITY AND INDEMNIFICATION
PROGRAM
Pursuant to the servicing agreements, National is indemnified and held
harmless by the Investors from and against any and all liabilities for acts
or omissions performed in the course of its activities as servicing agent,
except as to such liabilities caused or contributed to, in whole or in part,
by any gross negligence or willful misconduct on the part of National or its
Agents.
COMPANY
The Company's Directors are not personally liable for ordinary liabilities of
the Company. The Charter Documents provide that a Director's liability for
breach of fiduciary duty is limited to the full extent allowable under
Delaware law. The Charter Documents and Delaware law provide indemnification
rights to Directors and officers who act in good faith, and in a manner
reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to criminal actions or proceedings, who act without
reasonable cause to believe their conduct was unlawful. In addition, the
Charter Documents indemnify Directors and officers against amounts paid for
settlement, authorize the Company to advance expenses incurred in defense
upon receipt of an appropriate undertaking to repay such amounts if
appropriate, and authorize the Company to carry insurance for the benefit of
the officers and Directors. See "Fiduciary Responsibility."
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ANTI-TAKEOVER PROVISIONS
PROGRAM
Changes in management of any of the Programs can be effected only by removal
of National as the servicing agent by holders of a majority of the
Outstanding Investment in such Programs. This would be an extraordinary event.
COMPANY
The Charter Documents contain a number of provisions that may have the effect
of delaying or discouraging a hostile takeover of the Company. These
provisions include, among others, (i) the power of the Board of Directors to
issue additional equity securities in the Company; (ii) the classified Board
of Directors wherein only one-third of the Directors are re-elected to the
Board in any given year and Directors serve three year terms; (iii) any
action required or permitted to be taken by Shareholders of the Company must
be effected at a duly called annual meeting or a special meeting unless such
action requiring or permitting stockholder approval is approved by a majority
of the Board of Directors; (iv) special meetings of Shareholders may only be
called by a majority of the Board, a Chairman of the Board or the President;
(v) Directors may only be removed for cause and only by the affirmative vote
of holders of not less than two-thirds of the voting power of all outstanding
Shares; and (vi) amendments to the anti-takeover provisions of the
Certificate of Incorporation may only be effected by the affirmative vote of
holders of not less than two-thirds of the voting power of all outstanding
Shares. See "Description of Shares."
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VOTING RIGHTS
PROGRAM
Holders of a majority of the Outstanding Investment in each Program may
control decisions respecting the collection, servicing and administration of
such Outstanding Investment. Otherwise, investors in the Programs have no
voting rights.
COMPANY
The Company's Board of Directors consists of three classes. Shareholders are
entitled to elect one class of the Company's Board of Directors at each
annual meeting of the Company. In addition, Shareholders have the power to
amend the Charter Documents by the votes required therein, to dissolve the
Company and to approve business combinations between the Company and other
entities.
LIMITED LIABILITY OF INVESTORS
PROGRAM
As tenants-in-common in the respective programs, the Investors are not
effectively insulated from personal liability. Pursuant to the
tenancy-in-common agreements, Investors are susceptible to mandatory
assessments.
COMPANY
Under Delaware law, Shareholders will not be liable for Company debts or
obligations. Upon issuance, the Shares will be fully paid and non-assessable.
VOTING PROCEDURES
THE VOTE OF EACH INVESTOR IS IMPORTANT. EACH INVESTOR IS URGED TO MARK,
DATE AND SIGN THE INVESTOR BALLOT AND RETURN IT IN THE ENCLOSED ENVELOPE.
TIME OF VOTING
The vote of the Investors with respect to the Acquisition will be
tabulated on _____________, 1997, unless such date is extended by the Company
in its sole discretion. The vote will be tabulated by National and verified
by BDO Seidman, LLP, which is not affiliated with the Company, the Programs
or National. See "Investor Ballot and Vote Required."
RECORD DATE AND OUTSTANDING VOTES
The Acquisition is being submitted for approval to those Investors
holding interests in the Programs as of the Record Date. The Record Date is
[_________________] for all Programs. At the Record Date, the following
number of votes were held of record by the number of Investors indicated
below.
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Number of Number of Votes Required for Approval
Program Investors Held of Record of Acquisition
- ------- --------- --------------- ---------------------
Sacramento/Delta Greens 332 6,031,903 3,015,952
Oceanside 1,755 27,325,000 13,662,501
Yosemite/Ahwahnee I 426 8,987,163 4,493,582
Yosemite/Ahwahnee II 837 19,338,632 9,669,317
Mori Point 486 12,409,626 6,204,814
Each Investor is entitled to one vote for each dollar (or fraction
thereof exceeding $0.50) of Outstanding Investment it has in the applicable
Program. Based on amounts of "Trudy Pat" tenancy-in-common interests
purchased in each program, National has the following votes in each of the
programs: 3,118 Sacramento/Delta Greens; 2,082 Oceanside; 2,373 Yosemite/
Ahwahnee I; 46,454 Yosemite/Ahwahnee II; and 5,279 in Mori Point. It will
cast all of its votes in favor of the acquisition.
APPROVAL DATE
The Prospectus and form of Investor Ballot constitutes National's notice
of the proposed Acquisition. Each Investor has until 11:59 p.m., Pacific
Time, on ________________ (60 days from the date of first mailing the
Prospectus or proposed Acquisition date) , unless extended by the Company in
its sole discretion (the "Approval Date"), to inform the Company whether such
Investor wishes to approve or disapprove of his Program's participation in
the Acquisition. The Company and National ask that each Investor vote by
completing and returning the form of Investor Ballot accompanying this
Prospectus in the manner described below.
INVESTOR BALLOT AND VOTE REQUIRED
Investors who wish to vote "YES" for the Acquisition should complete,
sign and return the Investor Ballot relating to their interests which
accompanies this Prospectus. Each Investor's attention is directed to the
Investor Ballot and Instructions accompanying this Prospectus. Investor
Ballots must be delivered in person or by mail or by other delivery service
to National at the following address on, or prior to, the Approval Date:
National Investors Financial, Inc., Attention: Vivian Kennedy, 4220 Von
Karman Avenue, Suite 110, Newport Beach, California 92660.
Approval of the Acquisition by a Program requires the vote of Investors
holding a majority of the outstanding votes as of the Record Date. National
will tabulate the votes and such tabulation will be verified by BDO Seidman,
LLP. Abstentions will be tabulated with respect to the Acquisition and
related matters. Broker (or other custodian) non-votes, if any, are not
counted for purposes of determining whether the Acquisition and related
proposals have been
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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.
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REVOCABILITY OF CONSENT
Investors may withdraw or revoke their consent at any time prior to the
Approval Date. To be effective, a written, telegrahic, fax or telex notice
of revocation or withdrawal of the Investor Ballot must be received by no
later than the Approval Date, addressed as follows: National Investors
Financial, Inc., Attention: Vivian Kennedy, 4220 Von Karman Avenue, Suite
110, Newport Beach, California 92660, telecopy number 714-752-9753. A notice
of revocation or withdrawal must specify the Investor's name and the name of
the Program to which such revocation or withdrawal relates.
SOLICITATION OF VOTES; SOLICITATION EXPENSES
Votes of Investors may be solicited by the management of National or by
third parties. Costs of solicitation will be allocated among the Programs,
pro rata in accordance with Exchange Values. No party will receive any
compensation contingent upon solicitation of a favorable vote or success of
the Acquisition.
NO DISSENTERS' RIGHTS
If the Acquisition is approved, Investors in any of the Programs who
dissent or abstain from consenting to the Acquisition will not be entitled to
dissenters' or appraisal rights under the tenancy-in-common agreements or the
Delaware or California Law. Such rights, when they exist, give the holders
of securities the right to surrender such securities for an appraised value
in cash, if they oppose a merger or similar reorganization. No such rights
will be provided by National, the Programs, or the Company.
NO RIGHT TO PROGRAM BOOKS AND RECORDS
Investors have no rights under a Program's tenancy-in-common agreement or
servicing agreement, or under federal or state law, to obtain a list of the
names and addresses of the other Investors in a Program. If an Investor
wishes to communicate with the other Investors in a Program, upon receipt of
the material an Investor wishes mailed together with the amount of postage
necessary to make such mailing, National will promptly mail such
communications to a Program's Investors.
ISSUANCE OF CERTIFICATES FOR ACQUISITION SHARES
Promptly after the Effective Time, there will be issued and mailed to
former Investors of record at the Effective Time a certificate representing
the number of Shares to which such Investor is entitled.
If any certificate representing Shares is to be issued in a name other
than that in which an Investor is registered on National's books for each
Program as of the Effective Time, it will be a condition of such issuance
that the person requesting such change pay to the Company's transfer agent
any transfer fee or taxes required by reason of the issuance of a certificate
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representing shares in any name other than that of the registered Investor,
or the person requesting such change establishes to the satisfaction of the
Company that any transfer tax has been paid or is not applicable.
After the Effective Time, there will be no further registration of
transfers of tenancy-in-common interests that were issued and outstanding
immediately before such time and that were exchanged for Shares.
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION
AND CONFLICTS OF INTEREST
A number of potential conflicts of interest are inherent in the
relationship between National (and its shareholders) and the "Trudy Pat"
Investors. In recognition of these conflicts, and the resulting need to
independently determine that the allocation of Shares is fair to the
Investors, National and the Company engaged Houlihan Valuation Advisers, the
Independent Valuator, to render the Fairness Opinion and the independent
appraisers named on page __ to independently determine the value of the
Properties. Certain conflicts of interest are summarized below.
BENEFITS TO NATIONAL
The benefits of the Acquisition for National primarily reside in the
relief from its duties and related costs as servicing agent for the Programs
that are acquired by the Company. Asset management for the Programs will no
longer be necessary. This benefit is not susceptible to meaningful
quantification but it will reduce National's overhead for managing the
programs that have not paid National's servicing fees. Although some of the
Programs (Oceanside and Yosemite Ahwahnee I and II) paid National its
contractual fees for such activities, some of the Programs (Sacramento/Delta
Greens and Mori Point) accrued these fees and other amounts due National.
Without having current payments for such fees, National frequently operated
under financial constraints and unprofitably. Additionally, without
obligation to do so, National also advanced its own funds to the
Sacramento/Delta Greens, Mori Point and Yosemite/ Ahwahnee Programs, for the
benefit of those Investors. Aside from servicing-related activities,
specific operational functions performed by National's principals and
employees that will no longer be required to be performed by them relate to
construction disbursements, budget analysis, vendor and subcontractor
payments, accounting and bookkeeping, site inspections and work
verifications, insurance negotiations, bonding, property and use tax
coordination and payment, council and planning meeting attendance, political
involvement, consultant selection and management, securities, real estate and
specialty legal resource management, investor and broker administration and
tenancy-in-common-oriented communication and management. If the Acquisition
is approved, these duties will be undertaken by the Company's management.
See "Management Following the Acquisition -- Directors and Executive Officers
Compensation and Incentives" for information about compensation to be
received by the identified persons for management services.
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Upon completion of the Acquisition, National can focus on its duties on
other projects for which it serves and performs the functions of servicing
agent and asset manager. Since the volume of its responsibilities will
decrease with the Acquisition, National may be able to decrease some of the
associated direct and variable costs.
COMPANY SHARES OWNED BY NATIONAL'S PRINCIPALS AND OTHER COMPANY MANAGEMENT
Family partnerships controlled by David G. Lasker and James N. Orth (the
shareholders of National) presently own, in the aggregate, [433,734] shares
of the Company's Common Stock. That represents over 75% of the Company's
outstanding stock. On the basis of a $10 per share value, such shares would
be deemed to have a value of $[4,337,340]. They paid, out-of-pocket, $0.01
per share for the stock. National and its principals have forgiven, or
agreed to forgive if the Acquisition is completed, over $3,000,000 of fees
and expenses owned by the Programs. See the table set forth in Note (a) to
Note 6 to the table set forth in "Background and Reasons for the Acquisition
- -- Allocation of Shares Among the Programs." After the Acquisition, these
family partnerships will each control 8.13% of the Company's outstanding
stock (6.85% if all the units are sold).
In addition, in the formation period of the Company, L.C. Albertson, Jr.,
Executive Vice President of the Company, and Mark K. Kawanami, Vice President
of the Company, have purchased 54,118 and 1,000 shares, respectively, at
$0.01 per share. Mr. Albertson will control 2.03% (1.71% if all the units
are sold) of the Company's outstanding stock after the Acquisition, and Mr.
Kawanami will control less than one percent.
OTHER BENEFITS TO SHAREHOLDERS OF NATIONAL
In addition to the Shares of the Company to be beneficially owned by Mr.
Lasker and Mr. Orth, they will receive the following additional economic
benefits if the Acquisition is completed:
Mr. Lasker Mr. Orth
Annual salary $ 180,000 $ 180,000
Bonus 2% of pre-tax 2% of pre-tax
profits, if any profits, if any
Additional Discretionary up to 50% of up to 50% of
Bonus(1) salary salary
Stock Options(2) 30,000 30,000
Participation in Company
employee benefit plans yes yes
5-year employment contract(3) yes yes
- -----------
(1) If certain budgeted performance attained.
(2) 10,000 to be issued at the completion of the Acquisition exercisable at
$10 per share; 10,000 to be issued on the first anniversary of the
Acquisition; and 10,000 to be issued
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on the second anniversary of the Acquisition. The last two groups are
exercisable at market value on date of grant.
(3) See "Management Following the Acquisition -- Employment Agreements."
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS
The independent appraisers have independently determined the value of the
Properties. National and the Company have used their respective judgment to
reconcile the disparity between the October 1996 and May 1997 appraisals of
the Yosemite/Ahwahnee Properties in arriving at the Exchange Values for the
Yosemite/Ahwahnee I and II Programs. See "Background and Reasons for the
Acquisition -- Calculation of Exchange Value" and "Appraisals and Fairness
Opinion -- Reconciliation of Yosemite/Ahwahnee Appraisals." 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 independent verification of its view
that permitting the Company's founders to hold [19.84]% of the outstanding
Shares of the Company upon completion of the Acquisition is fair under the
circumstances. In addition, the Shares will be allocated among the Programs
in accordance with their respective Exchange Values, and within the Programs
among the Investors pro rata in accordance with their Adjusted Outstanding
Investment in each of the Programs. Recognizing the inherent conflict of
interest of having National establish these numbers independently (without
active involvement from persons not having a financial interest in the
Acquisition), they engaged independent appraisers to value the real estate
assets owned by each of the Programs and the Independent Valuator to render
an opinion on the overall fairness of the allocation of
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Shares in the transaction, including the number of Shares in the Company
allocated to the programs, as well as to affiliates, employees, and the
principal shareholders of National and the Company. See "Appraisal and
Fairness Opinion."
FEATURES DISCOURAGING POTENTIAL TAKEOVERS
Certain features of the Charter Documents, as well as the Delaware law,
could be used by management of the Company to delay, discourage or defeat
efforts of third parties to take control of the Company, or acquire a
significant number of the Shares. See "Comparisons of Programs and the
Company -- Anti-Takeover Provisions."
ALLOCATION OF SERVICES AND EXPENSES
In addition to Messrs. Lasker and Orth, other employees of National who
will become employees of the Company currently provide investor relations,
accounting and office administration services related to the operation of
other Programs which will not be included in the Acquisition. These Programs
were also formed by National. If the Acquisition is consummated, these
employees of National who will become employees of the Company will continue
to provide services related to non-participating programs. As a result,
possible conflicts of interest may arise regarding allocation of services of
these employees between the Company, National and the non-participating
programs. At this time, the allocation of services between the Company and
National's other programs is not susceptible to meaningful quantification.
NON-ARM'S-LENGTH AGREEMENTS
All agreements and arrangements, including those relating to
compensation, between the Company and employees of the Company who are also
employees of National will not be the result of arm's-length negotiations.
COMPETITION WITH THE COMPANY FROM OTHER PROGRAMS ORGANIZED BY NATIONAL
National will retain the servicing agent and asset management
responsibilities for the following five other projects: two undeveloped
projects that are zoned for single-family residential use (totalling over 30
acres) an undeveloped 6-acre project that is zoned for commercial use,
located in Victorville, California; an undeveloped 660-acre project with a
vesting, tentative map for 1,330 single-family mixed units with a golf course
and amenities that is located in Contra Costa County, California; and an
undeveloped 800-acre project with an application for a vesting tentative
tract map for 539 single-family detached, large lot, equestrian-oriented
residential lots located in Palmdale, California. Some or all of these
projects may be available for future acquisition by the Company or its
subsidiaries. However, National will continue to apply time and resources to
the management of these projects. In order to do this, they will require the
on-going attention of Messrs. Orth and Lasker, as well as some of the
personnel expertise that may also be employed by the Company or its
subsidiaries. It is anticipated that there will be minimal conflicts;
however, National is committed to continue to
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provide the same quality of service for these projects as it currently does
on behalf of and for the benefit of the Programs.
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION
FIDUCIARY RESPONSIBILITY OF NATIONAL
The Programs are not partnerships and, thus, National does not have the
fiduciary duties of a general partner in dealing with the Programs. However,
as servicing agent for each of the Programs, National has the specific duties
to Investors set forth in the various servicing agreements. In addition,
under California law, as an agent, National is under a fiduciary duty to
Investors (i) to use reasonable care, diligence and skill in its work, (ii)
not to compete with the Investors' interests without full disclosure to, and
agreement from, the Investors, and (iii) not to obtain an interest adverse to
the Investors without full disclosure to, and consent from, the Investors.
INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY
The directors and officers of the Company, in exercising the powers and
responsibilities of managing the Company, owe the Company and its
shareholders a duty of care and a duty of loyalty. However, under the
so-called "business judgment rule," which could apply to the officers and
directors of the Company, the officers and directors of the Company may not
be liable for errors in judgment or other acts or omissions made in good
faith which are done in a manner they believe to be in the best interests of
the Company and are performed with the care that an ordinarily prudent person
in a like position would use under similar circumstances. In the event any
legal action were brought against officers or directors of the Company, they
might be able to assert defenses based on the business judgment rule.
According to the Charter Documents, officers and directors and other
agents of the Company are entitled to indemnification from the Company for
any loss, damage or claim (including any reasonable attorneys' fees incurred
by such person in connection therewith) due to any act or omission made by
him or her, except in the case of fraudulent or illegal conduct of such
person. See "Management After the Acquisition -- Limitation of Liability and
Indemnification."
The indemnification provided by the Charter Documents is not deemed to be
exclusive of any other rights to which those indemnified may be entitled
under any agreement, vote of shareholders or directors, or otherwise, and
shall inure to the benefit of the heirs, executors and administrators of such
person. Any repeal or modification of the indemnification provisions
contained in the Charter Documents will not adversely affect any right or
protection of a director or officer of the Company existing at the time of
such repeal or modification.
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Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to officers, directors or persons controlling the Company
pursuant to any provisions described in this Consent Solicitation/Prospectus,
in the opinion of the Commission, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
OFFICERS AND DIRECTORS INSURANCE
The Company intends to obtain insurance for the benefit of the Company's
officers, directors and other agents relating to the liability of such
persons. Such insurance would insure the officers, directors and agents of
the Company from any claim arising out of an alleged wrongful act by such
persons while acting as officers, directors or agents of the Company, and the
Company to the extent that it has indemnified the officers, directors and
agents for such loss.
BUSINESS AND PROPERTIES
THE COMPANY (OR ITS REPRESENTATIVES) OR NATIONAL 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, THE BUSINESS PLANS OF
THE RESPECTIVE PROGRAMS, ESTIMATES OF REAL ESTATE VALUES, ESTIMATES OF
POTENTIAL FINANCIAL RESULTS FROM PROGRAM OPERATIONS OR FROM SALES OF PROGRAM
REAL ESTATE 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.
ACCORDINGLY, FORWARD-LOOKING STATEMENTS SHOULD NOT BE RELIED UPON AS A
PREDICTION OF ACTUAL RESULTS.
THE COMPANY
The Company was formed as a Delaware corporation named American Family
Holdings, Inc. on August 6, 1997 to conduct the Acquisition. It currently
files no reports with the Commission under the Exchange Act. It will operate
as a holding company, with actual day-to-day management of the operations of
the Properties being handled by a to-be-formed wholly-owned subsidiary named
American Family Communities, Inc. ("AFC"). Upon completion of the
Acquisition, the Properties will be held and operated through four separate
subsidiaries of AFC, namely Delta Greens Homes, Inc. (Sacramento/Delta Greens
Property), Yosemite Woods Family Resort, Inc. (Yosemite/Ahwahnee Properties),
Oceanside Homes, Inc. (Oceanside Property) and Mori Point Destinations, Inc.
(Mori Point Property).
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BUSINESS OF THE COMPANY
Upon completion of the Acquisition, the Company will be a diversified
real estate company involved in the residential development industry, as well
as the lodging and recreational industries. Its overall initial objective
will be to consolidate the various business plans of the Programs into a
unified Company business plan with the ultimate goal of creating sufficient
value in the Company's Shares to allow for Investors in the Programs to have
the ability to recover a significantly larger portion of their Outstanding
Investments in such Programs than if the Acquisition did not occur.
As a part of its plan, in the future the Company may seek to acquire certain
assets and properties that are synergistic and add value to the Company in
accordance with its overall business plan. 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.
PROPERTIES
The Company will purchase the Properties in their "as is" condition from
the Investors in the Programs, except that any remaining Investors' liens
will be removed. They are presently managed by National for the Investors
pursuant to servicing agreements which entitle National to receive an annual
servicing fee equal to one percent of the original principal amount of the
applicable "Trudy Pat" loan. Upon completion of the Acquisition, the
Company, through its subsidiaries, will own four Properties which are
described below.
SACRAMENTO/DELTA GREENS PROPERTY. The Delta Greens Property consists of a
121-acre site in South Sacramento, California, located approximately one-half
mile east of Interstate 5. Title is held by National Investors Land Holding
Trust IV as the agent of and for the benefit of the Program's Investors.
Except for property tax liens, the Property is unencumbered by liens and is
subject to no leases, sales contracts or options. It has a revised and
approved tentative tract map from the City of Sacramento for over 500 lots
for the construction of single-family homes. The area in which the Property
is located is populated primarily by lower to lower-middle income workers
with combined family incomes of $25,000 to $35,000. The nearby Meadowview
has a reputation as a high crime area, but an active community effort is
underway to upgrade the community identity.
OCEANSIDE PROPERTY. The Oceanside Property consists of one remaining
tract of 111 residential lots known as the "Symphony" tract. Title is held
by ODI as the agent of and for the benefit of Oceanside Investors. The
Property is located in the east-central portion of the city
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of Oceanside, California, some five miles east of the downtown area. There
are several homebuilding companies building competitive single-family
residences in the immediate area surrounding the property.
In addition to a property tax lien, the Property is presently encumbered
by a first lien in the amount of $27,325,000 which is held by National for
the benefit of the Oceanside Program's Investors. That lien will be
extinguished in the Acquisition so that the Company will own the Property
free of encumbrances other than property taxes. The Symphony tract of the
Property is for sale.
YOSEMITE/AHWAHNEE PROPERTIES. The Yosemite/Ahwahnee Properties consist of
approximately 1,650 acres divided into two parcels, one containing 660 acres
and one containing 990 acres. The 660 acre parcel was intended to be
developed with 218 residential estate lots, 1-3 acres in size. Of the 58
completed lots in this portion of the property, 13 have been sold. The
balance of the project consists of approximately 990 acres which has been
partially developed into an 18-hole golf course, a clubhouse and other
amenities. In addition, this portion contains a recreational vehicle
membership park developed for an eventual 600 spaces. It currently contains
54 "full hookup" sites with an additional 110 sites with full hookups under
construction. "Full hookups" are spaces that have water, sewer, electrical
and even cable service to the site. The Properties are located in Madera
County, California, approximately 46 miles northeast of Fresno and 15 miles
south of Yosemite National Park. Over the past few years, the Park has
averaged an annual visitor rate of 4.1 million people with the average group
size being approximately 3.3 people.
Title to the 660 acre parcel is held by National Investors Land Holding
Trust VIII for the benefit of the Investors in Yosemite/Ahwahnee II Program.
Title to the 990 acre parcel is held by National Investors Land Holding Trust
IX for the benefit of Investors in the Yosemite/ Ahwahnee I Program. The 660
acre parcel is presently encumbered by a property tax lien and a first trust
deed held for the benefit of the Investors in the Yosemite/Ahwahnee I
Program. The 990 acre parcel is presently encumbered by a property tax lien
and a first trust deed held for the benefit of the Investors in the Yosemite/
Ahwahnee II Program. The aggregate principal balance due on the both parcels
remains at approximately $20,000,000. The trust deeds will be extinguished
as part of the Acquisition so that there will be no liens on the Properties
except for taxes.
MORI POINT PROPERTY. The Mori Point Property consists of approximately
105 acres oceanfront land located in Pacifica, California. Pacifica is a
coastal suburban community of approximately 40,000 residents located about 15
miles from downtown San Francisco and 7.5 miles west of the San Francisco
International Airport. The site is bounded on the north by Sharp Park Golf
Course, which is a publicly-owned golf course operated by the City of San
Francisco; on the south by a 120-acre parcel known as the "Quarry" which is
approved for mixed-use development as part of Pacifica's Redevelopment
District; and on the east by the Pacific Coast Highway. There is in excess
of a quarter of a mile of oceanfront on the west. Except for a property tax
lien, the Property is unencumbered by liens and is subject to no leases or
sales
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contracts or options. Portions of this Property include habitat for two
endangered species. Development will not be permitted unless it can be
demonstrated that impact on the garter snake habitat can be ultimately
mitigated. The cost to develop and implement a mitigation plan is expected
to be expensive and potentially time-consuming. The Company believes that
the impact can be mitigated and that approvals from the Department of Fish
and Game can be obtained; however, if a satisfactory, economical, mitigation
plan cannot be developed, no development could take place on the Property.
This would radically reduce its value. Title to the Mori Point property is
held by National Investors Land Holding Trust for the benefit of Investors in
the Mori Point Program.
CONSOLIDATION OF THE PROGRAMS
Prior to the Acquisition, the Programs operated according to their
respective separate business plans. There have been many impediments to
achieving the objectives of Investors under those business plans. Upon
completion of the Acquisition, each of the Properties will be held in
subsidiaries of the Company with AFC coordinating the management according to
a unified business plan which is designed to maximize the value of the
Company's Shares. The economies of scale which will result from the
consolidation will allow AFC to introduce resources such as additional
management and development opportunities that would not have been
economically feasible for the Program to obtain for themselves. Further, the
consolidation will also reduce the dependence of Investors in a particular
Program on the geographic or economic constraints which their respective
operations were subject to prior to the Acquisition. For example,
Sacramento/Delta Greens Investors are entirely dependent upon the economic
opportunities available from building entry-level homes in South Sacramento
submarket. That dependency will be substantially reduced by the Acquisition.
As another example, the Oceanside Investors are restricted to accepting the
economic opportunities available from building homes in Oceanside,
California, and acquiring additional lots. The Acquisition will allow for
Oceanside Investors to have geographical diversification in residential
development because of the Sacramento/Delta Greens Property, as well as being
diversified into the lodging and recreation industries as made available with
the Yosemite/Ahwahnee and the Mori Point Properties. This diversification
will reduce the Oceanside Investors dependence on homebuilding exclusively in
the Oceanside market. Conversely, the Yosemite/Ahwahnee and Mori Point
Investors' opportunities will be expanded and diversified as well to take
advantage of those represented by the Sacramento/Delta Greens and the
Oceanside Properties.
Upon completion of the Acquisition, the Company's resources can be managed
such that the operation of each of its subsidiaries contributes meaningfully
to the achievement of its consolidated business objectives. Initially, the
Company will be involved in two primary industries: (1) the residential
development industry, and (2) the lodging and recreation industry.
THE RESIDENTIAL DEVELOPMENT INDUSTRY
After a protracted economic downturn, the residential development industry
shows signs of significant improvement in California. Until recently,
inventories of lots were at relatively high levels and capital for
acquisition and development of unimproved land was limited.
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The Company anticipates that the demand for unimproved land will increase
substantially in the near future and that unimproved properties with
entitlements, ready for physical improvements, will be in greatest demand.
In order to build homes, land entitlements (necessary governmental approvals)
must be obtained and maintained in effect. Entitlements include development
agreements, vesting tentative maps and recorded maps. These give a developer
the right to obtain building permits to begin construction upon compliance
with conditions that are usually within the developer's control.
In order to acquire land for residential development while conserving
cash, the Company may utilize options to buy land (generally requiring a
payment that is a small fraction of the purchase price to hold the property
pending financing). Such payment usually is applied to the purchase price.
It will fund additional acquisitions whenever possible with non-recourse
seller financing which does not require a full payment of the purchase price
immediately. The risk of securing the availability of property through the
use of options is that the Company will be unable to exercise the option and
lose the option payment. The risk of seller non-recourse financing is the
potential loss of the property, loss of the downpayment and loss of funds
spent on development if there is a default on the loan by the Company.
The Company views land as a component of a home's cost structure, rather
than for its speculative value. Due to the cyclical nature of the industry,
the critical role of risk-management in land development, and the low margins
that are typical in today's homebuilding market, the Company will seek to
place more emphasis on the acquisition and development of residential land to
entitle and sell to merchant homebuilders as opposed to a primary emphasis on
the actual construction of homes. The Company intends to focus its
residential development operations primarily in the infill and emerging
market segments. Properties acquired by the Company through the Acquisition
will be in various stages of the approval process and development.
THE LODGING AND RECREATION INDUSTRY
This industry includes many distinct product categories, including
commercial lodging-oriented products such as hotels and conference centers,
recreation-oriented products such as golf courses, equestrian facilities,
sports complexes, marinas, theme parks, destination resorts, recreational
vehicle resorts, and vacation-oriented products such as timeshare resorts, to
name a few. Initially, the Company will focus on the future development of
an executive conference center and timeshare resort, and the operation of a
golf course and recreational vehicle and timeshare resorts.
THE EXECUTIVE CONFERENCE CENTER INDUSTRY
An Executive Conference Center is distinguished from general, resort,
institutional and academic conference centers by virtue of its positioning
within the target market to attract corporate executive meetings. According
to the International Association of Conference Centers ("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
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from a hotel or resort that has meeting space in that the primary purpose of
a conference center is to satisfy and accommodate groups by offering a
self-contained, full-service meeting environment. It is dedicated to
accommodating small-to-medium sized groups, and meetings usually comprise at
least 60% of a facility's overall business. Due to this dedication to
meetings, conference centers tailor their facilities and services primarily
to the needs of the meeting planner by providing all necessary arrangements
for the complete schedule of activities from arrival to departure. The
pricing structure for a conference is often a single, uniform per person rate
- - a package that includes lodging, meals, coffee breaks, meeting services,
and equipment fees, called a Complete Meeting Package, or the Full American
Plan. Meeting rooms are designed and used only for meetings and do not
double as banquet rooms or exhibition space. Meal functions are held in a
central dining area. The IACC defines five types of conference centers, one
of which, the Executive or Dedicated Conference center, the Company feels
suits the Mori Point site the best.
At an Executive (Dedicated) Conference Center, groups are typically
composed of corporations, associations, and other organizations that
emphasize quality of accommodations and services over price. This type of
facility was developed primarily to satisfy upper-level management meetings
and education/training seminars. Facilities usually include sophisticated
equipment and are staffed with professional conference coordinators. Because
of its proximity to San Francisco and the Silicon Valley, the Company
believes that the Mori Point Conference Center could be positioned within
this category of facilities.
According to a recent report issued by the IACC and PKF Consulting
entitled "Conference Center Industry, A Statistical and Financial Profile -
North American 1996," since the recession in 1991 to year-end 1995, U.S.
conference centers have achieved a 27.2% increase in occupancy. This
compares to an 8.3% increase in occupancy for the overall lodging industry
during the same period. Except for resort conference centers, all types of
conference facilities have enjoyed double digit increases in occupancy since
1991.
Total revenue, measured on a per occupied room basis, has grown
approximately 20% for resort and executive conference centers since 1991.
For comparative purposes, cumulative inflation during the same period was
11.9% and the total revenue for U.S. hotels grew only 10.4%.
The primary competitive lodging market for the proposed conference center
at Mori Point is comprised of four hotels with a total of 508 rooms. The
selection of the competitive supply was based on location, facilities and
amenities, room rate structure, and market orientation. These hotels are all
full-service hotels and conference centers which cater to group and leisure
demand emanating primarily from the Bay Area, but with a secondary component
of national business attracted to their coastal locations. The secondary
competitive lodging market is comprised of three group-oriented airport
properties with 1,865 guest rooms, rendering the total potential current
competition to 2,373 rooms.
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THE RECREATIONAL VEHICLE RESORT INDUSTRY.
Recent statistics indicate that recreational vehicle travel is on the rise
and, like timeshare, is being pushed by the baby boomer demands. There are
now an estimated 25 million recreational vehicle enthusiasts in the United
States. Recreational vehicle owners travel an average of 5,900 miles a year
and spend 23 days on the road. The average recreational vehicle owner is 48
years old, owns his own home, has a household income just under $40,000 and
is overwhelmingly pleased with the purchase. Recreational vehicle sales have
increased by 44% between 1992 and 1995 and are projected to continue to
increase as the "boomers" enter their prime buying years of between 45 and
54. They value the recreational vehicle as a less expensive way for the
entire family to travel together. Recreational vehicle camping topped
hiking, wilderness camping, biking, horseback riding, canoeing, boating and
many other forms of recreation for satisfaction among participants in outdoor
activities. Nine of ten recreational vehicle owners agree that recreational
vehicles are a great way to travel because they offer the convenience of home
away from home; a majority said that recreational vehicle parks are like a
second neighborhood; and there is a real camaraderie among users. Also,
weekend trips have increased 85% since 1984 and recreational vehicles are
well suited for such weekend travel. The above information is derived from
publications of the California Travel Parks Association.
THE TIMESHARE INDUSTRY
THE MARKET. 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;
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- Increased consumer awareness of the value and benefits of timeshare
ownership; and
- Improved availability of financing for purchasers of timeshare units.
The timeshare industry traditionally has been highly fragmented and
dominated by local and regional resort developers and operators. The Company
believes that one of the most significant factors contributing to the current
success of the timeshare industry is the entry into the market of some of the
world's major lodging, hospitality and entertainment companies, such as
Marriott, Disney, Hilton, Hyatt, Four Seasons and Inter-Continental, as well
as Promus and Westin. However, none of such brand name lodging companies are
presently potential competitors of the Company.
THE CONSUMER. The Company believes that the prime market for vacation
intervals is customers in the 40-55 year age range who are reaching the peak
of their earning power and are rapidly gaining more leisure time.
According to an American Resort Development Association ("ARDA") study,
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.
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.
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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 to create the necessary cash
flow and capital to do so. The Company does not currently own or operate any
timeshare or recreational vehicle resort properties. After the Acquisition,
the Company will own the Yosemite/Ahwahnee Programs and their assets. On
behalf of Investors in those Programs, National currently operates a 54 site
recreational vehicle park and is expanding the park with the addition of
another 100 sites. Additionally, National is investigating the feasibility
of future timeshare facilities on the site as well.
The Company expects that it will have a competitive advantage by virtue of
the location advantages of the Yosemite/Ahwahnee and Mori Point Properties.
By striving to meet this objective, the Company expects that it will be
capable of enhancing the value and financial performance of the businesses
and assets currently held by the Investors in separate Programs through the
consolidation which the Acquisition will provide.
In order to meet its objectives, the Company intends to (i) develop the
Properties for their highest and best use, thereby maximizing the value of
the Company's asset base; (ii) increase the current cash flow from the
Company's consolidated operations, thereby enhancing the value of the
Company's businesses; (iii) maximize the profit margins of tangible and
intangible for-sale products by lowering costs and promoting efficiencies
through economies of scale; (iv) raise funds through a strategic combination
of the sale of units to Investors and the sale of selected real estate assets
acquired from the Programs to outside parties in order to finance the
Company's operations and expansion; and (v) generate revenues through lateral
expansion by acquiring complimentary projects and assets which are consistent
with the Company's objectives and business plans (external growth).
EXTERNAL GROWTH STRATEGY. When appropriate, and assuming market
acceptance for the Company's Shares, it is intended that growth through
acquisitions will be initially achieved through (i) the issuance of Shares of
the Company to the seller of the asset(s) to be acquired or (ii) the
utilization of options to purchase real estate assets. Preserving cash may
be preferable even though such transactions may result in the dilution of the
current Shareholders.
THE CONSOLIDATED BUSINESS PLAN
It is anticipated that the Company will have approximately $450,000 of
liquidity if none of the units are sold and approximately $5,000,000 if all
units are sold. The Company will seek additional liquidity from the sale of
one or more of the Company's assets or a combination
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thereof. It will then conduct the following activities in such a manner so
as to maximize positive cash flow in the most expeditious way.
THE SACRAMENTO/DELTA GREENS PROPERTY. It is the intent of the Company to
develop the Property in phases. Depending on the availability of working
capital from the sale of units and/or assets, the Company will seek to obtain
final map approval from the City of Sacramento for 50 lots by the second
quarter of 1998. The necessary infrastructure (main road and utilities) can
then be built along with finished lots, model homes and the first phase of
productions homes. The Company believes that the first home sales can occur
within six months of obtaining the final map. It will cost nearly $3,000,000
for the infrastructure and first phase of home construction. Subject to
receipt of government approvals and construction occurring on a timely basis,
the project is expected to generate cash flow by the fourth quarter of 1998,
and to become profitable by the second quarter of 1999. Depending on the
amount, the Company may provide these funds internally should no outside
financing sources be available. Once the first phase of homes has been built
and are selling, the Company will begin processing the final map for the next
parcel of 50 lots and will begin an aggressive program to sell this and other
parcels to merchant builders so as to accelerate the cash flow and
profitability to the Company and its Shareholders.
The material risks associated with the development of the Sacramento/Delta
Greens Property are (i) as of [September 30, 1997], approximately $54,000 of
property taxes are owed for the current year and for the fourth payment of a
5-year payment plan and must be kept current in order to avoid loss of the
Property for delinquent taxes; (ii) funds must be available to cover the
delinquent property taxes, as well as costs of obtaining final map approval
from the City of Sacramento and construction of necessary roads and
utilities, finished lots, model homes and the first phase of production
homes; (iii) a substantial sales and marketing effort will be necessary to
sell homes constructed on the Property if a bulk sale of the lots is not
made; (iv) the Property is located in a lower income residential area that
has had a reputation as a high crime area; and (v) increasing government fees
and assessments for streets, schools, parks and other infrastructure
requirements could increase the cost of lots to the Company thereby
increasing the sales price of the lots which will delay market absorption.
Real estate values in the area of the Property have improved in 1997.
However, the Property is located in the South Sacramento area which is
primarily populated with lower income residents. The general population of
the Sacramento area has been growing in recent years, indicating that housing
demand should continue to improve. However, there can be no assurance that
the Company will be able to develop the Property in a manner that is
ultimately profitable.
There are currently 230 active subdivisions in the Sacramento market.
Eleven of those are within ten miles of the Property and are designed to
provide single-family housing at a cost comparable to that proposed for the
Property.
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THE OCEANSIDE PROPERTY. The Company has completed the construction and
recent sale of the Encore tract. The Company will also continue to pursue
the buildout of the Symphony tract and aggressively seek a potential buyer as
soon as possible after the Acquisition is completed. If the Company conducts
the buildout, it is estimated that approximately $700,000 of equity financing
will be required plus approximately $3,500,000 of construction financing.
Assuming that a potential buyer for the entire Symphony tract cannot be
located promptly, the risks associated with pursuing the buildout of the
Symphony Tract are (i) rising governmental fees and assessments may increase
the cost of construction; (ii) construction financing would be required to
complete the buildout and unpredictable financing costs could increase the
cost of construction; (iii) the Property could be lost in a tax sale if units
are not sold in this offering or certain assets are not sold by the Company
in order to meet its working capital (including delinquent property taxes)
needs; and (iv) competition in the area.
The Property is located in the eastern portion of Oceanside, California.
