<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM................TO..................
COMMISSION FILE NUMBER 000-24803
SUNDERLAND CORPORATION
------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-2102142
-------------------------------------- ---------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2901 EL CAMINO AVENUE, LAS VEGAS, NEVADA 89102
------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
702/227-0965
------------------------------------
(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No__
Number of shares outstanding of each of the issuer's classes of common equity,
as of October 15, 1999:
Common 6,161,270
<PAGE>
<TABLE>
<CAPTION>
SUNDERLAND CORPORATION
INDEX
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Sunderland Corporation:
Consolidated Balance Sheet as of September 30, 1999 (Unaudited) 1
Consolidated Statements of Operations for the three months ended
September 30, 1999 and for the period from April 27, 1999(Date of
Reorganization) through September 30, 1999 (Unaudited) 2
Consolidated Statement of Stockholders' Equity for the period from
April 27, 1999 (Date of Reorganization) through September 30, 1999
(Unaudited) 3
Consolidated Statement of Cash Flows for the period from April 27,
1999 (Date of Reorganization) through September 30, 1999 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
Del Mar Mortgage, Inc. and Del Mar Holdings, Inc.:
Combined Statements of Operations for the period from January 1, 1999
through April 26, 1999, for the three months ended September 30,
1999, and for the nine months ended September 30, 1998 (Unaudited) 9
Combined Statement of Stockholders' Equity for the period from January
1, 1999 through April 26, 1999 (Unaudited) 10
Combined Statements of Cash Flows for the period from January 1, 1999
through April 26, 1999 and for the nine months ended
September 30, 1998 (Unaudited) 11
Notes to Combined Financial Statements 12
Item 2. Management's Discussion and Analysis 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities And Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL INFORMATION
SUNDERLAND CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
Cash........................................................................ $ 164,670
Accounts receivable (net of allowance for
doubtful accounts of $1,210)............................................. 694,401
Due from related parties.................................................... 307,699
Investments in mortgage loans on real estate................................ 3,961,537
----------
TOTAL CURRENT ASSETS............................................. 5,128,307
Property and equipment (net of accumulated
depreciation of $14,129)................................................. 23,768
Other assets................................................................ 36,477
----------
TOTAL ASSETS................................................................ $5,188,552
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................................ $ 99,896
Income taxes payable........................................................ 773,573
Due to affiliates........................................................... 193,363
Note payable................................................................ 350,000
----------
TOTAL CURRENT LIABILITIES........................................ 1,416,832
----------
COMMITMENTS AND CONTINGENCIES............................................... --
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value; 20 million shares authorized;
no shares issued...................................................... --
Common stock, $.0001 par value; 100 million shares authorized;
6,161,270 shares issued and outstanding shares......................... 616
Additional paid-in capital................................................ 2,705,108
Retained earnings......................................................... 1,501,642
Receivable from shareholder............................................... (435,646)
----------
TOTAL STOCKHOLDERS' EQUITY....................................... 3,771,720
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $5,188,552
----------
----------
</TABLE>
See Accompanying Notes to Financial Statements.
1
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period
From April 27, 1999
(Date of
For the Three Reorganization)
Months Ended Through
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
REVENUES
Loan origination and related fees........................... $ 3,015,696 $ 5,333,907
Interest income............................................. 69,259 111,798
------------------ ------------------
TOTAL REVENUES......................................... 3,084,955 5,445,705
------------------ ------------------
OPERATING EXPENSES
Sales and marketing ........................................ 386,086 905,691
General and administrative.................................. 1,376,184 2,264,799
------------------ ------------------
TOTAL OPERATING EXPENSES............................... 1,762,270 3,170,490
------------------ ------------------
Income Before Provision for Income Taxes.......................... 1,322,685 2,275,215
Provision for Income Taxes........................................ 449,713 773,573
------------------ ------------------
NET INCOME........................................................ $ 872,972 $ 1,501,642
------------------ ------------------
------------------ ------------------
PRIMARY AND FULLY DILUTED EARNINGS PER COMMON SHARE............... $ 0.14 $ 0.24
------------------ ------------------
------------------ ------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED
IN PER SHARE CALCULATION....................................... 6,161,270 6,161,270
------------------ ------------------
------------------ ------------------
</TABLE>
See Accompanying Notes to Financial Statements.
2
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 27, 1999 (DATE OF REORGANIZATION) THROUGH
SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
ADDITIONAL RECEIVABLE TOTAL
NUMBER OF PAID-IN RETAINED FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHAREHOLDER EQUITY
---------- -------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES TRANSFERRED IN
REORGANIZATION FROM DEL
MAR MORTGAGE, INC. AND
DEL MAR HOLDINGS, INC.,
ON APRIL 27, 1999.............. 4,891,270 $ 489 $ 2,692,459 $ -- $ (535,646) $ 2,157,302
Issuance to acquire Sunderland
Corporation, April 27, 1999,
$0.00 per share................ 1,250,000 125 291 -- -- 416
Issuance to acquire
Capsource, Inc., April 27,
1999, $0.62 per share.......... 20,000 2 12,358 -- -- 12,360
Payments received on
receivable from shareholder.... -- -- -- -- 100,000 100,000
Net income for the period...... -- -- -- 1,501,642 -- 1,501,642
---------- -------- ------------ ------------ ------------ -------------
BALANCE AT SEPTEMBER 30, 1999.. 6,186,270 $ 616 $ 2,705,108 $ 1,501,642 $ (435,646) $ 3,771,720
---------- -------- ------------ ------------ ------------ -------------
---------- -------- ------------ ------------ ------------ -------------
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 27, 1999 (DATE OF REORGANIZATION) THROUGH
SEPTEMBER 30, 1999
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
<TABLE>
<S> <C>
Net income................................................................................... $ 1,501,642
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................................................... 5,429
Changes in operating assets and liabilities:
Increase in accounts receivable......................................................... (694,401)
Decrease in other receivables........................................................... 417,518
Increase in other assets................................................................ (915)
Increase in due from related party...................................................... (155,731)
Increase in accounts payable and accrued expenses....................................... 99,896
Increase in due to related party........................................................ 193,363
Increase in income taxes payable........................................................ 773,573
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................... 2,140,374
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash transferred in reorganization........................................................... 416
Cash outlay for property and equipment....................................................... (6,413)
Purchases of mortgage loans.................................................................. (1,969,707)
-----------
NET CASH USED BY INVESTING ACTIVITIES................................................... (1,975,704)
-----------
NET INCREASE IN CASH............................................................................... 164,670
CASH, BEGINNING BALANCE AT APRIL 27, 1999.......................................................... --
-----------
CASH, ENDING BALANCE AT SEPTEMBER 30, 1999......................................................... $ 164,670
-----------
-----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On April 27, 1999, 1,250,000 shares of common stock were issued to acquire $416
of assets of Sunderland Corporation and 20,000 shares of common stock were
issued to acquire all of the outstanding common stock of Capsource, Inc.
On September 30, 1999, 25,000 shares of treasury stock were issued in exchange
for relief of a $350,000 note payable.
See Accompanying Notes to Financial Statements.
4
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Sunderland Corporation ("Sunderland" or the "Company"), was
incorporated in the state of Delaware on June 2, 1998. Through its
subsidiaries, the Company operates as a mortgage company licensed in the
state of Nevada. The Company is engaged in the origination, arrangement, and
secondary purchase and sale of loans secured by real property. In addition,
construction loans, which the Company arranges for investor-parties, are
serviced by the Company during the construction period. Through its
predecessors, the Company has also invested in short-term mortgage loans
relating to construction projects and real estate bridge financing.