It is primarily a bedroom community for employment centers in Southern Orange
County and San Diego County, California. According to the California State
Employment Development Department, employment has been expanding in both of
those counties with Orange County reporting unemployment rates at the lowest
in the State. Overall economic factors in the area have been improving since
1995.
Competition for lots and new homes in the area of the Property is strong.
The principal competition is from large homebuilders (such as Centex, Kaufman
& Broad Homes, Lermar Homes, and Greystone Homes) which are able to initiate
expensive and broad-based marketing campaigns. There are three directly
competing tracts and approximately 14 total projects offering homes of
comparable quality and price within a ten mile radius of the Property.
THE YOSEMITE/AHWAHNEE PROPERTIES. Yosemite National Park is located
within a six hour drive of over 30 million people. The Company plans to
aggressively focus on the following areas of operations and development for
these properties: (1) recreational vehicle facility, (2) timeshare
development, and (3) the golf course facility.
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 110 more. Revenue from
membership sales and dues is expected to continue to increase in 1998 based
on investing an additional amount of about $350,000 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.
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There are virtually no competitive recreational vehicle resorts in the
immediate area of the Property. The recreational vehicle park is a member of
Coast to Coast Resorts, AOR and Western Horizons. These affiliations are
important marketing tools. They allow members reciprocal use of many other
recreational vehicle camp resorts located regionally and across the country.
Bass Lake Resort, the nearest competitor, consists of 175 sites and is
located about 12 miles from the Property's site. It has about 1,900 members
and has been operational since 1984. On the other hand, the
Yosemite/Ahwahnee recreational vehicle park has been fully operational since
August 1996 with 54 sites and has over 280 members to date. The Company
intends to aggressively expand this membership base. The Bass Lake
recreational vehicle resort is of significantly lesser quality than the
Yosemite/Ahwahnee recreational vehicle park. It is older with deferred
maintenance, has no golf course and lacks space for any additional amenities
or expansion.
The timeshare industry continues its significant growth pace, particularly
for developments that are well located near natural amenities, like the
Yosemite/Ahwahnee Property. A prominent timeshare industry consultant has
evaluated the project and has recommended a 170-unit timeshare development on
the Property. The Company will begin the processing of permits and licenses
with the appropriate agencies as soon as possible. Final approval is
expected to take about nine months before construction can begin. An initial
investment of approximately $3,000,000 will be required to begin timeshare
construction and an aggressive marketing program.
In terms of timeshare competition, the Property has none. As of October
1996, there were 15 timeshare projects in California with active marketing
and sales programs. They include six from the Desert-Palm Springs and Big
Bear Mountain ski areas, four from the Lake Tahoe area and the remaining five
in other scattered locations. There is one relatively small project of 13
units near Bass Lake, run by Worldmark, a timeshare operator located in
Seattle. That project is of no competitive consequence because of its size
and lack of comparable amenities. There is no present or planned direct
competition in the immediate vicinity from any of the major companies
involved in the timeshare industry such as Marriott, Hyatt, Four Seasons,
Disney or Hilton.
Since 1995, a significant amount of capital has been used for improvements
to the golf course. The golf course is considered to be a primary amenity to
attract future timeshare sales. Annual revenues have increased over 200%
since 1995 and rounds played have more than doubled. Additional revenues are
a natural bi-product from the golf course for the ancillary products like
food, liquor and clothing.
There are also no comparable golf courses in the area. A nine-hole course
exists approximately five miles from the Property. It offers a recreational
facility primarily for local players but has no resort-type amenities or room
for expansion. In addition, there is another nine-hole course just inside
Yosemite Park near the Wawona Hotel. It is designed and used primarily for
tourist day stop and family-type entertainment. For persons seeking a
golf-related
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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 [September 30, 1997, [$640,000] of property taxes are delinquent and
must be brought current to avoid loss of the Properties for delinquent
property taxes; (ii) the need for substantial working capital to operate and
develop the recreational vehicle facility, the proposed timeshare
development, and the golf course facility; (iii) assuming that working
capital is available to accomplish the business plan, high marketing costs
could adversely affect profitability; 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 and
the proposed timeshare project, given its location in the much travelled,
highly desirable area near Yosemite Park, the Company believes that with
proper marketing it will be able to attract users of resort property to
either the recreational vehicle facility or the proposed timeshare units.
Presently, California has a strong economy with relatively low unemployment.
The income demographics for the products being offered at the
Yosemite/Ahwahnee Properties range from $35,000 to over $50,000 annually,
and, according to the California Travel Parks Association, there are
5,100,000 households in California with incomes over $35,000 and 3,100,000
households in California with incomes exceeding $50,000.
THE MORI POINT PROPERTY. The Company will continue with the proposed
development plan for a hotel/conference center on the Property. Because of
its proximity to San Francisco and the Silicon Valley, the Company considers
that the Mori Point Property could be positioned competitively within the
executive conference center category of facilities. Furthermore, it presents
itself as an outstanding timeshare location. Detailed plans for the
development of the Property do not exist at this time. Therefore, an
accurate cost to develop the facility, as well as a timetable, is not
possible. A study of the endangered species' habitat and any potential
mitigation measures is being conducted as are other environmentally-related
issues like traffic impacts. It is anticipated that over $500,000 will be
needed by the Company to complete the permitting process and deal with any
other environmental concerns. Within 12-18 months from completion of the
Acquisition, the Company will determine whether it can obtain governmental
approvals to complete the development of the Property. During that period,
it will consider whether it will be necessary to sell the Property or enter
into a joint venture agreement. if the Company were to move forward to
construct the hotel/conference center, it is estimated by National that
approximately $40,000,000 of external funding would be required.
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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
unless funds can be generated to keep current on the payment plan for
delinquent property taxes worked out with the local taxing authority; (ii)
permits to develop the Property have expired and new entitlements must be
processed which is costly and time-consuming; (iii) two endangered species
are located on the Property requiring the preparation of an acceptable plan
to mitigate disruption of their habitats and there is no assurance that
acceptable mitigation plans can be proposed; (iv) if an acceptable mitigation
plan cannot be developed, the Property will have little value to the Company
and it will be difficult to sell at any cost; and (v) if the necessary
permits to develop the Property can be obtained, there is no assurance that
the Company will be able to successfully develop the Property into a
hotel/conference center or find a partner to assist in such project.
The Property is oceanfront property in the town of Pacifica, California,
located approximately ten miles from downtown San Francisco and five miles
from San Francisco International Airport. The San Francisco Bay Area has
enjoyed an economic boom for the last few years and it is on the cutting edge
of the emerging knowledge-based economy in the United States. The Bay Area
is a favorite destination for both tourists and conventioneers. It is
desired for its scenery, restaurants, mild climate, and varied types of
entertainment.
The following table, based on information contained in the May 1997
appraisal of the Mori Point Property by PKF Consulting, provides a summary of
the current primary and second competition of the proposed executive
conference center for Mori Point.
Property Number of Rooms Amenities
- -------- --------------- ----------
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 2,373
- ----
A - Restaurant
B - Meeting Rooms
C - Swimming Pool
D - Exercise Room
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Estimated year-end 1996 occupancy level for the primary competition for a
Mori Point hotel/conference center was 67.8%; the secondary competitive
market's performance was at a higher occupancy level of 83.3% for the same
period.
PRIORITY OF PROJECTS AND ESTIMATED TIMETABLE. If adequate working capital
is available from the sale of units, the Company will begin work on all of
the Properties promptly after the Acquisition is completed. If adequate
working capital is not raised from a sale of units, the Company plans to sell
one or more of the Sacramento/Delta Greens, Oceanside or Mori Point
Properties to raise such working capital.
The Company considers the Yosemite/Ahwahnee Properties to have the most
potential for a long-term profits. Thus, in an environment with limited
working capital, any costs for the development or construction of any of the
other Properties would assume lesser priority in order to maximize the
potential of the Yosemite/Ahwahnee Properties.
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. To the extent that external sources of
financing are not available, the Company plans to sell one or more of the
Sacramento/Delta Greens, Oceanside or Mori Point Properties to raise
operating capital.
The Company's plans for the development of the Yosemite/Ahwahnee
Properties currently targets mid-1998 for the completion of 100 additional
recreational vehicle sites and the readiness of the initial timeshare units
for sale. Thereafter, additional recreational vehicle sites and timeshare
units will be built from cash flow. If funds are available either from
external sources or the Unit offering, the Company estimates that the
Sacramento/Delta Greens Property will involve approximately three years to
complete the permitting process, construction and sell out to homebuyers or
other builders in the area. The Mori Point permitting process will require
up to two years. Assuming necessary permits to develop a hotel/conference
center are obtained, a sale of the Property or its development with a joint
venture partner will be solicited. The construction and sale of the
remaining 111 lots and homes on the Oceanside Property will take
approximately two years if a bulk sale to another developer is not sooner
arranged. THERE IS NO ASSURANCE THAT THE ABOVE ESTIMATED TIMETABLES FOR ANY
OF THE PROPERTIES CAN BE MET.
TYPES OF BORROWING REQUIRED. The Company anticipates that it will engage
in 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 takeout financing available when the loan is due
resulting in a default.
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Construction loans involve the financing necessary to actually build a
proposed project once the infrastructure is in place. As with infrastructure
financing, it is secured by the real estate meaning the failure to generate
sales or operating cash flow sufficient to pay the loans will result in a
default and a potential loss of the land which has been provided as
collateral. While less risky than infrastructure loans, construction loans
usually bear a higher interest rate than permanent loans do. See "-- Impact
of Interest Rates on the Company."
IMPACT OF INTEREST RATES ON THE COMPANY. The Company intends to use
traditional construction loan financing for the buildout of the lots and
homes on its Sacramento/Delta Greens and Oceanside Properties, as well as for
the construction of the timeshare units beyond the initial models. If
interest rates rise during the construction of and prior to the sell out of
the completed homes, then the prices of the homes would have to be increased
or the Company would have to absorb the increased cost and associated
decrease in profits. If prices are increased, some buyers may be priced out
of the market in, which case the Properties would have less potential buyers
and could suffer from a decline in volume of homes sold. In addition, the
sale of homes is dependent on adequate and competitive buyer financing.
Higher interest rates for potential homebuyers will result in a decrease and
velocity of homes sold. The Company may also consider some infrastructure
financing, for roads and utilities, for the Sacramento/Delta Greens Property.
If that occurs, then higher interest rates will negatively affect the
profitability of the Property. A falling interest rate environment will have
the opposite effect on these two Properties.
The Company intends to use its working capital to perform the planning,
engineering and other approval work for the Mori Point Property. It also
intends to use working capital and internally generated funds to finalize the
construction of an additional 100 recreational vehicle sites, as well as the
initial costs for the timeshare approvals and initial model construction for
the Yosemite/Ahwahnee Properties. In these cases, a rising or falling
interest rate environment will have little or no direct affect on those
Properties. If the Company decides later to use a construction loan to
build the initial timeshare models, then a change in interest rates will have
the same affect as stated above relative to the construction of the
Sacramento/Delta Greens and Oceanside Properties.
INSURANCE
Management of the Company believes that each of the Properties is adequately
insured for title, property and casualty matters.
EMPLOYEES
It is anticipated that the Company's initial employees will consist of
approximately 15 individuals located at the home office in Newport Beach,
California, who will handle the responsibilities of management, accounting
and administration of the subsidiaries through AFC. 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
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carry forward with the development and entitlement activities. Marketing and
consulting services for the recreational vehicle membership sales and resort
operations are contracted through Western Horizons, a Colorado-based
recreational vehicle park management and marketing company. None of the
employees will be subject to collective bargaining agreements.
LEGAL PROCEEDINGS
Neither the Company nor the Properties is the subject of any material,
legal proceeding.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing, conflicts
of interest and other policies of the Company. These policies have been
determined by the Company's Board of Directors and generally may be amended
or revised from time to time by the Board of Directors without a vote of the
shareholders.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE. Initially, the Company will invest in the
Properties it receives in the Acquisition. This is a portfolio of properties
in various stages of development. As the business plans for the various
Properties described herein are either completed or matured, the Company will
seek to acquire and develop or manage, as appropriate, properties which are
compatible with its existing properties. Such properties may include resort
properties (in the development phase or completed), residential properties
(in the development phase), or such other types of properties as the Board of
Directors may from time to time in its sole discretion deem to be appropriate
investments for the Company. The Company expects that most of its initial
investments will be located in the State of California, although there is no
requirement that such be the case.
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.
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SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES. The Company may also invest in securities of entities engaged in
real estate activities or securities of other issuers, including for the
purpose of exercising control over such entities. However, the Company has
no present plans to make any such investment in securities. In any event,
the Company does not intend that its investments in securities will require
it to register as an "investment company" under the Investment Company Act of
1940, and the Company would divest itself of such securities before any such
registration would be required.
JOINT VENTURES. The Company may enter into joint ventures or partnerships
or other participations with real estate developers, builders, owners and
others for the purpose of obtaining or retaining equity interests in a
particular property.
OFFERING SECURITIES IN EXCHANGE FOR PROPERTY. The Company may offer its
securities in exchange for a property in which it wishes to invest.
REPURCHASING ITS OWN SHARES. The Company may purchase or repurchase
Shares from any person for such consideration as the Board of Directors may
determine in its reasonable discretion, whether more or less than the
original issuance price of such Share or the then trading price of such Share.
ISSUANCE OF ADDITIONAL SECURITIES. The Board of Directors may, in its
discretion, issue additional equity securities from time to time to increase
its available capital. Such issuance will result in a dilution of the
interests of the then-existing Shareholders.
FINANCING POLICIES
ISSUANCE OF SENIOR SECURITIES. The Company may, at any time, issue
securities senior to the Shares, upon such terms and conditions as may be
determined by the Board of Directors.
BORROWING POLICY. The Company may, at any time, borrow, on a secured or
unsecured basis, funds to finance its business and, in connection therewith,
execute, issue and deliver promissory notes, commercial paper, notes,
debentures, bonds and other debt obligations which may be convertible into
shares or other equity interests or be issued together with warrants to
acquire shares or other equity interests. The Charter Documents impose no
limit upon the Company's debt. The Board has not established any maximum
debt limit for the Company, although it intends to act prudently in borrowing
funds for Company operations.
LENDING POLICIES. The Company may, at any time, make mortgage loans
secured by properties of the type in which the Company may invest, subject to
restrictions on related party transactions contained in the Delaware General
Corporation Law.
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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.
USE OF PROCEEDS
If all units are sold through the efforts of broker-dealers, the Company will
receive $4,650,000 before estimated offering expenses of $200,000. The net
proceeds from the sale of the units offered hereby will be prioritized and
used by the Company to pay Acquisition Expenses, property taxes due and
general and administraive expenses to fund its business plan and for working
capital purposes as follows:
Estimated Amount
----------------
Acquisition expenses $ 300,000
Property taxes due 450,000
General and administrative 450,000
Entitlement processing 1,100,000
Infrastructure improvements 1,300,000
Construction 350,000
Working capital 500,000
----------
TOTAL $4,450,000
----------
----------
The above amounts are estimates and management of the Company may revise
these priorities and amounts as necessary to fulfill the best interests of
the Company.
Except to the extent used to pay future salaries and reimburse officers
for future out-of-pocket expenses, none of the proceeds will be allocated to
officers, directors or principal shareholders of the Company.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
[September 30], 1997 after giving effect to the completion of the Acquisition.
[September 30], 1997
--------------------
Pro Forma
Acquisition
--------------------
DEBT:
Capital lease obligations $ 375,681
--------------
Total debt 375,681
--------------
--------------
STOCKHOLDERS' EQUITY:
Common Stock(1) 2,667
Additional paid-in capital(1) 19,930,497
Accumulated deficit(2) (267,000)
Total stockholders' equity 19,666,164
--------------
Total capitalization $ 20,041,845
--------------
--------------
- -----------
(1) Gives pro forma effect to the utilization of carryover basis in
conjunction with the Acquisitions, the conversion of investor interests
into common stock ownership in the Company.
(2) Gives pro forma effect to the reduction to stockholders' equity of costs
allocated to the Offering upon an unsuccessful units offering.
DILUTION
Assuming completion of the Acquisition, the following table sets forth on a
pro forma basis as of [September 30], 1997, with respect to the founders,
consultants and existing Program Investors, a comparison of the number and
percentage of Shares purchased and cash or other consideration paid and the
average price per share.
Acquisition
----------------------------------------------------
Shares Purchased Total Consideration Average
------------------ --------------------- Price per
Number Percent Number Percent Share
---------- ------- ------------ ------- ---------
Founders and Consultants 529,037 20% $ 951,401(1) 5% $ 1.80
Program Investors 2,137,480 80 18,981,763 95 8.88
---------- ------- ------------ ------- ---------
Total 2,666,517 100% $[19,933,164 100% $ 7.47
---------- ------- ------------ ------- ---------
---------- ------- ------------ ------- ---------
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- --------
(1) Amount consists of $5,290 of cash and $946,111 of fees that have been
incurred since 1994 that will be forgiven by National and its principals
upon the successful completion of the Acquisition.
SELECTED FINANCIAL INFORMATION
The following selected financial information should be read in conjunction
with the discussion set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and all of the financial
statements included elsewhere in this Prospectus. The pro forma financial
information is not necessarily indicative of what the actual financial
position and results of operations of the Company would have been as and for
the periods indicated, nor does it purport to represent the future financial
position and results of operations for future periods.
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<TABLE>
<CAPTION>
Company Pro Forma The Acquisition Historical
---------------------------------- ----------------------------------------
Nine Months
Nine Months Year Ended Ended Years Ended
Ended December 31, 1996 September 30 December 31
September 30, ----------------- ------------ -------------------------
1997
---------------
The Acquisition The Acquisition 1997 1996 1995
--------------- --------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $5,129,774 $6,675,718 $ 5,129,774 $ 6,675,718 $ 6,333,143
Cost of sales 3,585,345 5,327,856 3,585,345 5,327,856 5,346,735
---------- ---------- ----------- ----------- -----------
Gross profit 1,544,429 1,347,862 1,544,429 1,347,862 986,408
Expenses:
Selling, general and administrative 3,251,026 4,017,227 2,988,526 3,667,227 2,033,496
Land write-down 983,143 845,000 983,143 845,000 -
Management fees 0 0 487,500 650,000 650,000
Acquisition expenses - - 800,544 - -
---------- ---------- ----------- ----------- -----------
Total expenses 4,234,169 4,862,227 5,259,713 5,162,227 2,683,496
Net interest income 39,542 63,518 39,542 63,518 135,875
---------- ---------- ----------- ----------- -----------
Net loss (2,650,198) (3,450,847) (3,675,742) (3,750,847) (1,561,213)
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
Net loss per share (0.99) (1.29) N/A N/A N/A
Average number of shares outstanding 2,666,517 2,666,517 N/A N/A N/A
Balance Sheet Data:
Cash and cash equivalents 455,409 N/A 451,506 863,373 N/A
Total real estate 19,138,668 N/A 19,138,668 19,283,472 N/A
Total assets 23,021,022 N/A 23,284,119 25,535,082 N/A
Total debt 375,681 N/A 375,681 424,767 N/A
Total liabilities 3,356,245 N/A 4,302,356 3,952,822 N/A
Stockholders'/ owners' equity 19,664,777 N/A 18,981,763 21,582,260 N/A
Other Data:
Cash provided by operating activities (952,142) (765,447) (1,169,642) (616,257) 652,473
Cash used in investing activities (268,433) (186,211) (268,433) (186,211) (436,545)
Cash provided by financing activities 1,026,158 642,815 1,026,158 642,815 115,311
</TABLE>
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<TABLE>
<CAPTION>
The Acquisition Historical The Acquisition Historical
-------------------------------------- ----------------------------------
Nine months Nine Months
Ended Years Ended Ended Years Ended
September 30 December 31 September 30 December 31
------------ ------------------------ ------------ --------------------
1997 1996 1995 1997 1996 1995
----------- ----------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Program Data Investment Program Data
Oceanside Mori Point
- --------- ----------
Cash and cash equivalents $ 206,335 $ 660,207 $ N/A Cash and cash equivalents $ 83,410 $ 39,032 $ N/A
Real estate 3,301,071 3,219,920 N/A Real estate 4,100,000 4,100,000 N/A
Total assets 5,646,980 7,938,216 N/A Total assets 4,258,387 4,139,032 N/A
Total debt - 3,910 N/A Total debt - - N/A
Total liabilities 905,459 1,207,402 N/A Total liabilities 954,116 807,514 N/A
Total owners' equity 4,741,521 6,730,814 N/A Total owners' equity 3,304,271 3,331,518 N/A
Revenues 3,640,850 5,490,180 5,920,600 Revenues - - -
Gross margin 404,983 515,020 624,859 Gross margin - - -
Net Loss 1,539,293 548,675 367,219 Net Loss 422,0281 89,125 146,867
Ahwahnee Sacramento/Delta Greens
- -------- -----------------------
Cash and cash equivalents $ 126,664 $ 101,551 $ N/A Cash and cash equivalents $ 35,097 $ 62,583 $ N/A
Real estate 9,737,597 9,734,050 N/A Real estate 2,000,000 2,230,000 N/A
Total assets 11,313,077 11,165,251 N/A Total assets 2,065,675 2,292,583 N/A
Total debt 375,681 420,857 N/A Total debt - - N/A
Total liabilities 2,112,046 1,678,840 N/A Total liabilities 330,735 259,066 N/A
Total owners' equity 9,201,031 9,486,411 N/A Total owners' equity 1,734,940 2,033,517 N/A
Revenues 1,488,924 1,185,538 412,543 Revenues - - -
Gross margin 1,139,446 832,842 361,549 Gross margin - - -
Net Loss 1,261,988 1,950,363 915,537 Net Loss 452,433 1,062,684 131,590
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion should be read in conjunction with the "Selected
Financial Information" as well as the financial statements listed in the index
on page F-1. If approved by the Investors in the five former "Trudy Pat"
programs, the programs discussed below will be acquired by the Company. Except
for historical information contained herein, the matters discussed in this
report contain forward-looking statements that involve risks and uncertainties
that could cause results to differ materially.
RESULTS OF OPERATIONS - THE OCEANSIDE PROGRAM
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO 1996
For the nine months ended September 30, 1997 the net loss amounted to
$1,539,293 compared to $410,810 for the nine months ended September 30, 1996.
The increase in the net loss is primarily due to the following factors: an
increase in revenue of $387,470, an increase in cost of sales of $235,712, an
increase in selling, general and administrative expenses of $184,301 and a
writedown in the real estate inventory of $753,143 during 1997 and costs
associated with the proposed acquisition of the Program by the Company of
$329,253.
The increase in revenues is due to the increase in the average selling
price per home of $10,000, as well as during 1997, one additional house was
sold as compared to the same period in 1996.
The increase in cost of sales of approximately $235,712 (8%) was due to
the additional house sold in 1997, as well as the significant increase in
incentives provided to the buyers in conjunction with the sales of homes during
the nine months ended September 30, 1997 as compared to 1996.
Selling, general and administrative expenses increased by $184,301 (37%)
due to an increase in the sales activity and incentives provided on houses sold
during 1997 versus 1996.
Based on the net proceeds received from the sale of the remaining
inventory lots subsequent to September 30, 1997, the Program wrotedown its real
estate inventory to its estimated fair value as to September 30, 1997 of
$593,175, resulting in a $753,143 charge against income during the nine months
ended September 30, 1997.
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COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO 1995
For the year ended December 31,1996, the net loss amounted to $548,675
compared to a net loss of $367,219 for the year ended December 31,1995. The
change of results are primarily from the following factors: a decrease in
revenue of $430,420, which has been offset by a decrease in cost of sales of
$320,581, an increase in selling, general and administrative expenses of
$46,126 and a decrease in interest income of $25,491.
Revenues decreased in 1996 by $430,420 or 7% as compared to 1995. This
decrease was caused by two less homes being sold in 1996 as compared to 1995,
as well as a decrease in the average selling price of approximately $2,000
per house. These figures are indicative of the soft single family housing
market throughout Southern California during 1995 and 1996.
Cost of sales decreased in 1996 by $320,581 or 6% as compared to 1995
primarily due to the decrease in the number of houses sold discussed above.
Selling, general and administrative expenses increased $46,126 or 6% as
compared to 1995. The increase is principally due to an increase in rent
expense paid for leases of model homes within the development.
The decrease in interest income of $25,491 or 24% was due to a decrease in
the average invested cash balance during 1996 as compared to 1995.
RESULTS OF OPERATIONS - THE YOSEMITE/AHWAHNEE PROGRAMS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO 1996
For the nine months ended September 30, 1997, the net loss amounted to
$1,261,908, compared to a net loss of $1,414,496 for the nine months ended
September 30, 1996. The change of results is primarily from the following
factors: an increase in revenues of $801,694, an increase in cost of sales
of $190,050, an increase in selling, general and administrative expenses of
$304,777 and costs associated with the proposed acquisition of the Programs
by the Company of $154,628.
The increase in revenues of $801,694 (117%) 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 nine months ended September 30,
1996, as well as $884,760 of recreational vehicle memberships. The increase
in cost of sales of $190,050 (125%) was principally due to the increase in
membership sales activity.
The increase in selling, general and administrative expenses of $304,777
(17%) is a result of the increased operations of the golf course and the
increased recreational vehicle membership sales effort during 1997 as
compared to the same period in 1996.
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COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO 1995
Due to the minimal operations of the resort during the first nine months
of 1995, the property experienced significant increases in revenues and
expenses which are discussed in the following paragraphs.
For the year ended December 31, 1996, the property experienced a net loss
of $1,950,363 compared to a net loss of $915,537 for the year ended December
31, 1995. The change of results is due to the following factors: an increase in
revenue of $772,995, an increase in cost of sales of $301,702, an increase in
selling, general and administrative expenses of $1,467,998 and an increase in
interest expense of $38,121.
Revenues increased in 1996 by $772,995 or 187%. This increase was
primarily attributable to the sale of $513,799 of recreational vehicle
memberships, the increased fees received from the operation of the golf course
during 1996 and the sale of two of the property's developed lots for $99,961
during 1996. The increase in cost of sales of $301,702 (592%) was principally
due to the increase in, and the change in makeup of, revenues.
Selling, general and administrative expenses increased $1,467,998 (134%)
during 1996 as compared to 1995. The increase was primarily attributable to
increases in salaries and wages of $506,693, consulting fees of $272,557,
advertising and promotion of $178,489, repairs and maintenance of $139,110
and depreciation and amortization of $77,535.
The property had interest expense of $18,962 during 1996, while having
interest income of $19,159 during 1995. This change was due to the
incurrence of capital lease obligations during 1996, the interest expense
from which more than offset any interest income from bank accounts and notes
receivable.
RESULTS OF OPERATIONS - THE MORI POINT PROGRAM
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 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 $41,383 for
the nine months ended September 30,1996 to $123,448 at September 30, 1997, an
increase of $82,065. The operating expenses primarily consist of property
taxes and consulting fees related to feasibility studies performed on the
property. Property tax expense increased by $39,607 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. The Program also expended approximately $225,000 associated with
the acquisition of the Program by the Company. Management fees were
consistent for both periods at $75,000 per period. These fees were for the
management and administration of the property.
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COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO 1995
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 $46,867 at
December 31,1995 to $90,348 at December 31, 1996, an increase of $43,481.
The operating expenses primarily consist of property taxes and legal
expenses. During 1996, property taxes increased by $27,092 due to an
increase in the property value. Legal expenses increased by $10,525. These
legal expenses mainly relate to a proposed development on this property which
never materialized. Management fees were consistent for both year ends at
$100,000 per year. These fees were for the management and administration of
the property.
RESULTS OF OPERATIONS - THE SACRAMENTO/DELTA GREENS PROGRAM
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 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 increased from $81,323 for the
nine months ended September 30, 1996 to $93,879 at September 30, 1997, an
increase of $12,556. The difference is a result of the employment of
consultants during 1997 to perform studies related to the proposed development
of the property. In addition, $91,732 was expended on the contemplated
acquisition of this Program by the Company. Management fees were consistent
for both periods at $37,500 per period.
Due to a decrease in the median prices of homes in the communities
surrounding Delta Greens during 1996 and a decrease in the number homes zoned
for this property during 1997, impairment losses of $633,750 and $230,000
were recorded on the property's financial statements during the periods
presented.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO 1995
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 increased from $93,523 at
December 31,1995 to $169,649 at December 31, 1996, an increase of $76,126.
The operating expenses primarily consist of property taxes, planning and
engineering expenses, and consulting fees. During 1996, planning and
engineering expenses increased by $48,219 due to engineer studies and surveys
performed on the property. Consulting fees increased by $44,875. These
consulting expenses relate to the proposed development of this property.
Management fees were consistent for both year ends at $50,000 per year.
These fees were for the management and administration of the property.
Due to a decrease in the median prices of homes in the communities
surrounding Delta Greens during 1996, an impairment loss of $845,000 was
recorded on the property's 1996 financial statements.
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LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Acquisition on a pro forma basis as of September
30, 1997, the Company will have approximately $450,000 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 Acquisitions, which if fully subscribed would result in
net proceeds of approximately $4,450,000.
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 September
30, 1997, the Company had no debt and approximately $1,052,000 of delinquent
property taxes levered against its real estate, some of which is being paid
pursuant to 5-year payment plans. Based on its lack of significant leverage,
the Company believes that significant liquidity can be generated through
additional borrowings, if necessary
(b) Obtain additional funding by selling off additional properties: The
Company believes some of the properties, or portions thereof, can be sold to
generate sufficient liquidity to develop the remaining properties. In
conjunction with this strategy, the remaining 23 parcels of the Encore
property, a development within the Oceanside Program, were sold during
October 1997 for net proceeds of $593,115.
(c) Reduce development capital needs through joint venture arrangements:
The Company believes that it will be able 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 would develop and construct 170 vacation homes on currently
entitled lots which would be sold as time share intervals. The Company
expects that it will require an initial amount of approximately $3,000,000 of
funding for this development phase which would last for approximately 6
years. In addition, the Company plans to continue to develop the recreational
vehicle park, which should be self-funding from sales of currently available
recreational vehicle memberships. Although the Company currently does not
have the proper entitlements to develop the remaining raw land within the
resort, the Company does anticipate eventually developing this
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land subsequent to the completion of the other projects occurring within
the resort which have been described above.
OCEANSIDE
The Company could start developing the Symphony project residential homes.
The Symphony project consists of 111 lots upon which the Company projects
building single family homes principally containing 3 to 4 bedrooms. The
Company anticipates that funds which have been generated from the Encore
tract, along with approximately $700,000 of equity funding and an estimated
maximum of $3,500,000 of construction financing, will be sufficient to
develop Symphony, which should be completed within approximately two years
from the date of commencement.
MORI POINT
The Company anticipates developing a state of the art business conference
center located near San Francisco, California. The Company anticipates that
approximately $500,000 and 1.5 years is needed to complete the entitlement
and mapping process. If construction commences upon completion of the
entitlement/mapping process, the Company anticipates that the business
conference center would be operational by 2001. The business conference
center will consist of multiple meeting rooms, restaurant, indoor and outdoor
facilities, which is expected to require approximately $40,000,000 of
external funding. Due to the significant development funding required for
this project, the Company anticipates that it will seek a joint venture
development partner to reduce the funding required of the Company.
SACRAMENTO/DELTA GREENS
The property is zoned for a single-family housing project, consisting of
over 500 homesites, in Sacramento, California. The total expected funding
needs for this project are approximately $3,000,000, with completion of the
project currently estimated for approximately 10 years after commencement.
LIQUIDITY SUMMARY
The Company expects to meet its short- and long-term liquidity
requirements through the methods described above in addition to cash generated
from the operations of the resort properties once these properties are
operational. The Company believes that the liquidity sources described above
will be adequate to satisfy the cash requirements of the Company for the 12
months following the completion of the Acquisition.
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HISTORICAL CASH FLOWS
THE OCEANSIDE PROGRAM
Cash flows from operations decreased from net inflows of $1,277,135 for
the year ended December 31, 1995 to net inflows of $1,002,238 for the year
ended December 31, 1996. The decrease is principally due to the increase in
the net loss of the property from $367,219 during 1995 to $548,675 during 1996.
Cash flows from operations increased from inflows of $468,447 for the nine
months ended September 30, 1996 to inflows of $86,043 for the nine months ended
September 30, 1997. The significant cash inflows were due to the large number
of houses sold during the nine months ended September 30, 1996 and 1997.
Cash flows used in investing activities decreased, going from $323,914 in
1995 to $114,062 in 1996, due to the slowdown in development of the Symphony
site. Cash flows used in investing activities decreased from the nine months
ended September 30, 1996 to the nine months ended September 30, 1997 also due
to changes in the level of development expenditures made on the Symphony site.
Cash flows from financing activities were net outflows of $900,000 and
$896,090 for the years ended December 31, 1995 and 1996, which were
principally composed of capital distributions. For the nine months ended
September 30, 1996, cash outflows for financing activities of $675,000
occurred while cash outflows for the nine months ended September 30, 1997 of
$453,910 occurred. These outflows are also composed principally of
distributions paid to Program investors. The decrease is a result of less
investor contributions during 1997 than in 1996.
THE YOSEMITE/AHWAHNEE PROGRAM
Cash used in operations increased from net outflows of $546,788 for the
year ended December 31, 1995 to net outflows of $1,247,623 for the year ended
December 31, 1996. The decrease is principally due to the increase in the
net loss of the property from $915,537 during 1995 to $1,950,363 during 1996.
Cash flows from operations improved from the nine months ended September 30,
1996 to 1997, decreasing from outflows of $889,722 to outflows of $723,941.
The decrease is principally due to significant increases in accounts payable
and accrued expenses in 1997 versus smaller increases in these balances
during the nine months ended September 30, 1996.
Cash flows used in investing activities resulted principally from
purchasing equipment for the golf course and minor additions to the property as
a whole. Net cash used in investing activities was $112,631, $72,149, $27,949
and $182,428 for the years ended December 31, 1995 and 1996 and for the nine
months ended September 30, 1996 and 1997.
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Cash flows from financing activities were net inflows of $1,003,278,
$1,074,023, $629,005 and $931,432 for the years ended December 31, 1995 and
1996 and the nine months ended September 30, 1996 and 1997. The level of
owner contributions into the property was the principal component driving the
above fluctuations in cash flows from financing activities.
THE MORI POINT PROGRAM
Cash flows from operations changed from $0 for the year ended December 31,
1995 to outflows of $163,278 for the year ended December 31, 1996. The
change is principally due to payments being made on accrued liabilities.
Cash flows used in operations increased from outflows of $131,408 for the
nine months ended September 30, 1996 to $350,403 for the nine months ended
September 30, 1997. The increase is principally due to a decrease in accrued
liabilities in 1997.
Cash flows from financing activities for the year ended December 31, 1996
consisted of $202,310 made up of contributions from investors. For the nine
months ended September 30, 1996 and 1997, cash inflows from financing
activities were $172,341 and $44,378. Inflows consisted of additional
contributions from existing program investors.
THE SACRAMENTO/DELTA GREENS PROGRAM
Cash outflows from operations were $77,874, $207,594, $153,051 and
$181,341 for the years ended December 31, 1995 and 1996 and for the nine months
ended September 30, 1996 and 1997. The variations are principally due to the
timing of payments of accounts payable and accrued liabilities.
Cash flows from financing activities for the years ended December 31 1996
and 1995 and the nine months ended September 30, 1996 and 1997 consisted of
contributions from investors of $12,033, $262,572, $256,918 and $153,855.
NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" (SFAS No. 125) issued by the Financial Accounting Standards
Board ("FASB") is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1996, and is
to be applied prospectively. Earlier or retroactive application is not
permitted. The new standard provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of
liabilities. Because the Company is not currently engaging in any
transactions within the scope of this pronouncement, the Company does not
expect adoption of SFAS No. 125 to have a material effect on its financial
position or result of operations.
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Statements of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS No. 128) issued by the FASB is effective for financial
statements for both interim and annual periods ending after December 15,
1997. Earlier application is not permitted. SFAS 128 requires dual
presentation of basic and diluted earnings per share ("EPS") on the face of
the income statement. It also requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This statement also requires restatement of all
prior period EPS data presented. The Company does not expect adoption of
SFAS No. 128 to have a material effect on its results of operations.
Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The adoption of SFAS No. 129 will not have a
material effect on the financial position or results of operations of the
Company.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The adoption of SFAS No. 130
will not have a material effect on the financial position or results of
operations of the Company.
Statements of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by
the FASB is effective for financial statement beginning after December 15,
1997 (although the FASB is encouraging earlier application). The new
standard requires that public business enterprises report certain information
about operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas
in which they operate and their major customers. The adoption of SFAS No.
131 will not have a material effect on the financial position or results of
operations of the Company.
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
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Directors on the Board; that is, persons who are not employed by or otherwise
affiliated with the Company prior to becoming directors. The Board will then
be divided into three classes serving staggered three year terms. See
"Comparisons of Programs and the Company -- Anti-Takeover Provisions."
Any director may resign at any time and may be removed with or without
cause by the shareholders upon the affirmative vote of a majority of all the
votes entitled to be cast for the election of directors at a special meeting
called for the purpose of such proposed removal. The notice of such meeting
shall indicate that the purpose, or one of the purposes, of such meeting is
to determine if a director will be removed. A vacancy created by death,
resignation or removal of a director may be filled by a vote of a majority of
the remaining directors. Each director will be bound by the Company's
Charter Documents.
The directors are not required to devote all of their time to the
Company and are only required to devote such of their time to the affairs of
the Company as their duties require. The directors will meet quarterly or
more frequently if necessary. It is not expected that the directors will be
required to devote a substantial portion of their time to discharge their
duties as directors. Consequently, in the exercise of their fiduciary
responsibilities, the directors will be relying heavily on the executive
officers of the Company. The Board is empowered to fix the compensation of
all officers that it selects and may pay directors such compensation for
special services performed by them as it deems reasonable. Initially, the
Company will pay Independent Directors a retainer fee of $20,000 per year,
plus $1,000 per meeting attended, plus 2,500 options 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 shall establish further written
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 shall 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. To the extent a property
needs skills not possessed by management, or cannot be efficiently provided
by management, consultants will be hired to provide those skills and
services.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
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Director Term
Name Age Position Expires
- ---- --- -------- -------
David G. Lasker 52 Co-Chairman of the Board, 2000
President and Chief Financial
Officer
James N. Orth 50 Co-Chairman of the Board, 2000
Chief Executive Officer and
Secretary
L.C. "Bob" Albertson, 54 Executive Vice President of 1999
Jr. the Company and President
and Chief Executive Officer of
American Family
Communities, Inc., Director
Mark K. Kawanami 34 Vice President N/A
Charles F. Hanson 60 Director 1999
Dudley Muth 58 Director 1998
James G. LeSieur, III 56 Director 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 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.
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From 1969 through 1976, Mr. Orth was employed by IBM Corporation as a
marketing representative and territory manager. From 1978 to 1980, he was
vice president and branch manager of ENI Corporation, an oil and gas
exploration company. He received a Bachelor of Science in
Mathematics-Statistics, French and Economics from the University of Wyoming
in 1969 and did post-graduate work in the MBA-Finance program at the
University of Colorado.
L.C. "BOB" ALBERTSON, JR. - Executive Vice President and Director of the
Company, President and Chief Executive Officer of American Family
Communities, Inc., a wholly-owned subsidiary of the Company. Mr. Albertson
is responsible for the operation of the Company's Properties and the
implementation of the Company's business plan. Mr. Albertson is a 32-year
veteran of the homebuilding industry. From 1985 to 1996, he served as
President of Presley Homes, Southern California Region, a large
publicly-traded homebuilding company. From 1981 to 1983, he was President of
Barrett American, Irvine, a publicly-traded homebuilding company based in
Great Britain. Mr. Albertson is President of HomeAid America, a non-profit
organization supported by the National Association of Homebuilders. From
1985 to 1986, he served as President of the Building Industry
Association/Orange County Region.
MARK K. KAWANAMI - Vice President of the Company and Vice President of
Finance of American Family Communities, Inc., a wholly-owned subsidiary of
the Company. From 1996 to 1997, he was Corporate Controller for California
Pacific Homes, Inc. From 1995 to 1996, he was Director of Finance and
Administration for Creative Design Consultants, Inc. From 1991 to 1995, he
was Assistant Treasurer/Assistant Controller for A-M/Greystone Homes. After
leaving public accounting in 1989, Mr. Kawanami held two other finance
positions with Southern California homebuilders. From 1986 to 1989, he was
with the accounting firm of KPMG Peat Marwick (independent accountants) where
he earned his CPA. Mr. Kawanami received a Bachelor of Arts degree in
Economics from the University of California, Los Angeles, in 1985.
CHARLES F. HANSON - Director of the Company. Since 1989, Mr. Hanson has
served as Co-Chairman of the Board of Larson Training Centers, Inc., a
vocational training company with campuses in the Cities of Orange and Carson,
California. Also, since 1994, he has served as an independent marketing
director for a major pharmaceutical company. In 1991, he developed Coastal
Pacific Commercial Corporation, a consulting company to the real estate
industry. From 1987 to 1989, Mr. Hanson was associated with CIS Corporation,
a New York stock exchange listed company and a leading equipment leasing
firm, as Vice President and National Sales Manager. In 1985, he developed
Half-Time Associates, Inc., a national seminar company. From 1983 to 1985,
Mr. Hanson was associated with Integrated Resources, Inc. as Vice President,
Director of Marketing. Prior positions at Integrated Resources, Inc.
included Senior Executive Vice President of Integrated Resources Equity Corp.
and Executive Vice President, National Sales Manager and Director of
Marketing for Integrated Resources Energy Group. Mr. Hanson received his
Liberal Arts degree from the University of Washington. He is Registered
Principal with the NASD and is licensed with the New York Stock Exchange.
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DUDLEY MUTH - Director of the Company. Mr. Muth's career includes over
20 years of extensive experience in the field of corporate management, law,
securities and real estate. From June 1993 through May 1997, Mr. Muth served
as a consultant on real estate and securities matters and as Vice President
of Drake Capital Securities, Inc. He recently rejoined Drake Capital
Securities, Inc. to direct all compliance and legal activities. From March
1990 until June 1992, he served as president of First Diversified Financial
Services, Inc., a syndicator of all-cash investments in California real
estate. From June 1987 until February 1990, he was President of USREA/WESPAC
which controlled two public real estate investment trusts. From January 1985
to May 1987, Mr. Muth was President of Cambio Equities Corporation and Cambio
Securities Corporation. From October 1982 to December 1984, he served as
Executive Vice President of Angeles Corporation. From July 1977 through
September 1979, he was Vice President and Director of Compliance for The Pacific
Stock Exchange, Inc. In 1967, he began his career in the tax department of
Arthur Andersen & Co. Mr. Muth received his Bachelor of Arts degree in
Economics from Pomona College, his M.B.A. in accounting from UCLA Graduate
School of Management, and his J.D. from the University of Southern
California. He is a member of the California State Bar and a Registered
Principal with the NASD.
JAMES G. LESIEUR, III - Director of the Company. From April 1991 to the
present, Mr. LeSieur has been President and Chief Executive Officer of
Sunwest Bank, Tustin, California. Prior to that, he was Executive Vice
President and Chief Financial Officer of Sunwest Bank from December 1985 to
March 1991, and held other responsible officer positions with that bank from
September 1975 to November 1985. Before joining Sunwest Bank, he was with
Arthur Young & Company (independent accountants). He received a Bachelor of
Science degree from Purdue University and an M.B.A. degree from Wharton
Graduate School of University of Pennsylvania.
COMMITTEES OF THE BOARD OF DIRECTORS
EXECUTIVE COMMITTEE. In due course, the Board of Directors will
establish an executive committee (the "Executive Committee") which will be
granted the authority to acquire and dispose of real property and the power
to authorize, on behalf of the full Board of Directors, the execution of
certain contracts and agreements. The Company expects that the Executive
Committee will ultimately consist of the co-Chairmen of the Board of
Directors and two Independent Directors.
AUDIT COMMITTEE. The audit committee will consist of two Independent
Directors and one "inside" director (the "Audit Committee"). The Audit
Committee will make recommendations concerning the engagement of independent
auditors, review with the independent auditors the plans and result of the
audit engagement, approve professional services provided by the independent
auditors, review the independence of the independent auditors, consider the
range of audit and non-audit fees and review the adequacy of the Company's
internal accounting controls.
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
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Independent Directors. Until the Committee is established, the Independent
Directors will serve as the Compensation Committee.
NOMINATING COMMITTEE. In due course, the Board of Directors will
establish a nominating committee (the "Nominating Committee") to nominate
persons to serve on the Company's Board of Directors as vacancies arise. The
Nominating Committee will ultimately consist of three directors, at least two
of whom will be Independent Directors.
DIRECTORS AND EXECUTIVE OFFICERS COMPENSATION AND INCENTIVES
The Company will compensate designated key managers of the Company with
cash compensation and certain incentives including stock option and bonus
plans. The below table sets forth the estimated annual base salary to be
paid to the Chief Executive Officer, President and Vice Presidents, as well
as the stock options for the officers and directors.
Annual Common Stock
Name Position Salary(1) Options
- ---- -------- --------- ------------
David G. Lasker* Co-Chairman of the Board, $180,000 30,000(2)
President and Chief Financial
Officer
James N. Orth Co-Chairman of the Board, $180,000 30,000(2)
Chief Executive Officer and
Secretary
L.C. "Bob" Albertson, Executive Vice President and $200,000 30,000(2)
Jr. Director of the Company;
President and Chief Executive
Officer of American Family
Communities, Inc., Director
Mark K. Kawanami Vice President of the $100,000 5,000(2)
Company; Vice President of
Finance of American Family
Communities, Inc.
Charles F. Hanson Director - 2,500(3)
Dudley Muth* Director - 2,500(3)
James G. LeSieur, III* Director - 2,500(3)
____________
* Initial members of Audit Committee.
(1) Employment Agreements for Messrs. Lasker, Orth and Albertson contain
provisions for bonus payments based on performance criteria.
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(2) 10,000 to be issued upon completion of the Acquisition to Messrs.
Lasker, Orth and Albertson and 10,000 additional options to be issued to
each of them on the first and second anniversaries of the Acquisition.
These options are nonqualified stock options which are not issued pursuant
to the Company's 1997 Stock Option and Incentive Plan. They have a ten
year term. Messrs. Lasker, Orth and Albertson may exercise options for
3,333 shares immediately. Mr. Kawanami's options will be issued upon
completion of the Acquisition and he may exercise options for 1,250 shares
immediately. They are exercisable at $10 per Share. Options issued at
later dates will be exercisable at market value on the date of issuance.
(3) To be issued upon completion of the Acquisition. These options are
issued pursuant to the Company's 1997 Stock Option and Incentive Plan.
They have a ten-year term and are exercisable one year from the date of
grant at $10 per Share. The number of options is determined by formula
for the Independent Directors.
STOCK INCENTIVE PLAN
The Company has established a stock incentive plan (the "Stock Incentive
Plan") to enable executive officers, key employees and directors of the
Company and its subsidiaries to participate in the ownership of the Company.
The Stock Incentive Plan is designed to attract and retain executive
officers, other key employees and directors of the Company and its
subsidiaries and to provide incentives to such persons to maximize the
Company's value, as well as cash flow, available for distribution. The Stock
Incentive Plan provides for the award to such executive officers and
employees of the Company and its subsidiaries of stock-based compensation
alternatives such as restricted stock, nonqualified stock options and
incentive stock options and provides for the grant to Independent Directors
of nonqualified stock options on a formula basis.
The Stock Incentive Plan will be administered by the Compensation
Committee, which is authorized to select from among the eligible employees of
the Company and its subsidiaries the individuals to whom options are to be
granted and to determine the number of shares to be subject thereto and the
terms and conditions thereof. The Compensation Committee is also authorized
to adopt, amend and rescind rules relating to the administration of the Stock
Incentive Plan. Nonqualified stock options shall be granted to Independent
Directors in accordance with the formula set forth in the Stock Incentive
Plan.
The Stock Incentive Plan was approved by the Company's founding
shareholders September 15, 1997. The following awards may be made under the
Plan:
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.
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INCENTIVE STOCK OPTIONS, if granted, will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of fair market value
of Common Stock on the grant date and a ten year restriction on their term,
but may be subsequently modified to disqualify them from treatment as an
incentive stock option.
RESTRICTED STOCK is Common Stock of the Company which may be awarded to
key employees of the Company by the Compensation Committee, subject to such
restrictions on the exercise of full ownership as such Committee may
determine. Restrictions may relate, among other things, to duration of
employment, Company performance and individual performance.
Promptly after the Closing of the Acquisition, the Company expects to
issue to certain officers, directors and key employees of the Company and its
subsidiaries options to purchase an aggregate of 7,500 shares of Common Stock
pursuant to the Stock Incentive Plan. The term of each of such options will
be ten years from the date of grant and they will be exercisable one year
after the date of grant at a price per share equal to the public offering
price per Share in the Offering. The expected allocations of the options to
such persons is as presented above in the "Directors and Executive Officers
Compensation and Incentives." Except for those options, the Company does not
plan to grant options under the Stock Incentive Plan until after the first
year of operations.
No criteria for issuance of options or restricted stock have yet been
developed by the Compensation Committee. There is no maximum number of
options that a single individual may receive.
185,000 shares of Common Stock, subject to adjustment, will be reserved
for issuance under the Stock Incentive Plan. There is no limit on the number
of awards that may be granted to any one individual (other than Independent
Directors who annually receive a fixed number of options automatically)
FEDERAL INCOME TAXES. If the option has no readily ascertainable fair
market value, no income is recognized by a participant at the time an option
is granted. If the option is an incentive stock option ("ISO"), no income
will be recognized upon the participant's exercise of the option. Income is
recognized by a participant when he or she disposes of shares acquired under
an ISO. The exercise of a nonqualified stock option ("NQSO") generally is a
taxable event that requires the participant to recognize, as ordinary income,
the difference between the shares' fair market value on the exercise date and
the option price.
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.
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401(k) PLAN
The Company intends to establish a qualified retirement plan, with a
salary deferral feature designed to qualify under Section 401 of the Code
(the "401(k) Plan"). The 401(k) Plan will permit the employees of the
Company and the Operating Partnership to defer a portion of their
compensation in accordance with the provisions of Section 401(k) of the Code.
The 401(k) Plan will allow participants to defer up to 15% of their eligible
compensation on a pre-tax basis subject to certain maximum amounts. Matching
contributions may be made in amounts and at times determined by the Company.
Amounts contributed by the Company for a participant will vest over a period
of years to be determined and will be held in trust until distributed
pursuant to the terms of the 401(k) Plan.
Employees of the Company and its subsidiaries will be eligible to
participate in the 401(k) Plan if they meet certain requirements concerning
minimum age and period of credited service. All contributions to the 401(k)
Plan will be invested in accordance with participant elections among certain
investment options. Distributions from participant accounts will not be
permitted before age 59 1/2, except in the event of death, disability, certain
financial hardships or termination of employment.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Lasker
and Orth for a term of five years, Mr. Albertson for a term of three years,
and Mr. Kawanami for a term of one year, each subject to automatic one year
extensions unless terminated. The agreements provide for initial annual
salary compensation as follows: Messrs. Lasker and Orth, each $180,000; Mr.
Albertson $200,000; and Mr. Kawanami $100,000. Each of the agreements for
Messrs. Lasker and Orth provides for annual increases of the greater of ten
percent per annum or the increase in the consumer price index for the
metropolitan area in which Newport Beach, California, is located and Mr.
Albertson's provides for annual salary increases of $25,000 per year for the
second and third years of his agreement. In addition, the salaries may be
raised at the discretion of the Board upon recommendation of the Compensation
Committee. No criteria other than prudent stewardship of Company resources
exist for the exercise of such discretion. Each agreement also contains
provisions for discretionary bonus consideration and a fixed bonus equal to
two percent of [pre-tax profits in the case of Messrs. Orth, Lasker and
Albertson, and up to 20% of base salary for Mr. Kawanami]. In addition,
Messrs. Lasker, Orth and Albertson may receive discretionary bonuses of up to
50% of base salary if certain to-be-budgeted financial results are exceeded.
Except to the extent required to carry on pre-existing duties to investors in
other programs managed by National or other pre-existing real estate
investments, each agreement includes provisions restricting the officers from
competing with the Company during the term of such employment. Each
agreement also provides for certain salary and benefit continuance for six
months if the officer is permanently disabled; and, provides for a severance
payment in the amount of 2.99 times for Messrs. Lasker, Orth and Albertson,
and .5 times for Mr. Kawanami, the officer's average salary and bonus over
the past five years (or such
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shorter time as the officer was employed), payable in 18 equal monthly
installments for Messrs. Lasker, Orth and Albertson, and no more than six
equal monthly installments for Mr. Kawanami, if any of such officers elect to
resign within six months of the completion of a change of control. 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 which is not approved by the employee after which the existing
shareholders of the Company hold less than 51% of the voting securities of
the resulting entity, or a change in membership of the Board of Directors
resulting in 50% or more of the Board of Directors not being nominated by
management.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Charter Documents limit the liability of the Company's
directors to the Company and its stockholders for money damages to the
fullest extent permitted from time to time by Delaware law. Delaware law
presently permits the liability of directors to a corporation or its
shareholders for money damages to be limited, except (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders; (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; (iii) for unlawful
distributions to stockholders; and (iv) for any transaction from which the
director derived an improper benefit.
The Company's By-Laws require the Company to indemnify its directors,
officers and certain other parties (collectively "agents") to the fullest
extent permitted from time to time by Delaware law. The Company's
Certificate of Incorporation and By-Laws also permit the Company to indemnify
its agents who have served another corporation or enterprise in various
capacities at the request of the Company. The Delaware law presently permits
a corporation to indemnify its agents against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service to or at the request of the Company, unless it is established that:
(i) the act or omission of the indemnified party was material to the matter
giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; (ii) the indemnified party
actually received an improper personal benefit; or (iii) in the case of any
criminal proceeding, the indemnified party had reasonable cause to believe
that the act or omission was unlawful. Indemnification may be made against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by the director or officer in connection with the proceeding;
provided, however, that if the proceeding is one by or in the right of the
Company, indemnification may not be made with respect to any proceeding in
which the director or officer has been adjudged to be liable to the Company.
In addition, a director or officer may not be indemnified with respect to any
proceeding charging improper personal benefit to the director or officer in
which the director or officer was adjudged to be liable on the basis that the
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
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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.
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
Percent of All
Name and Address Common Stock Voting Shares Outstanding, Assuming
---------------- ------------ -----------------------------------
Acquisition
Acquisition Completed and All
Completed Only Units Sold
-------------- -----------------
Yale Partnership for
Growth and Development,
L.P.(1) [216,867] 8.13% 6.85%
4220 Von Karman Avenue
Suite 110
Newport Beach, CA 92660
J-Pat, L.P.(2)
4220 Von Karman Avenue [216,867] 8.13% 6.85%
Suite 110
Newport Beach, CA 92660
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- -------------------
(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.
DIRECTOR AND OFFICER STOCK OWNERSHIP
<TABLE>
<CAPTION>
Percent of
Percent Class if
of Class if Acquisition
Acquisition Completed Common
Common Completed and All Stock Percent
Name/Position Stock Only Units Sold Options of Class
------------- ----- ---- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
David G. Lasker, President, Chief
Financial Officer and Director(2) [216,867] [8.13]% [6.85]% 10,000(1) 23.53%
James Orth, Chief Executive Officer,
Secretary and Director(3) [216,867] [8.13]% [6.85]% 10,000(1) 23.53%
L.C. "Bob" Albertson, Jr. Executive
Vice President, Director 54,118 2.03% 1.71% 10,000(1) 23.53%
Mark K. Kawanami 1,000 .04% .03% 5,000(1) 11.77%
Charles F. Hanson, Jr., Director - - - 2,500 5.88%
Dudley Muth, Director - - - 2,500 5.88%
James G. LeSieur III, Director - - - 2,500 5.88%
Directors and Officers as a group [488,852] [18.33]% [15.44]% 42,500 100.00%
</TABLE>
- -----------------------
(1) Messrs. Lasker, Orth and Albertson each may exercise options to purchase
3,333 shares presently, and Mr. Kawanami, 1,250 shares. In addition, each
of Messrs. Lasker, Orth and Albertson will be issued 10,000 options on the
first anniversary of the Acquisition and 10,000 options on the second
anniversary of the Acquisition.
(2) Mr. Lasker controls Yale Partnership for Growth and Development, L.P.
which owns the Shares reported. He has sole voting and investment power.
(3) Mr. Orth controls J-Pat, L.P. which owns the Shares reported. He has sole
voting and investment power.
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DESCRIPTION OF SHARES
The following description of the Shares and other capital stock of the
Company does not purport to be complete but contains a summary of portions of
the Company's Certificate of Incorporation and is qualified in its entirety
by reference to the Company's Certificate of Incorporation.
GENERAL
The total number of shares of stock which the Company has authority to
issue is 12,000,000 shares, of which 10,000,000 are shares of Common Stock,
$0.001 par value per share ("Common Stock"), and 2,000,000 are shares of
Preferred Stock, $0.001 par value per share ("Preferred Stock"). The Board
of Directors is authorized to provide for the issuance of shares of
Preferred Stock in one or more series, to establish the number of shares in
each series and to 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
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terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms
or conditions of redemption. Subject to the express terms of any other
series of preferred stock outstanding at the time and notwithstanding any
other provision of the Certificate of Incorporation, the Board of Directors
may increase or decrease the number of shares of, or alter the designation or
classify or reclassify, any unissued shares of any series of Preferred Stock
by setting or changing, in any one or more respects, from time to time before
issuing the shares, and the terms, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption of the
shares of any series of Preferred Stock. There are no shares of Preferred
Stock outstanding and the Company has no present plans to issue any.
WARRANTS
The only presently existing warrants will be issued as part of the units.
Each warrant will have a two year life, is immediately exercisable, and will
allow the holder to purchase two shares of Common Stock for a per share
purchase price equal to 80% of the closing price for the Company's Common
Stock on the trading date immediately preceding the warrant exercise date.
These warrants are detachable from the units immediately on issuance and
contain appropriate anti-dilution clauses and will be fully transferable from
the date of the close of the Acquisition. The Common Stock issued upon
exercise of these warrants has been registered under the Securities Act and,
when issued, will be freely tradable. The Company does not intend to list
the warrants on any market or exchange.
CERTAIN SHAREHOLDER VOTING REQUIREMENTS
The Company's Certificate of Incorporation requires the concurrence of
the holders of two-thirds of the voting power of the outstanding voting stock
to amend specified provisions of the Company's Certificate of Incorporation
and By-Laws, which provide that (i) shareholders generally may not call a
special meting of shareholders or act by written consent; (ii) subject to
applicable law, the Company's Board of Directors will be divided into three
classes, the effect of which is that only approximately one-third of the
Board will be elected each year; (iii) directors may be removed by the
Shareholders only for cause and only upon the affirmative vote of two-thirds
of the voting power of the outstanding voting stock; (iv) a vote of
two-thirds of the voting power of the outstanding voting stock not held by an
"interested stockholder" is required for the approval of specified types of
business combinations; and (v) subject to applicable law, holders of Common
Stock will not be entitled to cumulative voting of shares for the election of
directors. These provisions, together with a classified Board of Directors
and the authorization to issue Preferred Stock on terms designated by the
Board of Directors, could be used to defend against certain business
combinations not favored by the Board of Directors (so-called "hostile
takeovers").
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
American Stock Transfer & Trust Company.
THE OFFERING
OFFERING OF ACQUISITION SHARES
Subject to the conditions set forth in this Prospectus, the Company is
offering to Investors in the Programs an aggregate of [2,137,480] Shares
("Acquisition Shares") in exchange for all of the real estate, certain of the
liabilities and business of all of the Programs. The Acquisition Shares will
be allocated to the Programs based on Exchange Values and will be further
allocated within each of the Programs pro rata in respect of the Adjusted
Outstanding Investments of the Investors in the respective Programs. For
example,
If your Adjusted Outstanding You will receive the following number
- ---------------------------- of Acquisition Shares
Investment is $10,000 in ---------------------
- ------------------------
Sacramento/Delta Greens 310
Oceanside 199
Yosemite/Ahwahnee I 400
Yosemite/Ahwahnee II 298
Mori Point 379
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.
OFFERING OF UNITS
The Company is also offering to Investors EXCLUSIVELY an aggregate of
500,000 units at $10 per unit. A unit consists of one Share and one Warrant.
For a period of two years, each warrant entitles the holder to purchase two
additional shares of Common Stock at a per share price equal to 80% of the
closing price for the Company's Common Stock on the trading date immediately
preceding the warrant exercise date. The Warrants are immediately
exercisable. Shares purchasable upon exercise of Warrants will be registered
under the Securities Act. units
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<PAGE>
will be allocated among the Investors on a first-come-first-serve basis.
NASD broker-dealers which assist in selling the units will receive an
aggregate commission of $0.70 per unit sold.
Any unsubscribed for units may be purchased at the offering price by
officers or directors of the Company simultaneously with the Closing of the
Acquisition.
The offering price of $10 per unit was arbitrarily established and was
not determined by reference to any traditional criteria of value, such as
book value, earnings or assets. There is no existing public market for the
units or the Common Stock; however, the Company has received approval for
listing upon issuance on _________ under the symbol "___."
FINANCIAL ADVISORY SERVICES. National has entered into an agreement with
L.H. Friend, Weinress, Frankson & Presson, Inc. and National Securities
Corporation (the "Advisors"), whereby the Advisors agreed to provide
financial advisory and investment banking services in connection with the
exchange offering and the offering of units. In exchange, the Advisors will
receive $7,500 per month for a minimum of three months and options to
purchase 30,000 shares of Common Stock.
ESCROW ARRANGEMENTS. Commencing on the date of this Prospectus, all
funds received by the Company from orders for units will be placed promptly
in an interest bearing escrow account with the Escrow Agent at the National's
expense until such funds are released as described below. Separate escrow
accounts will be established for benefit plan funds as required by law or
such benefit plans. Payment for units will be payable to "First Trust of
California, N.A., as Escrow Agent for American Family Holdings, Inc. Unit
Offering," but sent to the Company which will promptly send them to the
Escrow Agent. Such funds will be held in trust for the benefit of
subscribing Investors to be used for the purposes set forth in this
Prospectus. The funds will be invested in a money market account maintained
by the Escrow Agent. The interest, if any, earned on escrow funds prior to
the transmittal of such proceeds to the Company will not become part of the
Company's capital. Instead, within 15 days following the issuance of units,
the Company will cause the Escrow Agent to make distributions to subscribing
Investors of all interest earned on their escrowed funds used to purchase the
Shares.
As soon as practicable after the Closing of the Acquisition, the Company
will cause to be issued units to all Investors whose orders have been
accepted. The Offering of units will terminate at the time of the Effective
Time of the Acquisition.
On or after the date received by the Escrow Agent, Investors will have no
right to withdraw any funds submitted to the Escrow Agent prior to the
earlier of the Effective Time of the Acquisition or the determination by
National that the votes to approve the Acquisition are not available. No
sales of units will be consummated unless the Acquisition is approved.
If the Acquisition is not approved within 60 days after the date this
Prospectus is first mailed to Investors, or such later date as may by
approved by National and the Company, then the Company will cancel all
existing orders for units and all funds submitted on account of such
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orders will be released from escrow and promptly returned to each investor
together with all interest earned thereon.
Pending use of funds received by the Company from the Escrow Agent, the
Company may invest such funds in Permitted Temporary Investments.
FIRST TRUST OF CALIFORNIA, N.A., IS ACTING ONLY AS AN ESCROW AGENT IN
CONNECTION WITH THE OFFERING OF THE UNITS DESCRIBED IN THIS PROSPECTUS, AND
HAS NOT ENDORSED, RECOMMENDED OR GUARANTEED THE PURCHASE VALUE OR REPAYMENT
OF THE UNITS.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Acquisition, the Company will have outstanding
[__________] shares of Common Stock. Of these shares, the [__________]
shares issued in the Acquisition and Offering will be freely tradable without
restriction or further registration under the Securities Act except for any
of such shares held by "affiliates" of the Company.
The remaining shares of Common Stock held by the existing shareholders are
"restricted securities" as that term is defined in Rule 144 of the Securities
Act. In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for
at least one year, as well as persons who may be deemed "affiliates" of the
Company, will be entitled to sell in any three month period a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of Common Stock or (ii) the average weekly trading volume
of the Common Stock during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission. Sales pursuant to Rule 144 are also subject to certain other
requirements relating to manner of sale, notice and availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months immediately preceding the sale is entitled to
sell restricted shares pursuant to Rule 144(k) without regard to the
limitations described above, provided that two years have expired since the
later of the date on which such restricted shares were fist acquired from the
Company or from an affiliate of the Company.
Upon completion of the Acquisition, 72,500 authorized shares of Common
Stock will be subject to outstanding options. Additionally, 185,000 shares
of Common Stock of the Company have been reserved for issuance pursuant to
the 1997 Stock Incentive Plan. Shares granted or issued upon the exercise of
stock options will be restricted shares and subject to Rule 144.
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Because there has been no public market for shares of Common Stock of the
Company, the Company is unable to predict the effect that sales made under
Rule 144, pursuant to future registration statements or otherwise may have on
any then prevailing market price of shares of the Common Stock.
Nevertheless, sales of a substantial amount of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
market prices.
APPRAISALS AND FAIRNESS OPINION
GENERAL
Exchange Values were determined as of _________, 1998
[the month-end before mailing of this Prospectus] and have been assigned to
each of the Programs solely to establish a method of allocating the Shares
for purposes of the Acquisition. The Exchange Values were determined by
National and the Company. The starting point for the Exchange Values was the
independent appraised value of each of the Program's real estate; however,
due to the significant disparity between the May 1997 and the October 1996
appraised values of the Yosemite/Ahwahnee I and II Properties, management of
National and the Company had to reconcile those appraisals to arrive at
Exchange Values for the Yosemite/Ahwahnee I and II Properties. See "--
Reconciliation of Yosemite/Ahwahnee 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:
Name, Address of Appraisers
Name of Program and Date of Appraisal
- --------------- ---------------------
Sacramento/Delta Greens David E. Lane, Inc.
9851 Horn Road, Suite 150
Old Mills Winery Office Park
Sacramento, California 95827
Date: May 1997
Oceanside Boznanski & Company
283 North Rampart Street
Suite A
Orange, California 92868
Date: May 1997
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Yosemite/Ahwahnee I and II Arnold Associates
751 West 18th Street
Post Office Box 272
Merced, California 95341
Date: May 1997
and
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
The aggregate appraised values of the assets covered by all appraisals
(as the Yosemite/Ahwahnee appraisals were reconciled by National and the
Company) is $20,515,575.
The above appraisers were selected because of their respective
reputations and experience in appraising the value of real estate of the type
involved. In addition, in the cases of Arnold Associates and Boznanski &
Company, the original borrowers had used these companies for the appraisals
delivered to the lenders (Investors) at the time the original "Trudy Pat"
loan was made. National felt their prior experience with the
Yosemite/Ahwahnee Properties and the Oceanside Property, respectively, might
provide some cost savings to their respective Programs.
National then engaged Houlihan Valuation Advisors, 2029 Century Park
East, Suite 2890, Los Angeles, California 90067, the Independent Valuator, to
render an opinion that the allocation of Shares among the Programs, as well
as the number of Shares retained by management of the Company and other
founders of the Company, is fair to the Investors from a financial point of
view. The Fairness Opinion is attached as Appendix 1 to this Prospectus.
The Fairness Opinion and appraisals have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. Copies may be
obtained without charge by writing to Vivian Kennedy, National Investors
Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport Beach, California
92660.
National did not impose any limitations on the scope of the
investigations of the independent appraisers or the Independent Valuator to
enable them to render their respective appraisals and the Fairness Opinion.
National and the Company determined the consideration to be paid to the
Investors.
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EXPERIENCE OF INDEPENDENT APPRAISERS
Each of the independent appraisers is a member in a nationally recognized
society such as the American Institute of Real Estate Appraisers ("MAI").
Each has been involved in the appraisal of real estate in California for many
years. National believes that each of the independent appraisers is
recognized among such appraiser's peers as being well experienced in
appraising the type of real estate it was asked to value. National selected
the appraisers because of the appraisers' respective experience and
reputation in connection with real estate assets of the nature they were,
respectively, asked to value.
MAY 1997 APPRAISALS
On behalf of the Programs, National engaged the independent appraisers
identified in "-- General" above in the Spring of 1997 to appraise the "as
is," highest and best use, value of the real estate portfolio of the
applicable Program. Each of the independent appraisers has consented to
reference to the appraisals in this Prospectus.
SUMMARY OF METHODOLOGY. In the case of the real estate in the
Sacramento/Delta Greens Program, the independent appraiser determined that
the sales comparison, land residual, and discounted cash flow methods for
appraising real estate were appropriate to use. In the case of the real
estate in the Oceanside Program, the independent appraiser determined that
the sales comparison and land residual methods for appraising real estate
were appropriate to use for the 111 partially finished residential lots in
the Symphony tract. In the case of the real estate in the Yosemite/Ahwahnee
I and II Programs, the independent appraiser determined that the sales
comparison, income and cost methods for appraising real estate were
appropriate to use on various portions of the Properties. In the case of the
real estate in the Mori Point Program, the independent appraiser determined
that the discounted cash flow, ground rent capitalization and sales
comparison methods for appraising real estate were appropriate to use. See
Appendix 2 for definitions of these appraisal methods.
In conducting each of the appraisals, representatives of the several
appraisers reviewed and relied upon, without independent verification,
certain information provided by National, including, but not limited to:
applicable financial information; property descriptions; historical
acquisition information; title information relating to encumbrances; and such
other information as was requested by the appraiser and available to
National. Representatives of each of the appraisers performed site
inspections on the real estate of each of the Programs in 1997. In the
course of these visits, any physical facilities were inspected and
information on the local market, as well as the subject property, was
gathered.
Where appropriate, applicable government records were reviewed and
information was gathered from applicable government officials. As
appropriate, historical operating statements for certain of the Properties
were reviewed.
Each appraiser then estimated the value of the real estate of the applicable
Programs based on the approaches to valuation described above.
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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:
Real Estate "As Is" Ownership Date Real
Name of Program Value Conclusion(1) Estate Value Conclusions
---------------- ------------------- ------------------------
Sacramento/Delta Greens $ 2,000,000 $ 3,075,000
Oceanside 2,850,000 6,484,000(2)
Yosemite/Ahwahnee I and II 20,916,000 19,641,000
Mori Point 5,500,000 4,100,000
TOTAL $31,266,000 $ 33,800,000
- ------------------
(1) See Appendix 2 for a description of each appraiser's conclusion with
regard to the valuation methods selected and with regard to separately
identifiable portions of the Property of each program.
(2) Since the Ownership Date, a significant number of lots have been sold.
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS. Each appraisal report was
prepared in accordance with the Uniform Standards of Professional Appraisal
Practice. Each appraiser utilized certain assumptions to determine the
appraised value of the Properties.
See Appendix 2 for a discussion of the assumptions, limitations and
qualifications of the appraisals.
THE MENTOR APPRAISAL
In the Fall of 1996, National hired The Mentor Group, Inc. ("Mentor") to
appraise the "highest and best use" value of the Yosemite/Ahwahnee Properties
as a guide for planning purposes. As of October 10, 1996, using primarily
the cost approach, Mentor determined the "as is" value of the subdivision
portion of the Properties to be $530,000 and the "as is" value of the balance
(deemed excess land) as $3,460,000 for an aggregate appraised value of
approximately $4,000,000. Mentor determined that the highest and best use of
the Properties, as of the appraisal date, was to hold the project for future
study or project implementation. In the Spring of 1997, National hired
Arnold Associates to determine the "as is" value of the Properties assuming
that they were developed at their highest and best use, recognizing that, to
achieve highest and best use, it would take a substantial continued
investment in the Properties and a significant amount of time.
In conducting the appraisal, representatives of The Mentor Group reviewed
and relied upon, without independent verification, certain information
provided by National, including, but not limited to: applicable financial
information; property descriptions; historical acquisition information; title
information relating to encumbrances; and such other information as was
requested by the appraiser and available to National. Representatives of the
appraiser performed site inspections on the real estate of each of the
Programs in the Fall of 1997. In the course of these visits, any physical
facilities were
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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.
RECONCILIATION OF YOSEMITE/AHWAHNEE PROPERTIES' APPRAISALS
Faced with the significant disparity between the Yosemite/Ahwahnee
valuation conclusions of The Mentor Group and Arnold Associates, in order to
arrive at an Exchange Value for the Yosemite/Ahwahnee Properties, National
reconciled the two appraisals as follows:
First, with regard to the Ahwahnee Country Club portion of the combined
Properties, National judged the Arnold Associates appraisal as more
reasonable due to a doubling in the number of golf course rounds played since
the Mentor appraisal. Thus, the Arnold appraisal of $4,480,000 for this
portion of the Properties was used to determine the aggregate value for
purposes of calculating Exchange value.
Second, with regard to the Ahwahnee recreational vehicle park portion,
National accepted the Arnold Associates appraisal as more reasonable due to
the significant increase in membership sales from approximately 50 to over
150 since the Mentor appraisal. Thus, the Arnold appraisal of $3,886,000 for
this portion of the Properties was used to determine the aggregate appraised
value for purposes of calculating Exchange Value.
Third, with regard to Phase I of the Ahwahnee Country Club Estate lots and
the balance of the land, National accepted the conservative Mentor appraisals
of $530,000 and $1,269,575, respectively, as more reasonable due to the time
and costs required to develop these parcels.
Fourth, the aggregate reconciled appraisal was allocated between the
Yosemite/Ahwahnee I and II Programs in accordance with the Property held by
each Program. National deemed this allocation reasonable because the
portions of the Property allocated to each Program could be reconciled to the
appraisals. This allocation yielded a reconciled appraised value of
$3,912,454 to the Yosemite/Ahwahnee I Property and $6,253,121 to the
Yosemite/Ahwahnee II Property.
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ON-GOING RELATIONSHIPS
Each of the appraisers was paid a fee for its appraisals deemed to be
reasonable by National. The fees for such appraisals were paid out of funds
available to the respective Programs through cash flow or assessments. In
addition, each appraiser was reimbursed for reasonable travel and other
out-of-pocket expenses incurred in making site visits and in preparing the
valuations. The fees were negotiated between National and each of the
appraisers and payment thereof is not dependent upon completion of the
Acquisition. Neither National nor the Company has retained any of the
appraisers in the past, although the borrower in the Oceanside Program used
Boznanski & Company and the borrower in the Yosemite/Ahwahnee I and II
Programs used Arnold Associates in connection with the original "Trudy Pat"
loans. National and the Company may engage one or more of the appraisers to
provide appraisal and other services in the future. There is no contract,
agreement or understanding between National or the Company on the one hand
and any of the appraisers on the other hand regarding any future engagement.
UPDATES/CHANGES
None of the appraisers have any obligation to update their appraisals and,
at present, neither National nor the Company plan to obtain updates. Except
for improvement in revenues from operations of the golf course at the
Yosemite/Ahwahnee Properties since the date of the Mentor appraisal, neither
National nor the Company are aware of any conditions which have changed since
the date of the appraisals which may affect appraised values.
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.
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.
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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.
MATERIALS REVIEWED. In preparing the Fairness Opinion, the Independent
Valuator reviewed and analyzed the following: (i) this Consent Solicitation
Statement/Prospectus; (ii) real estate appraisals with respect to each of the
Properties prepared by independent real estate appraisers; (iii) feasibility
studies with respect to the Yosemite/Ahwahnee Properties and the
Sacramento/Delta Green Property; (iv) audited financial statements for each
of the Sacramento/Delta Greens Property, the Mori Point Property, the
Oceanside Property, and the Yosemite/Ahwahnee I and II Properties, as well as
unaudited pro forma consolidated financial statements for the Company for the
year ended December 31, 1996 and the [nine] months ended [September 30],
1997; (v) certain documents related to the "Trudy Pat" loans on the
Properties; and (vi) other documents and schedules pertinent to their
analysis. In addition, the Independent Valuator met with members of
management of the Company and National regarding matters pertinent to its
analysis, conducted site visits to each of the Properties, met with the
general manager of the Yosemite/Ahwahnee I and II Properties, and conducted
such other studies, analyses and inquiries as it deemed appropriate.
The Independent Valuator did not independently verify the accuracy or
completeness of the information supplied to it with respect to the Company or
the Properties and does not assume any responsibility with respect to that
information.
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.
Based on its analysis of each of the real estate appraisals and the
assumptions and methodologies underlying the conclusions (including
National's reconciliation of the Mentor and Arnold appraisals); the
feasibility studies with respect to the Yosemite/Ahwahnee I and II Properties
and the Sacramento/Delta Greens Property, which studies contained information
regarding the feasibility of various development alternatives for the
Properties and financial projections concerning future income to be generated
by such development alternatives; due diligence discussions with National
regarding the current status of each Property, cash requirements and future
development risks and potential; due diligence discussions with the auditors
and National regarding the nature of the assets and liabilities for each of
the Programs as of the most recent financial statement date; and other
analyses, the Independent Valuator determined that the Exchange Values for
the respective Programs obtained by utilizing the estimated market value for
each Program's real estate (which was based on the May 1997 appraisals for
all but the Yosemite/Ahwahnee I and II Properties) adjusted by the net value
of other assets and
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liabilities as shown on the most recent financial statements was generally a
reasonable methodology for allocation of Shares between the Programs. The
fact that the Oceanside Program received the benefit of a disproportionate
amount of fees forgiven in its allocation of Shares was deemed reasonable
because the Oceanside Program's assets were the most liquid. The allocation
of Shares to the founders was determined to be reasonable because, among
other things, the dilution to the Investors resulting therefrom was believed
to be offset by the fact that the Investors would benefit from having
publicly traded shares as a result of the transaction. Also, National and
its principals have forgiven and will forgive certain accrued but unpaid fees
and expenses relating to the Programs. Based on its review and analysis
described above, as well as certain assumptions, limitations and
qualifications described below, the Independent Valuator concluded that the
allocation of Shares is fair, from a financial point of view, to the
Investors.
ASSUMPTIONS. The Independent Valuator assumed that the financial
statements provided to it correctly reflect the financial results and
condition of the Company (on a pro forma basis) and the Properties for the
time periods covered in accordance with generally accepted accounting
principles consistently applied. The Independent Valuator further assumed
that there has been no material change in the financial results and condition
of the Company (on a pro forma basis) or the Properties since the date of the
most recent financial statements made available to it.
LIMITATIONS AND QUALIFICATIONS. The Independent Valuator was not asked to
and therefore did not solicit third party indications of interest in
acquiring all or any of the Properties. Furthermore, the Independent
Valuator did not negotiate the Acquisition or advise National or the Company
with respect to alternatives to the Acquisition, or select the method of
determining the allocation of the Shares or establish the allocations.
Further, the Independent Valuator expressed no opinion as to (a) the
fairness of the Acquisition (other than the fairness of the allocations) as
described above or the amounts or allocations of Acquisition Expenses; (b)
the prices at which the Shares may trade following the Acquisition or the
trading value of the Shares as compared with the current market value of the
Programs' Properties if liquidated in current real estate markets; and (c)
alternatives to the Acquisition.
In connection with preparing the Fairness Opinion, the Independent Valuator
was not engaged to, and consequently did not, prepare any written report or
compendium of its analysis for internal or external use beyond the analysis
set forth in Appendix 1. The Independent Valuator did not deliver any
additional written summary of its analysis.