REORGANIZATION AND BASIS OF PRESENTATION--Effective April 27, 1999,
Sunderland consummated an asset purchase agreement with Del Mar Mortgage,
Inc. and Del Mar Holdings, Inc. (collectively referred to as the "Del Mar
Entities") whereby Sunderland acquired certain assets and assumed certain
liabilities of the Del Mar Entities in exchange for 4,891,270 shares of
Sunderland common stock (post 5-for-3 stock split). The shareholders of Del
Mar Entities received 4,891,270 shares of common stock of Sunderland
Corporation. Sunderland had 6,161,270 (post-split) common shares outstanding
after the reorganization. As a result of the transaction with Sunderland, the
shareholders of the Del Mar Entities received a majority of the common stock
of Sunderland. Accordingly, the Del Mar Entities were considered the acquirer
for financial reporting purposes and their financial statements have been
restated for all periods presented to reflect the common shares received by
the stockholders of the Del Mar Entities, in a manner similar to a stock
split.
The Del Mar Entities were related entities under common management and
controlling ownership. Accordingly, the business combination between the Del
Mar Entities has been accounted for as a reorganization of entities under
common control.
Since the Del Mar Entities are considered the accounting acquirer in the
business combinations with Sunderland and Capsource, the assets not acquired,
net of the liabilities not assumed, have been accounted for as distributions
to the Del Mar Entities' shareholders.
Sunderland was a shell corporation with no operations and nominal assets
prior to the transaction. Accordingly, the transaction between the Del Mar
Entities and Sunderland has been accounted for as a reverse acquisition of
the net assets of Sunderland by the Del Mar Entities in exchange for the
issuance of 1,250,000 shares of common stock. The assets of Sunderland have
been recorded at their historical cost which was also equal to their fair
value.
The business combination with Capsource has been accounted for as a purchase
business combination. The cost of Capsource is based upon the fair value of
the 20,000 common shares issued to the Capsource shareholder, which was
$12,360 or $0.62 per share. The acquisition resulted in the recognition of
$1,390 of goodwill. Goodwill is being amortized over a period of 5 years
using the straight-line method.
Following the above transactions, the new Sunderland shareholders approved a
5-for-3 stock split of Sunderland's common stock, resulting in 6,161,270
common shares outstanding after the stock split. The above amounts and the
accompanying financial statements have been restated for the effects of the
stock split on a retroactive basis.
The Company has continued the loan origination segment of the various
business operations formerly conducted by Del Mar Mortgage, Inc. through
Capsource, a wholly owned subsidiary. Capsource operates as a mortgage
company licensed in the state of Nevada. Capsource is engaged in the
origination, arrangement, and secondary purchase and sale of loans secured by
real property.
5
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The following unaudited pro forma consolidated information is to present the
results of operations of the combined companies as though the above
transactions had been effective on January 1, 1998. The pro forma results of
operations are based upon assumptions that Sunderland Corporation believes
are reasonable and are based on the historical operations of Del Mar
Mortgage, Inc., Del Mar Holdings, Inc., Sunderland and Capsource adjusted for
the effects of the reorganization and the purchases described above, and
income taxes using a rate of 34%. The pro forma information is presented for
informational purposes only and is not necessarily indicative of results of
operations that would have occurred had the above transactions been
consummated on January 1, 1998, or which may occur in the future:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues........................... $8,758,700 $5,279,070
Net income......................... 2,243,032 1,299,436
Basic and diluted income per
common share..................... $ 0.36 $ 0.21
</TABLE>
INTERIM CONSOLIDATED FINANCIAL STATEMENTS--The accompanying consolidated
financial statements are unaudited and include the accounts of the Company
and its subsidiary which is wholly-owned. All significant inter-company
transactions and balances have been eliminated in consolidation. In the
opinion of management, all necessary adjustments (which include only normal
recurring adjustments) have been made to the accompanying financial
statements in order to present fairly the financial position, results of
operations and cash flows for the period presented.
GEOGRAPHIC CONCENTRATION--Substantially all of the Company's operations are
derived from Southern Nevada. Consequently, the Company's results of
operations and financial condition are affected by general trends in the
Southern Nevada economy and its commercial and residential real estate market.
USE OF 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.
REVENUE RECOGNITION--The Company recognizes revenue primarily from loan
origination fees, loan servicing fees, and extension fees. Loan origination
fees are recorded as revenue at the close of escrow and are reduced by direct
loan origination costs, excluding loan processing costs. Loan servicing fees
are recorded as revenue when such services are rendered. Servicing fees
represent the interest spread between what is paid the investor and what the
borrower pays for the use of the money. This can vary from loan to loan.
Extension fees are recorded as revenue at the extension grant date.
CASH--The Company invests its cash in high quality financial institutions,
which at times may be in excess of the Federal Deposit Insurance Corporation
insurance limits.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided principally on the
straight-line method over the estimated useful lives of the assets. The cost
of repairs and maintenance is charged to expense as incurred. Expenditures
for property betterments and renewals are capitalized. Upon sale or other
disposition of depreciable asset, cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in other income
(expense).
6
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS--Advertising costs incurred in the normal course of
operations are expensed currently.
INCOME TAXES--The Company accounts for its income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, which requires
recognition of deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED--The Company adopted the
provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, as of September 30, 1999.
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that an asset's carrying amount may not be
recoverable. Assets to be disposed of are reported at the lower of the
carrying amount or the fair value less costs to sell. Adoption of this
statement did not have a material impact on the Company's financial position,
results of operations, or liquidity.
NOTE 2--ACCOUNTS RECEIVABLE
The Company services loans which have been arranged for the investor parties
through a servicing agreement. The servicing agreement stipulates that all
extension fees charged on behalf of the investors shall be retained by the
Company as part of the loan servicing fees. Accounts receivable represent
extension and loan origination fees earned but not yet funded.
NOTE 3--INVESTMENT IN MORTGAGE LOANS ON REAL ESTATE
The Company has invested in mortgage loans secured by first and second real
estate deeds of trust. These loans have maturities of one year or less with
interest rates ranging from 12% to 14% payable monthly, with principal due at
maturity. The underlying value of the trust deeds securing the mortgage loans
is considered sufficient to realize their carrying value. Accordingly, an
allowance for loan losses was not required.
NOTE 4--RELATED PARTY TRANSACTIONS
As of September 30, 1999, the Company has a balance due from related parties
of $307,699 which represents amounts due from an entity wholly-owned by the
Company's major shareholder. This balance bears no interest and is due on
demand.
As of September 30, 1999, the Company has a balance owed to a related party
of $193,363 which represents an amount due to an entity wholly owned by the
Company's major shareholder. This balance bears no interest and is due on
demand.
The receivable from a shareholder represents amounts advanced to the
Company's major shareholder. The promissory note is collateralized by this
shareholder's stock in the Company, bears interest of 8%, and the principal
and interest are due December 2001.
The Company incurred consulting fees expense of $582,580 for the period from
April 27, 1999 (Date of Reorganization) through September 30, 1999 which was
paid to an entity wholly-owned by the Company's sole shareholder.
7
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 5--INCOME TAXES
The Company did not record any current or deferred income tax provision or
benefit for any of the periods presented because of nominal differences.
NOTE 6--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable and accounts payable,
approximate fair value because of the short-term maturity of these
instruments.
NOTE 7--COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS--The Company operates from a leased office facility under a
noncancellable operating lease. The lease requires the Company to pay certain
escalation clauses for real estate taxes, operating expense, usage and common
area charges. Rent expense for the leased office facility charged to
operations for the period ended September 30, 1999 approximates $43,722.
Future minimum rental payment required under the operating lease for the
office facility as of September 30, 1999, are as follows:
<TABLE>
<S> <C>
October 1, 1999 through December 31, 1999 $ 29,388
2000 200,194
2001 158,610
2002 161,640
2003 165,240
2004 41,610
-----------
Total future minimum operating lease payments $ 756,682
-----------
-----------
</TABLE>
VOUCHER CONTROL SERVICE CONTRACT--In September of 1999, the Company entered
into a contract with Disbursement Management, Inc. (DMI) to provide
construction voucher control services. The Company will pay all voucher
control fees collected from borrowers upon loan closing. Per the contractual
agreement, the minimum paid to DMI will be $20,000 per month. The Company may
terminate this contract any time after September of 2000. DMI will have the
option of canceling the contract three years after its inception.