COMPENSATION. The Independent Valuator has been paid a fee of $35,000 for
preparing the Fairness Opinion. In addition, the Independent Valuator will
be reimbursed for all reasonable out-of-pocket expenses, including legal fees
up to a maximum of $750, and indemnified against certain liabilities,
including certain liabilities under the federal securities laws. The fee was
negotiated between National and the Independent Valuator. Payment of the fee
is not dependent upon completion of the Acquisition. The Independent
Valuator has rendered no services to either National or the Company, or their
Affiliates, in the past.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material Federal income tax
consequences of the Acquisition to the Investors and the Company. It is
based on the Internal Revenue Code of 1986, as amended, the Income Tax
Regulations, judicial decisions, current positions of the Treasury Department
and the Internal Revenue Service contained in published Revenue Rulings and
Revenue Procedures, and current administrative positions of the Service, any
of which could be materially and adversely changed, possibly on a retroactive
basis, at any time.
It is impractical to summarize all potential Federal, state, local and
foreign tax consequences of the Acquisition. Accordingly, the following
discussion does not address any aspect of state, local or foreign law or
Federal estate or gift tax matters. Moreover, the following discussion does
not address special considerations that may apply (i) to certain classes of
Investors including, without limitation, Investors who are insurance
companies, financial institutions, securities dealers, foreign persons or
Investors who receive Shares as compensation, or (ii) to Investors subject to
special rules including, without limitation, the personal holding company
tax, the accumulated earnings tax, the tax on unrelated business taxable
income of tax-exempt entities, and the S corporation rules. The Federal
income tax consequences to any particular Investor may be affected by matters
not discussed below. Consequently, the following discussion should not be
regarded as a complete analysis of all the possible tax consequences or as a
substitute for careful tax planning by Investors.
No advance rulings have been or will be obtained from the Service with
respect to any aspect of the Acquisition. Counsel to the Company, Arter &
Hadden LLP, is unable to give an opinion as to whether the Acquisition
transaction will be a tax-free or taxable transaction. Counsel has delivered
its opinion to the Company to the effect that the discussion under "Federal
Income Tax Consequences" accurately reflects the law as of the date of this
Prospectus. No other opinion of counsel has been or will be obtained with
respect to any tax aspect of the Acquisition. Unlike an advance ruling,
counsel's opinion is not binding on the Service and provides no assurance
that the Service will not challenge an Investor's or the Company's tax
treatment of the Acquisition. In the event of such a challenge, an Investor
or the Company may be adversely affected and personally may incur substantial
legal and accounting fees and costs even if the challenge proves to be
unsuccessful. The adverse consequences might not be the same for all
Investors.
Upon receipt of a written request, a copy of the opinion will be
transmitted promptly, without charge, by the Company. Requests should be
addressed to Vivian Kennedy, National Investors Financial, Inc. 4220 Von
Karman Avenue, Suite 110, Newport Beach, California 92660.
INVESTORS SHOULD 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.
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QUALIFICATION OF THE ACQUISITION AS A SECTION 351 TRANSACTION
1. GENERAL RULES. The Federal income tax consequences of the Acquisition
will depend primarily on whether the Acquisition qualifies as a Section 351
transaction. (All "Section" references in this summary are to the specified
Section of the Code.) The Company intends to treat the Acquisition as a
qualifying Section 351 transaction.
The Acquisition will qualify under Section 351 if (i) the Company is not an
"investment company," and (ii) collectively, the Investors in the Programs
who transfer the Properties to the Company in exchange for Shares and
Investors who acquire units are in "control" of the Company "immediately
after the exchange." The Company's transfer of the Properties to its
subsidiary corporations in Section 351 transfers will not invalidate the
Acquisition from qualifying as a Section 351 transaction. See, E.G., Revenue
Ruling 77-449, 1977-2 C.B.
110.
(a) INVESTMENT COMPANY. The Acquisition will not qualify under Section
351 if the Company is an "investment company" as defined in Section 351(e).
Counsel to the Company is of the opinion that the Company is not an
investment company for this purpose.
(b) CONTROL. The Investors (all of whom will transfer property or cash
to the Company in exchange for Shares) must be in "control" of the Company
immediately after the exchange. The term "control" is defined in Section
368(c) as stock possessing at least 80% of the total combined voting power of
all classes of stock entitled to vote and at least 80% of the total number of
shares of all other classes of stock of the corporation. Investors will
acquire 80% or more of the Shares of the Company (which is the only class of
stock of the Company) and, accordingly, will acquire "control" of the Company.
(c) IMMEDIATELY AFTER THE EXCHANGE. The Investors also must be in
control of the Company "immediately after the exchange." This requirement
of Section 351 has been the subject of considerable litigation, remains
uncertain in certain respects, and is subject to a case-by-case analysis of
the facts and is subject to the application of the "step transaction
doctrine" to those facts. This uncertainty is compounded because the courts
have not universally agreed upon all of the components that are used in
determining whether the step transaction doctrine should be applied.
The principal concern raised by the possible application of the step
transaction doctrine to the Acquisition is that it may cause a sufficient
number of Investors, who will own 80% or more of the outstanding Shares on
the Effective Date, to be treated as owning less than 80% "immediately after
the exchange." This may occur if Investors in transactions CONTEMPLATED BY
THEM ON THE EFFECTIVE DATE dispose of Shares after the Effective Date. This
also could occur if the Company issues additional Shares after the
Acquisition in a transaction subject to the step transaction doctrine. The
Company does not intend to issue any additional Shares with respect to which
the step transaction may apply.
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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 qualifies under Section 351. However, because
(i) Investors will acquire 80% or more of the Shares in the Acquisition, and
(ii) the Company is not aware of any facts which lead it to believe that any
subsequent disposition of Shares by one or more Investors may be subject to
any of the step transaction tests discussed above, the Company intends to
take the position that the Acquisition qualifies under Section 351. There
can be no assurance, however, that the Service will not take a contrary
position.
Investors should recognize that if a relatively small number of Investors
subsequently dispose of their Shares in transactions subject to the step
transaction doctrine, the Acquisition will not qualify under Section 351.
Investors will acquire 80.16% of the Shares if no units are sold, and will
acquire 84.18% of the Shares if all of the units are sold. See "Prospectus
Summary - Exchange Value/Allocation of Shares." Accordingly, depending on the
number of units sold, if any, if Investors dispose of more than 0.16% to
more than 4.18% of the Shares in transactions subject to the step transaction
doctrine, the Acquisition will not qualify under Section 351. Conversely, if
Investors who acquire 80% or more of the Shares are not subject to the step
transaction doctrine, counsel to the Company is of the opinion that the
Acquisition will qualify under Section 351.
FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION
1. TAX CONSEQUENCES TO INVESTORS OF A SECTION 351 TRANSACTION. If the
Acquisition qualifies under Section 351, the tax consequences to the
Investors will include the following:
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(a) Pursuant to Section 351(a), no gain or loss will be recognized by
Investors in a Program which transfers a Property to the Company in exchange
for Shares. Sections 357(b) and 357(c) provide special gain recognition
rules if one or more properties subject to liabilities are contributed to a
corporation for the principal purpose of tax avoidance or for other than a bona
fide business purpose, or if such liabilities exceed the tax basis of the
contributed properties. Because of the nature and amount of the liabilities
which will be assumed by the Company, it is not anticipated that any
Investor will recognize gain under these rules.
(b) Pursuant to Section 358, an Investor's tax basis in his Shares on the
Effective Date generally will equal the sum of the tax basis of his
interests in the Properties at that time and any gain recognized
by him (none is anticipated) in the Acquisition. However, an Investor's tax
basis in his Shares will be reduced by the amount of his share of any
liabilities to which the Properties are subject, except to the extent that
the payment of such liabilities would have been deductible.
(c) Pursuant to Section 1223(1), an Investor's holding period in his
Shares will be determined by including ("tacking") the holding period of his
real estate interests in the Properties if his interests in the Properties
are held by him as capital assets or Section 1231(b) assets. An Investor's
interests in the Properties may constitute a combination of capital assets
and Section 1231(b) assets, for which tacking of holding periods is allowed,
and non-capital assets, for which tacking of holding periods is not allowed.
In such event, it may be necessary to make an allocation under Section
1223(1), with the result that the tax basis of each Share received by the
Investor will be divided for holding-period purposes. See Rev. Rul. 85-164,
1985-2 C.B. 117.
2. TAX CONSEQUENCES OF ACQUISITION TO THE COMPANY OF A SECTION 351
TRANSACTION. If the Acquisition qualifies under Section 351, the tax
consequences to the Company will include the following:
(a) Pursuant to Section 1032, no gain or loss will be recognized by the
Company on its receipt of the Properties in exchange for the issuance of
Shares.
(b) Pursuant to Section 362(a), the initial tax bases of the Company in
the Properties on the Effective Date will equal the sum of the tax
bases of the Investors in the Properties on the Effective Date and any gain
recognized by the Investors (none is anticipated) in the Acquisition.
(c) Pursuant to Section 1223(2), the Company's holding periods in the
contributed Properties will include ("tack") of the holding periods of the
Investors in the Properties.
3. TAX CONSEQUENCES OF PURCHASE OF UNITS. No gain or loss will be
recognized by an Investor with respect to the purchase of units for cash. An
Investor's $10 tax basis for each unit is divided between the Share and
warrant to purchase Shares based on the relative fair market value of the
Share and the warrant on the Effective Date. Each Investor should consult
and rely on his own tax advisor for purposes of determining the allocation of
tax basis between the Share and
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the warrant. The holding periods of the Share and warrant constituting a
unit will commence on the day after the Effective Date.
4. TAX CONSEQUENCES IF THE ACQUISITION DOES NOT QUALIFY UNDER SECTION 351.
As discussed above, the Company intends to report the Acquisition as a
qualifying under Section 351. However, if for any reason the Acquisition
does not qualify, the tax consequences will include the following:
(a) INVESTORS.
(i) An Investor will recognize gain or loss upon his receipt of Shares in
exchange for his real estate interests in the Properties transferred by the
Programs. The amount of gain or loss will equal the difference between the
tax basis of his interests in the Properties on the Effective Date and his
amount realized in the Acquisition. The amount realized generally will
equal the sum of the fair market value on the Effective Date of the Shares
he acquires and his share of any liabilities to which the Properties are
subject. The character of an Investor's gain or loss will depend on his
holding periods with respect to his interests in the Properties and whether
such interests are capital assets, Section 1231(b) assets or non-capital
assets.
(ii) An Investor's initial tax basis in the Shares he acquires will be equal
to the fair market value of the Shares on the Effective Date. An Investor's
holding period of such Shares will commence on the day after the Effective
Date, with no tacking of his holding periods for his interests in the
Properties sold to the Company.
(b) COMPANY. The Company will not recognize any gain or loss upon the
receipt of contributed Properties of the Programs in exchange for the
issuance of Shares. The initial tax basis of the Company in the Properties
generally will be equal to the sum of the fair market value of the Shares on
the Effective Date and the amount of liabilities to which the Properties are
subject. The Company's holding periods in the Properties will commence on
the day after the Effective Date.
FEDERAL INCOME TAX CONSEQUENCES TO INVESTORS AFTER THE EFFECTIVE DATE
1. SHAREHOLDERS NOT TAXABLE ON COMPANY'S INCOME. The Company is a C
corporation ( a "regular" corporation, rather than an S corporation) and is a
separate entity from the Shareholders for tax purposes. Consequently, the
Company will file its own income tax returns and pay tax on its taxable
income. The Company's taxable income will not flow through to the
shareholders for purposes of determining their tax liabilities.
2. DISTRIBUTIONS TO SHAREHOLDERS. Distributions by the Company to the
Shareholders will be taken into account in determining their tax liabilities.
In general, distributions will be taxable as dividend income to the extent
of the Company's current or accumulated "earnings and profits" (as calculated
for Federal income tax purposes). Any distributions to a Shareholder in
excess of earnings and profits (i) will constitute a non-taxable return of
capital to
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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 upon
his receipt of Shares pursuant to the exercise of warrants. The tax basis of
such Shares will be equal to the sum of the exercise price and the tax basis
of the warrants. The holding period for Shares will commence on the date of
exercise of the warrants. An Investor will recognize a loss if a warrant
expires without being exercised in an amount equal to the tax basis of the
warrant. An Investor generally will recognize gain or loss upon the
disposition of a warrant in an amount equal to the difference of the amount
realized upon disposition and the tax basis of the warrant.
REPORTS TO SHAREHOLDERS
The Company intends to provide periodic reports to Shareholders regarding
the operations of the Company over the course of the year. Financial
information contained in all reports to Shareholders will be prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles. The Company's annual report, which will include financial
statements audited and reported upon by independent public accountants, will
be furnished within 120 days following the close of each fiscal year.
Summary information regarding the quarterly financial results of the Company
will be furnished to Shareholders on a quarterly basis.
Investors have the right under applicable federal and Delaware laws to
obtain information about the Company and, at their expense, may obtain a list
of names and addresses of all of the Shareholders to be used for a proper
purpose. In the event that the Commission promulgates rules and/or in the
event that the applicable ________________ Exchange rules and regulations
141
<PAGE>
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 SB-2
and the exhibits relating thereto which the Company has filed with the
Commission, in Washington, D.C., under the Securities Act, and to which
reference is hereby made. The Registration Statements and the exhibits and
schedules forming a part thereof filed by the Company with the Commission can
be inspected and copies obtained at the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: 7 World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates, and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's Website (http://www.sec.gov).
All summaries contained herein of documents which are filed as exhibits to
the Registration Statements are qualified in their entirety by this reference
to those exhibits. The Company has not knowingly made any untrue statement
of a material fact or omitted to state any
142
<PAGE>
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.
"Company" means American Family Holdings, Inc., a Delaware corporation.
143
<PAGE>
"Directors" means persons authorized to manage and direct the affairs of
the Company and who are members of the Board of Directors of the Company.
"Effective Time" means the date and time as of which the Acquisition is
completed, and title to the Properties has passed to the Company.
"Escrow" means the account established by the Company with the Escrow Agent
wherein the funds received from Investors desiring to purchase units are held
pending completion of the Acquisition.
"Escrow Agent" means First Trust of California, N.A.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Value" means the price in the form of Shares, valued at $10 per
Share, by the Company, that the Company is willing to pay for the assets,
liabilities and business of a Program for purposes of allocating Shares among
the Programs in the Acquisition. Exchange Value of a Program is calculated
as follows: appraisal value of real estate plus book value of other assets
minus liabilities plus the amount of accrued fees and expenses to be forgiven
by National in the Acquisition.
"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.
144
<PAGE>
"ODI" means Oceanside Development, Inc., the entity formed to hold title
to the Oceanside Property for the benefit of Investors in the Oceanside
Program and to supervise continued development.
"Offering" means the offering of 500,000 units described in the Prospectus.
"Outstanding Investment" means the sum of the unpaid principal balance
owed to an Investor as of the Ownership Date plus accrued but unpaid interest
on such balance as of the Ownership Date plus all amounts paid by the
Investor pursuant to mandatory assessments called for by National 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.
"Permitted Temporary Investments" means United States government
securities, certificates of deposit or other time or demand deposits of
commercial banks, savings banks, savings and loan associations or similar
institutions which have a net worth of at least $100,000,000 or in which such
certificates or deposits are fully insured by any federal or state government
agency, United States dollar deposits in foreign branches of banks which have
a net worth of at least $100,000,000, bank repurchase agreements covering
securities of the United States government or governmental agencies,
commercial paper, bankers acceptance, public money funds or other similar
short-term highly liquid investments.
"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 Statements filed with the Commission in
connection with the issuance of the Shares in the Acquisition and the
issuance of the units.
145
<PAGE>
"Record Date" means the date five days before the date of this Prospectus.
"Registration Statements" means the Company's registration statement on
Form S-4 and SB-2, both containing the Prospectus, filed with the Commission
in the form in which it becomes effective, as the same may be at any time and
from time to time thereafter amended or supplemented.
"Securities Act" means the U.S. Securities Act of 1933, as amended.
"Shares" means common stock in the Company.
"Shareholder" means a Person holding Shares.
"Solicitation Period" means the period commencing on the date this Consent
Solicitation Statement/Prospectus is first mailed or delivered to Investors
and continuing until the later of (i) ___________, 199_ [60 days from the date
the Prospectus is mailed] and (ii) such later dates as may be selected by the
Company.
"Trudy Pat" means trust deed loan participation. With regard to the
Programs, Trudy Pat refers to the loans, secured by first deeds of trust, in
which fractional, tenancy-in-common, interests were purchased by the
applicable Investors. Each Program started out as a "Trudy Pat" loan.
146
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PRO FORMA COMBINED FINANCIAL INFORMATION:
Pro Forma Combined Balance Sheets as of September 30, 1997.................F-4
Notes to Pro Forma Combined Balance Sheets.................................F-5
Pro Forma Combined Statements of Operations for the year ended
December 31, 1996 and for the nine months ended September 30, 1997.......F-7
Notes to Pro Forma Combined Statements of Operations.......................F-8
AMERICAN FAMILY HOLDINGS, INC.
Report of Independent Certified Public Accountants........................F-10
Balance Sheet as of September 30, 1997....................................F-11
Notes to Balance Sheet....................................................F-12
THE OCEANSIDE PROGRAM
Report of Independent Certified Public Accountants........................F-14
Balance Sheets as of December 31, 1996 and September 30, 1997
(unaudited).............................................................F-15
Statements of Operations for two years ended December 31, 1996 and 1995
and the nine months ended September 30, 1997 and 1996 (unaudited).......F-16
Statements of Owners' Equity for two years ended December 31, 1996
and 1995 and the nine months ended September 30, 1997 (unaudited).......F-17
Statements of Cash Flows for two years ended December 31, 1996
and 1995 and the nine months ended September 30, 1997 and 1996
(unaudited).............................................................F-18
Notes to Financial Statements.............................................F-19
THE YOSEMITE/AHWAHNEE PROGRAMS
Report of Independent Certified Public Accountants........................F-24
Balance Sheets as of December 31, 1996 and September 30, 1997
(unaudited).............................................................F-25
Statements of Operations for two years ended December 31, 1996
and 1995 and the nine months ended September 30, 1997
and 1996 (unaudited)....................................................F-26
Statements of Owners' Equity for two years ended December 31, 1996
and 1995 and the nine months ended September 30, 1997
(unaudited).............................................................F-27
Statements of Cash Flows for two years ended December 31, 1996
and 1995 and the nine months ended September 30, 1997
and 1996 (unaudited)....................................................F-28
Notes to Financial Statements.............................................F-29
THE MORI POINT PROGRAM
Report of Independent Certified Public Accountants........................F-34
Balance Sheets as of December 31, 1996 and September 30, 1997
(unaudited).............................................................F-35
Statements of Operations for two years ended December 31, 1996
and 1995 and the nine months ended September 30, 1997
and 1996 (unaudited)....................................................F-36
Statements of Owners' Equity for two years ended December 31,
1996 and 1995 and the nine months ended September 30, 1997
(unaudited).............................................................F-37
Statements of Cash Flows for two years ended December 31, 1996 and
1995 and the nine months ended September 30, 1997
and 1996 (unaudited)....................................................F-38
Notes to Financial Statements...............................................F-39
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
THE SACRAMENTO/DELTA GREENS PROGRAM
Report of Independent Certified Public Accountants........................F-42
Balance Sheets as of December 31, 1996 and September 30, 1997
(unaudited).............................................................F-43
Statements of Operations for two years ended December 31, 1996 and 1995
and the nine months ended September 30, 1997 and 1996 (unaudited).......F-44
Statements of Owners' Equity for two years ended December 31, 1996
and 1995 and the nine months ended September 30, 1997 (unaudited).......F-45
Statements of Cash Flows for two years ended December 31, 1996 and
1995 and the nine months ended September 30, 1997 and 1996
(unaudited).............................................................F-46
Notes to Combined Financial Statements....................................F-47
F-2
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
PRO FORMA COMBINED BALANCE SHEETS
The following unaudited Pro Forma Combined Balance Sheets as of September 30,
1997 and the Pro Forma Combined Statements of Operations for the year ended
December 31, 1996 and for the nine months ended September 30, 1997 have been
prepared to reflect the acquisitions of the assets, certain liabilities and
business of the Oceanside Program, the Yosemite/Ahwahnee Programs, the Mori
Point Program and the Sacramento/Delta Greens Program (collectively, "The
Acquisition"). The unaudited Pro Forma Balance Sheets have been prepared as
if The Acquisition had been consummated as of September 30, 1997. The
unaudited Pro Forma Statements of Operations for the year ended December 31,
1996 and the nine months ended September 30, 1997 have been prepared as if
The Acquisition occurred at the beginning of the periods 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 September 30, 1997
--------------------------------------------------------
The Pro Forma Pro Forma
Company Programs(1) Adjustments Combined
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
THE ACQUISITION
ASSETS:
Real estate, net..................... $ - $19,138,668 $ $19,138,668
Cash and cash equivalents............ 3,903 451,506 1,387(6) 456,796
Restricted cash...................... - 1,404,248 - 1,404,248
Notes receivable..................... - 569,441 569,441
Inventory............................ - 974,167 974,167
Property and equipment............... - 414,777 414,777
Other assets........................ - 64,312 64,312
Due from affiliate.................. 267,000 (267,000)(5) -
Deferred offering costs.............. 267,000 (267,000)(3) -
-------- ----------- ----------- -----------
Total assets....................... 270,903 23,284,119 23,022,409
-------- ----------- ----------- -----------
LIABILITIES:
Line of credit....................... - 0 0
Capital lease obligations............ - 375,681 375,681
Accounts payable and other
liabilities......................... - 3,926,675 (946,111)(4) 2,980,564
Due to affiliate..................... 267,000 (267,000)(5) -
-------- ----------- ----------- -----------
Total liabilities.................. 267,000 4,302,356 3,356,245
-------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock......................... 391 0 2,137(2) 2,667
139(6)
Additional paid-in-capital........... 3,512 0 18,979,626(2) 9,930,499
946,111(4)
1,248(6)
Accumulated deficit.................. - - (267,000)(3) (267,000)
Owners' equity....................... - 18,981,763 (18,981,763)(2) -
Total stockholders' equity......... 3,903 18,981,763 19,666,164
-------- ----------- ----------- -----------
Total liabilities and
stockholders' equity............. 270,903 23,284,119 23,022,409
-------- ----------- ----------- -----------
-------- ----------- ----------- -----------
</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
September 30, 1997.
(2) To reflect the utilization of carryover basis in conjunction with the
Acquisitions and the conversion of investor interests into common stock
shares of the Company.
(3) To reflect the effect on the accumulated deficit of an unsuccessful units
offering.
September 30, 1997
------------------
Acquisition
------------------
Total costs $ 1,067,544
Less: Amount previously expensed (800,544)
------------------
Costs to account for $ 267,000
------------------
------------------
(4) Represents the forgiveness of accrued expenses, owed to National, upon
successful completion of the Acquisition, as summarized by the following.
Sacramento/
Ahwahnee ODI Mori Point Delta Greens TOTAL
-------- -------- ---------- ------------ ----------
Total fees and
advances due to National $732,734 $752,000 $516,218 $179,944 $2,180,896
Amounts forgiven
by National 105,000 704,000 - 137,111 946,111
-------- -------- ---------- ------------ ----------
Total due to
National after
Acquisition $627,734 48,000 516,218 42,833 $1,234,785
-------- -------- ---------- ------------ ----------
-------- -------- ---------- ------------ ----------
(5) To eliminate intercompany receivables and payables.
(6) To reflect the issuance of 138,734 shares of common stock of the Company
to the Company's founders and consultants in conjunction with the
Acquisition.
(7) Segment Information
American Family Holdings, Inc. ("American") has two reportable segments:
vacation and leisure resort properties and residential home properties.
The vacation and leisure resort property is used to generate revenue
through a recreational vehicle membership plan, as well as a golf course
and resort operation. The residential home properties segment derives its
revenue from the development and sales of residential housing and lots.
F-5
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED BALANCE SHEETS
(7) Segment Information (continued)
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies.
Segment Assets September 30, 1997
--------------- --------------------------------------------------------
Vacation and Residential Home
Leisure Resort Development All Other Total
-------------- ----------------- ---------- ---------
Segment Assets 11,313,077 5,646,980 6,324,0622 3,284,119
Reconciliation of Assets
-------------------------
Total assets for reportable segments 23,284,119
Cash 3,903
Elimination of receivables from corporate
headquarters (267,000)
Consolidated total assets after adjustments 23,021,022
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, 1996 Nine Months Ended September 30, 1997
------------------------------------- ----------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Programs(1) Adjustments Combined Programs(1) Adjustments Combined
----------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
THE ACQUISITION
Revenues $ 6,675,718 $ $ 6,675,718 $ 5,129,774 $ $ 5,129,774
Cost of sales 5,327,856 5,327,856 3,585,345 3,585,345
------------ ----------- ------------ ----------- -----------
Gross profit 1,347,862 1,347,862 1,544,429 1,544,429
Selling, general and administrative 3,667,227 350,000(2) 4,017,227 2,988,526 262,500(2) 3,251,026
Land write down 845,000 845,000 983,143 983,143
Management fees 650,000 (650,000)(3) 0 487,500 (487,500)(3) -
Acquisition expenses - - 800,544 (800,544)(5) -
Total expenses 5,162,227 4,862,227 5,259,713 4,234,169
------------ ----------- ------------ ----------- -----------
Interest income (expense) 63,518 63,518 39,542 39,542
------------ ----------- ------------ -----------
Net income (loss) (3,750,847) (3,450,847) (3,675,742) (2,650,198)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net loss per
common share(4) (1.29) (0.99)
</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, 1996 and the nine months ended
September 30, 1997.
(2) To reflect the replacement of National as asset manager of the investment
programs with the new management structure of the Company:
Year Ended Nine Months Ended
December 31, 1996 September 30, 1997
----------------- ------------------
Officers and staff salaries to
be included in selling,
general and administration
after Acquisition $ 806,000 $ 604,500
Officers
salaries included in
selling, general and
administration prior to
Acquisition $ (456,000) $ (342,000)
---------- ----------
Pro forma adjustment to
selling, general and
administration $ 350,000 $ 262,500
---------- ----------
---------- ----------
(3) To reflect the cancellation of the servicing agreements between National
and the investment programs.
(4) Net loss per share is based on 2,666,517 weighted average number of
shares outstanding and does not include any warrants to be issued in
conjunction with the company's units offering.
(5) To eliminate the nonrecurring costs associated with 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.
September 30, 1997
Vacation and Residential Home
Leisure Resort Development All Other Total
Revenues 1,488,924 3,640,850 5,129,774
Segment profit/(loss) (759,360) (841,040) (445,298) (2,045,698)
F-8
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(6) Segment Information (continued)
December 31, 1996
---------------------------------------------------------
Vacation and Residential Home
Leisure Resort Developers All Other Total
-------------- ----------------- ---------- ----------
Revenues 1,185,538 5,490,180 6,675,718
Segment profit/(loss) (1,486,363) (56,675) (1,101,809) (2,644,847)
Profit or Loss Reconciliation September 30, 1997 December 31, 1996
- ----------------------------- ------------------ -----------------
Total profit or loss for
reportable segments (2,045,698) (2,644,847)
Adjustment for expenses not
included in segment loss:
Officers Salaries (604,500) (806,000)
Total pro forma loss after
adjustments (2,650,198) (3,450,847)
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 September 30, 1997. The balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, based on our audit, the balance sheet referred to above
presents fairly, in all material respects, the financial position of American
Family Holdings, Inc. of as of September 30, 1997 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
October 31, 1997
F-10
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
BALANCE SHEET
September 30, 1997
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,903
Deferred Offering Costs . . . . . . . . . . . . . . . . . 267,000
--------
Total Assets . . . . . . . . . . . . . . . . . . . . . . 270,903
--------
--------
LIABILITIES
Due to affiliate . . . . . . . . . . . . . . . . . . . . . 267,000
--------
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 - 390,303. . . 391
Additional paid in capital . . . . . . . . . . . . . . . . 3,512
Total stockholders' equity . . . . . . . . . . . . . . 3,903
--------
Total liabilities and stockholders' equity . . . . . . . . 270,903
--------
--------
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 500,000 shares of common
stock and warrants (the "Units") at a price of $10 per Unit. Each warrant
entitled the holder to purchase two additional shares of common stock at 80%
of the closing price of the stock on the day prior to exercise of the
warrant. The warrant has a term of two years following the completion of the
Offering. Listed below are the investment programs to be acquired and the
number of common stock shares of the Company issued to the investors in these
programs:
Shares of
Investment Program Common Stock
- ------------------ -------------
Oceanside 544,552
Yosemite/Ahwahnee I and II 935,296
Mori Point 470,427
Sacramento/Delta Greens 187,205
-------------
2,137,480
-------------
-------------
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, contingent upon the
successful completion of the Acquisition, with two members of senior
management for a term of five years and one member of senior management for a
term of three years, each subject to automatic one year extensions unless
terminated. The agreements provide for annual compensation of $180,000,
$180,000 and $200,000 and contain provisions for bonus consideration based on
performance standards. In addition, except to the extent required to carry
on pre-existing duties to investors in other programs managed by National or
other pre-existing real estate investments, each agreement includes
provisions restricting the officers from competing with the Company during
the term of such employment; providing for certain salary and benefit
continuance for six months if the officer is permanently disabled; and,
providing for a severance payment in the amount of 2.99 times the officer's
average salary and bonus over the past five years (or such shorter time as
the officer was employed), payable in 36 equal monthly installments, in the
event of a change of control of the Company within two years of the change of
control event.
F-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, 1996,
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, 1996. 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, 1996, and the results of operations and
cash flows for each of the two years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 27, 1997
F-14
<PAGE>
THE OCEANSIDE PROGRAM
BALANCE SHEETS
December 31, September 30,
1996 1997
------------ -------------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 660,207 $ 206,335
Restricted cash 1,780,141 1,404,248
Real estate inventory 2,231,159 593,115
Real estate property held for sale (Note 7) 3,219,920 3,301,071
Property and equipment, net (Note 3) 21,823 20,279
Other assets 24,966 12,181
Due from affiliate (Note 1) - 109,751
------------ -------------
Total assets $7,938,216 $5,646,980
------------ -------------
LIABILITIES:
Line of credit (Note 4) $ 3,910 $ -
Accounts payable 585,768 58,676
Due to affiliate (Note 5) 608,000 752,000
Accrued expenses and other liabilities 9,724 94,783
------------ -------------
Total liabilities 1,207,402 905,459
------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 5)
OWNERS' EQUITY:
Owners' Equity 6,730,814 4,741,521
------------ -------------
Total liabilities and owners' equity $7,938,216 $5,646,980
------------ -------------
------------ -------------
See accompanying notes to financial statements.
F-15
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
----------------------- -----------------------
1996 1995 1997 1996
---------- ----------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES FROM HOME SALES $5,490,180 $5,920,600 $ 3,640,850 $3,253,380
COST OF HOME SALES 4,975,160 5,295,741 3,235,867 3,000,155
---------- ----------- ----------- ----------
GROSS PROFIT 515,020 624,859 404,983 253,225
EXPENSES:
Selling, general and administrative 842,987 796,861 684,363 500,062
Real estate inventory writedown
(Note 8) - - 753,143 -
Related party management fees (Note 5) 300,000 300,000 225,000 225,000
Acquisition expenses (Note 1) - - 329,253 -
---------- ----------- ----------- ----------
Total expenses 1,142,987 1,096,861 1,991,759 725,062
---------- ----------- ----------- ----------
Interest income 79,292 104,783 47,483 61,027
---------- ----------- ----------- ----------
Net income (loss) $ (548,675) $ (367,219) $(1,539,293) $ (410,810)
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF OWNERS' EQUITY
Amount
-----------
Balance January 1, 1995 $ 9,446,708
Capital distributions (900,000)
Net loss for the year (367,219)
------------
Balance December 31, 1995 8,179,489
Capital distributions (900,000)
Net loss for the year (548,675)
------------
Balance December 31, 1996 6,730,814
Capital distributions (unaudited) (450,000)
Net loss for the period (unaudited) (1,539,293)
-----------
Balance September 30, 1997 (unaudited) $ 4,741,521
-----------
-----------
See accompanying notes to financial statements.
F-17
<PAGE>
THE OCEANSIDE PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------ ------------------------
1996 1995 1997 1996
----------- ---------- ----------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (548,675) $ (367,219) $(1,539,293) $(410,810)
Adjustments net loss to cash
provided by (used in) operating
activities:
Depreciation and amortization 3,352 903 6,398 2,402
Increase (decrease) from changes in:
Restricted cash 326,089 447,123 375,893 239,975
Real estate inventory 1,155,537 761,195 1,637,984 505,962
Other assets (24,120) 400,718 12,845 846
DUE FROM AFFILIATE - - (109,751) -
Accounts payable 286,196 (160,904) (527,092) (15,231)
Accrued expenses and
other liabilities (196,141) 195,319 229,059 145,303
Net cash provided by (used in) ----------- ---------- ----------- ---------
operating activities 1,002,238 1,277,135 86,043 468,447
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (17,600) (8,478) (4,854) (16,535)
Additions to real estate property held
for sale (96,462) (315,436) (81,151) (38,644)
----------- ---------- ----------- ---------
Net cash used in investing activities (114,062) (323,914) (86,005) (55,179)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds 3,600,000 - 1,821,560 -
Line of credit repayments (3,596,090) - (1,825,470) -
Contributions (distributions) (900,000) (900,000) (450,000) (675,000)
----------- ---------- ----------- ---------
Net cash provided by (used in)
financing activities (896,090) (900,000) (453,910) (675,000)
----------- ---------- ----------- ---------
Net increase (decrease) in
cash and cash equivalents (7,914) 53,221 453,872 (261,732)
Cash and cash equivalents
at beginning of period 668,121 614,900 660,207 668,121
----------- ---------- ----------- ---------
Cash and cash equivalents
at end of period $ 660,207 $ 668,121 $ 206,335 $ 406,389
----------- ---------- ----------- ---------
----------- ---------- ----------- ---------
Cash paid during the
period for interest $ 9,526 $ - $ 4,272 $ -
----------- ---------- ----------- ---------
----------- ---------- ----------- ---------
</TABLE>
Interest capitalized for the year ended December 31, 1996 and for the nine
months ended September 30, 1997 were $14,939 and $4,536.
See accompanying notes to financial statements
F-18
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1993 National Investors Financial, Inc. ("National"), represented
by NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Oceanside Program (the "Program") to entities affiliated
with the Ved Corporation, the original borrowers, in the amount of
$30,000,000 by selling undivided tenant-in-common interests in such loan to
1,755 investors. In November of 1993, the borrower granted the property
("Oceanside Development") securing the loan to Oceanside Development, Inc., a
California corporation (the "Company"), formed by National on behalf of the
investors in the Oceanside Program. The first lien was kept intact after the
date of grant to protect the investors' interests in the underlying property
during its development. As the investors' interests are to be converted to
common stock in conjunction with a proposed acquisition of the Program, the
underlying protection of the lien is no longer needed and will be
extinguished as part of the acquisition. Oceanside Development is a single
family detached home development consisting of two tracts, Encore and
Symphony. The property is located in Oceanside, California and is currently
held by Oceanside Development, Inc. on behalf of the Oceanside Investors.
The Oceanside property was appraised at $6,484,000 as of the date of grant
from the original borrower. Therefore, the property has been written down to
its fair market value at the time of grant and the investors' interests in
the property is reflected as Owners' Equity in the financial statements.
The accompanying financial statements include the accounts of the Program,
which consist of Oceanside Development, Inc. and Oceanside Development, LLC,
and do not include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), was
formed to be a publicly-held corporation to acquire the businesses of certain
investment programs previously syndicated by National in exchange for common
stock. In addition, American Family Holdings, Inc. will offer a maximum of
500,000 units, which consists of one share of common stock and one warrant at
a price of $10 per unit. Each warrant entitled the holder to purchase two
additional shares of common stock at 80% of the closing price of the stock on
the day prior to exercise of the warrant. The warrant has a term of two years
following the completion of the Offering.
In conjunction with the contemplated transactions, the Program is
currently paying for a certain portion of the costs of the transactions.
Costs which have been allocated to the acquisition of the investment programs
by American have been expensed by the Program as incurred. Costs which will
be allocated against the proceeds of the units offering have been recorded as
a receivable from American, and capitalized as deferred offering costs by
American. If the units offering is not successful, this receivable will be
written off by the Program.
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, 1996 and September 30, 1997 were
$1,780,141 and $1,404,248.
F-19
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
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, 1996 and
September 30, 1997, the Oceanside Development had 41 and 23 lots classified
as inventory and 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 nine months ended September 30,
1996 and 1997 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.
F-20
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
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,
1996 and September 30, 1997 approximate their fair values. The carrying
value of cash and cash equivalents, accounts payable and accrued expenses are
assumed to approximate fair value as they are short term in nature and
receivable or payable on demand. The fair value of the line of credit was
estimated based on similar interest rates available for comparable financial
instruments.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, September 30,
1996 1997
----------- ------------
Office and computer equipment $ 933 $ 933
Furniture and fixtures 25,145 29,999
----------- ------------
26,078 30,932
Less accumulated depreciation (4,255) (10,653)
----------- ------------
$21,823 $ 20,279
----------- ------------
----------- ------------
NOTE 4. LINE OF CREDIT
The line of credit is as discussed below:
Interest December 31, September 30,
Rate 1996 1997
-------- ------------ -------------
OCEANSIDE PROPERTY
$3,600,000 construction
loan facility with a bank,
paid through the sales of
homes, due on demand including
interest; collateralized by a
first trust deed on a portion
of the property 9.5% $3,910 $ -
Accrued interest at December 31, 1996 and September 30, 1997 was $5,413
and $0. Prior to September 30, 1997, this facility was retired.
F-21
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
NOTE 5. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages six other programs under similar
servicing agreements. As documented within the servicing agreement, National
is to receive an annual fee equal to 1% of the original loan balance.
National's requirements under the servicing agreement include managing the
assets of the Program to assure that the purpose and the activities of the
Program are continued for the investors. The Program incurred asset
management expenses of $300,000, $300,000, $225,000 and $225,000 for the
years ended December 31, 1995 and 1996 and for the nine months ended
September 30, 1996 and 1997. Additionally, the Program accrued compensation
expense of $192,000, $192,000, $144,000 and $144,000 for the years ended
December 31, 1995 and 1996 and for the nine months ended September 30, 1996
and 1997 payable to senior management of the Program, who are also the
principals of National. Total accrued and unpaid management fees and
compensation as of December 31, 1996 and September 30, 1997 were $608,000 and
$752,000.
CONTRACT WITH FEE BUILDER
The Program entered into an agreement with a fee builder to build out and
sell the Oceanside Development property. The agreement can be terminated
without cause by the Company with sixty days notice to the builder.
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 6. 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 7. 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.
F-22
<PAGE>
THE OCEANSIDE PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
NOTE 8. REAL ESTATE INVENTORY WRITEDOWN
Based on offers received from potential buyers in the marketplace, the
Program wrotedown its real estate inventory to its estimated fair value as of
September 30, 1997 of $593,115, resulting in a $753,143 charge against income
during the nine months ended September 30, 1997. Subsequent to September 30,
1997, the remainder of the 23 lots of inventory were sold for net proceeds of
$593,115.
F-23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
National Investors Financial, Inc.