8
<PAGE>
DEL MAR MORTGAGE, INC. AND
DEL MAR HOLDINGS, INC.
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE NINE
FROM JANUARY 1, MONTHS ENDED MONTHS ENDED
1999 THROUGH SEPTEMBER 30, SEPTEMBER 30,
APRIL 26, 1999 1998 1998
------------- -------------- --------------
<S> <C> <C> <C>
Revenues
Loan origination and related fees........................ $ 2,633,050 $ 1,542,673 $ 4,801,202
Interest income.......................................... 488,885 69,170 392,518
Other income............................................. 191,060 73,250 85,350
------------- -------------- --------------
Total Revenues...................................... 3,312,995 1,685,093 5,279,070
------------- -------------- --------------
Operating Expenses
Sales and marketing...................................... 407,685 75,528 343,567
General and administrative............................... 1,757,226 989,430 2,898,299
Interest expense......................................... 24,765 9,116 68,362
------------- -------------- --------------
Total Operating Expenses............................ 2,189,676 1,074,074 3,310,228
------------- -------------- --------------
Net Income..................................................... $ 1,123,319 $ 611,019 $ 1,968,842
------------- -------------- --------------
------------- -------------- --------------
Primary and Fully Diluted Earnings
Per Common Share............................................ $ 0.23 $ 0.12 $ 0.40
------------- -------------- --------------
------------- -------------- --------------
Weighted Average Number of Common
Shares Used in Primary and Fully
Diluted Per Share Calculation............................... 4,891,270 4,891,270 4,891,270
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
BASIS OF COMBINED STATEMENTS OF OPERATIONS PRESENTATION: The condensed
combined statements of operations for Del Mar Mortgage, Inc. and Del Mar
Holdings, Inc. noted above have been presented on a historical basis.
See Accompanying Notes to Financial Statements
9
<PAGE>
DEL MAR MORTGAGE, INC., AND
DEL MAR HOLDINGS, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 26, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL RECEIVABLE TOTAL
NUMBER OF PAID-IN RETAINED FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHAREHOLDER EQUITY
------------ --------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE--DECEMBER 31, 1998:
Del Mar Mortgage, Inc......... 100,000 $ 10 $ 361,394 $ 127,969 $ -- $ 489,373
Del Mar Holdings, Inc......... 4,791,270 479 2,713,783 -- (535,646) 2,178,586
------------ --------- ------------- ------------- ------------ --------------
Combined Balance.............. 4,891,270 489 3,075,147 127,969 (535,646) 2,667,959
Distribution of assets, net of
liabilities, to the Del Mar
Mortgage, Inc. and Del Mar
Holdings, Inc. shareholders,
April 26, 1999................. -- -- (1,633,976) -- -- (1,633,976)
Net Income for the period........ -- -- 1,123,319 -- -- 1,123,319
------------ --------- ------------- ------------- ------------ --------------
BALANCE--APRIL 26, 1999.......... 4,891,270 $ 489 $ 2,564,490 $ 127,969 $ (535,646) $ 2,157,302
------------ --------- ------------- ------------- ------------ --------------
------------ --------- ------------- ------------- ------------ --------------
</TABLE>
See Accompanying Notes to Financial Statements
10
<PAGE>
DEL MAR MORTGAGE, INC. AND
DEL MAR HOLDINGS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE NINE
FROM JANUARY 1, MONTHS ENDED
1999 THROUGH SEPTEMBER 30,
APRIL 26, 1999 1998
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................ $ 1,123,319 $ 1,968,842
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........................................ 884 9,806
Changes in operating assets and liabilities:
Increase in accounts receivable...................................... (72,556) (323,296)
Increase in other assets............................................. (235,253) (5,201)
Increase in due from related party................................... (1,255,304) --
Decrease in due to related party..................................... -- (100,007)
Increase (decrease) in accounts payable.............................. (139,271) 296,526
-------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES..................... (578,181) 1,846,670
-------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase (distribution) of furniture and equipment........................ 18,067 (15,034)
Purchase of mortgage loans................................................ -- (4,424,712)
Cash received from principal of trust deed investments.................... 636,894 --
-------------- -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES..................... 654,961 (4,439,746)
-------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES
Distribution to the shareholders.......................................... (534,490) --
Payments of capital lease obligations..................................... (221) (2,484)
Collection of revenues and fees of Del Mar Mortgage, Inc.
in excess of payments made for Del Mar Mortgage, Inc. .................. -- 859,453
Proceeds from issuance of common stock.................................... -- 2,539,990
-------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES..................... (534,711) 3,396,959
-------------- -------------
NET INCREASE (DECREASE) IN CASH................................................. (457,931) 803,883
CASH, BEGINNING BALANCE......................................................... 457,931 191,141
-------------- -------------
CASH, ENDING BALANCE............................................................ $ -- $ 995,024
-------------- -------------
-------------- -------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: On April
27, 1999, but shown in these financial statements as having occurred on April
26, 1999, certain assets, net of liabilities, with a carrying value of
$1,633,976, including cash of $534,490, were distributed to the shareholders
of Del Mar Mortgage, Inc. and Del Mar Holdings, Inc.
See Accompanying Notes to Financial Statements
11
<PAGE>
DEL MAR MORTGAGE, INC. AND
DEL MAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
APRIL 26, 1999
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--The accompanying combined financial statements include the
combined accounts of Del Mar Holdings, Inc. ("DMH") and Del Mar Mortgage,
Inc. ("DMM"), which are under common management of DMH. The combined group is
collectively referred to as the "Company". The combined financial statements
have been presented on a combined basis due to common control and management.
All significant intercompany balances and transactions have been eliminated.
Del Mar Holdings, Inc. was incorporated in the state of Nevada in October
1997. The Company operates as a management company in the state of Nevada.
Del Mar Mortgage, Inc. was incorporated in the state of Nevada in April 1995.
The Company operates as a mortgage company licensed in the state of Nevada.
The Company is engaged in the origination, arrangement, and secondary
purchase and sale of loans secured by real property. In addition, the Company
services construction loans during the construction period which it has
arranged for investor parties.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures during the reporting period. Accordingly, actual results could
differ from those estimates.
INTERIM FINANCIAL STATEMENTS--The accompanying financial statements are
unaudited and, in the opinion of management, all necessary adjustments (which
include only normal recurring adjustments) have been made to present fairly
the results of operations and cash flows for the periods presented.
REVENUE RECOGNITION--The Company recognizes revenue primarily from loan
origination fees and extension fees. Loan origination fees are recorded as
revenue at the close of escrow. Extension fees are recorded as revenue at the
extension grant date.
ADVERTISING COSTS--Advertising costs incurred in the normal course of
operations are expensed currently.
NOTE 2--RELATED PARTY TRANSACTIONS
The Company incurred management fees expense of $226,015 for the nine months
ended September 30, 1998 which was paid to an entity wholly-owned by the
Company's sole shareholder.
NOTE 3--REORGANIZATION
Effective April 27, 1999, Sunderland Acquisition Corporation ("Sunderland")
consummated an asset purchase agreement with Del Mar Mortgage, Inc. and Del
Mar Holdings, Inc. (collectively referred to as "Del Mar Entities") whereby
Sunderland acquired certain assets and assumed certain liabilities of the Del
Mar Entities in exchange for 4,891,270 shares of Sunderland common stock
(post 5-for-3 stock split). Accordingly, the business combination between the
Del Mar Entities and Sunderland has been accounted for as a reorganization of
entities under common control. The reorganization reflects the combined
financial statements of the Del Mar Entities and the restatement of their
stockholders' equity for the shares issued by Sunderland in a manner similar
to a stock split. Assets consisting of mortgage loans, receivables, and
property and equipment approximating $3,019,000, and a liability consisting
of a promissory note totaling $350,000 of the Del Mar Entities were acquired
by Sunderland, assets not acquired, net of liabilities not assumed, of
$1,633,976 have been accounted for as distributions to the Del Mar Entities'
shareholders in these financial statements. The transaction between the Del
Mar Entities and Sunderland has been accounted for as a reverse acquisition
of Sunderland by the Del Mar Entities and the assets of Sunderland have been
recorded at historical cost since Sunderland was a shell corporation with no
operations and only nominal assets prior to the transaction.