Los Angeles, California
We have audited the accompanying balance sheets of the Yosemite/Ahwahnee I
and II "Trudy Pat" Programs (the "Yosemite/Ahwahnee Programs") (as defined in
Note 1) as of December 31, 1996, 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, 1996. 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, 1996, and the results of
operations and cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 27, 1997
F-24
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
BALANCE SHEETS
December 31, September 30,
1996 1997
------------ -------------
(Unaudited)
ASSETS:
Real estate and improvements (Note 3)....... $ 9,734,050 $ 9,737,597
Cash and cash equivalents................... 101,551 126,664
Notes receivable (Note 4)................... 255,274 569,441
Inventory................................... 538,414 381,052
Property and equipment, net (Note 5)........ 490,296 394,498
Other assets................................ 45,666 52,131
Due from affiliate (Note 1)................. - 51,694
------------ -------------
Total assets.............................. $ 11,165,251 $ 11,313,077
------------ -------------
LIABILITIES:
Capital lease obligations (Note 6).......... 420,857 375,681
Accounts payable............................ 210,740 261,904
Due to affiliate (Note 7)................... 508,129 721,902
Accrued property taxes (Note 7)............. 508,429 639,776
Accrued expenses and other liabilities...... 30,685 112,783
------------ -------------
Total liabilities......................... 1,678,840 2,112,046
------------ -------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
OWNERS' EQUITY:
Owners' Equity.............................. 9,486,411 9,201,031
------------ -------------
Total liabilities and owners' equity...... $ 11,165,251 $ 11,313,077
------------ -------------
------------ -------------
See accompanying notes to financial statements
F-25
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------ ----------------------
1996 1995 1997 1996
----------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Golf course operations $ 571,778 $ 412,543 $ 604,164 $ 431,315
Sale of RV memberships 513,799 - 884,760 255,915
Sale of developed lots 99,961 - - -
----------- ----------- ----------- ----------
Total revenues 1,185,538 412,543 1,488,924 687,230
COST OF SALES
Golf course operations 165,836 50,994 120,122 107,179
RV memberships 103,670 - 229,356 52,249
Developed lots 83,190 - - -
----------- ----------- ----------- ----------
Total cost of sales 352,696 50,994 349,478 159,428
GROSS PROFIT 832,842 361,549 1,139,446 527,802
EXPENSES:
Selling, general and administrative 2,564,243 1,096,245 2,086,836 1,782,059
Related party management fees (Note 7) 200,000 200,000 150,000 150,000
Acquisition expenses (Note 1) - - 154,628 -
Total expenses 2,764,243 1,296,245 2,391,464 1,932,059
Interest income (expense) (18,962) 19,159 (9,970) (10,239)
----------- ----------- ----------- -----------
Net loss $(1,950,363) $ (915,537) $(1,261,988) $(1,414,496)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements
F-26
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF OWNERS' EQUITY
Balance January 1, 1995 (Note 8) $ 10,202,036
Capital contributions 1,009,164
Net loss for the year (915,537)
-------------
Balance December 31, 1995 10,295,663
Capital contributions 1,141,111
Net loss for the year (1,950,363)
-------------
Balance December 31, 1996 9,486,411
Capital contributions (unaudited) 976,608
Net loss for the period (unaudited) (1,261,988)
-------------
Balance September 30, 1997 (unaudited) $ 9,201,031
-------------
-------------
See accompanying notes to financial statements
F-27
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------- ------------------------
1996 1995 1997 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,950,363) $ (915,537) $(1,261,908) $(1,414,496)
Adjustments net loss to cash
provided by (used in) operating activities:
Cost of developed lots sold 83,190 - - 37,436
Depreciation and amortization 303,228 225,763 274,679 209,717
Increase (decrease) from changes in:
Inventory 103,670 - 157,362 110,063
Other assets (264,478) (36,462) (320,632) (155,944)
Due from affiliate - - (51,694) -
Accounts payable 172,210 109,530 51,164 85,196
Accrued expenses and
other liabilities 304,920 69,918 427,138 238,306
----------- ----------- ----------- -----------
Net cash used in operating activities (1,247,623) (546,788) (723,891) (889,722)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (48,899) (25,650) (174,135) (26,434)
Additions to real estate (23,250) (86,981) (8,293) (1,515)
----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities (72,149) (112,631) (182,428) (27,949)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease repayments (67,088) (5,886) (45,176) (46,602)
Contributions 1,141,111 1,009,164 976,608 675,607
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 1,074,023 1,003,278 931,432 629,005
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents (245,749) 343,859 25,113 (288,666)
Cash and cash equivalents
at beginning of period 347,300 3,441 101,551 347,300
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period $ 101,551 $ 347,300 $ 126,664 $ 58,634
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash paid during the
period for interest $ - $ - $ - $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements
F-28
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1989 and 1992 National Investors Financial, Inc. ("National"),
represented by NASD registered securities broker-dealers, completed the
funding of two real estate loans for the Yosemite/Ahwahnee Programs (the
"Programs") by selling undivided tenant-in-common interests in such loans to
investors. The Yosemite/Ahwahnee I loan was in the amount of $6,500,000 to
426 investors and Yosemite/Ahwahnee II was in the amount of $13,500,000 to
837 investors. In September of 1995, on behalf of the Yosemite/Ahwahnee
investors, National foreclosed on the borrower and took title to the property
("Ahwahnee Golf Course and Resort") involved. The first liens were kept
intact after the foreclosure to protect the investors' interests in the
underlying property during its development. As the investors' interests are
to be converted to common stock in conjunction with a proposed acquisition of
the Programs, the underlying protection of the liens are no longer needed and
will be extinguished as part of the acquisition. Ahwahnee Golf Course and
Resort is projected to be a multi-faceted resort, which currently includes a
country club and a partially completed recreational vehicle park, with plans
to develop the remainder of the project, potentially as a timeshare facility.
The 1,650 acre property is located in Madera County, California,
approximately 15 miles south of Yosemite National Park and is currently held
in trust by National on behalf of the Yosemite/Ahwahnee Investors. The
Company obtained an appraisal as of the date of foreclosure, which assumes
that the property is developed at its highest and best use, and the result of
the appraisal, after certain accounting-related adjustments made by the
Company, was a fair market value of $10,800,000. Therefore, the property has
been written down to its fair market value at the time of the foreclosure and
the investors' interest in the property is reflected as Owners' Equity in the
financial statements. Since taking over these properties, National has
operated them on behalf of the investors through a corporation known as
Ahwahnee Golf Course and Resort, Inc.
The accompanying financial statements include the accounts of the
Programs, which consist of Ahwahnee Golf Course and Resort, Inc., National
Investors Land Holding Trust VII and National Investors Land Holding Trust
IX, and do not include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), was
formed to be a publicly-held corporation to acquire the businesses of certain
investment programs previously syndicated by National in exchange for common
shares. In addition, American will offer a maximum of 500,000 units, which
consist of one share of common stock and one warrant at a price of $10 per
unit. Each warrant entitled the holder to purchase two additional shares of
common stock at 80% of the closing price of the stock on the day prior to
exercise of the warrant. The warrant has a term of two years following the
completion of the Offering.
In conjunction with the contemplated transactions, the Program is
currently paying for a certain portion of the costs of the transactions.
Costs which have been allocated to the acquisition of the investment programs
by American have been expensed by the Program as incurred. Costs which will
be allocated against the proceeds of the units offering have been recorded as
a receivable from American, and capitalized as deferred offering costs by
American. If the units offering is not successful, this receivable will be
written off by the Program.
F-29
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
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 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.
F-30
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF SALES AND INVENTORY OF RV MEMBERSHIPS
Cost of sales of recreational vehicle memberships is determined by
dividing the total costs incurred in the development of the recreational
vehicle facility by the number of units completed. Inventory of recreational
vehicle memberships, including all land costs and improvements, is stated at
cost, which is not greater than its net realizable value.
INCOME TAXES
The financial statements include the activity of the Programs, whose
income or losses are included in the investors' respective tax returns.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements for the nine months ended September 30,
1997 are unaudited; however in the opinion of Programs' 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.
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,
1996 and September 30, 1997 approximate their fair values. The carrying
value of cash and cash equivalents, accounts payable and accrued expenses are
assumed to approximate fair value as they are short term in nature and
receivable or payable on demand. The fair values of notes receivable and
capital lease obligations were estimated based on similar interest rates
available for comparable financial instruments.
NOTE 3. REAL ESTATE AND IMPROVEMENTS
Real estate and improvements consist of the following:
December 31, September 30,
1996 1997
------------ ------------
Land $ 8,114,645 $ 8,114,645
Land improvements 1,251,044 1,425,179
Buildings and improvements 820,783 820,783
------------ ------------
10,186,472 10,360,607
Less accumulated depreciation (452,422) (623,010)
------------ ------------
$ 9,734,050 $ 9,737,597
------------ ------------
------------ ------------
F-31
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
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 $8,500 and $24,950 as of December 31, 1996 and September 30,
1997. As of September 30, 1997, a total of $446,737 of the notes receivable
balance is expected to be collected after one year. The total allowance for
doubtful accounts as of December 31, 1996 and September 30, 1997 is $7,500
and $11,742, respectively.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, September 30,
1996 1997
----------- -------------
Capital lease equipment $ 505,998 $ 507,295
Furnitures and fixtures 25,349 25,349
Machinery and equipment 37,033 44,029
----------- -------------
568,380 576,673
Less accumulated depreciation (78,084) (182,175)
----------- -------------
$ 490,296 $ 394,498
----------- -------------
----------- -------------
NOTE 6. CAPITAL LEASE OBLIGATIONS
Future minimum rental payments under noncancellable capital leases as of
December 31, 1996 were as follows:
Amount
-----------
1997 $ 121,433
1998 120,923
1999 113,893
2000 113,893
2001 59,184
-----------
Total minimum lease payments 529,326
Amount representing interest 108,469
-----------
Present value of minimum lease payments 420,857
-----------
-----------
F-32
<PAGE>
THE YOSEMITE/AHWAHNEE PROGRAMS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
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, $150,000 and $150,000 for the
years ended December 31, 1995 and 1996 and for the nine months ended
September 30, 1996 and 1997. Additionally, the Programs accrued compensation
expense of $58,620, $264,000, $198,000 and $198,000 for the years ended
December 31, 1995 and 1996 and for the nine months ended September 30, 1996
and 1997 payable to senior management of the Company, who are also principals
of National. Total accrued and unpaid management fees and compensation as of
December 31, 1996 and September 30, 1997 were $508,129 and $721,902.
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 $639,776 as of September
1997. The Program is in the process of negotiating a payment plan with
appropriate taxing authorities relative to the payment of these past due
taxes.
NOTE 8. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in
the Program to make additional capital contributions. Such contributions are
only recorded to the extent of cash received.
NOTE 9. DEBT FORECLOSURE
In September 1995, the management company, for the benefit of investors in
debt securities secured by the Property, foreclosed on the Property. Due to
the debtor's financial position as of December 31, 1994, the foreclosure has
been accounted for as if it took place prior to January 1, 1995.
NOTE 10. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the years ended December 31, 1995 and 1996, the Company entered
into capital lease obligations of $195,259 and $298,572.
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,
1996, 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, 1996.
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, 1996, and the results of operations and
cash flows for each of the two years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 27, 1997
F-34
<PAGE>
THE MORI POINT PROGRAM
BALANCE SHEETS
December 31, September 30,
1996 1997
------------ ------------
(Unaudited)
ASSETS:
Land $ 4,100,000 $4,100,000
Cash and cash equivalents 39,032 83,410
Due from affiliate (Note 1) - 74,977
------------ ------------
Total assets $ 4,139,032 $4,258,387
------------ ------------
------------ ------------
LIABILITIES:
Due to affiliate (Note 3) $ 441,218 $ 516,218
Accrued property taxes (Note 3) 366,296 293,780
Accrued expenses - 144,118
------------ ------------
Total liabilities $ 807,514 $ 954,116
------------ ------------
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 3)
OWNERS' EQUITY:
Owners' Equity 3,331,518 3,304,271
------------ ------------
Total liabilities and
owners' equity $ 4,139,032 $4,258,387
------------ ------------
------------ ------------
See accompanying notes to financial statements
F-35
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF OPERATIONS
Nine Months Ended
Year Ended December 31, September 30,
----------------------- -----------------------
1996 1995 1997 1996
---------- ----------- ---------- -----------
(Unaudited)
EXPENSES:
Selling, general and
administrative $ 90,348 $ 46,867 $ 123,448 41,383
Related party management
fees (Note 3) 100,000 100,000 75,000 75,000
Acquisition expenses
(Note 1) - - 224,931 -
Total expenses 190,348 146,867 423,379 116,383
Interest income 1,223 - 1,351 898
---------- ----------- ---------- -----------
Net loss $ (189,125) $ 146,867 $ (422,028) $(115,485)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
See accompanying notes to financial statements
F-36
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF OWNERS' EQUITY
Total
------------
Balance January 1, 1995 $ 3,465,200
Net loss for the year (146,867)
------------
Balance December 31, 1995 3,318,333
Capital contributions 202,310
Net loss for the year (189,125)
------------
Balance December 31, 1996 3,331,518
Capital contributions (unaudited) 394,781
Net loss for the period (unaudited) (422,028)
------------
Balance September 30, 1997 (unaudited) $ 3,304,271
------------
------------
See accompanying notes to financial statements
F-37
<PAGE>
THE MORI POINT PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------- ---------------------
1996 1995 1997 1996
----------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (189,125) $(146,867) $(422,028) $(115,485)
Increase (decrease) from changes in:
Due from affiliate - - (74,977) -
Accrued expenses 25,847 146,867 146,602 (15,923)
----------- --------- --------- ---------
Net cash used in operating activities (163,278) - (350,403) (131,408)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 202,310 - 394,781 172,341
----------- --------- --------- ---------
Net cash provided by financing activities 202,310 - 394,781 172,341
Net increase (decrease) in cash and cash equivalents 39,032 - 44,378 40,933
Cash and cash equivalents at beginning of period - - 39,032 -
----------- --------- --------- ---------
Cash and cash equivalents at end of period $ 39,032 $ - $ 83,410 $ 40,933
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements
F-38
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1990 National Investors Financial, Inc. ("National"), represented
by NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Mori Point "Trudy Pat" Program (the "Program") in the
amount of $10,000,000 by selling undivided tenant-in-common interests in such
loan to 486 investors. In August of 1992, on behalf of the Mori Point
Program investors, National foreclosed on and took title to the property
("Mori Point") involved in the Mori Point Program. Mori Point is currently
raw land which is zoned for a 275 room hotel/conference center, 60
residential units and an equestrian/commercial facility. The property is
located in Pacifica, California and is currently held in trust by National on
behalf of the Mori Point Investors. The Mori Point property was recently
appraised at $4,100,000 as of the date of foreclosure. Therefore, the
property has been written down to its fair market value at the time of the
foreclosure and the investors' interest in the property is reflected as
Owners' Equity in the financial statements.
The accompanying financial statements include the accounts of the Program,
which consists of the Mori Point Land Holding Trust, and do not include the
accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"), was
formed to be a publicly-held corporation to acquire the businesses of certain
investment programs previously syndicated by National in exchange for common
shares. In addition, American will offer a maximum of 500,000 units, which
consist of one share of common stock and one warrant at a price of $10 per
unit. Each warrant entitled the holder to purchase two additional shares of
common stock at 80% of the closing price of the stock on the day prior to
exercise of the warrant. The warrant has a term of two years following the
completion of the Offering.
In conjunction with the contemplated transactions, the Program is
currently paying for a certain portion of the costs of the transactions.
Costs which have been allocated to the acquisition of the investment programs
by American have been expensed by the Program as incurred. Costs which will
be allocated against the proceeds of the units offering have been recorded as
a receivable from American, and capitalized as deferred offering costs by
American. If the units offering is not successful, this receivable will be
written off by the Program.
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)
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
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 nine months ended September 30,
1996 and 1997 are unaudited; however in the opinion of the Program'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 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, $75,000 and $75,000 for the years
ended December 31, 1995 and 1996 and for the nine months ended September 30,
1996 and 1997. Total accrued and unpaid management fees as of December 31,
1996 and September 30, 1997 were $441,218 and $516,218.
F-40
<PAGE>
THE MORI POINT PROGRAM
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
NOTE 3. COMMITMENTS (CONTINUED)
LAWSUITS
The Program is, from time to time, involved in various lawsuits generally
incidental to its business operations. In the opinion of management, the
ultimate resolution of these matters, if any, will not have a significant
effect on the financial position of the Program.
DELINQUENT PROPERTY TAXES
The Program has delinquent property taxes of $293,780 as of September
1997. The Program has entered into a five-year payment plan with appropriate
taxing authorities relative to the payment of these past due taxes.
NOTE 4. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as Servicing
Agent, a majority of the investors has the power to require all investors in
the Program to make additional capital contributions. Such contributions are
only recorded to the extent of cash received.
F-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, 1996, 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, 1996. 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, 1996, and the results of
operations and cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 27, 1997
F-42
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
BALANCE SHEETS
December 31, September 30,
1996 1997
------------ -------------
(Unaudited)
ASSETS:
Land $2,230,000 $2,000,000
Cash and cash equivalents 62,583 35,097
Due from affiliate (Note 1) - 30,578
------------ -------------
Total assets $2,292,583 $2,065,675
------------ -------------
------------ -------------
LIABILITIES:
Accounts payable $ 29,924 $ 25,641
Due to affiliate (Note 3) 146,611 179,944
Accrued property taxes (Note 3) 82,531 53,993
Accrued expenses - 71,157
------------ -------------
Total liabilities 259,066 330,735
COMMITMENTS AND CONTINGENCIES
(Note 3)
OWNERS' EQUITY:
Owners' Equity 2,033,517 1,734,940
------------ -------------
Total liabilities and owners'
equity $2,292,583 $2,065,675
------------ -------------
------------ -------------
See accompanying notes to financial statements
F-43
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF OPERATIONS
Nine Months Ended
Year Ended December 31, September 30,
----------------------- ----------------------
1996 1995 1997 1996
----------- --------- ---------- ----------
(Unaudited)
EXPENSES:
Selling, general
and administrative $ 169,649 $ 93,523 $ 93,879 $ 81,823
Land write-down (Note 5) 845,000 - 230,000 633,250
Related party management
fees (Note 3) 50,000 50,000 37,500 37,500
Acquisition expenses
(Note 1) - - 91,732 -
Total expenses 1,064,649 143,523 453,111 752,573
Interest income 1,965 11,933 678 1,437
----------- --------- ---------- ----------
Net income (loss) $(1,062,684) $(131,590) $(452,433) $(751,136)
----------- --------- ---------- ----------
----------- --------- ---------- ----------
See accompanying notes to financial statements
F-44
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF OWNERS' EQUITY
Total
------------
Balance January 1, 1995 $ 2,953,186
Capital contributions 12,033
Net loss for the year (131,590)
------------
Balance December 31, 1995 2,833,629
Capital contributions 262,572
Net loss for the year (1,062,684)
------------
Balance December 31, 1996 2,033,517
Capital contributions (unaudited) 153,856
Net loss for the period (unaudited) (452,433)
------------
Balance September 30, 1997 (unaudited) $ 1,734,940
------------
------------
See accompanying notes to financial statements.
F-45
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------- ---------------------------
1996 1995 1997 1996
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,062,684) $ (131,590) $ (452,433) $ (751,136)
Adjustment to reconcile net income
(loss) to net cash provided by (used in)
operating activities -
Real estate property write-down 845,000 -- 230,000 633,750
Increase (decrease) from changes in:
Due from affiliate -- -- (30,578) --
Accounts payable 29,924 -- (4,283) --
Accrued expenses (19,834) 53,716 75,952 (35,665)
------------- ----------- ------------ ------------
Net cash provided by (used in)
operating activities (207,594) (77,874) (181,342) (153,051)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions 262,572 12,033 153,856 256,918
------------- ----------- ------------ ------------
Net cash provided by
financing activities 262,572 12,033 153,856 256,918
------------- ----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents 54,978 (65,841) (27,486) 103,867
Cash and cash equivalents at beginning
of period 7,605 73,446 62,583 7,605
------------- ----------- ------------ ------------
Cash and cash equivalents
at end of period $ 62,583 $ 7,605 $ 35,097 $ 111,472
------------- ----------- ------------ ------------
------------- ----------- ------------ ------------
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
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
During 1989 National Investors Financial, Inc. ("National"), represented
by NASD registered securities broker-dealers, completed the funding of a real
estate loan for the Sacramento/Delta Greens Program (the "Program") in the
amount of $5,000,000 by selling undivided tenant-in-common interests in such
loan to 332 investors. In March of 1993, on behalf of the Sacramento/Delta
Greens Program investors, National foreclosed on the property and took title
to the property ("Sacramento/Delta Greens") involved in the Sacramento/Delta
Greens Program. Sacramento/Delta Greens is currently raw land which is zoned
and has an approved tentative tract map for a single-family detached housing
development of 534 homes. The property is located in Sacramento, California
and is currently held in Trust by National on behalf of the Sacramento/Delta
Greens investors. The Sacramento/Delta Greens property was recently
appraised at $3,075,000 as of the date of foreclosure. Therefore, the
property has been written down to its fair market value at the time of the
foreclosure and the investors' interest in the property is reflected as
Owners' Equity in the financial statements.
The accompanying financial statements include the accounts of the
Program, which consists of the Sacramento/Delta Greens Land Holding Trust,
and do not include the accounts of National.
AMERICAN FAMILY HOLDINGS, INC.
American Family Holdings, Inc., a California corporation ("American"),
was formed to be a publicly-held corporation to acquire the businesses of
certain investment programs previously syndicated by National in exchange for
common shares. In addition, American Family Holdings, Inc. will offer a
maximum of 500,000 units, which consist of one share of common stock and one
warrant at a price of $10 per unit. Each warrant entitled the holder to
purchase two additional shares of common stock at 80% of the closing price of
the stock on the day prior to exercise of the warrant. The warrant has a term
of two years following the completion of the Offering.
In conjunction with the contemplated transactions, the Program is
currently paying for a certain portion of the costs of the transactions.
Costs which have been allocated to the acquisition of the investment programs
by American have been expensed by the Program as incurred. Costs which will
be allocated against the proceeds of the units offering have been recorded as
a receivable from American, and capitalized as deferred offering costs by
American. If the units offering is not successful, this receivable will be
written off by the Program.
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)
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
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 nine months ended September 30,
1996 and 1997 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.
F-48
<PAGE>
THE SACRAMENTO/DELTA GREENS PROGRAM
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1997 is unaudited)
NOTE 3. COMMITMENTS
SERVICING/MANAGEMENT AGREEMENT
The Program is currently managed, subject to a servicing agreement, by
National. National also currently manages six other programs under similar
servicing agreements. As documented within the servicing agreement, National
is to receive an annual fee equal to 1% of the original loan balance.
National's requirements under the servicing agreement include managing the
assets of the Program to assure that the purpose and activities of the
program are continued for the investors. The Program incurred asset
management expenses of $50,000, $50,000, $37,500 and $37,500 for the years
ended December 31, 1995 and 1996 and for the nine months ended September 30,
1996 and 1997. Total accrued and unpaid management fees as of December 31,
1996 and September 30, 1997 were $146,611 and $179,944.
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 $53,993 as of September 30,
1997. The Program has entered into a five-year payment plan with appropriate
taxing authorities relative to the payment of these past due taxes.
NOTE 4. CAPITAL CONTRIBUTIONS
Through a voting procedure that can be initiated by National as
Servicing Agent, a majority of the investors has the power to require all
investors in the Program to make additional capital contributions. Such
contributions are only recorded to the extent of cash received.
NOTE 5. LAND WRITE-DOWN
Due to changes in zoning and the housing market surrounding
Sacramento/Delta Greens, write-downs in the cost of the land of $845,000,
$633,750 and $230,000 were recorded during the year ended December 31, 1996
and the nine months ended September 30, 1996 and 1997.
F-49
<PAGE>
APPENDICES
Appendix 1 Fairness Opinion
Appendix 2 Selected Additional Appraisal Information
<PAGE>
APPENDIX 1
[Form of Fairness Opinion]
_________ __, 1998
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
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 assets, liabilities and business activities (the
"Properties") relating to certain trust deed participation ("Trudy Pat") loan
programs sponsored by National Investors Financial, Inc. ("National"). The
Trudy Pat loans were initially funded by groups of investors (the
"Investors") who, by virtue of the borrowers' default on the loans, have
become the beneficial owners of the Properties which secured the loans.
These include Trudy Pat loans on real property in Sacramento, California
("Delta Greens"), Pacifica, California ("Mori Point"), Oceanside, California
("Oceanside"), and two separate parcels in Oakhurst, California
("Yosemite/Ahwahnee I" and "Yosemite/Ahwahnee II"). The Company's initial
capitalization was 529,037 shares of common stock, represented by 216,867
shares each to two partnerships controlled by the principals of National and
95,313 total shares issued to employees of National and the Company, and
consultants to certain of the Properties (collectively, the "Founders'
Shares"). As consideration for the purchase of the Properties, the Company
will issue shares of common stock (the "Shares") to the respective Investors
in the following amounts: 187,205 shares to the Delta Greens Investors
(representing 7.02 percent of the total shares outstanding after the issuance
of the Shares), 470,427 Shares to the Mori Point Investors (representing
17.64 percent of the total Shares outstanding after the issuance of the
Shares), 544,552 shares to the Oceanside Investors (representing 20.42
percent of the total Shares outstanding after the issuance of the Shares),
359,429 Shares to the Yosemite/Ahwahnee I Investors (representing 13.48
percent of the total Shares outstanding after the issuance of the Shares) and
575,867 Shares to the Yosemite/Ahwahnee II Investors (representing 21.60
percent of the total Shares outstanding after the issuance of the Shares).
In connection with the Transaction, it is anticipated that the Company's
common stock will be listed for public sale on the ________ ___ under the
symbol ___ ____. The Company will also commence an offering of additional
common shares to the Investors in the aggregate amount of up to $5,000,000,
at a price of $10 per Unit, each Unit representing one new share of common
stock and one warrant to purchase two additional shares of common stock at 80
percent of the Company's stock price immediately prior to the exercise date.
A1.1
<PAGE>
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 Delta Greens, Mori Point, Oceanside, Yosemite/Ahwahnee I
and Yosemite/Ahwahnee II. Our Opinion is limited to the allocation of Shares
to the Investors in connection with the Transaction. Therefore, we have not
performed an analysis of, and express no opinion with respect to, the
proposed price of $10 per Unit. In addition, we have not performed an
analysis of, and express no opinion with respect to, the Company's cost
structure on a going forward basis and whether such structure will result in
a greater cost for services to the Investors than they were incurring
collectively when the Properties were being managed by National.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the
circumstances. Among other things, we have:
1. Reviewed a draft copy of the Consent Solicitation Statement/Prospectus for
the Transaction (the "Prospectus") dated ________________, 1998;
2. Reviewed the following real estate appraisals (the "Appraisals") with
respect to the Properties:
a) an appraisal of the Yosemite/Ahwahnee I and II Properties, prepared by
Arnold Associates, as of May 1, 1997 (the "Arnold Appraisal"),
b) an appraisal of the Yosemite/Ahwahnee I and II Properties, prepared by
the Mentor Group, as of October 10, 1996 (the "Mentor Appraisal"),
c) an appraisal of the Mori Point Property, prepared by PKF Consulting,
as of May 19, 1997 (the "PKF Appraisal"),
d) an appraisal of the Delta Greens Property, prepared by David E, Lane,
Inc., as of May 9, 1997 (the "Lane Appraisal"), and
e) an appraisal of the Oceanside Property, prepared by Boznanski and
Company, as of March 31, 1997 (the "Boznanski Appraisal");
3. Reviewed the following feasibility studies with respect to the Properties:
a) a study of the Yosemite/Ahwahnee I and II Properties, prepared by
LEXES Enterprises, dated August 28, 1996,
b) a study of the Yosemite/Ahwahnee I and II Properties, prepared by RCI
Consulting, dated November 1996, and
A1.2
<PAGE>
c) a study of the Delta Greens Property, prepared by Barnett Research
Associates, dated December 23, 1996;
4. Reviewed the Agreement of Purchase and Sale and Joint Escrow Instructions
between Oceanside Development, Inc. and a publicly traded home builder,
dated as of June 18, 1997 (the "Purchase Agreement"), relating to a
potential sale of a portion of the Oceanside Property, the Symphony tract
(which agreement has since been canceled);
5. Reviewed audited financial statements for each of the Delta Greens
Property, the Mori Point Property, the Oceanside Property and the
Yosemite/Ahwahnee I and II Properties, as well as pro forma consolidated
financial statements for the Company, for the year ended December 31, 1996
and the nine months ended September 30, 1997;
6. Met with management of the Company and National regarding matters pertinent
to our analysis;
7. Conducted site visits to each of the Properties, and met with the General
Manager of the Yosemite/Ahwahnee I and II Properties;
8. Reviewed certain documents related to the Trudy Pat loans on the Properties;
9. Reviewed certain other documents and schedules which were pertinent to our
analysis; and
10. Conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company or the Properties and
do not assume any responsibility with respect to it. Our Opinion is
necessarily based on business, economic, market and other conditions as they
exist and can be evaluated by us at the date of this letter.
We have assumed that the financial statements provided to us correctly
reflect the financial results and condition of the Company (on a pro forma
basis) and the Properties 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 Properties
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.
We are not experts in real estate appraisal and, except as stated below, we
have relied upon the opinions and analyses expressed in the Appraisals as
representing the current fair market values of the respective Properties.
With respect to the Yosemite/Ahwahnee I and II
A1.3
<PAGE>
Properties, the wide disparity between the conclusions expressed in the
Arnold and Mentor Appraisals necessitated additional analysis and scrutiny of
the Appraisals as well as additional input from management regarding a
reconciliation of the Appraisals. With respect to the Oceanside Property, in
spite of the fact that the Purchase Agreement has been canceled, we have
considered the fact that, according to management, negotiations with the
potential buyer are expected to continue and that there is a significant
possibility that a sale of the Symphony tract will be completed to either
that particular entity or another buyer in the near future.
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
A1.4
<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.)
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
Heaviest reliance was placed on the Sales Comparison Approach because
the Property is undeveloped and generates no revenue.
Material Assumptions
- As of the 1993 date of value the property was approved for 596 lots,
including 144 duplexes.
- As of the 1997 date of value the property is approved for 534 lots,
all single family.
- Physical and economic conditions as of the 1993 date of value were
as reported in the appraisal. No inspection or investigation was made in
1993.
Assumptions particular to cash flow analysis
- A sell-out, or absorption, period of ten years.
- A base paper lot value of $7,500 for small groups of lots, with
step-up increases of $500 per lot per year - as many option or phased sales
are usually arranged (last year is at $12,000 per lot).
- Lots sold in groups of two phases per year in numerical order, using
the current tentative map of 534 lots.
- Commission and marketing of 5%, as limited sales agreements are
envisioned.
A2.1
<PAGE>
- Real estate taxes based on an interpolated value of $2,000,000,
times the combined 1.5% tax and levies rate, with the declining total value
of the remaining lots increased by 2% annually.
- Miscellaneous costs, such as insurance and overhead, of 1% of sales.
- A discount rate of 20%.
OCEANSIDE PROGRAM (Boznanski & Company)
Symphony 111 lots
Sales Comparison Approach(1) $2,636,000 - $3,164,000
Land Residual Approach(4) 2,850,000
Conclusion of "as is" value $2,850,000
The Land Residual Approach was deemed to be the more realistic as it
took into account remaining development costs and was approximately the
mid-point of Sales Comparison Approach range.
MORI POINT (PKF Consulting)
Discounted Cash Flow(3) $5,300,000
Ground Rent Capitalization Approach(5) 6,000,000
Sales Comparison Approach(1) 5,400,000
Conclusion of "as is" value $5,500,000
Material Assumption
- The project will be open by January 1, 2001.
- Assumes a sell out of ten years
As the sales comparisons available were not similarly sized or located,
of a similar development potential, the greatest reliance was placed on the
Discounted Cash Flow Approach as good market information was available to
support the potential cash flow and development cost of the potential
project. The Ground Rent Capitalization Approach was used as a test of
reasonableness.
YOSEMITE/AHWANHEE I AND II (Arnold Associates)
GOLF COURSE/COUNTRY CLUB
Sales Comparison Approach(1) $5,400,000
Income Approach(6) 4,810,000
Cost Approach(7) 6,270,000
Conclusion of "as is" value $4,480,000*
A2.2
<PAGE>
* Reflects a $5,100,000 stabilized value less $620,000 of lost income
during stabilization process of the golf course.
The Sales Comparison Approach was deemed the most reliable because
sufficient market data existed, although the comparables were superior in
location, quality or condition. The Income Approach was not reliable as
there was no historical data available.
Material Assumption
- Stabilized income and rounds played.
RV PARK
Sales Comparison Approach(1) $3,886,000
Cost Approach(7) 3,986,000
Conclusion of "as is" value $3,886,000
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.
COUNTRY CLUB ESTATES ("as is") $2,250,000
ESTATE OUTLOTS F, G AND H ("as is") $5,800,000
OTHER OUTLOTS C, D AND E ("as is") $4,500,000
In each of the last three categories, only the Sales Comparison
Approach was used as such approach was deemed the only reliable indicator
value for the types of property in question.
Valuation qualification for the Estates: Changes in concept and
realignment of Road 621 could change density and possibly trigger additional
wildlife habitat easement acreage.
YOSEMITE/AHWAHNEE I AND II (Mentor)
Utilizing a sales comparison approach (1) for the undeveloped land and
a cost approach (7) for the balance of the Properties, in October 1996, The
Mentor Group, Inc. appraisal valued the
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
A2.3
<PAGE>
At the time of the appraisal, The Mentor Group did not adopt the income
capitalization approach for the golf course portion because it was not
projected to be profitable in the near future and needed considerable
expenditures to be operational. The sales comparison approach was not used
for the golf course portion because there were no comparable sales.
(1) The sales comparison approach produces an estimate of value by comparing the
sales and/or listings of similar properties in the same area as the subject
property or in competing areas. This technique is used to indicate the
value established by informed buyers and sellers in the market.
(2) In a land residual analysis, a simple deduction is applied to an estimated
finished-lot price that a homebuilder could afford to pay in the
neighborhood.
(3) A discounted cash flow analysis is used to value vacant land that has the
potential for development for a use when that use represents the likely
highest and best use of the land.
(4) The Oceanside residual land analysis includes two separate scenarios. The
first utilizes a finished land value estimate, and the second utilizes a
finished product (land plus home plus site improvements) as a basis from
which to back out all necessary costs to arrive at the finished values.
(5) The ground rent approach is particularly appropriate for special use
properties such as hotels, where there is not a sufficient number of truly
comparable land sales to accurately estimate the value of the site using the
sales comparison approach. Ground rent is the amount paid for the right
to use and occupy the land according to the terms of a ground lease. It
corresponds to the value of the land owner's interest in the land, the lease
fee interest.
(6) The income capitalization approach is based on an estimate of the subject
property's possible net operating income. The net operating income is
capitalized to arrive at an indication of value from the standpoint of an
investment. This method measures the present worth of anticipated future
benefits (net income) derived from the property.
(7) The cost approach considers the current cost of reproducing or replacing a
property, less accrued depreciation in the property. A summation of the
market value of the land assumed vacant and reproduction cost new of the
improvements provides an indication of the total value of the property.
A2.4
<PAGE>
GENERAL APPRAISAL ASSUMPTIONS
1. SACRAMENTO/DELTA GREENS PROGRAM
- The legal description, dimensions, and areas used herein are assumed
to be correct.
- Title to the property is assumed to be free and clear of any liens or
encumbrances, and to be merchantable title, unless otherwise specified herein.
- No responsibility is assumed for matters that are legal in nature.
- Information furnished by the appraiser by others has been reviewed and
analyzed and is believed to be reasonably accurate, but cannot be guaranteed.
- Unless otherwise specified herein, it is assumed that there are no
adverse subsurface conditions, particularly those relating to soil-bearing
capacity.
- Unless otherwise stated in this report: The existence of hazardous
material, which may or may not be present on the property, was not observed
by the appraiser. The appraiser has no knowledge of the existence of such
materials on or in the property. The appraiser, however, is not qualified to
detect such substances. He presence of substances such as asbestos, radon
urea-formaldehyde foam insulation, or other potentially hazardous materials
may affect the value of the property. The value estimate is predicated on
the assumption that there is no such material on or in the property that
would cause a loss in value. No responsibility is assumed for any such
conditions, or for any expertise or engineering knowledge required to
discover them.
2. OCEANSIDE PROGRAM
- That the vesting and legal description furnished this appraiser are
correct.
- That measurements and areas furnished by others are correct. No
survey has been made for the purpose of the appraisal.
- That the maps and exhibits found in this report are provided for
reader reference purposes only. No guarantee as to accuracy is expressed or
implied.
- That the property is appraised as if free and clear of liens and that
the title is good and marketable.
- That no guarantee is made as to the corrections of estimates or
opinions furnished by others which have been used in making this appraisal.
A2.5
<PAGE>
- That no liabilities be assumed on account of inaccuracies in such
estimates or opinions.
- That no liability is assumed on account of matters of a legal nature
affecting this property, such as title defects, liens, encroachments,
overlapping boundaries, etc.
- Unless otherwise stated in this report, the existence of hazardous
material, which may or may not be present on the property, was not observed
by the appraiser. The appraiser has no knowledge of the existence of such
materials on or in the property. The appraiser, however, is not qualified to
detect such substances such as asbestos, urea-formaldehyde foam insulation,
or other potentially hazardous materials may affect the value of the
property. The value estimate is predicated on the assumption that there is
no such material on or in the property that would cause a loss in value. No
responsibility is assumed for any such conditions, or for any expertise or
engineering knowledge required to discover them the client is urged to
retain an expert in this field, if desired.
- It is assumed that there are no hidden or unapparent conditions of the
property, subsoil, or structures that render it more or less valuable. No
responsibility is assumed for such conditions or for arranging for
engineering studies that may be required to discover them.
3. MORI POINT
- The appraiser assumes no responsibility for economic, physical or
demographic factors which may affect or alter the opinions in this report if
said economic, physical or demographic factors were not present as of the
date of the letter of transmittal accompanying this report. The appraiser is
not obligated to predict future political, economic or social trends.
- In preparing the report, the appraiser was required to rely on
information furnished by other individuals or found in previously existing
records and/or documents. Unless otherwise indicated, such information is
presumed to be reliable. However, no warranty, either express or implied, is
given by the appraiser for the accuracy of such information and the appraiser
assumes no responsibility for information relied upon later found to have
been inaccurate.
- No opinion as to the title of the subject property is
rendered. Data related to ownership and legal description was obtained from
the attached title report records and is considered reliable. Title is
assumed to be marketable and free and clear of all liens, encumbrances,
easements and restrictions except those specifically discussed in the report.
The property is appraised assuming it to be under responsible ownership and
competent management, and available for its highest and best use.
A2.6
<PAGE>
- 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.
- It is assumed that the utilization of the land and/or improvements is
within the boundaries or property described herein and that there is no
encroachment or trespass.
4. YOSEMITE/AHWAHNEE I AND II (Arnold)
A2.7
<PAGE>
- No responsibility is assumed for the legal description or for matters
including legal or title considerations. Title to the property is assumed to
be good and marketable unless otherwise stated. The property is assumed to
be available for its highest and best use.
- The property is appraised free and clear of any or all liens or
encumbrances unless otherwise stated.
- Responsible ownership and competent property management are assumed.
- The information furnished by others is believed to be reliable.
However, no warranty is given for its accuracy.
- The appraiser assumes no responsibility for economic or physical
factors occurring after the date of value which may affect the opinions
herein stated. The projections included in this report are subject to
changes in future conditions that cannot be accurately predicted by the
appraiser and could affect the future income or value projections.
- No engineering survey has been made by the appraiser. Except as
specifically stated, data relative to size and area were taken from sources
considered reliable. The plot plans 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.
A2.8
<PAGE>
- That all applicable zoning and use regulations and restrictions have
been complied with, unless a nonconformity has been stated, defined, and
considered in the appraisal report.
- That all required licenses, certificates of occupancy, consents, or
other legislative or administrative authority from any local, state, or
national government or private entity organization have been or can be
obtained or renewed for any use on which the value estimate contained in this
report is based.
- That the utilization of the land and improvements is within the
boundaries or property lines of the property described and that there is no
encroachment or trespass unless noted in this report.
5. YOSEMITE/AHWAHNEE I AND II (Mentor)
- The title of the property is marketable.
- Unless otherwise indicated, the property is free and clear of all
liens, encumbrances, easement and restrictions.
- The property does not exist in violation of any applicable codes,
ordinances, statutes or other governmental regulations.
- The property is under responsible ownership and competent management
and is available for its highest and best use.
- Information supplied by others, which was considered in this
valuation, came from sources believed to be reliable. The appraiser assumes
no further responsibility for its 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.