12
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
SUNDERLAND
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following information should be read in conjunction with the consolidated
financial statements and the combined financial statements and the
accompanying notes thereto included in Item 1 of this Quarterly Report, and
the Form 8-K/A filed October 7, 1999.
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-QSB the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated," or
similar expressions are intended to identify "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties, including but
not limited to changes in interest rates, the Company's dependence on debt
financing and securitizations to fund operations, risks associated with the
Year 2000 issue, and fluctuations in operating results. Such factors, which
are discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations, could affect the Company's financial performance
and could cause the Company's actual results for future periods to differ
materially from any opinion or statements expressed herein with respect to
future periods. As a result, the Company wishes to caution readers not to
place undue reliance on any such forward looking statements, which speak only
as of the date made.
The following financial review and analysis is intended to assist in
understanding and evaluating the financial condition and results of
operations of the Company for the three and nine months ended September 30,
1999. This information should be read in conjunction with the financial
statements and accompanying notes included in this quarterly report.
COMPANY OVERVIEW
Sunderland Corporation is a newly-created company resulting from the
acquisition by Sunderland Acquisition Corporation, which had no operations,
revenues or liabilities, of Capsource, Inc., an operating Nevada mortgage
lending company, on April 27, 1999 in exchange for 20,000 (post-split) shares
of common stock of Sunderland. Simultaneously, Sunderland Acquisition
Corporation acquired certain assets and assumed certain liabilities of Del
Mar Mortgage, Inc., a Nevada mortgage company, and Del Mar Holdings, Inc., a
Nevada corporation, (the "Del Mar Entities") in exchange for 4,891,270
(post-split) shares of common stock of Sunderland. Upon effectiveness of
these transactions, the Company changed its name to Sunderland Corporation
and effected a 5-for-3 forward stock split of its common stock.
Because Del Mar Holdings and Del Mar Mortgage are related entities under
common management and controlling ownership, the business combination between
them has been accounted for as a reorganization of entities under common
control. The reorganization reflects the combined financial statements of the
Del Mar Entities and the restatement of their stockholders' equity for the
shares issued by Sunderland in a manner similar to a stock split. Only
certain assets of the Del Mar Entities were acquired by Sunderland; however,
since the Del Mar Entities are considered the accounting acquirer in the
business combinations with Sunderland and Capsource, the assets not acquired,
net of the liabilities not assumed, have been accounted for as distributions
to the Del Mar Entities' shareholders. The transaction between the Del Mar
Entities and Sunderland has been accounted for as a reverse acquisition of
Sunderland by the Del Mar Entities and the assets of Sunderland have been
recorded at historical cost since Sunderland was a shell corporation with no
operations and only nominal assets prior to the transaction.
The business combination between the Del Mar Entities and Capsource has been
accounted for under the purchase method of accounting resulting in
recognition of $1,390 in goodwill to be amortized over five years.
As part of the transactions, the Company assumed $350,000 in liabilities of
Del Mar Holdings.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS:
The following table represents the Company's unaudited consolidated results
of operations for the three and nine months ended September 30, 1999 and has
been presented in the following table on a pro forma basis giving effect to
the reorganization and acquisitions as if they had become effective at the
beginning of each period. The combined results of operations for Del Mar
Mortgage, Inc. and Del Mar Holdings, Inc. for the three and nine months ended
September 30, 1998 has also been presented on a pro forma comparative
purposes.