A2.9
<PAGE>
In the development of the appraiser's opinion of value, no consideration
has been given to such liability or its impact on value. The appraiser is
not qualified to investigate the possible presence of toxic materials
requiring either immediate or future correction.
- The overall site does contain various easements, as well encumbering
the larger landholdings, which are assumed not to adversely affect the
utilization of the subject land.
- All governmental approvals necessary to permit development for the
proposed residential, recreational vehicle timeshare area are assumed
available as per actual discussions with the Madera County planner. However,
no preliminary site plans showing the proposed development were submitted.
A2.10
<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 AND THE OFFERING OF UNITS EXPIRES AT 11:59 PM,
PACIFIC TIME, ON ___________, 1998, UNLESS EXTENDED (THE "EXPIRATION TIME").
Pursuant to the Prospectus dated _________, 1998 (the "Prospectus"), which
accompanied the original mailing of this Official Investor Ballot, American
Family Holdings, Inc. (the "Company") is proposing to acquire the assets,
(including, without limitation, real estate and cash reserves), certain
liabilities and business activities of the Programs (the "Acquisition") in
exchange for shares of the Company's common stock (the "Shares"). The
Acquisition requires the approval of Investors holding a majority beneficial
economic interest in each of the Programs. If a majority of Investors in any
one of the Programs does not approve the Acquisition prior to the Expiration
Time, then the Acquisition will not occur. If the Acquisition is approved,
all Investors in each of the Programs are bound by the vote of the majority
that granted approval. Capitalized terms in this Official Investor Ballot
shall have the same meaning as in the accompanying Prospectus.
NATIONAL RECOMMENDS A "YES" VOTE.
VOTING BALLOT (PLEASE INDICATE ONE CHOICE ONLY)
_____YES! I vote to approve the Acquisition described in the Prospectus,
and, as part of that Acquisition, to receive Acquisition
Shares in the Company in exchange for my Adjusted Outstanding
Investment in the Program. I authorize and instruct National
to reconvey and extinguish on my behalf all encumbrances
against the Program's real estate in which I have an interest.
_____NO. I vote against the Acquisition. I have read and understand
the portions of the Prospectus which describe the consequences
to my investment in the Program if the Acquisition does not
occur.
_____ABSTAIN. I abstain from voting. I understand that my abstention will
be counted as a vote AGAINST the Acquisition.
I represent and warrant that I (1) have received and reviewed the Prospectus
and the applicable Supplement, (2) understand that if the Acquisition is
completed, I will become a shareholder in the Company, (3) have full power
and authority to vote as an Investor pursuant to the Program's
tenancy-in-common agreement, (4) understand that if a voting selection is not
indicated, but this ballot is signed and delivered, I will be deemed to have
voted in favor of the Acquisition, and (5) that to the best of my knowledge,
when and if my interests in the property sold are transferred to the Company
in exchange for Shares, the Company will acquire good, marketable and
unencumbered title to them, free and clear of all liens, restrictions and
encumbrances, and that the interests in the property sold will not be subject
to any adverse claim other than property taxes. By voting in favor of the
Acquisition, I confirm that I am concurrently voting to terminate the
tenancy-in-common agreement and the servicing agreement which govern the
Program and I understand that the provisions of such agreement states that
such termination, if it occurs, will result in National being relieved from
any and all liabilities or responsibilities connected with the Program, and
that all amounts owing to National under the servicing agreement (less
amounts forgiven by National) shall remain owing to National and be assumed
by the Company. This vote, and all authority conferred herein, shall survive
my death or incapacity, and any of my obligations in connection with this
vote and subscription shall be binding upon my heirs, successors and assigns.
- --------------------------------------- ----------------------------------
Signature of Primary Investor Date
- ---------------------------------------
Print Name
Daytime Telephone Tax I.D. No.
----------------------
<PAGE>
AMERICAN FAMILY HOLDINGS, INC.
SUBSCRIPTION ORDER FOR UNITS
I am subscribing for _______ Units at $10.00 each for a total amount of
$__________. I have enclosed a check for that amount, made payable to "First
Trust of California, N.A, as Escrow Agent for American Family Holdings, Inc.
Unit Offering." I understand that no Units will be sold if the Acquisition
described in the Prospectus, dated _________________, 1998, of American
Family Holdings, Inc. is not completed.
The undersigned investor(s) having read and reviewed the Prospectus,
understand that if the Acquisition is completed, the Company is offering to
sell, on a first-come, first-served basis, up to 500,000 Units at $10.00 per
Unit, and that each Unit consists of one share of common stock and one warrant
to purchase two additional shares at a 20% discount. In making this
subscription order, I/we represent and warrant that I/we am/are eligible to
participate in the Offering by virtue of the fact that I/we am/are currently
invested in the Program, and that I/we followed the Instructions which
accompanied this Subscription Order Form. Furthermore, under penalties of
perjury, I/we certify that (i) the number shown below is my/our correct
Taxpayer Identification Number or Social Security Number (or I/we am/are
waiting for a number to be issued) and (ii) I/we am/are not subject to backup
withholding either because I/we have not been notified by the Internal Revenue
Service (IRS) that I/we am/are subject to backup withholding as a result of a
failure to report all interests or dividends, or the IRS has notified me/us
that I/we am/are no longer subject to backup withholding. (NOTE: CLAUSE (ii)
IN THIS CERTIFICATION SHOULD BE CROSSED OUT IF AN INVESTOR IS SUBJECT TO
BACKUP WITHHOLDING.)
INVESTOR INFORMATION
Name of Investor
----------------------------------------
Name of Joint Investor
----------------------------------------
Street address
----------------------------------------
City/State/Zip
----------------------------------------
Business Telephone Number
----------------------------------------
Home Telephone Number
----------------------------------------
- ----------------------------------- ----------------------------------------
Investor's Tax I.D. No./ Joint Investor's Tax I.D. No./
Social Security No. Social Security No.
- ----------------------------------- ----------------------------------------
Signature of Investor Signature of Joint Investor
Date: Date:
------------------------------- ----------------------------------
<PAGE>
BROKER / DEALER INFORMATION FORM
This Form must be returned with a subscription order, or the order cannot be
processed. If a broker is involved in the subscription order, the registered
representative broker/dealer must sign the form. If the subscription is made
without the assistance of a broker, the Investor must sign the form.
Broker/Dealer Name
-------------------------------------------------------------
Registered Representative Name
-------------------------------------------------
Registered Representative Mailing Address
--------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
City State Zip Code
---------------------------------- --------- ----------------
Broker Number Telephone Number
------------------------- -----------------------
BROKER STATEMENT: The undersigned confirms by his or her signature that the
broker/dealer is duly licensed and may lawfully sell shares in the state
designated as the Investor's residence, and that the person named as the
registered representative is duly licensed to represent the broker in this
transaction, and that he or she (i) has reasonable grounds to believe that the
information and representations concerning the Investor identified herein are
true, correct and complete in all respects; (ii) has discussed such Investor's
prospective purchase of Units with such Investor; (iii) has advised such
Investor of all pertinent facts with regard to the liquidity and marketability
of the Units pursuant to the NASD's Conduct Rules; (iv) has delivered a
current Prospectus and related supplements, if any, to such Investor; and (v)
has reasonable grounds to believe that the purchase of Units is a suitable
investment for such Investor and that such Investor is in a financial position
to enable such Investor to realize the benefits of such an investment and to
suffer any loss that may occur with respect thereto.
Registered Representative Name
-------------------------------------------------
- ------------------------------------ ----------------------------------------
Registered Representative Signature Date
Broker/Dealer Authorized Signature
---------------------------------------------
Print Name
---------------------------------------------------------------------
ALL INVESTOR AND BROKER/DEALER INFORMATION MUST BE COMPLETED
OR REGISTRATION CANNOT PROCEED
INVESTOR STATEMENT: I confirm by my signature below that I have made my
subscription order without the assistance of a broker.
Name Joint Investor
--------------------------------- --------------------------
Signature Signature
---------------------------- -------------------------------
Date Date
--------------------------------- ------------------------------------
<PAGE>
INSTRUCTIONS TO INVESTORS ON HOW TO COMPLETE THE
OFFICIAL INVESTOR BALLOT AND SUBSCRIPTION ORDER FORM
STEPS TO COMPLETE THE INVESTOR BALLOT AND SUBSCRIPTION ORDER
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.
3. If you want to purchase Units, complete the Subscription Order form
and attach your check for the full amount (see "Subscriptions" on the
next page of these Instructions for more details). Remember, orders
are first-come, first-served.
4. Make sure to include a Broker/Dealer Information Form with your
Subscription Order form, or your order cannot be processed.
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. If any legal representative of a deceased
or legally disabled Investor refuses to cast votes on behalf of the Program
interests held in the name of an Investor, and if the other Investors vote to
approve the Acquisition, that affirmative vote shall be binding and effective
as though the deceased or legally disabled Investor had approved the
Acquisition themselves, while alive and not under any legal disability (per
Section 2.5 of each Tenancy-in-Common Agreement).
<PAGE>
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.
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.
SUBSCRIPTIONS
Subscription Orders for Units will be accepted on a first-come,
first-served basis, and the quantity of Units offered to Investors is
strictly limited. If you choose to subscribe, you must enclose a check
payable to "First Trust of California, N.A, as Escrow Agent for American
Family Holdings, Inc. Unit Offering," along with your order form, and your
funds will be held in escrow until the Acquisition is completed. If you
complete the subscription information, but fail to enclose a check, your
subscription will be deemed invalid. You may subscribe after sending your
ballot by sending a copy of the form with your check at any time prior to
completion of the Acquisition, subject to availability of Units. All
subscriptions must be accompanied by a Broker/Dealer Information Form. Units
can only be issued to the same investor(s), and in the same manner, as Shares
are issued to those same investor(s) entitled to participate in the
Acquisition and the Offering. If the Acquisition is not completed, the
Offering will be terminated and your money (plus accrued interest) will be
returned by the Escrow Agent.
<PAGE>
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 AND SUBSCRIPTION ORDER
Send your completed and duly executed ballot or order for Units, 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.
VOTING UPDATES AND INVESTOR CONTEST AVAILABLE 24 HOURS
Throughout the voting period, which will end on the Expiration Time,
information on the percentages of votes received from Investors in each
Program in favor of the Acquisition, as of the previous day, is available by
recorded messages posted on the Trudy Pat Bulletin Board. To access the
system, simply call 1-800-590-7772 (toll-free from outside California).
During business hours, ask to be connected to the Trudy pat Bulletin Board and
follow the simple instructions. After hours, a recorded message provides
instructions on how to access the system.
QUESTIONS OR ADDITIONAL MATERIALS:
Contact National at the above address or by calling 1-800-590-7772.
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
SACRAMENTO/DELTA GREENS "TRUDY PAT" PROGRAM
CAPITALIZED TERMS USED IN THIS SUPPLEMENT AND NOT DEFINED HEREIN
HAVE THE MEANING GIVEN TO THEM IN THE PROSPECTUS. SEE "GLOSSARY"
AT PAGE __ OF THE PROSPECTUS.
--------------
This Supplement has been prepared to help the Investors in the
Sacramento/Delta Greens Program to understand how the Acquisition described
in the accompanying Prospectus will affect them. If completed, the effects
of the Acquisition may be different for Investors in the other Programs. A
separate supplement has been prepared for each of the other Programs, copies
of which may be obtained, without charge, by writing to National Investors
Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport Beach, California
92660, Attention: Vivian Kennedy, or calling 1-800-590-7772.
As described in the accompanying Prospectus, American Family Holdings,
Inc. (the "Company") is offering shares of its Common Stock in exchange for
the assets (including cash reserves), certain liabilities and business
activities owned by Investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[21,374,800] of shares
of common stock at $10 per Share. The stock will be listed for trading on
the ___________ under the symbol "___."
Of the [2,137,480] shares to be issued by the Company in the Acquisition,
Investors in the Sacramento/Delta Greens Program will receive a total of
[187,205]shares or [310] 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 an amount
that is higher than the value of the Company shares to be received in the
Acquisition.
In each of the Programs, the Investors will vote on whether to approve the
Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF
THE FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
Special Risks of the Acquisition:
- - If the Acquisition is approved, there will be a fundamental change in the
nature of your investment. You will receive stock in the Company and have no
remaining interest in the real estate or business of your Program. Further,
you will have an investment in a business which 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 value of the shares you receive may be less than you might receive if
the Property of your Program were sold.
- - If a trading market develops, the initial trading price for the stock will
likely be below $10 per share.
- - Employees of National and the Company will hold almost 20% of the
Company's stock and will receive compensation as officers and employees.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event. If
so, a tax loss is the probable result.
The Company is also offering $5,000,000 of units (consisting of one share
of common stock and one warrant to purchase two additional shares) at $10
each exclusively to current Investors in the Programs. NASD broker-dealers
will receive a commission totalling $0.70 per unit for any units sold with
their help. If all the units are sold with their help, the proceeds of the
sale, net of estimated expenses of $200,000, will be $4,450,000. If you want
to participate, subscriptions for units should be returned with your ballot.
Subscriptions will be accepted on a FIRST-COME-FIRST-SERVED BASIS.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found
on pages [23] through [32] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. If the Acquisition is
completed, there will be a change in the nature of the investment of each
Investor from holding a tenancy-in-common interest in real estate to holding
shares in an on-going company, the assets of which may be changed from time
to time without approval of Investors. If the Acquisition is completed,
Investors will be able to liquidate their investments only by selling their
shares on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through
property sales. If the Acquisition is completed, Investors will have an
investment in an entity that is larger than each of the Programs and will
thus lose relative voting power.
DIFFERENCES BETWEEN EXCHANGE VALUES AND SALES PRICE. Investors are
subject to the risk that the Exchange Value of a Program does not reflect the
price a Program's assets might bring in a sale. If the property of a Program
were to be sold, the net proceeds of the sale and the amount finally
distributed to an Investor in that Program may be more or less than the
Exchange Value.
UNCERTAINTY REGARDING TRADING PRICE FOR THE SHARES. Shares may trade at
prices substantially below Exchange Value per share or historical book value
of the Company's assets. If a trading market develops for the shares, the
price of shares after the Acquisition will likely decrease below the Exchange
Value per share of $10 due to a potentially large number of shares that
Investors may sell immediately after the Acquisition.
CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The founders of the
Company which included the principal shareholders of National initiated and
structured the Acquisition and will own approximately 20% of the Company and
be entitled to other substantial economic benefits. Therefore, the founders
of the Company are subject to conflicts of interest with respect to the
Acquisition.
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS. No independent party was
retained by National to negotiate on behalf of the Investors. Therefore,
terms of the Acquisition may be less favorable to Investors and more
favorable to founders of the Company which included the principal
shareholders of National than if the Acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of
each Program, the terms of the Acquisition may have been more favorable to
certain or all of the Programs and fewer shares and less favorable employment
contracts may have been received by the founders of the Company.
2
<PAGE>
TAX UNCERTAINTIES. The Acquisition may not be a tax-free transaction to
Investors. Due to uncertainties in the facts of this transaction, tax
counsel is unable to opine conclusively on the taxability of the Acquisition
to Investors. If the Acquisition is a taxable transaction, an Investor would
recognize gain or loss in 1998 equal to the difference between the Investor's
tax basis in his interest in a Program property, and the number of shares of
the Company received valued at $10 per share. If the Acquisition is treated
as taxable, National believes most Investors would experience a tax loss.
POTENTIAL CHANGE IN THE AMOUNT OF LEVERAGE. After the Acquisition, none
of the properties will be subject to any liens other than for property taxes.
The board of directors could authorize borrowing by the Company the debt
service for which may adversely affect the Company's ability to make
distributions to shareholders. The Company may incur full recourse debt
which exposes all of the assets of the Company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN INVESTMENT,
FINANCING AND CERTAIN OTHER POLICIES. Although the board of directors of the
Company intends to implement the business plan set forth in the Prospectus,
the board will have the ability to change investment, financing and other
policies of the Company without the consent of shareholders.
NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS. If you vote
against the Acquisition, and it is approved, you will not be able to object
to the Acquisition and receive the appraised value of your tenancy-in-common
interest in your Program's assets. You will have no choice other than to
accept shares for your interests.
COMPANY HAS NO OPERATING HISTORY. The Company was formed within the past
year to take part in the Acquisition of your Property. It does not have the
benefit of operating for a long time. This means that shares in the Company
are much riskier than ownership of shares of established companies. If the
Company had been operating as if it owned the Properties which it desires to
acquire, it would have experienced losses to date.
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.
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 [September] 30, 1997:
Sacramento/Delta Greens - approximately $54,000; Oceanside - approximately
$10,000; Yosemite/Ahwahnee (combined) - approximately $640,000; and Mori
Point - approximately $294,000. Annual payments required for all the
properties total approximately $431,000.
3
<PAGE>
PERMITS TO DEVELOP CERTAIN PROPERTIES HAVE LAPSED OR 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.
COMPLIANCE WITH CONDITIONS IN EXISTING PERMITS AND APPROVALS MAY REQUIRE
CHANGES TO DEVELOPMENT PLANS. The tentative tract map for the
Sacramento/Delta Greens property requires that studies must be conducted to
identify any endangered species' habitat which may exist on the property. If
any are identified, changes to the tentative development plans will have to
be made and approved that will reduce or eliminate any damage to the habitat.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO FURTHER THE BUSINESS PLAN. Unless
funds from sale of the units or from sale of certain assets of the Programs
become available, the Company will not be able to proceed with its business
plan and properties might be lost to tax sales before sales to third parties
can be arranged. The Company will also need financing from other sources to
complete its plan. Financing sources are not predictable and interest rates
or other costs of financing may be prohibitive.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE OR
SACRAMENTO/DELTA GREENS PROPERTIES 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.
FEDERAL, STATE AND LOCAL LAW MAY REQUIRE EXPENSIVE HAZARDOUS SUBSTANCE
CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC IMPROVEMENTS. Environmental
audits have not been conducted on the Properties.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. Extraordinary losses caused by floods
or earthquakes may be uninsurable or too expensive to insure.
THERE ARE CERTAIN RISKS ASSOCIATED WITH THE CALIFORNIA MARKET. While
economic conditions are improving in California, its 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 $[1,234,785] BY THE COMPANY. This represents accrued fees and expenses
from the Programs which National has not cancelled.
GOLF COURSE RISKS
THERE ARE INDUSTRY OPERATING RISKS, INCLUDING INCREASED COMPETITION,
SEASONALITY, WEATHER AND COURSE CONDITIONS. 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
4
<PAGE>
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.
RESIDENTIAL DEVELOPMENT RISKS
THE COMPANY MAY BE AFFECTED BY MARKET RISKS AND COMPETITION. 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.
RESORT DESTINATION RISKS
THERE ARE RISKS ASSOCIATED WITH RESORT DEVELOPMENT. 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.
THERE ARE CERTAIN RISKS SPECIFIC TO TIMESHARE PROJECTS.
Negative press surrounding the remarketing of timeshares might negatively
impact sales and operations.
Marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
There are relatively more defaults among timeshare owners when they borrow
to buy timeshares compared to 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.
We may not be able to secure development financing on acceptable terms.
RISKS FOR RECREATIONAL VEHICLE PARKS ARE SUBSTANTIALLY THE SAME AS
TIMESHARE RISKS.
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. Some of these provisions include:
5
<PAGE>
1. 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.
2. The Board is divided into three classes serving staggered three year
terms meaning you may not be able to efficiently change control of the
Company even if you believe that change would be in your best interests.
3. There are restrictions on certain business combinations with
interested parties without the approval of the Board of Directors.
4. The Delaware law, as well as the charter documents, limit the
liability of directors and officers to shareholders.
5. 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.
EFFECT OF THE ACQUISITION
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE
FOR YOUR INVESTMENT IN THE PROGRAM, AS ADJUSTED PER THE TERMS OF THE
GOVERNING AGREEMENTS. You will receive [310] shares per $10,000 of Adjusted
Outstanding Investment in the Program.
- YOU MAY HAVE A LIQUID TRADING MARKET FOR YOUR SHARES. After the
Acquisition, shares will be listed on the ______________. If a trading
market exists, you will have the opportunity to liquidate all or some of
those shares at your preference.
- YOU MAY HAVE MORE CONTROL OVER THE TIMING OF LIQUIDATING OF YOUR
INVESTMENT. You can control when you choose to take profits or losses.
Under the Program's tenancy-in-common agreement, you are required to abide by
a majority vote to sell or retain the Program's Property, regardless of
whether or not the timing of the action or the decision of the majority is
consistent with your individual preferences.
- YOU WILL OWN SHARES IN A POOL OF ASSETS WHOSE DIVERSITY CAN MITIGATE
RISK AND INCREASE THE LIQUIDITY OF THE PROPERTIES. Your investment will be
spread over an initial asset base of four different real estate projects (the
two Yosemite/Ahwahnee Programs will be one project after the Acquisition).
- YOU WILL HAVE EXPERIENCED PROPERTY MANAGEMENT. We have hired key
real estate management professionals who are experienced in real estate
development, operation and construction.
- YOU WILL NO LONGER BE LIABLE FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
Acquisition, meaning your liability for mandatory assessments will cease.
6
<PAGE>
- YOUR LIABILITY WILL BE LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the Program, you are not
effectively insulated from personal liability based on operation of those
assets. As shareholders of a corporation, you will be.
- THE ASSETS OWNED BY THE COMPANY WILL NO LONGER BE SUBJECTED TO
SERVICING FEES. For all Programs involved in the Acquisition, National will
stop earning servicing fees of approximately $650,000 per year and National
and its principals will forgive a total of $946,111 of unpaid post-1994
servicing fees and expenses if the Acquisition is approved. Although the
services of National are being replaced by a management team and staff to run
the Company, National believes that the cost of this new management team will
be modestly lower than the historical cost of National servicing the Programs
on an individual basis.
- The Acquisition will have no material effect on this Program's
stand-alone financial condition or results of operations. The Company
expects to experience losses in the initial year of operations.
- For further information about how the Acquisition will affect you and
the Program, see the following portions of the Prospectus:
- "Background and Reasons for the Acquisition" commencing at
page __.
- "Comparison of Tenancy-in-Common Interests and Shares"
commencing at page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition
and Results of Operations" commencing at page __.
- "Management Following the Acquisition" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
FAIRNESS TO INVESTORS IN THE SACRAMENTO/DELTA GREENS PROGRAM
From a financial point of view, National believes the terms of the
Acquisition are fair as a whole and to the Investors in each of the Programs.
National based its determination on the following factors:
- the shares offer an opportunity for individual Investor liquidity
while the tenancy-in-common interests do not;
- the Exchange Value offered to Investors for their assets exceeds
what National believes could be received on liquidation sale of the assets;
7
<PAGE>
- on completion of the Acquisition, principals, employees, and
consultants of National, the Programs or the Company will hold less than 20%
of the Company's shares while the Programs' Investors will hold over 80%;
- the opportunity for each Investor to vote for or against the
Acquisition;
- valuation of the real estate assets of the Program by an independent
appraiser; and
- the fact that the transaction will either be tax-free to Investors
or most likely yield a tax loss. Either way, 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 and the issuance of shares to the founders of the Company, we
believe they have been counterbalanced by your opportunity to vote on the
transaction and the Fairness Opinion; and
- the Fairness Opinion rendered by the independent valuation firm.
See "Background and Reasons for the Acquisition" at page __.
National reviewed the value you will receive in connection with the
Acquisition and compared it with what you might receive under the
alternatives to Acquisition. Despite the adjustments to appraised value to
arrive at Exchange Values, National concluded that the likely market value of
the shares of the Company would be higher in the long run than the value you
would have received if any of the alternatives to the Acquisition had been
implemented. See "Background and Reasons for the Acquisition -- Comparison
of 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 Program (as well as each of the other four
Programs) is essentially the consideration at which the Company is offering
in exchange for the real estate assets, certain liabilities and business of
the Program. The value is reflected as a number of shares of the Company
common stock (in the case of the Program, [187,205] shares) multiplied by an
arbitrary $10 per share value.
The Exchange Value for the Program was calculated as follows: appraised
value of the Program's Property at May 1997, plus book value of other
Sacramento/Delta Greens Program assets at [September 30], 1997, less Program
liabilities at [September 30], 1997, and plus liabilities to National to be
forgiven by National as part of the Acquisition.
8
<PAGE>
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:
Value Assigned
to Program per
Appraised Net Other $10,000 of Adjusted
Value of + Assets and = Exchange Outstanding
Real Estate(1) Liabilities(2) Value Investment
- -------------- -------------- -------- -------------------
$2,000,000 $[(127,949)] $[1,872,051] $[3,104](3)
- -----------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values made
in determining a Property's Exchange Value as of [September 30, 1997].
Book To Be Net Other
Book Assets = Liabilities + Forgiven = Assets and
(9/30/97)- (9/30/97)- Amounts Liabilities
- ----------- ----------- -------- -----------
$65,675 $(330,735) $137,111 $(127,949)
* See balance sheet of the Program in the financial statements accompanying
the Prospectus for details of book assets and book liabilities. There is
no mortgage debt on the Property.
(3) Equals 310 Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,137,480] shares of Company common stock being offered to Investors
in the Acquisition represent 80.16% of the Company's shares which will be
outstanding upon completion of the Acquisition. The remaining shares will be
held by management and other founders of the Company. Such shares will be
allocated among the five Programs pro rata in accordance with Exchange
Values. The Sacramento/Delta Greens Program will be allocated [187,205]
shares.
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in
the applicable Program (taking into account assessments paid and unpaid, as
well as interest accrued to each Investor through the date beneficial
ownership of the Program's Property was taken for the Investors) as adjusted
for voluntary advances. An Investor in the Sacramento/Delta Greens Program
with an adjusted investment amount of $10,000 will receive [310] shares of
Company stock arbitrarily valued at $10 per share.
Neither National nor the Company's founders have any interest in the
Sacramento/Delta Greens Program except for the $3,118 of tenancy-in-common
interests purchased by National at the inception of the Program for which
interests National will receive Company shares in the Acquisition pro rata
with the other Sacramento/Delta Greens Investors.
9
<PAGE>
The following table and its footnotes sets forth the amount owed by the
original borrower to the Program (including accrued but unpaid interest) plus
the amount of assessments and advances paid by Investors at [September 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
Amount Real Estate Outstanding
Owed plus Appraised Exchange No. of Shares After the
Name of Program Assessments Value Value(1) Allocated(1)(2) Acquisition
- --------------- ----------- ----------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $6,015,723 $2,000,000 $[1,872,205] [187,205] 7.02%
</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 [529,037] Company shares after the
Acquisition (19.84% of the outstanding shares post-Acquisition) which, if
valued at $10 per share, would have an aggregate value of $[5,290,370].
The Company was formed, and shares were purchased by the founders for $.01
per share, prior to making the Acquisition proposal. While a factor
considered in the analysis, the shares to be retained by the Company's
founders were not determined based only on fees cancelled or to be
cancelled by National and its principals. Overall, National believed that
the Company's founders should hold slightly less than 20% of the shares
after the Acquisition. See "Dilution" at page __ of the Prospectus. If
the Acquisition is completed, the following table sets forth the fees
which National and its principals have cancelled, or will cancel:
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------- ---------- ----------
Sacramento/Delta Greens $ 137,111 $ 500,000 $ 637,111
Oceanside 704,000 -0- 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point -0- 461,589 461,589
--------- ---------- ----------
TOTAL $ 946,111 $2,191,614 $3,137,725
--------- ---------- ----------
--------- ---------- ----------
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees. [20.30]% of the total shares
to be owned by the Company's founders after the Acquisition ([107,420]
shares) would have been deemed allocated from this Program.
10
<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, 1996,
1995 and 1994, and for the nine month period ending [September 30], 1997.
<TABLE>
<CAPTION>
Actually
Actually Actually Actually Incurred Paid for
Incurred Paid for Incurred Paid for Incurred Paid for for Nine Nine
for Year Year for Year Year for Year Year Months Months
Ended Ended Ended Ended Ended Ended Ended Ended
Name of Program 12/31/94(1) 12/31/94 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96 9/30/97(1) 9/30/97
- --------------- ----------- -------- ----------- --------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens $50,000 $-0- $50,000 $-0- $50,000 $-0- $37,500 $4,167
</TABLE>
- ------------
(1) These amounts represent accrued servicing fees.
If the Acquisition had been completed during the above periods, National
would not have been entitled to receive any further servicing fees. 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 which would have aggregated approximately $700,000 per year. If that
amount were allocated to the Program pro rata based on its Exchange Values,
annual compensation would have been approximately $[61,300]. No cash would
have been available to pay officers' bonuses or dividends.
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 and 1996
and during the nine months ended [September] 30, 1997:
<TABLE>
<CAPTION>
Prior to September
Name of Program 1992 1992 1993 1994 1995 1996 30, 1997 Total
- --------------- ---------- --------- ---- ---- ---- ---- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento/Delta Greens
Principal $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest $1,654,013 $343,750 $ 0 $ 0 $ 0 $ 0 $ 0 $1,997,763
</TABLE>
There have been no recent distributions to Investors. The Acquisition is
not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
11
<PAGE>
- "Management's Discussion and Analysis of Financial Condition and Result
of Operations" at page __.
- "Financial Statements" at page F-1.
12
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
OCEANSIDE "TRUDY PAT" PROGRAM
CAPITALIZED TERMS USED IN THIS SUPPLEMENT AND NOT DEFINED HEREIN HAVE
THE MEANING GIVEN TO THEM IN THE PROSPECTUS. SEE "GLOSSARY" AT PAGE __ OF
THE PROSPECTUS.
-----------------------
This Supplement has been prepared to help the Investors in the Oceanside
Program to understand how the Acquisition described in the accompanying
Prospectus will affect them. If completed, the effects of the Acquisition
may be different for Investors in the other Programs. A separate supplement
has been prepared for each of the other Programs, copies of which may be
obtained, without charge, by writing to National Investors Financial, Inc.,
4220 Von Karman Avenue, Suite 110, Newport Beach, California 92660,
Attention: Vivian Kennedy, or calling 1-800-590-7772.
As described in the accompanying Prospectus, American Family Holdings,
Inc. (the "Company") is offering shares of its Common Stock in exchange for
the assets (including cash reserves), certain liabilities and business
activities owned by Investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[21,374,800] of shares
of common stock at $10 per Share. The stock will be listed for trading on
the _____ ______ under the symbol "___."
Of the [2,137,480] shares to be issued by the Company in the
Acquisition, Investors in the Oceanside Program will receive a total of
[544,552] shares or [199]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 an amount
that is higher than the value of the Company shares to be received in the
Acquisition.
In each of the Programs, the Investors will vote on whether to approve
the Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH
OF THE FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE
PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on ___ _______, 1998 and expires at 5:00
p.m., Pacific Time, on __________, 1998 unless extended. Call
1-800-590-7772 with questions.
Special Risks of the Acquisition:
* If the Acquisition is approved, there will be a fundamental change in the
nature of your investment. You will receive stock in the Company and have no
remaining interest in the real estate or business of your Program. Further,
you will have an investment in a business which 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 value of the shares you receive may be less than you might receive if
the Property of your Program were sold.
* If a trading market develops, the initial trading price for the stock will
likely be below $10 per share.
* Employees of National and the Company will hold almost 20% of the Company's
stock and will receive compensation as officers and employees.
* No independent advisors represented you in structuring this transaction.
* There can be no assurance that the transaction is not a taxable event. If
so, a tax loss is the probable result.
The Company is also offering $5,000,000 of units (consisting of one
share of common stock and one warrant to purchase two additional shares) at
$10 each exclusively to current Investors in the Programs. NASD
broker-dealers will receive a commission totalling $0.70 per unit for any
units sold with their help. If all the units are sold with their help, the
proceeds of the sale, net of estimated expenses of $200,000, will be
$4,450,000. If you want to participate, subscriptions for units should be
returned with your ballot. Subscriptions will be accepted on a
FIRST-COME-FIRST-SERVED BASIS.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found on
pages [23] through [32] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. If the Acquisition is
completed, there will be a change in the nature of the investment of each
Investor from holding a tenancy-in-common interest in real estate to holding
shares in an on-going company, the assets of which may be changed from time
to time without approval of Investors. If the Acquisition is completed,
Investors will be able to liquidate their investments only by selling their
shares on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through
property sales. If the Acquisition is completed, Investors will have an
investment in an entity that is larger than each of the Programs and will
thus lose relative voting power.
DIFFERENCES BETWEEN EXCHANGE VALUES AND SALES PRICE. Investors are subject
to the risk that the Exchange Value of a Program does not reflect the price a
Program's assets might bring in a sale. If the property of a Program were to
be sold, the net proceeds of the sale and the amount finally distributed to
an Investor in that Program may be more or less than the Exchange Value.
UNCERTAINTY REGARDING TRADING PRICE FOR THE SHARES. Shares may trade at
prices substantially below Exchange Value per share or historical book value
of the Company's assets. If a trading market develops for the shares, the
price of shares after the Acquisition will likely decrease below the Exchange
Value per share of $10 due to a potentially large number of shares that
Investors may sell immediately after the Acquisition.
CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The founders of the
Company which included the principal shareholders of National initiated and
structured the Acquisition and will own approximately 20% of the Company and
be entitled to other substantial economic benefits. Therefore, the founders
of the Company are subject to conflicts of interest with respect to the
Acquisition.
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS. No independent party was
retained by National to negotiate on behalf of the Investors. Therefore,
terms of the Acquisition may be less favorable to Investors and more
favorable to founders of the Company which included the principal
shareholders of National than if the Acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of
each Program, the terms of the Acquisition may have been more favorable to
certain or all of the Programs and fewer shares and less favorable employment
contracts may have been received by the founders of the Company.
2
<PAGE>
TAX UNCERTAINTIES. The Acquisition may not be a tax-free transaction to
Investors. Due to uncertainties in the facts of this transaction, tax
counsel is unable to opine conclusively on the taxability of the Acquisition
to Investors. If the Acquisition is a taxable transaction, an Investor would
recognize gain or loss in 1998 equal to the difference between the Investor's
tax basis in his interest in a Program property, and the number of shares of
the Company received valued at $10 per share. If the Acquisition is treated
as taxable, National believes most Investors would experience a tax loss.
POTENTIAL CHANGE IN THE AMOUNT OF LEVERAGE. After the Acquisition, none of
the properties will be subject to any liens other than for property taxes.
The board of directors could authorize borrowing by the Company the debt
service for which may adversely affect the Company's ability to make
distributions to shareholders. The Company may incur full recourse debt
which exposes all of the assets of the Company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN INVESTMENT,
FINANCING AND CERTAIN OTHER POLICIES. Although the board of directors of the
Company intends to implement the business plan set forth in the Prospectus,
the board will have the ability to change investment, financing and other
policies of the Company without the consent of shareholders.
NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS. If you vote
against the Acquisition, and it is approved, you will not be able to object
to the Acquisition and receive the appraised value of your tenancy-in-common
interest in your Program's assets. You will have no choice other than to
accept shares for your interests.
COMPANY HAS NO OPERATING HISTORY. The Company was formed within the past
year to take part in the Acquisition of your Property. It does not have the
benefit of operating for a long time. This means that shares in the Company
are much riskier than ownership of shares of established companies. If the
Company had been operating as if it owned the Properties which it desires to
acquire, it would have experienced losses to date.
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.
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 [September] 30, 1997:
Sacramento/Delta Greens - approximately $54,000; Oceanside - approximately
$10,000; Yosemite/Ahwahnee (combined) - approximately $640,000; and Mori
Point - approximately $294,000. Annual payments required for all the
properties total approximately $431,000.
3
<PAGE>
PERMITS TO DEVELOP CERTAIN PROPERTIES HAVE LAPSED OR 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.
COMPLIANCE WITH CONDITIONS IN EXISTING PERMITS AND APPROVALS MAY REQUIRE
CHANGES TO DEVELOPMENT PLANS. The tentative tract map for the Oceanside
property requires that studies must be conducted to identify any endangered
species' habitat which may exist on the property. If any are identified,
changes to the tentative development plans will have to be made and approved
that will reduce or eliminate any damage to the habitat.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO FURTHER THE BUSINESS PLAN. Unless
funds from sale of the units or from sale of certain assets of the Programs
become available, the Company will not be able to proceed with its business
plan and properties might be lost to tax sales before sales to third parties
can be arranged. The Company will also need financing from other sources to
complete its plan. Financing sources are not predictable and interest rates
or other costs of financing may be prohibitive.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE OR
SACRAMENTO/DELTA GREENS PROPERTIES 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.
FEDERAL, STATE AND LOCAL LAW MAY REQUIRE EXPENSIVE HAZARDOUS SUBSTANCE
CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC IMPROVEMENTS. Environmental
audits have not been conducted on the Properties.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. Extraordinary losses caused by floods
or earthquakes may be uninsurable or too expensive to insure.
THERE ARE CERTAIN RISKS ASSOCIATED WITH THE CALIFORNIA MARKET. While
economic conditions are improving in California, its 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 $[1,234,785] BY THE COMPANY. This represents accrued fees and expenses
from the Programs which National has not cancelled.
GOLF COURSE RISKS
THERE ARE INDUSTRY OPERATING RISKS, INCLUDING INCREASED COMPETITION,
SEASONALITY, WEATHER AND COURSE CONDITIONS. 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
4
<PAGE>
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.
RESIDENTIAL DEVELOPMENT RISKS
THE COMPANY MAY BE AFFECTED BY MARKET RISKS AND COMPETITION. 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.
RESORT DESTINATION RISKS
THERE ARE RISKS ASSOCIATED WITH RESORT DEVELOPMENT. 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.
THERE ARE CERTAIN RISKS SPECIFIC TO TIMESHARE PROJECTS.
Negative press surrounding the remarketing of timeshares might
negatively impact sales and operations.
Marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
There are relatively more defaults among timeshare owners when they borrow
to buy timeshares compared to 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.
We may not be able to secure development financing on acceptable terms.
RISKS FOR RECREATIONAL VEHICLE PARKS ARE SUBSTANTIALLY THE SAME AS
TIMESHARE RISKS.
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. Some of these provisions include:
5
<PAGE>
1. 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.
2. The Board is divided into three classes serving staggered three year
terms meaning you may not be able to efficiently change control of the
Company even if you believe that change would be in your best interests.
3. There are restrictions on certain business combinations with
interested parties without the approval of the Board of Directors.
4. The Delaware law, as well as the charter
documents, limit the liability of directors and officers to shareholders.
5. 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.
EFFECT OF THE ACQUISITION
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE
FOR YOUR INVESTMENT IN THE PROGRAM AS ADJUSTED PER THE TERMS OF THE GOVERNING
AGREEMENTS. You will receive [199] shares per $10,000 of Adjusted
Outstanding Investment in the Program.
- YOU MAY HAVE A LIQUID TRADING MARKET FOR YOUR SHARES. After the
Acquisition, shares will be listed on the ______________. If a trading
market exists, you will have the opportunity to liquidate all or some of
those shares at your preference.
- YOU MAY HAVE MORE CONTROL OVER THE TIMING OF LIQUIDATING OF YOUR
INVESTMENT. You can control when you choose to take profits or losses.
Under the Program's tenancy-in-common agreement, you are required to abide by
a majority vote to sell or retain the Program's Property, regardless of
whether or not the timing of the action or the decision of the majority is
consistent with your individual preferences.
- YOU WILL OWN SHARES IN A POOL OF ASSETS WHOSE DIVERSITY CAN MITIGATE
RISK AND INCREASE THE LIQUIDITY OF THE PROPERTIES. Your investment will be
spread over an initial asset base of four different real estate projects (the
two Yosemite/Ahwahnee Programs will be one project after the Acquisition).
- YOU WILL HAVE EXPERIENCED PROPERTY MANAGEMENT. We have hired key
real estate management professionals who are experienced in real estate
development, operation and construction.
- YOU WILL NO LONGER BE LIABLE FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
Acquisition, meaning your liability for mandatory assessments will cease.
6
<PAGE>
- YOUR LIABILITY WILL BE LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the Program, you are not
effectively insulated from personal liability based on operation of those
assets. As shareholders of a corporation, you will be.
- THE ASSETS OWNED BY THE COMPANY WILL NO LONGER BE SUBJECTED TO
SERVICING FEES. For all Programs involved in the Acquisition, National will
stop earning servicing fees of approximately $650,000 per year and National
and its principals will forgive a total of $946,111 of unpaid post-1994
servicing fees and expenses if the Acquisition is approved. Although the
services of National are being replaced by a management team and staff to run
the Company, National believes that the cost of this new management team will
be modestly lower than the historical cost of National servicing the Programs
on an individual basis.
- The Acquisition will have no material effect on this Program's
stand-alone financial condition or results of operations. The Company
expects to experience losses in the initial year of operations.
- For further information about how the Acquisition will affect you
and the Program, see the following portions of the Prospectus:
- "Background and Reasons for the Acquisition" commencing at
page __.
- "Comparison of Tenancy-in-Common Interests and Shares"
commencing at page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition
and Results of Operations" commencing at page __.
- "Management Following the Acquisition" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
FAIRNESS TO INVESTORS IN THE OCEANSIDE PROGRAM
From a financial point of view, National believes the terms of the
Acquisition are fair as a whole and to the Investors in each of the Programs.
National based its determination on the following factors:
- the shares offer an opportunity for individual Investor liquidity
while the tenancy-in-common interests do not;
- the Exchange Value offered to Investors for their assets exceeds
what National believes could be received on liquidation sale of the assets;
7
<PAGE>
- on completion of the Acquisition, principals, employees, and
consultants of National, the Programs or the Company will hold less than 20%
of the Company's shares while the Programs' Investors will hold over 80%;
- the opportunity for each Investor to vote for or against the
Acquisition;
- valuation of the real estate assets of the Program by an independent
appraiser; and
- the fact that the transaction will either be tax-free to Investors
or most likely yield a tax loss. Either way, 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 and the issuance of shares to the founders of the Company, we
believe they have been counterbalanced by your opportunity to vote on the
transaction and the Fairness Opinion; and
- the Fairness Opinion rendered by the independent valuation firm.
See "Background and Reasons for the Acquisition" at page __.
National reviewed the value you will receive in connection with the
Acquisition and compared it with what you might receive under the
alternatives to Acquisition. Despite the adjustments to appraised value to
arrive at Exchange Values, National concluded that the likely market value of
the shares of the Company would be higher in the long run than the value you
would have received if any of the alternatives to the Acquisition had been
implemented. See "Background and Reasons for the Acquisition -- Comparison
of 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 Program (as well as each of the other four
Programs) is essentially the consideration which the Company is offering in
exchange for the real estate assets, certain liabilities and business of the
Program. The value is reflected as a number of shares of the Company's
common stock (in the case of the Program, [544,552] shares) multiplied by an
arbitrary $10 per share value.
The Exchange Value for the Program was calculated as follows: appraised
value of the Program's Property at May 1997, plus book value of other
Oceanside Program assets at [September 30], 1997, less Program liabilities at
[September 30], 1997, and plus liabilities to National to be forgiven by
National as part of the Acquisition.
8
<PAGE>
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>
$ 2,850,000 $ [2,595,521] $ [5,445,521] $ [1,993](3)
</TABLE>
- -----------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values made
in determining a Property's Exchange Value as of [September 30, 1997].
<TABLE>
<CAPTION>
Book Assets Book To Be Net Other
(9/30/97)* = Liabilities + Forgiven = Assets and
(9/30/97)* Amounts Liabilities
----------- ----------- -------- -----------
<S> <C> <C> <C>
$ 2,796,980 $ (905,459) $ 704,000 $ 2,595,521
</TABLE>
* See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no mortgage debt on the Property.
(3) Equals [199] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,137,480] shares of Company common stock being offered to Investors
in the Acquisition represent 80.16% of the Company's shares which will be
outstanding upon completion of the Acquisition. The remaining shares will be
held by management and other founders of the Company. Such shares will be
allocated among the five Programs pro rata in accordance with Exchange
Values. The Oceanside Program will be allocated [544,552 shares.
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in
the applicable Program (taking into account assessments paid and unpaid, as
well as interest accrued to each Investor through the date beneficial
ownership of the Program's Property was taken for the Investors) as adjusted
for voluntary advances. An Investor in the Oceanside Program with an
adjusted investment amount of $10,000 will receive [199] shares of Company
stock arbitrarily valued at $10 per share.
Neither National nor the Company's founders have any interest in the
Oceanside Program except for the $[2,082] of tenancy-in-common interests
purchased by National at the inception of the Program for which interests
National will receive Company shares in the Acquisition pro rata with the
other Mori Point Investors.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Program (including accrued but unpaid interest) plus
the amount of assessments and advances paid by Investors at
[September 30, 1997], appraised real estate
9
<PAGE>
value, Exchange Value of the Program, the number and percentage of shares
allocated to the Program, and the number of shares and comparative value of
the Company to be held by founders after the Acquisition.
<TABLE>
<CAPTION>
% of Total
Shares to be
Amount Real Estate Outstanding
Owed plus Appraised Exchange No. of Shares After the
Name of Program Assessments Value Value(1) Allocated(1)(2) Acquisition
- --------------- ----------- ----------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Oceanside $ 27,325,000 $ 2,850,000 $ 5,445,521 [544,552] [20.42]%
</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 [529,037] Company
shares after the Acquisition (19.84% of the outstanding shares
post-Acquisition) which, if valued at $10 per share, would have an
aggregate value of $[5,290,370]. The Company was formed, and shares
were purchased by the founders for $.01 per share, prior to making the
Acquisition proposal. While a factor considered in the analysis, the
shares to be retained by the Company's founders were not determined
based only on fees cancelled or to be cancelled by National and its
principals. Overall, National believed that the Company's founders
should hold slightly less than 20% of the shares after the Acquisition.
See "Dilution" at page __ of the Prospectus. If the Acquisition is
completed, the following table sets forth the fees which National and
its principals have cancelled, or will cancel:
<TABLE>
<CAPTION>
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
----------------------- --------- ----------- ------------
<S> <C> <C> <C>
Sacramento/Delta Greens $ 137,111 $ 500,000 $ 637,111
Oceanside 704,000 -0- 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point -0- 461,589 461,589
TOTAL $ 946,111 $ 2,191,614 $ 3,137,725
</TABLE>
(2) Had the shares retained by the founders of the Company been allocated
to the founders based only on cancelled fees, 22.44% of the total
shares to be owned by the Company's founders after the Acquisition
([118,716]shares) would have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1996,
1995 and 1994, and for the nine month period ending [September 30], 1997.
10
<PAGE>
<TABLE>
<CAPTION>
Actually
Actually Actually Actually Incurred Paid for
Incurred Paid for Incurred Paid for Incurred Paid for for Nine Nine
for Year Year for Year Year for Year Year Months Months
Ended Ended Ended Ended Ended Ended Ended Ended
Name of Program 12/31/94(1) 12/31/94(2) 12/31/95(1) 12/31/95(2) 12/31/96(1) 12/31/96(2) 9/30/97(1) 9/30/97(2)
- --------------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oceanside $ 492,000 $ 300,000 $ 492,000 $ 300,000 $ 492,000 $ 300,000 $ 246,000 $ 150,000
</TABLE>
- --------------
(1) These amounts represent servicing fees and officer salaries for
Oceanside Development, Inc.
(2) These amounts represent servicing fees.
If the Acquisition had been completed during the above periods,
National would not have been entitled to receive any further servicing fees.
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 which would have aggregated approximately $700,000
per year. If that amount were allocated to the Program pro rata based on its
Exchange Values, annual compensation would have been approximately $[178,300].
No cash would have been available to pay officers' bonuses or dividends.
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 and 1996
and during the nine months ended [September] 30, 1997:
<TABLE>
<CAPTION>
September
Name of Program 1992 1993 1994 1995 1996 30, 1997 Total
- --------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Oceanside
Principal $ 0 $ 0 $375,000 $900,000 $900,000 $450,000 $2,625,000
Interest $1,080,804 $3,145,869 $393,750 $ 0 $ 0 $ 0 $4,620,423
</TABLE>
There have been no recent distributions to Investors. The Acquisition is
not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
11
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
YOSEMITE/AHWAHNEE I "TRUDY PAT" PROGRAM
CAPITALIZED TERMS USED IN THIS SUPPLEMENT AND NOT DEFINED HEREIN HAVE THE
MEANING GIVEN TO THEM IN THE PROSPECTUS. SEE "GLOSSARY" AT PAGE __
OF THE PROSPECTUS.
------------------
This Supplement has been prepared to help the Investors in the
Yosemite/Ahwahnee I Program to understand how the Acquisition described in
the accompanying Prospectus will affect them. If completed, the effects of
the Acquisition may be different for Investors in the other Programs. A
separate supplement has been prepared for each of the other Programs, copies
of which may be obtained, without charge, by writing to National Investors
Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport Beach, California
92660, Attention: Vivian Kennedy, or calling 1-800-590-7772.
As described in the accompanying Prospectus, American Family Holdings,
Inc. (the "Company") is offering shares of its Common Stock in exchange for
the assets (including cash reserves), certain liabilities and business
activities owned by Investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[21,374,800] of shares
of common stock at $10 per Share. The stock will be listed for trading on
the _____ ______ under the symbol "___."
Of the [2,137,480] shares to be issued by the Company in the Acquisition,
Investors in the Yosemite/Ahwahnee I Program will receive a total of [359,429]
shares or [400] 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 an amount that is higher
than the value of the Company shares to be received in the Acquisition.
In each of the Programs, the Investors will vote on whether to approve
the Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH
OF THE FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE
PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
Special Risks of the Acquisition:
- - If the Acquisition is approved, there will be a fundamental change in the
nature of your investment. You will receive stock in the Company and have no
remaining interest in the real estate or business of your Program. Further,
you will have an investment in a business which also plans to construct and
sell residential properties, and which plans to pursue the development of a
hotel/conference center.
- - The value of the shares you receive may be less than you might receive if
the Property of your Program were sold.
- - If a trading market develops, the initial trading price for the stock
will likely be below $10 per share.
- - Employees of National and the Company will hold almost 20% of the
Company's stock and will receive compensation as officers and employees.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event.
If so, a tax loss is the probable result.
The Company is also offering $5,000,000 of units (consisting of one share
of common stock and one warrant to purchase two additional shares) at $10
each exclusively to current Investors in the Programs. NASD broker-dealers
will receive a commission totalling $0.70 per unit for any units sold with
their help. If all the units are sold with their help, the proceeds of the
sale, net of estimated expenses of $200,000, will be $4,450,000. If you want
to participate, subscriptions for units should be returned with your ballot.
Subscriptions will be accepted on a FIRST-COME-FIRST-SERVED BASIS.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found on
pages [23] through [32] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. If the Acquisition is
completed, there will be a change in the nature of the investment of each
Investor from holding a tenancy-in-common interest in real estate to holding
shares in an on-going company, the assets of which may be changed from time
to time without approval of Investors. If the Acquisition is completed,
Investors will be able to liquidate their investments only by selling their
shares on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through
property sales. If the Acquisition is completed, Investors will have an
investment in an entity that is larger than each of the Programs and will
thus lose relative voting power.
DIFFERENCES BETWEEN EXCHANGE VALUES AND SALES PRICE. Investors are
subject to the risk that the Exchange Value of a Program does not reflect the
price a Program's assets might bring in a sale. If the property of a Program
were to be sold, the net proceeds of the sale and the amount finally
distributed to an Investor in that Program may be more or less than the
Exchange Value.
UNCERTAINTY REGARDING TRADING PRICE FOR THE SHARES. Shares may trade at
prices substantially below Exchange Value per share or historical book value
of the Company's assets. If a trading market develops for the shares, the
price of shares after the Acquisition will likely decrease below the Exchange
Value per share of $10 due to a potentially large number of shares that
Investors may sell immediately after the Acquisition.
CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The founders of
the Company which included the principal shareholders of National initiated
and structured the Acquisition and will own approximately 20% of the Company
and be entitled to other substantial economic benefits. Therefore, the
founders of the Company are subject to conflicts of interest with respect to
the Acquisition.
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS. No independent party
was retained by National to negotiate on behalf of the Investors. Therefore,
terms of the Acquisition may be less favorable to Investors and more
favorable to founders of the Company which included the principal
shareholders of National than if the Acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of
each Program, the terms of the Acquisition may have been more favorable to
certain or all of the Programs and fewer shares and less favorable employment
contracts may have been received by the founders of the Company.
2
<PAGE>
TAX UNCERTAINTIES. The Acquisition may not be a tax-free transaction to
Investors. Due to uncertainties in the facts of this transaction, tax
counsel is unable to opine conclusively on the taxability of the Acquisition
to Investors. If the Acquisition is a taxable transaction, an Investor would
recognize gain or loss in 1998 equal to the difference between the Investor's
tax basis in his interest in a Program property, and the number of shares of
the Company received valued at $10 per share. If the Acquisition is treated
as taxable, National believes most Investors would experience a tax loss.
POTENTIAL CHANGE IN THE AMOUNT OF LEVERAGE. After the Acquisition, none
of the properties will be subject to any liens other than for property taxes.
The board of directors could authorize borrowing by the Company the debt
service for which may adversely affect the Company's ability to make
distributions to shareholders. The Company may incur full recourse debt
which exposes all of the assets of the Company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN INVESTMENT,
FINANCING AND CERTAIN OTHER POLICIES. Although the board of directors of the
Company intends to implement the business plan set forth in the Prospectus,
the board will have the ability to change investment, financing and other
policies of the Company without the consent of shareholders.
NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS. If you vote
against the Acquisition, and it is approved, you will not be able to object
to the Acquisition and receive the appraised value of your tenancy-in-common
interest in your Program's assets. You will have no choice other than to
accept shares for your interests.
COMPANY HAS NO OPERATING HISTORY. The Company was formed within the past
year to take part in the Acquisition of your Property. It does not have the
benefit of operating for a long time. This means that shares in the Company
are much riskier than ownership of shares of established companies. If the
Company had been operating as if it owned the Properties which it desires to
acquire, it would have experienced losses to date.
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.
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 [September] 30, 1997:
Sacramento/Delta Greens - approximately $54,000; Oceanside - approximately
$10,000; Yosemite/Ahwahnee (combined) - approximately $640,000; and Mori
Point - approximately $294,000. Annual payments required for all the
properties total approximately $431,000.
3
<PAGE>
PERMITS TO DEVELOP CERTAIN PROPERTIES HAVE LAPSED OR 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.
COMPLIANCE WITH CONDITIONS IN EXISTING PERMITS AND APPROVALS MAY REQUIRE
CHANGES TO DEVELOPMENT PLANS. For example, the tentative tract map for the
Yosemite/Ahwahnee I property requires that studies must be conducted to
identify any endangered species' habitat which may exist on the property. If
any are identified, changes to the tentative development plans will have to
be made and approved that will reduce or eliminate any damage to the habitat.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO FURTHER THE BUSINESS PLAN.
Unless funds from sale of the units or from sale of certain assets of the
Programs become available, the Company will not be able to proceed with its
business plan and properties might be lost to tax sales before sales to third
parties can be arranged. The Company will also need financing from other
sources to complete its plan. Financing sources are not predictable and
interest rates or other costs of financing may be prohibitive.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE OR
SACRAMENTO/DELTA GREENS PROPERTIES 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.
FEDERAL, STATE AND LOCAL LAW MAY REQUIRE EXPENSIVE HAZARDOUS SUBSTANCE
CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC IMPROVEMENTS. Environmental
audits have not been conducted on the Properties.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. Extraordinary losses caused by floods
or earthquakes may be uninsurable or too expensive to insure.
THERE ARE CERTAIN RISKS ASSOCIATED WITH THE CALIFORNIA MARKET. While
economic conditions are improving in California, its 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 $[1,234,785] BY THE COMPANY. This represents accrued fees and expenses
from the Programs which National has not cancelled.
GOLF COURSE RISKS
THERE ARE INDUSTRY OPERATING RISKS, INCLUDING INCREASED COMPETITION,
SEASONALITY, WEATHER AND COURSE CONDITIONS. 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
4
<PAGE>
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.
RESIDENTIAL DEVELOPMENT RISKS
THE COMPANY MAY BE AFFECTED BY MARKET RISKS AND COMPETITION. 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.
RESORT DESTINATION RISKS
THERE ARE RISKS ASSOCIATED WITH RESORT DEVELOPMENT. 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.
THERE ARE CERTAIN RISKS SPECIFIC TO TIMESHARE PROJECTS.
Negative press surrounding the remarketing of timeshares might negatively
impact sales and operations.
Marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
There are relatively more defaults among timeshare owners when they
borrow to buy timeshares compared to 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.
We may not be able to secure development financing on acceptable terms.
RISKS FOR RECREATIONAL VEHICLE PARKS ARE SUBSTANTIALLY THE SAME AS
TIMESHARE RISKS.
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. Some of these provisions include:
5
<PAGE>
1. 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.
2. The Board is divided into three classes serving staggered three year
terms meaning you may not be able to efficiently change control of the
Company even if you believe that change would be in your best interests.
3. There are restrictions on certain business combinations with
interested parties without the approval of the Board of Directors.
4. The Delaware law, as well as the charter documents, limit the
liability of directors and officers to shareholders.
5. 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.
EFFECT OF THE ACQUISITION
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE FOR
YOUR INVESTMENT IN THE PROGRAM AS ADJUSTED PER THE TERMS OF THE GOVERNING
AGREEMENTS. You will received [400] shares per $10,000 of Adjusted
Outstanding Investment in the Program.
- YOU MAY HAVE A LIQUID TRADING MARKET FOR YOUR SHARES. AFTER THE
ACQUISITION, SHARES WILL BE LISTED ON THE ______________. If a trading
market exists, you will have the opportunity to liquidate all or some of
those shares at your preference.
- YOU MAY HAVE MORE CONTROL OVER THE TIMING OF LIQUIDATING OF YOUR
INVESTMENT. You can control when you choose to take profits or losses.
Under the Program's tenancy-in-common agreement, you are required to abide by
a majority vote to sell or retain the Program's Property, regardless of
whether or not the timing of the action or the decision of the majority is
consistent with your individual preferences.
- YOU WILL OWN SHARES IN A POOL OF ASSETS WHOSE DIVERSITY CAN MITIGATE
RISK AND INCREASE THE LIQUIDITY OF THE PROPERTIES. Your investment will be
spread over an initial asset base of four different real estate projects (the
two Yosemite/Ahwahnee Programs will be one project after the Acquisition).
- YOU WILL HAVE EXPERIENCED PROPERTY MANAGEMENT. We have hired key real
estate management professionals who are experienced in real estate
development, operation and construction.
- YOU WILL NO LONGER BE LIABLE FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
Acquisition, meaning your liability for mandatory assessments will cease.
6
<PAGE>
- YOUR LIABILITY WILL BE LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the Program, you are not
effectively insulated from personal liability based on operation of those
assets. As shareholders of a corporation, you will be.
- THE ASSETS OWNED BY THE COMPANY WILL NO LONGER BE SUBJECTED TO
SERVICING FEES. For all Programs involved in the Acquisition, National will
stop earning servicing fees of approximately $650,000 per year and National
and its principals will forgive a total of $946,111 of unpaid post-1994
servicing fees and expenses if the Acquisition is approved. Although the
services of National are being replaced by a management team and staff to run
the Company, National believes that the cost of this new management team will
be modestly lower than the historical cost of National servicing the Programs
on an individual basis.
- The Acquisition will have no material effect on this Program's
stand-alone financial condition or results of operations. The Company
expects to experience losses in the initial year of operations.
- For further information about how the Acquisition will affect you and
the Program, see the following portions of the Prospectus:
- "Background and Reasons for the Acquisition" commencing at page __.
- "Comparison of Tenancy-in-Common Interests and Shares" commencing at
page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing at page __.
- "Management Following the Acquisition" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
FAIRNESS TO INVESTORS IN THE YOSEMITE/AHWAHNEE I PROGRAM
From a financial point of view, National believes the terms of the
Acquisition are fair as a whole and to the Investors in each of the Programs.
National based its determination on the following factors:
- the shares offer an opportunity for individual Investor liquidity while
the tenancy-in-common interests do not;
- the Exchange Value offered to Investors for their assets exceeds what
National believes could be received on liquidation sale of the assets;
7
<PAGE>
- on completion of the Acquisition, principals, employees, and
consultants of National, the Programs or the Company will hold less than 20%
of the Company's shares while the Programs' Investors will hold over 80%;
- the opportunity for each Investor to vote for or against the
Acquisition;
- valuation of the real estate assets of the Program by an independent
appraiser; and
- the fact that the transaction will either be tax-free to Investors or
most likely yield a tax loss. Either way, 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
and the issuance of shares to the founders of the Company, we believe they
have been counterbalanced by your opportunity to vote on the transaction and
the Fairness Opinion; and
- the Fairness Opinion rendered by the independent valuation firm. See
"Background and Reasons for the Acquisition" at page __.
National reviewed the value you will receive in connection with the
Acquisition and compared it with what you might receive under the
alternatives to Acquisition. Despite the adjustments to appraised value to
arrive at Exchange Values, National concluded that the likely market value of
the shares of the Company would be higher in the long run than the value you
would have received if any of the alternatives to the Acquisition had been
implemented. See "Background and Reasons for the Acquisition -- Comparison
of 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 Program (as well as each of the other four
Programs) is essentially the consideration which the Company is offering in
exchange for the real estate assets, certain liabilities and business of the
Program. The value is reflected as a number of shares of the Company's
common stock (in the case of the Program, [359,429] shares) multiplied by an
arbitrary $10 per share value.
In calculating the Exchange Value for this Program, National had to
reconcile the differences between the May 1997 appraisal by Arnold Associates
and the October 1996 appraisal by The Mentor Group. See "Appraisals and
Fairness Opinion -- Reconciliation of Yosemite/Ahwahnee Properties'
Appraisals" at page [__] of the Prospectus. After determining the reconciled
appraised value of the Program, the Exchange Value was calculate by adding to
the reconciled appraised value the book value of the Program's other
8
<PAGE>
assets at [September 30], 1997, deducting the Program's liabilities as
[September 30], 1997, and adding back liabilities to National to be forgiven
by National as part of the Acquisition.
The following table summarizes the calculation of the Exchange Value of
the Yosemite/Ahwahnee I Program and the value assigned on $10,000 of Adjusted
Outstanding Investment:
Value Assigned
Appraised Net Other to Program per
Value of + Assets and = Exchange $10,000 of Adjusted
Real Estate(1) Liabilities(2) Value Outstanding
----------- ----------- ----- Investment
----------
$ 3,912,454 $[(318,166)] $ [3,594,287] $ [3,999](3)
- --------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values made
in determining a Property's Exchange Value as of [September 30, 1997].
Book Assets Book To Be Net Other
(9/30/97)- - Liabilities + Forgiven = Assets and
----------- (9/30/97)- Amounts Liabilities
---------- ------- -----------
$ 459,703 $ (812,869) $ 35,000 $ (318,166)
- See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no mortgage debt on the Property.
(3) Equals [400] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,137,480] shares of Company common stock being offered to Investors
in the Acquisition represent 80.16% of the Company's shares which will be
outstanding upon completion of the Acquisition. The remaining shares will be
held by management and other founders of the Company. Such shares will be
allocated among the five Programs pro rata in accordance with Exchange
Values. The Yosemite/Ahwahnee I Program will be allocated [359,429] shares.
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in
the applicable Program (taking into account assessments paid and unpaid, as
well as interest accrued to each Investor through the date beneficial
ownership of the Program's Property was taken for the Investors) as adjusted
for voluntary advances. An Investor in the Yosemite/Ahwahnee I Program with
an adjusted investment amount of $10,000 will receive [400] shares of Company
stock arbitrarily valued at $10 per share.
9
<PAGE>
Neither National nor the Company's founders have any interest in the
Yosemite/ Ahwahnee I Program except for the $[2,373] of tenancy-in-common
interests purchased by National for which interests National will receive
Company shares in the Acquisition pro rata with the other Yosemite/Ahwahnee I
Investors.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Program (including accrued but unpaid interest) plus
the amount of assessments and advances paid by Investors at [September 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
Amount Real Estate be
Owed plus Appraised Exchange No. of Shares Outstanding
Name of Program Assessments Value Value(1) Allocated(1)(2) After the
- --------------- ----------- ----- -------- --------------- Acquisition
-----------
<S> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee I $ 8,987,163 $ 3,912,4545 $ 3,594,287 359,429 13.48%
</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 [529,037] Company shares after the
Acquisition (19.84% of the outstanding shares post-Acquisition) which, if
valued at $10 per share, would have an aggregate value of $[5,290,370].
The Company was formed, and shares were purchased by the founders for $.01
per share, prior to making the Acquisition proposal. While a factor
considered in the analysis, the shares to be retained by the Company's
founders were not determined based only on fees cancelled or to be
cancelled by National and its principals. Overall, National believed
that the Company's founders should hold slightly less than 20% of the
shares after the Acquisition. See "Dilution" at page __ of the
Prospectus. If the Acquisition is completed, the following table sets
forth the fees which National and its principals have cancelled, or
will cancel:
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------------- --------- --------- ---------
Sacramento/Delta $ 137,111 $ 500,000 $ 637,111
Greens
Oceanside 704,000 -0- 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point -0- 461,589 461,589
---------- ---------- ----------
TOTAL $ 946,111 $2,191,614 $3,137,725
---------- ---------- ----------
---------- ---------- ----------
10
<PAGE>
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees. [3.42]% of the total shares to
be owned by the Company's founders after the Acquisition ([18,093] shares)
would have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1996,
1995 and 1994, and for the nine month period ending [September 30], 1997.
<TABLE>
<CAPTION>
Actually
Actually Actually Actually Incurred Paid for
Incurred Paid for Incurred Paid for Incurred Paid for for Nine Nine
for Year Year for Year Year for Year Year Months Months
Ended Ended Ended Ended Ended Ended Ended Ended
Name of Program 12/31/94(1) 12/31/94 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96(2) 9/30/97(1) 9/30/97(1)
- --------------- ----------- -------- ----------- -------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee I $65,000 $70,000 $84,051 $-0- $150,800 $101,626 $133,243 $50,570
</TABLE>
- -------------
(1) These amounts represent servicing fees and salaries for officers and
employees of Ahwahnee Golf Course and Resort, Inc.
(2) These amounts represent servicing fees only.
If the Acquisition had been completed during the above periods, National
would not have been entitled to receive any further servicing fees. 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 which would have aggregated approximately $700,000 per year. If
that amount were allocated to the Program pro rata based on its Exchange
Values, annual compensation would have been approximately $[117,700]. No
cash would have been available to pay officers' bonuses or dividends.
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 and 1996
and during the nine months ended [September] 30, 1997:
<TABLE>
<CAPTION>
Prior to September
Name of Program 1992 1992 1993 1994 1995 1996 30, 1997 Total
--------------- ---- ---- ---- ---- ---- ---- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee I
Principal $ 45,000 $ 135,000 $ 103,085 $ 4,756 $ 0 $ 0 $ 0 $ 287,841
Interest $ 1,903,306 $ 920,794 $ 335,557 $ 0 $ 0 $ 0 $ 0 $ 3,159,657
</TABLE>
There have been no recent distributions to Investors. The Acquisition is
not expected to alter this distribution pattern.
11
<PAGE>
Further Financial Information
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and Result
of Operations" at page __.
- "Financial Statements" at page F-1.
12
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
YOSEMITE/AHWAHNEE II "TRUDY PAT" PROGRAM
CAPITALIZED TERMS USED IN THIS SUPPLEMENT AND NOT DEFINED HEREIN
HAVE THE MEANING GIVEN TO THEM IN THE PROSPECTUS. SEE
"GLOSSARY" AT PAGE __ OF THE PROSPECTUS.
-------------------
This Supplement has been prepared to help the Investors in the
Yosemite/Ahwahnee II Program to understand how the Acquisition described in
the accompanying Prospectus will affect them. If completed, the effects of
the Acquisition may be different for Investors in the other Programs. A
separate supplement has been prepared for each of the other Programs, copies
of which may be obtained, without charge, by writing to National Investors
Financial, Inc., 4220 Von Karman Avenue, Suite 110, Newport Beach, California
92660, Attention: Vivian Kennedy, or calling 1-800-590-7772.
As described in the accompanying Prospectus, American Family Holdings,
Inc. (the "Company") is offering shares of its Common Stock in exchange for
the assets (including cash reserves), certain liabilities and business
activities owned by Investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[21,374,800] of shares
of common stock at $10 per Share. The stock will be listed for trading on
the ___________ under the symbol "___."
Of the [2,137,480] shares to be issued by the Company in the
Acquisition, Investors in the Yosemite/Ahwahnee II Program will receive a
total of [575,867] shares or [298] 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 an amount
that is higher than the value of the Company shares to be received in the
Acquisition.
In each of the Programs, the Investors will vote on whether to approve
the Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH
OF THE FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE
PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
Special Risks of the Acquisition:
- - If the Acquisition is approved, there will be a fundamental change in the
nature of your investment. You will receive stock in the Company and have no
remaining interest in the real estate or business of your Program. Further,
you will have an investment in a business which also plans to construct and
sell residential properties, and which plans to pursue the development of a
hotel/conference center.
- - The value of the shares you receive may be less than you might receive if
the Property of your Program were sold.
- - If a trading market develops, the initial trading price for the stock will
likely be below $10 per share.
- - Employees of National and the Company will hold almost 20% of the
Company's stock and will receive compensation as officers and employees.
- - No independent advisors represented you in structuring this transaction.
- - There can be no assurance that the transaction is not a taxable event. If
so, a tax loss is the probable result.
The Company is also offering $5,000,000 of units (consisting of one
share of common stock and one warrant to purchase two additional shares) at
$10 each exclusively to current Investors in the Programs. NASD
broker-dealers will receive a commission totalling $0.70 per unit for any
units sold with their help. If all the units are sold with their help, the
proceeds of the sale, net of estimated expenses of $200,000, will be
$4,450,000. If you want to participate, subscriptions for units should be
returned with your ballot. Subscriptions will be accepted on a
FIRST-COME-FIRST-SERVED BASIS.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be
found on pages [23] through [32] of the accompanying Prospectus. Those risks
include:
RISKS OF THE ACQUISITION
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. If the Acquisition is
completed, there will be a change in the nature of the investment of each
Investor from holding a tenancy-in-common interest in real estate to holding
shares in an on-going company, the assets of which may be changed from time
to time without approval of Investors. If the Acquisition is completed,
Investors will be able to liquidate their investments only by selling their
shares on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through
property sales. If the Acquisition is completed, Investors will have an
investment in an entity that is larger than each of the Programs and will
thus lose relative voting power.
DIFFERENCES BETWEEN EXCHANGE VALUES AND SALES PRICE. Investors are
subject to the risk that the Exchange Value of a Program does not reflect the
price a Program's assets might bring in a sale. If the property of a Program
were to be sold, the net proceeds of the sale and the amount finally
distributed to an Investor in that Program may be more or less than the
Exchange Value.
UNCERTAINTY REGARDING TRADING PRICE FOR THE SHARES. Shares may trade
at prices substantially below Exchange Value per share or historical book
value of the Company's assets. If a trading market develops for the shares,
the price of shares after the Acquisition will likely decrease below the
Exchange Value per share of $10 due to a potentially large number of shares
that Investors may sell immediately after the Acquisition.
CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The founders of
the Company which included the principal shareholders of National initiated
and structured the Acquisition and will own approximately 20% of the Company
and be entitled to other substantial economic benefits. Therefore, the
founders of the Company are subject to conflicts of interest with respect to
the Acquisition.
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS. No independent party
was retained by National to negotiate on behalf of the Investors. Therefore,
terms of the Acquisition may be less favorable to Investors and more
favorable to founders of the Company which included the principal
shareholders of National than if the Acquisition had been subject to
arm's-length negotiation. Had an independent party negotiated on behalf of
each Program, the terms of the Acquisition may have been more favorable to
certain or all of the Programs and fewer shares and less favorable employment
contracts may have been received by the founders of the Company.
2
<PAGE>
TAX UNCERTAINTIES. The Acquisition may not be a tax-free transaction
to Investors. Due to uncertainties in the facts of this transaction, tax
counsel is unable to opine conclusively on the taxability of the Acquisition
to Investors. If the Acquisition is a taxable transaction, an Investor would
recognize gain or loss in 1998 equal to the difference between the Investor's
tax basis in his interest in a Program property, and the number of shares of
the Company received valued at $10 per share. If the Acquisition is treated
as taxable, National believes most Investors would experience a tax loss.
POTENTIAL CHANGE IN THE AMOUNT OF LEVERAGE. After the Acquisition,
none of the properties will be subject to any liens other than for property
taxes. The board of directors could authorize borrowing by the Company the
debt service for which may adversely affect the Company's ability to make
distributions to shareholders. The Company may incur full recourse debt
which exposes all of the assets of the Company to repayment instead of
limited recourse debt which generally exposes specific properties for the
repayment of debt.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN
INVESTMENT, FINANCING AND CERTAIN OTHER POLICIES. Although the board of
directors of the Company intends to implement the business plan set forth in
the Prospectus, the board will have the ability to change investment,
financing and other policies of the Company without the consent of
shareholders.
NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS. If you
vote against the Acquisition, and it is approved, you will not be able to
object to the Acquisition and receive the appraised value of your
tenancy-in-common interest in your Program's assets. You will have no choice
other than to accept shares for your interests.
COMPANY HAS NO OPERATING HISTORY. The Company was formed within the
past year to take part in the Acquisition of your Property. It does not have
the benefit of operating for a long time. This means that shares in the
Company are much riskier than ownership of shares of established companies.
If the Company had been operating as if it owned the Properties which it
desires to acquire, it would have experienced losses to date.
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.
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 [September] 30, 1997:
Sacramento/Delta Greens - approximately $54,000; Oceanside - approximately
$10,000; Yosemite/Ahwahnee (combined) - approximately $640,000; and Mori
Point - approximately $294,000. Annual payments required for all the
properties total approximately $431,000.
3
<PAGE>
PERMITS TO DEVELOP CERTAIN PROPERTIES HAVE LAPSED OR 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.
COMPLIANCE WITH CONDITIONS IN EXISTING PERMITS AND APPROVALS MAY
REQUIRE CHANGES TO DEVELOPMENT PLANS. The tentative tract map for the
Sacramento/Delta Greens property requires that studies must be conducted to
identify any endangered species' habitat which may exist on the property. If
any are identified, changes to the tentative development plans will have to
be made and approved that will reduce or eliminate any damage to the habitat.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO FURTHER THE BUSINESS PLAN.
Unless funds from sale of the units or from sale of certain assets of the
Programs become available, the Company will not be able to proceed with its
business plan and properties might be lost to tax sales before sales to third
parties can be arranged. The Company will also need financing from other
sources to complete its plan. Financing sources are not predictable and
interest rates or other costs of financing may be prohibitive.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE OR
SACRAMENTO/DELTA GREENS PROPERTIES 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.
FEDERAL, STATE AND LOCAL LAW MAY REQUIRE EXPENSIVE HAZARDOUS SUBSTANCE
CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC IMPROVEMENTS. Environmental
audits have not been conducted on the Properties.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. Extraordinary losses caused by floods
or earthquakes may be uninsurable or too expensive to insure.
THERE ARE CERTAIN RISKS ASSOCIATED WITH THE CALIFORNIA MARKET. While
economic conditions are improving in California, its 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 $[1,234,785] BY THE COMPANY. This represents accrued fees and expenses
from the Programs which National has not cancelled.
GOLF COURSE RISKS
THERE ARE INDUSTRY OPERATING RISKS, INCLUDING INCREASED COMPETITION,
SEASONALITY, WEATHER AND COURSE CONDITIONS. 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
4
<PAGE>
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.
RESIDENTIAL DEVELOPMENT RISKS
THE COMPANY MAY BE AFFECTED BY MARKET RISKS AND COMPETITION. 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.
RESORT DESTINATION RISKS
THERE ARE RISKS ASSOCIATED WITH RESORT DEVELOPMENT. 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.
THERE ARE CERTAIN RISKS SPECIFIC TO TIMESHARE PROJECTS.
Negative press surrounding the remarketing of timeshares might
negatively impact sales and operations.
Marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
There are relatively more defaults among timeshare owners when they
borrow to buy timeshares compared to 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.
We may not be able to secure development financing on acceptable terms.
RISKS FOR RECREATIONAL VEHICLE PARKS ARE SUBSTANTIALLY THE SAME AS
TIMESHARE RISKS.
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. Some of these provisions include:
5
<PAGE>
1. 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.
2. The Board is divided into three classes serving staggered three
year terms meaning you may not be able to efficiently change control of the
Company even if you believe that change would be in your best interests.
3. There are restrictions on certain business combinations with
interested parties without the approval of the Board of Directors.
4. The Delaware law, as well as the charter documents, limit the
liability of directors and officers to shareholders.
5. 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.
EFFECT OF THE ACQUISITION
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE
FOR YOUR INVESTMENT IN THE PROGRAM, AS ADJUSTED PER THE TERMS OF THE
GOVERNING AGREEMENTS. You will receive [298] shares per $10,000 of Adjusted
Outstanding Investment in the Program.
- YOU MAY HAVE A LIQUID TRADING MARKET FOR YOUR SHARES. AFTER THE
ACQUISITION, SHARES WILL BE LISTED ON THE ______________. If a trading
market exists, you will have the opportunity to liquidate all or some of
those shares at your preference.
- YOU MAY HAVE MORE CONTROL OVER THE TIMING OF LIQUIDATING OF YOUR
INVESTMENT. You can control when you choose to take profits or losses.
Under the Program's tenancy-in-common agreement, you are required to abide by
a majority vote to sell or retain the Program's Property, regardless of
whether or not the timing of the action or the decision of the majority is
consistent with your individual preferences.
- YOU WILL OWN SHARES IN A POOL OF ASSETS WHOSE DIVERSITY CAN MITIGATE
RISK AND INCREASE THE LIQUIDITY OF THE PROPERTIES. Your investment will be
spread over an initial asset base of four different real estate projects (the
two Yosemite/Ahwahnee Programs will be one project after the Acquisition).
- YOU WILL HAVE EXPERIENCED PROPERTY MANAGEMENT. We have hired key
real estate management professionals who are experienced in real estate
development, operation and construction.
- YOU WILL NO LONGER BE LIABLE FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
Acquisition, meaning your liability for mandatory assessments will cease.
6
<PAGE>
- YOUR LIABILITY WILL BE LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the Program, you are not
effectively insulated from personal liability based on operation of those
assets. As shareholders of a corporation, you will be.
- THE ASSETS OWNED BY THE COMPANY WILL NO LONGER BE SUBJECTED TO
SERVICING FEES. For all Programs involved in the Acquisition, National will
stop earning servicing fees of approximately $650,000 per year and National
and its principals will forgive a total of $946,111 of unpaid post-1994
servicing fees and expenses if the Acquisition is approved. Although the
services of National are being replaced by a management team and staff to run
the Company, National believes that the cost of this new management team will
be modestly lower than the historical cost of National servicing the Programs
on an individual basis.
- The Acquisition will have no material effect on this Program's
stand-alone financial condition or results of operations. The Company
expects to experience losses in the initial year of operations.
- For further information about how the Acquisition will affect you
and the Program, see the following portions of the Prospectus:
- "Background and Reasons for the Acquisition" commencing at
page __.
- "Comparison of Tenancy-in-Common Interests and Shares"
commencing at page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition
and Results of Operations" commencing at page __.
- "Management Following the Acquisition" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
FAIRNESS TO INVESTORS IN THE YOSEMITE/AHWAHNEE II PROGRAM
From a financial point of view, National believes the terms of the
Acquisition are fair as a whole and to the Investors in each of the Programs.
National based its determination on the following factors:
- the shares offer an opportunity for individual Investor liquidity
while the tenancy-in-common interests do not;
- the Exchange Value offered to Investors for their assets exceeds
what National believes could be received on liquidation sale of the assets;
7
<PAGE>
- on completion of the Acquisition, principals, employees, and
consultants of National, the Programs or the Company will hold less than 20%
of the Company's shares while the Programs' Investors will hold over 80%;
- the opportunity for each Investor to vote for or against the
Acquisition;
- valuation of the real estate assets of the Program by an independent
appraiser; and
- the fact that the transaction will either be tax-free to Investors
or most likely yield a tax loss. Either way, 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 and the issuance of shares to the founders of the Company, we
believe they have been counterbalanced by your opportunity to vote on the
transaction and the Fairness Opinion; and
- the Fairness Opinion rendered by the independent valuation firm.
See "Background and Reasons for the Acquisition" at page __.
National reviewed the value you will receive in connection with the
Acquisition and compared it with what you might receive under the
alternatives to Acquisition. Despite the adjustments to appraised value to
arrive at Exchange Values, National concluded that the likely market value of
the shares of the Company would be higher in the long run than the value you
would have received if any of the alternatives to the Acquisition had been
implemented. See "Background and Reasons for the Acquisition -- Comparison
of 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 Program (as well as each of the other four
Programs) is essentially the consideration which the Company is offering in
exchange for the real estate assets, certain liabilities and business of the
Program. The value is reflected as a number of shares of the Company's
common stock (in the case of the Program, [575,867] shares) multiplied by an
arbitrary $10 per share value.
In calculating the Exchange Value for this Program, National had to
reconcile the differences between the May 1997 appraisal by Arnold Associates
and the October 1996 appraisal by The Mentor Group. See "Appraisals and
Fairness Opinion -- Reconciliation of Yosemite/Ahwahnee Properties'
Appraisals" at page [__] of the Prospectus. After determining the reconciled
appraised value of the Program, the Exchange Value was calculate by adding to
the reconciled appraised value the book value of the Program's other
8
<PAGE>
assets at [September 30], 1997, deducting the Program's liabilities as
[September 30], 1997, and adding back liabilities to National to be forgiven
by National as part of the Acquisition.
The following table summarizes the calculation of the Exchange Value of
the Yosemite/Ahwahnee II Program and the value assigned on $10,000 of
Adjusted Outstanding Investment:
<TABLE>
<CAPTION>
Value Assigned
to Program per
Appraised Net Other $10,000 of Adjusted
Value of + Assets and = Exchange Outstanding
Real Estate(1) Liabilities(2) Value Investment
- ------------- -------------- ------------ --------------------
<S> <C> <C> <C>
$ 6,253,121 $([494,452]) $[5,758,670] $[2,978](3)
</TABLE>
- -------------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised
values made in determining a Property's Exchange Value as of
[September 30, 1997].
<TABLE>
<CAPTION>
Book To Be Net Other
Book Assets - Liabilities + Forgiven = Assets and
(9/30/97)* (9/30/97)* Amounts Liabilities
- ----------- ----------- -------- -----------
<S> <C> <C> <C>
$ 734,725 $ (1,299,177) $ 70,000 $[(494,452)]
</TABLE>
* See balance sheet of the Program in the financial statements accompanying
the Prospectus for details of book assets and book liabilities. There is
no mortgage debt on the Property.
(3) Equals [298] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,137,480] shares of Company common stock being offered to
Investors in the Acquisition represent 80.16% of the Company's shares which
will be outstanding upon completion of the Acquisition. The remaining shares
will be held by management and other founders of the Company. Such shares
will be allocated among the five Programs pro rata in accordance with
Exchange Values. The Yosemite/Ahwahnee II Program will be allocated
[575,867] shares.
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in
the applicable Program (taking into account assessments paid and unpaid, as
well as interest accrued to each Investor through the date beneficial
ownership of the Program's Property was taken for the Investors) as adjusted
for voluntary advances. An Investor in the Yosemite/Ahwahnee II Program with
an adjusted investment amount of $10,000 will receive [298] shares of Company
stock arbitrarily valued at $10 per share.
9
<PAGE>
Neither National nor the Company's founders have any interest in the
Yosemite/ Ahwahnee II Program except for the $[46,454] of tenancy-in-common
interests purchased by National at the inception of the Program for which
interests National will receive Company shares in the Acquisition pro rata
with the other Yosemite/Ahwahnee II Investors.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Program (including accrued but unpaid interest) plus
the amount of assessments and advances paid by Investors at
[September 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
Amount Real Estate Outstanding
Owed plus Appraised Exchange No. of Shares After the
Name of Program Assessments Value Value(1) Allocated(1)(2)% Acquisition
- --------------- ----------- ----------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II $ 19,338,632 $ 6,253,121 $[5,758,670] [575,867] [21.60]%
</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 [529,037] Company shares after
the Acquisition (19.84% of the outstanding shares post-Acquisition) which,
if valued at $10 per share, would have an aggregate value of $[5,290,370].
The Company was formed, and shares were purchased by the founders for $.01
per share, prior to making the Acquisition proposal. While a factor
considered in the analysis, the shares to be retained by the Company's
founders were not determined based only on fees cancelled or to be
cancelled by National and its principals. Overall, National believed that
the Company's founders should hold slightly less than 20% of the shares
after the Acquisition. See "Dilution" at page __ of the Prospectus. If
the Acquisition is completed, the following table sets forth the fees which
National and its principals have cancelled, or will cancel:
<TABLE>
<CAPTION>
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
- -------------------- ----------- ------------ -----------
<S> <C> <C> <C>
Sacramento/Delta Greens $ 137,111 $ 500,000 $ 637,111
Oceanside 704,000 -0- 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point -0- 461,589 461,589
TOTAL $ 946,111 $2,191,614 $3,137,725
</TABLE>
10
<PAGE>
(2) Had the shares retained by the founders of the Company been allocated
to the founders based only on cancelled fees. [39.13]% of the total
shares to be owned by the Company's founders after the Acquisition
([207,012] shares) would have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1996,
1995 and 1994, and for the nine month period ending [September 30], 1997.
<TABLE>
<CAPTION>
Actually
Actually Actually Actually Incurred Paid for
Incurred Paid for Incurred Paid for Incurred Paid for for Nine Nine
for Year Year for Year Year for Year Year Months Months
Ended Ended Ended Ended Ended Ended Ended Ended
Name of Program 12/31/94(1) 12/31/94 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96(2) 9/30/97(1) 9/30/97(2)
- --------------- ----------- -------- ----------- -------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II $ -0- $-0- $211,069 $214,757 $107,281
$135,000 $174,569 $313,200
</TABLE>
- ---------------
(1) These amounts represent servicing fees and salaries for officers and
employees of Ahwahnee Golf Course and Resort, Inc.
(2) These amounts represent servicing fees.
If the Acquisition had been completed during the above periods,
National would not have been entitled to receive any further servicing fees.
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 which would have aggregated approximately $700,000
per year. If that amount were allocated to the Program pro rata based on its
Exchange Values, annual compensation would have been approximately $[188,600].
No cash would have been available to pay officers' bonuses or dividends.
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 and 1996
and during the nine months ended [September] 30, 1997:
<TABLE>
<CAPTION>
Prior to September
Name of Program 1992 1992 1993 1994 1995 1996 30, 1997 Total
- --------------- -------- -------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yosemite/Ahwahnee II
Principal $ 20,000 $ 60,000 $ 68,264 $ 10,273 $ 0 $ 0 $ 0 $ 158,537
Interest $592,498 $1,153,352 $688,303 $ 0 $ 0 $ 0 $ 0 $2,434,153
</TABLE>
There have been no recent distributions to Investors. The Acquisition
is not expected to alter this distribution pattern.
11
<PAGE>
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and
Result of Operations" at page __.
- "Financial Statements" at page F-1.
12
<PAGE>
SUPPLEMENT TO CONSENT SOLICITATION STATEMENT/PROSPECTUS
OF
AMERICAN FAMILY HOLDINGS, INC.
PREPARED FOR INVESTORS IN
MORI POINT "TRUDY PAT" PROGRAM
CAPITALIZED TERMS USED IN THIS SUPPLEMENT AND NOT DEFINED HEREIN
HAVE THE MEANING GIVEN TO THEM IN THE PROSPECTUS. SEE "GLOSSARY"
AT PAGE __ OF THE PROSPECTUS.
-------------
This Supplement has been prepared to help the Investors in the Mori
Point Program to understand how the Acquisition described in the accompanying
Prospectus will affect them. If completed, the effects of the Acquisition
may be different for Investors in the other Programs. A separate supplement
has been prepared for each of the other Programs, copies of which may be
obtained, without charge, by writing to National Investors Financial, Inc.,
4220 Von Karman Avenue, Suite 110, Newport Beach, California 92660,
Attention: Vivian Kennedy, or calling 1-800-590-7772.
As described in the accompanying Prospectus, American Family Holdings,
Inc. (the "Company") is offering shares of its Common Stock in exchange for
the assets (including cash reserves), certain liabilities and business
activities owned by Investors in five former "Trudy Pat" programs managed by
National Investors Financial, Inc. ("National"). For this proposed
Acquisition, the Company will issue an aggregate of $[21,374,800] of shares
of common stock at $10 per Share. The stock will be listed for trading on
the ___________ under the symbol "___."
Of the [2,137,480] shares to be issued by the Company in the Acquisition,
Investors in the Mori Point Program will receive a total of [470,427] shares
or [379] 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 an amount that is higher than the
value of the Company shares to be received in the Acquisition.
In each of the Programs, the Investors will vote on whether to approve the
Acquisition. INVESTORS HOLDING A MAJORITY OF THE AMOUNT INVESTED IN EACH OF
THE FIVE PROGRAMS MUST VOTE TO APPROVE THE ACQUISITION FOR IT TO TAKE PLACE.
NATIONAL STRONGLY RECOMMENDS THAT ALL INVESTORS VOTE "YES" ON THE
ACQUISITION.
This solicitation commenced on _______, 1998 and expires at 5:00 p.m.,
Pacific Time, on __________, 1998 unless extended. Call 1-800-590-7772 with
questions.
SPECIAL RISKS OF THE ACQUISITION:
- - If the Acquisition is approved, there will be a fundamental change in the
nature of your investment. You will receive stock in the Company and have no
remaining interest in the real estate or business of your Program. Further,
you will have an investment in a business which operates a golf course and a
recreational vehicle park, and which plans to pursue the development of
timeshare facilities and sale of residential properties.
- - The value of the shares you receive may be less than you might receive if
the Property of your Program were sold.
- - If a trading market develops, the initial trading price for the stock will
likely be below $10 per share.
- - Employees of National and the Company will hold almost 20% of the
Company's stock and will receive compensation as officers and employees.
- - No independent advisors
represented you in structuring this
transaction.
- - There can be no assurance that the transaction is not a taxable event. If
so, a tax loss is the probable result.
The Company is also offering $5,000,000 of units (consisting of one share
of common stock and one warrant to purchase two additional shares) at $10
each exclusively to current Investors in the Programs. NASD broker-dealers
will receive a commission totalling $0.70 per unit for any units sold with
their help. If all the units are sold with their help, the proceeds of the
sale, net of estimated expenses of $200,000, will be $4,450,000. If you want
to participate, subscriptions for units should be returned with your ballot.
Subscriptions will be accepted on a FIRST-COME-FIRST-SERVED BASIS.
<PAGE>
MATERIAL RISKS AND DISADVANTAGES
A full description of the material risks of the Acquisition may be found on
pages [23] through [32] of the accompanying Prospectus. Those risks include:
RISKS OF THE ACQUISITION
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. If the Acquisition is
completed, there will be a change in the nature of the investment of each
Investor from holding a tenancy-in-common interest in real estate to holding
shares in an on-going company, the assets of which may be changed from time to
time without approval of Investors. If the Acquisition is completed,
Investors will be able to liquidate their investments only by selling their
shares on the _____ or in private transactions, and they will not receive a
return of their investment in the form of liquidation proceeds through
property sales. If the Acquisition is completed, Investors will have an
investment in an entity that is larger than each of the Programs and will thus
lose relative voting power.
DIFFERENCES BETWEEN EXCHANGE VALUES AND SALES PRICE. Investors are subject
to the risk that the Exchange Value of a Program does not reflect the price a
Program's assets might bring in a sale. If the property of a Program were to
be sold, the net proceeds of the sale and the amount finally distributed to an
Investor in that Program may be more or less than the Exchange Value.
UNCERTAINTY REGARDING TRADING PRICE FOR THE SHARES. Shares may trade at
prices substantially below Exchange Value per share or historical book value
of the Company's assets. If a trading market develops for the shares, the
price of shares after the Acquisition will likely decrease below the Exchange
Value per share of $10 due to a potentially large number of shares that
Investors may sell immediately after the Acquisition.
CONFLICTS OF INTEREST IN STRUCTURING THE ACQUISITION. The founders of the
Company which included the principal shareholders of National initiated and
structured the Acquisition and will own approximately 20% of the Company and
be entitled to other substantial economic benefits. Therefore, the founders
of the Company are subject to conflicts of interest with respect to the
Acquisition.
LACK OF INDEPENDENT REPRESENTATION OF INVESTORS. No independent party was
retained by National to negotiate on behalf of the Investors. Therefore,
terms of the Acquisition may be less favorable to Investors and more favorable
to founders of the Company which included the principal shareholders of
National than if the Acquisition had been subject to arm's-length negotiation.
Had an independent party negotiated on behalf of each Program, the terms of
the Acquisition may have been more favorable to certain or all of the Programs
and fewer shares and less favorable employment contracts may have been
received by the founders of the Company.
<PAGE>
TAX UNCERTAINTIES. The Acquisition may not be a tax-free transaction to
Investors. Due to uncertainties in the facts of this transaction, tax counsel
is unable to opine conclusively on the taxability of the Acquisition to
Investors. If the Acquisition is a taxable transaction, an Investor would
recognize gain or loss in 1998 equal to the difference between the Investor's
tax basis in his interest in a Program property, and the number of shares of
the Company received valued at $10 per share. If the Acquisition is treated
as taxable, National believes most Investors would experience a tax loss.
POTENTIAL CHANGE IN THE AMOUNT OF LEVERAGE. After the Acquisition, none of
the properties will be subject to any liens other than for property taxes.
The board of directors could authorize borrowing by the Company the debt
service for which may adversely affect the Company's ability to make
distributions to shareholders. The Company may incur full recourse debt which
exposes all of the assets of the Company to repayment instead of limited
recourse debt which generally exposes specific properties for the repayment of
debt.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN INVESTMENT,
FINANCING AND CERTAIN OTHER POLICIES. Although the board of directors of the
Company intends to implement the business plan set forth in the Prospectus,
the board will have the ability to change investment, financing and other
policies of the Company without the consent of shareholders.
NO APPRAISAL OR SIMILAR RIGHTS FOR NONCONSENTING INVESTORS. If you vote
against the Acquisition, and it is approved, you will not be able to object to
the Acquisition and receive the appraised value of your tenancy-in-common
interest in your Program's assets. You will have no choice other than to
accept shares for your interests.
COMPANY HAS NO OPERATING HISTORY. The Company was formed within the past
year to take part in the Acquisition of your Property. It does not have the
benefit of operating for a long time. This means that shares in the Company
are much riskier than ownership of shares of established companies. If the
Company had been operating as if it owned the Properties which it desires to
acquire, it would have experienced losses to date.
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.
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 [September] 30, 1997:
Sacramento/Delta Greens - approximately $54,000; Oceanside - approximately
$10,000; Yosemite/Ahwahnee (combined) - approximately $640,000; and Mori Point
- - approximately $294,000. Annual payments required for all the properties
total approximately $431,000.
3
<PAGE>
PERMITS TO DEVELOP CERTAIN PROPERTIES HAVE LAPSED OR 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.
COMPLIANCE WITH CONDITIONS IN EXISTING PERMITS AND APPROVALS MAY REQUIRE
CHANGES TO DEVELOPMENT PLANS. For example, the tentative tract map for the
Mori Point property requires that studies must be conducted to identify any
endangered species' habitat which may exist on the property. If any are
identified, changes to the tentative development plans will have to be made
and approved that will reduce or eliminate any damage to the habitat.
UNITS OR CERTAIN ASSETS MUST BE SOLD TO FURTHER THE BUSINESS PLAN. Unless
funds from sale of the units or from sale of certain assets of the Programs
become available, the Company will not be able to proceed with its business
plan and properties might be lost to tax sales before sales to third parties
can be arranged. The Company will also need financing from other sources to
complete its plan. Financing sources are not predictable and interest rates
or other costs of financing may be prohibitive.
HOLDING AN INVENTORY OF RESIDENTIAL LOTS AT THE OCEANSIDE OR
SACRAMENTO/DELTA GREENS PROPERTIES 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.
FEDERAL, STATE AND LOCAL LAW MAY REQUIRE EXPENSIVE HAZARDOUS SUBSTANCE
CLEAN-UP OR REMOVAL AS WELL AS EXPENSIVE PUBLIC IMPROVEMENTS. Environmental
audits have not been conducted on the Properties.
IF THERE IS AN UNINSURED LOSS, THE COMPANY COULD LOSE ITS INVESTMENT,
PROFITS OR CASH FLOW FROM A PROPERTY. Extraordinary losses caused by floods
or earthquakes may be uninsurable or too expensive to insure.
THERE ARE CERTAIN RISKS ASSOCIATED WITH THE CALIFORNIA MARKET. While
economic conditions are improving in California, its 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
$[1,234,785] BY THE COMPANY. This represents accrued fees and expenses from
the Programs which National has not cancelled.
GOLF COURSE RISKS
THERE ARE INDUSTRY OPERATING RISKS, INCLUDING INCREASED COMPETITION,
SEASONALITY, WEATHER AND COURSE CONDITIONS. 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
4
<PAGE>
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.
RESIDENTIAL DEVELOPMENT RISKS
THE COMPANY MAY BE AFFECTED BY MARKET RISKS AND COMPETITION. 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.
RESORT DESTINATION RISKS
THERE ARE RISKS ASSOCIATED WITH RESORT DEVELOPMENT. 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.
THERE ARE CERTAIN RISKS SPECIFIC TO TIMESHARE PROJECTS.
Negative press surrounding the remarketing of timeshares might negatively
impact sales and operations.
Marketing costs are high relative to selling price which can reduce or
eliminate profits from the sale of timeshare interests.
There are relatively more defaults among timeshare owners when they borrow
to buy timeshares compared to 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.
We may not be able to secure development financing on acceptable terms.
RISKS FOR RECREATIONAL VEHICLE PARKS ARE SUBSTANTIALLY THE SAME AS
TIMESHARE RISKS.
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.
Some of these provisions include:
5
<PAGE>
1. 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.
2. The Board is divided into three classes serving staggered three year
terms meaning you may not be able to efficiently change control of the Company
even if you believe that change would be in your best interests.
3. There are restrictions on certain business combinations with
interested parties without the approval of the Board of Directors.
4. The Delaware law, as well as the charter documents, limit the
liability of directors and officers to shareholders.
5. 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.
EFFECT OF THE ACQUISITION
- YOU WILL RECEIVE SHARES OF THE COMPANY'S COMMON STOCK IN EXCHANGE FOR
YOUR INVESTMENT IN THE PROGRAM, AS ADJUSTED PER THE TERMS OF THE GOVERNING
AGREEMENTS. You will receive [379] shares per $10,000 of Adjusted Outstanding
Investment in the Program.
- YOU MAY HAVE A LIQUID TRADING MARKET FOR YOUR SHARES. After the
Acquisition, shares will be listed on the ______________. If a trading market
exists, you will have the opportunity to liquidate all or some of those shares
at your preference.
- YOU MAY HAVE MORE CONTROL OVER THE TIMING OF LIQUIDATING OF YOUR
INVESTMENT. You can control when you choose to take profits or losses. Under
the Program's tenancy-in-common agreement, you are required to abide by a
majority vote to sell or retain the Program's Property, regardless of whether
or not the timing of the action or the decision of the majority is consistent
with your individual preferences.
- YOU WILL OWN SHARES IN A POOL OF ASSETS WHOSE DIVERSITY CAN MITIGATE
RISK AND INCREASE THE LIQUIDITY OF THE PROPERTIES. Your investment will be
spread over an initial asset base of four different real estate projects (the
two Yosemite/Ahwahnee Programs will be one project after the Acquisition).
- YOU WILL HAVE EXPERIENCED PROPERTY MANAGEMENT. We have hired key real
estate management professionals who are experienced in real estate
development, operation and construction.
- YOU WILL NO LONGER BE LIABLE FOR MANDATORY ASSESSMENTS. Your
tenancy-in-common agreement and servicing agreement will be cancelled by the
Acquisition, meaning your liability for mandatory assessments will cease.
6
<PAGE>
- YOUR LIABILITY WILL BE LIMITED TO THE AMOUNT OF YOUR INVESTMENT. As
beneficial owners of the assets and businesses of the Program, you are not
effectively insulated from personal liability based on operation of those
assets. As shareholders of a corporation, you will be.
- THE ASSETS OWNED BY THE COMPANY WILL NO LONGER BE SUBJECTED TO
SERVICING FEES. For all Programs involved in the Acquisition, National will
stop earning servicing fees of approximately $650,000 per year and National
and its principals will forgive a total of $946,111 of unpaid post-1994
servicing fees and expenses if the Acquisition is approved. Although the
services of National are being replaced by a management team and staff to run
the Company, National believes that the cost of this new management team will
be modestly lower than the historical cost of National servicing the Programs
on an individual basis.
- The Acquisition will have no material effect on this Program's
stand-alone financial condition or results of operations. The Company expects
to experience losses in the initial year of operations.
- For further information about how the Acquisition will affect you and
the Program, see the following portions of the Prospectus:
- "Background and Reasons for the Acquisition" commencing at page __.
- "Comparison of Tenancy-in-Common Interests and Shares" commencing
at page __.
- "Comparison of Programs and Company" commencing at page __.
- "Business and Properties" commencing at page __.
- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" commencing at page __.
- "Management Following the Acquisition" commencing at page __.
- "Federal Income Tax Consequences" commencing at page __.
FAIRNESS TO INVESTORS IN THE MORI POINT PROGRAM
From a financial point of view, National believes the terms of the
Acquisition are fair as a whole and to the Investors in each of the Programs.
National based its determination on the following factors:
- the shares offer an opportunity for individual Investor liquidity while
the tenancy-in-common interests do not;
- the Exchange Value offered to Investors for their assets exceeds what
National believes could be received on liquidation sale of the assets;
7
<PAGE>
- on completion of the Acquisition, principals, employees, and
consultants of National, the Programs or the Company will hold less than 20%
of the Company's shares while the Programs' Investors will hold over 80%;
- the opportunity for each Investor to vote for or against the
Acquisition;
- valuation of the real estate assets of the Program by an independent
appraiser; and
- the fact that the transaction will either be tax-free to Investors or
most likely yield a tax loss. Either way, 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
and the issuance of shares to the founders of the Company, we believe they
have been counterbalanced by your opportunity to vote on the transaction and
the Fairness Opinion; and
- the Fairness Opinion rendered by the independent valuation firm. See
"Background and Reasons for the Acquisition" at page __.
National reviewed the value you will receive in connection with the
Acquisition and compared it with what you might receive under the alternatives
to Acquisition. Despite the adjustments to appraised value to arrive at
Exchange Values, National concluded that the likely market value of the shares
of the Company would be higher in the long run than the value you would have
received if any of the alternatives to the Acquisition had been implemented.
See "Background and Reasons for the Acquisition -- Comparison of 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 Program (as well as each of the other four
Programs) is essentially the consideration at which the Company is offering in
exchange for the real estate assets, certain liabilities and business of the
Program. The value is reflected as a number of shares of the Company common
stock (in the case of the Program, [470,427] shares) multiplied by an
arbitrary $10 per share value.
The Exchange Value for the Program was calculated as follows: appraised
value of the Program's Property at May 1997, plus book value of other Mori
Point Program assets at [September 30], 1997, less Program liabilities at
[September 30], 1997, and plus liabilities to National to be forgiven by
National as part of the Acquisition.
8
<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:
Value Assigned
to Program per
Appraised Net Other $10,000 of Adjusted
Value of + Assets and = Exchange Outstanding
Real Estate(1) Liabilities(2) Value Investment
- -------------- -------------- -------- -------------------
$5,500,000 $[(795,729)] $[4,704,271] $[3,179](3)
- ----------
(1) Reflects independent appraisal as of May 1997.
(2) The following table quantifies the adjustments to appraised values made in
determining a Property's Exchange Value as of [September 30, 1997].
Book Book To Be Net Other
Assets - Liabilities + Forgiven = Assets and
(9/30/97)- (9/30/97)- Amounts Liabilities
- ------------- ----------- -------- -----------
$ 158,387 $ (954,116) $ 0 $ [(795,729)]
- See balance sheet of the Program in the financial statements
accompanying the Prospectus for details of book assets and book
liabilities. There is no mortgage debt on the Property.
(3) Equals [379] Company shares arbitrarily valued at $10 per share.
ALLOCATION OF SHARES
The [2,137,480] shares of Company common stock being offered to Investors
in the Acquisition represent 80.16% of the Company's shares which will be
outstanding upon completion of the Acquisition. The remaining shares will be
held by management and other founders of the Company. Such shares will be
allocated among the five Programs pro rata in accordance with Exchange Values.
The Mori Point Program will be allocated [470,427] shares
The shares allocated to each of the Programs will be allocated among
Investors in each Program based on their respective pro rata investments in
the applicable Program (taking into account assessments paid and unpaid, as
well as interest accrued to each Investor through the date beneficial
ownership of the Program's Property was taken for the Investors) as adjusted
for voluntary advances. An Investor in the Mori Point Program with an
adjusted investment amount of $10,000 will receive [379] shares of Company
stock arbitrarily valued at $10 per share.
Neither National nor the Company's founders have any interest in the Mori
Point Program except for the $[5,279] of tenancy-in-common interests purchased
by National for which interests National will receive Company shares in the
Acquisition pro rata with the other Sacramento/Delta Greens Investors.
The following table and its footnotes sets forth the amount owed by the
original borrower to the Program (including accrued but unpaid interest) plus
the amount of assessments and advances paid by Investors at
[September 30, 1997], appraised real estate
9
<PAGE>
value, Exchange Value of the Program, the number and percentage of shares
allocated to the Program, and the number of shares and comparative value of
the Company to be held by founders after the Acquisition.
<TABLE>
<CAPTION>
% of Total
Shares to
be
Amount Real Estate Outstanding
Owed plus Appraised Exchange No. of Shares After the
Name of Program Assessments Value Value(1) Allocated(1)(2) Acquisition
- --------------- ----------- ----------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Mori Point $12,409,626 $5,500,000 $[4,704,271] [470,427] [17.64]%
</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 [529,037] Company shares after the
Acquisition (19.84% of the outstanding shares post-Acquisition) which, if
valued at $10 per share, would have an aggregate value of $[5,290,370].
The Company was formed, and shares were purchased by the founders for $.01
per share, prior to making the Acquisition proposal. While a factor
considered in the analysis, the shares to be retained by the Company's
founders were not determined based only on fees cancelled or to be
cancelled by National and its principals. Overall, National believed that
the Company's founders should hold slightly less than 20% of the shares
after the Acquisition. See "Dilution" at page __ of the Prospectus. If
the Acquisition is completed, the following table sets forth the fees
which National and its principals have cancelled, or will cancel:
To Be Previously Total
Name of Program Cancelled Cancelled Cancelled
--------------- --------- ------------ -----------
Sacramento/Delta Greens $137,111 $ 500,000 $ 637,111
Oceanside 704,000 -0- 704,000
Yosemite/Ahwahnee I 35,000 72,158 107,158
Yosemite/Ahwahnee II 70,000 1,157,867 1,227,867
Mori Point -0- 461,589 461,589
TOTAL $946,111 $2,191,614 $3,137,725
(2) Had the shares retained by the founders of the Company been allocated to
the founders based only on cancelled fees. [14.71]% of the total shares
to be owned by the Company's founders after the Acquisition ([77,821]
shares) would have been deemed allocated from this Program.
HISTORICAL COMPENSATION TO NATIONAL/EFFECT OF ACQUISITION
The following table sets forth the compensation accrued by National, as
well as actually paid to National, during the years ended December 31, 1996,
1995 and 1994, and for the nine month period ending [September 30], 1997.
10
<PAGE>
<TABLE>
<CAPTION>
Actually
Actually Actually Actually Incurred Paid for
Incurred Paid for Incurred Paid for Incurred Paid for for Nine Nine
for Year Year for Year Year for Year Year Months Months
Ended Ended Ended Ended Ended Ended Ended Ended
Name of Program 12/31/94(1) 12/31/94 12/31/95(1) 12/31/95 12/31/96(1) 12/31/96 9/30/97(1) 9/30/97
- --------------- ----------- --------- ----------- -------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mori Point $100,000 $-0- $100,000 $-0- $100,000 $-0- $75,000 $-0-
</TABLE>
- ------------
(1) These amounts represent accrued servicing fees.
If the Acquisition had been completed during the above periods, National
would not have been entitled to receive any further servicing fees. 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 which would have aggregated approximately $700,000 per year. If that
amount were allocated to the Program pro rata based on its Exchange Values,
annual compensation would have been approximately $[154,000]. No cash would
have been available to pay officers' bonuses or dividends.
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 and 1996 or during the nine months ended [September]
30, 1997. Prior to 1992, $1,354,708 in interest was distributed to
Investors. The Acquisition is not expected to alter this distribution pattern.
FURTHER FINANCIAL INFORMATION
See the following portions of the Prospectus for further financial
information about this Program, as well as the others:
- "Selected Financial Information" at page __.
- "Management's Discussion and Analysis of Financial Condition and Result
of Operations" at page __.
- "Financial Statements" at page F-1.
11
<PAGE>
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
Item 20 Indemnification of Directors and Officers
Pursuant to the Registrant's Certificate of Incorporation and By-Laws and
pursuant to Section 145 of the Delaware General Corporation Law, directors,
officers and agents of the Registrant are entitled to indemnification for
their actions in respect of the Registrant to the fullest extent permitted by
Delaware law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to officers, directors and controlling persons of the
Registrant pursuant to such provisions, or otherwise, the Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
Item 21 Exhibits and Financial Statement Schedules
1.1 Form of Wholesaling Agreement between the Company and L.H.
Friend, Weinress, Frankson & Presson, Inc.*
1.2 Form of Selling Agreement between the Company and participating
broker-dealers*
2.1 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Mori Point Property*
2.2 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Oceanside Property*
2.3 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Yosemite/Ahwahnee I and II Property*
2.4 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Delta Greens Property*
3.1 Certificate of Incorporation of American Family Holdings, Inc.*
3.2 Certificate of Amendment of Certificate of Incorporation
before the Issuance of Stock*
3.3 By-Laws of American Family Holdings, Inc.*
4.1 Pages 1 through 4 of the Certificate of Incorporation of the
Company Filed as Exhibit 3.1 above defining the rights of
security holders are incorporated herein by this reference*
4.2 American Family Holdings, Inc. Warrant to Purchase Shares of
Common Stock*
5.1 Opinion of Arter & Hadden LLP regarding legality of Shares*
8.1 Form of Arter & Hadden LLP tax opinion
10.1 Form of Employment Agreement of David Lasker**
II-1
<PAGE>
10.2 Form of Employment Agreement of James Orth**
10.3 Form of Employment Agreement of L.C. "Bob" Albertson, Jr.**
10.4 1997 Stock Option and Incentive Plan for Officers, Independent
Directors and Employees of American Family Holdings, Inc. and
Affiliates*
21.1 Subsidiaries of 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)
24.1 Power of Attorney (see signature page)*
27 Financial Data Schedule*
99.1 Appraisal Report "Delta Greens" Residential Subdivision,
Sacramento, California, value dated as of May 9, 1997*
99.2 Appraisal of Ahwahnee Golf Course and Resort, Madera County,
California, value dated as of May 1, 1997*
99.3 Complete, Self-Contained Appraisal 23 Finished Residential
Lots Being a Part of "Encore," Oceanside, California, value
dated as of March 31, 1997*
99.4 Complete, Self-Contained Appraisal Partially Finished
Residential Land 111 Residential Lots, "Symphony," Oceanside,
California, value dated as of May 15, 1997*
99.5 Appraisal of Fee Simple Estate in a 104.98 Acre Parcel
Designated for Hotel Development, Located at Mori Point in
Pacific, California, value dated as of May 1, 1997*
99.6 Appraisal of Ahwahnee Resort and Country Club, value dated
October 10, 1996*
* Previously filed
** To be filed by amendment
Item 22 Undertakings
(a) Item 512 Undertakings.
(i) The undersigned Registrant hereby undertakes:
II-2
<PAGE>
(A) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(1) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(2) to reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and
(3) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration Statement.
(B) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
official BONA FIDE offer thereof.
(C) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(ii) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of competent
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) Other Part II, Form S-4, Undertakings.
(i) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
Prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated
documents by first-class mail or other equally prompt means. This includes
II-3
<PAGE>
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 January 13, 1998.
AMERICAN FAMILY HOLDINGS, INC.
By /s/ David G. Lasker
--------------------------
David G. Lasker,
Co-Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Co-Chairman of the Board,
/s/ David G. Lasker President, Chief Financial
- -------------------------- Officer and Chief Accounting January 13, 1998
David G. Lasker Officer
/s/ James N. Orth Co-Chairman of the Board,
- -------------------------- Chief Executive Officer January 13, 1998
James N. Orth and Secretary
L.C. "Bob" Albertson, Jr.* Executive Vice President
- -------------------------- and Director January 13, 1998
L.C. "Bob" Albertson, Jr.
Charles F. Hanson*
- -------------------------- Director January 13, 1998
Charles F. Hanson
Dudley Muth*
- -------------------------- Director January 13, 1998
Dudley Muth
John G. LeSieur, III*
- -------------------------- Director January 13, 1998
John G. LeSieur, III
*By /s/ David G. Lasker
----------------------
David G. Lasker, Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
EXHIBIT
1.1 Form of Wholesaling Agreement between the Company and L.H.
Friend, Weinress, Frankson & Presson, Inc.*
1.2 Form of Selling Agreement between the Company and
participating broker-dealers*
2.1 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Mori Point Property*
2.2 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Oceanside Property*
2.3 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Yosemite/Ahwahnee I and II Property*
2.4 Form of Agreement of Purchase and Sale and Joint Escrow
Instructions for Delta Greens Property*
3.1 Certificate of Incorporation of American Family Holdings, Inc.*
3.2 Certificate of Amendment of Certificate of Incorporation
before the Issuance of Stock*
3.3 By-Laws of American Family Holdings, Inc.*
4.1 Pages 1 through 4 of the Certificate of Incorporation of the
Company Filed as Exhibit 3.1 above defining the rights of
security holders are incorporated herein by this reference*
4.2 American Family Holdings, Inc. Warrant to Purchase Shares of
Common Stock*
5.1 Opinion of Arter & Hadden LLP regarding legality of Shares*
8.1 Form of Arter & Hadden LLP tax opinion
10.1 Form of Employment Agreement of David Lasker**
10.2 Form of Employment Agreement of James Orth**
10.3 Form of Employment Agreement of L.C. "Bob" Albertson, Jr.**
10.4 1997 Stock Option and Incentive Plan for Officers, Independent
Directors and Employees of American Family Holdings, Inc. and
Affiliates*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Arter & Hadden as counsel contained in Exhibit 5.1*
23.2 Consent of BDO Seidman, LLP as independent accountants*
23.3 Consent of Houlihan Valuation Advisers*
23.4 Consent of David E. Lane, Inc. (re Delta Greens appraisal)*
23.5 Consent of Boznanski and Company (re Oceanside appraisal)*
23.6 Consent of Arnold Associates (re Yosemite/Ahwahnee appraisals)*
23.7 Consent of PKF Consulting (re Mori Point appraisal)*
23.8 Consent of The Mentor Group, Inc. (re Yosemite/Ahwahnee
appraisal)*
23.9 Consent of BDO Seidman, LLP as independent accountants (re
Amendment No. 1)*
23.10 Consent of BDO Seidman, LLP, as independent accountants (re
Amendment No. 2)
<PAGE>
24.1 Power of Attorney (see signature page)*
27 Financial Data Schedule*
99.1 Appraisal Report "Delta Greens" Residential Subdivision,
Sacramento, California, value dated as of May 9, 1997*
99.2 Appraisal of Ahwahnee Golf Course and Resort, Madera County,
California, value dated as of May 1, 1997*
99.3 Complete, Self-Contained Appraisal 23 Finished Residential
Lots Being a Part of "Encore," Oceanside, California, value
dated as of March 31, 1997*
99.4 Complete, Self-Contained Appraisal Partially Finished
Residential Land 111 Residential Lots, "Symphony," Oceanside,
California, value dated as of May 15, 1997*
99.5 Appraisal of Fee Simple Estate in a 104.98 Acre Parcel
Designated for Hotel Development, Located at Mori Point in
Pacific, California, value dated as of May 1, 1997*
99.6 Appraisal of Ahwahnee Resort and Country Club, value dated
October 10, 1996*
* Previously filed
** To be filed by amendment
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF ARTER & HADDEN LLP]
January __, 1998
66944/66608
American Family Holdings, Inc.
4220 Von Karman Avenue,
Suite 110
Newport Beach, California 92660
Re: ISSUANCE OF SHARES IN ACQUISITION
Gentlemen:
You have requested our opinion as to certain Federal income tax
consequences with respect to the Acquisition described in that certain
Prospectus contained in Registration Statements (File Nos. 333-37161 and
333-_____) to which this opinion letter is attached as Exhibit 8.1. In
formulating our opinion, we have examined and have relied upon (i) the
Prospectus and the correctness of all statements, representations and
information set forth therein, and (ii) the correctness of other documents,
statements, representations and information that the Company and its
representatives have furnished to us. Capitalized words in this opinion have
the meanings set forth in the Prospectus.
For the reasons set forth in the portion of the Prospectus entitled
"Federal Income Tax Consequences," we are unable to opine that the
Acquisition will qualify under Section 351 of the Internal Revenue Code of
1986, as amended. However, if Investors who acquire 80% or more of the Shares
are not subject to the step transaction doctrine discussed therein, we are of
the opinion that the Acquisition will qualify under Section 351, with the
resulting Federal income tax consequences as summarized therein. Conversely,
if Investors who are not subject to the step transaction doctrine acquire
less than 80% of the Shares, we are of the opinion that the Acquisition will
not qualify under Section 351, with the resulting Federal income tax
consequences as summarized therein.
<PAGE>
American Family Holdings, Inc.
January ___, 1998
Page 2
We are also of the opinion that the discussion in "Federal Income Tax
Consequences" fully and fairly addresses all material Federal income tax issues
relating to the Acquisition which involve the reasonable possibility of a
challenge by the Service.
Our opinion (i) is subject to the qualifications and assumptions set
forth herein and in the "Federal Income Tax Consequences" discussion, (ii) is
rendered solely for your information and assistance in connection with the
Acquisition, and may not be relied upon by any other person or for any other
purpose, or quoted in whole or in part, or otherwise referred to, in any
document (other than the Prospectus) without our prior written consent, and
(iii) are dated as set forth above, and we undertake no, and hereby disclaim
any, obligation to advise you of any changes in the current laws and regulations
or any new developments which might affect matters set forth in "Federal Income
Tax Consequences" subsequent to the date hereof. We consent to the use of this
opinion as an exhibit to the Registration Statement. We bring to your attention
the fact that our legal opinion is our expression of professional judgment and
is not a guarantee of a result.
We consent to the use of this opinion as an exhibit to the Registration
Statements and to the use of our name under the headings "Federal Income Tax
Consequences" and "Legal Matters" in the Preliminary Prospectus forming a part
of the Registration Statements.
Very truly yours,
2
<PAGE>
Exhibit 23.10
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 October 31, 1997,
relating to the financial statement of American Family Holdings, Inc., as of
September 30, 1997; and our reports dated May 27, 1997 relating to the financial
statements of the Oceanside Program, the Yosemite/Ahwahnee Program, the Mori
Point Program and the Sacramento/Delta Greens Program for each of the two years
in the period ended December 31, 1996, 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
January 10, 1998