<TABLE>
<CAPTION>
Pro Forma Consolidated Pro Forma Combined Del Mar Mortgage, Inc.
Sunderland Corporation and Del Mar Holdings, Inc
------------------------------------------- -----------------------------------------
For the Three For the Nine For the Three For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, 1999 September 30, 1999 September 30, 1998 September 30, 1998
--------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 3,015,696 100% $ 8,758,700 100% $ 1,685,093 100% $ 5,279,070 100%
Sales and marketing expense 386,086 12% 1,313,376 15% 75,528 4% 343,567 7%
General and administrative expense 1,376,184 43% 4,022,025 45% 989,430 59% 2,898,299 55%
Interest expense -- 0% 24,765 0% 9,116 1% 68,362 1%
Income before income taxes 1,322,685 46% 3,398,534 40% 611,019 36% 1,968,842 37%
Provision for income taxes (1) 449,713 15% 1,155,502 14% 207,746 12% 669,406 13%
Net income $ 872,972 30% $ 2,243,032 26% $ 403,273 24% $ 1,299,436 24%
Earnings per share:
Primary and fully diluted $ 0.14 $ 0.36 $ 0.07 $ 0.21
Weighted average number of
common shares 6,161,270 6,161,270 6,161,270 6,161,270
</TABLE>
(1) Provisions for income taxes have been added for the nine months ended
September 30, 1999 and 1998, and for the three months ended September 30,
1998 using a tax rate of 34%.
COMPARISON OF PRO FORMA THREE MONTHS PERIOD ENDED SEPTEMBER 30, 1999 AND 1998
Revenue. The Company reported revenues of $3.0 million for the three months
ended September 30, 1999, an increase from $1.7 million in the same period
for 1998. The increase in revenue was primarily due to an increase in loan
funding activities significantly due to a large loan funded approximating $34
million.
Sales and Marketing Expenses. Sales and marketing expenses of $0.4 million
for the three months ended September 30, 1999 increased from $0.1 million in
the same period for 1998. The increase in sales and marketing expenses is due
to an increase in commissions paid primarily related to the increase in loans
originated as discussed above.
General and Administrative Expenses. General and administrative expenses of
$1.4 million for the three months ended September 30, 1999 increased from
$1.0 million in the same period for 1998. The increase in general and
administrative expenses is primarily due to increased salary and office
expenses from the Company's growth in loan volume.
Income before Income Taxes. As a result of the foregoing factors, income
before income taxes of $1.3 million for the three months ended September 30,
1999, increased from $0.6 million in the same period for 1998. Provision for
income taxes was not made during 1998 to the historical financial statements
as the Del Mar Entities were not subject to income taxes. However, pro forma
provisions for income taxes for the three months ended September 30, 1999 and
1998 were $0.5 million and $0.2 million respectively.
COMPARISON OF PRO FORMA NINE MONTHS PERIOD ENDED SEPTEMBER 30, 1999 AND 1998
Revenue. The Company reported revenues of $8.8 million for the nine months
ended September 30, 1999, an increase from $5.3 million in the same period
for 1998. The increase in revenue was primarily due to an increase in fees
charged on loan origination and an increase in loan funding activities
outside the State of Nevada.
14
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses of $1.3 million
for the nine months ended September 30, 1999 increased from $0.3 million in
the same period for 1998. The increase in sales and marketing expenses is due
to an increase in commissions paid primarily related to the increase in loans
originated as discussed above.
General and Administrative Expenses. General and administrative expenses of
$4.0 million for the nine months ended September 30, 1999 increased from $2.9
million in the same period for 1998. The increase in general and
administrative expenses is primarily due to increased salary and office
expenses from the Company's growth in loan volume.
Income before Income Taxes. As a result of the foregoing factors, income
before income taxes of $3.4 million for the nine months ended September 30,
1999, increased from $2.0 million in the same period for 1998. Provision for
income taxes was not made during 1998 to the historical financial statements
as the Del Mar Entities were not subject to income taxes. However, pro forma
provisions for income taxes for the nine months ended September 30, 1999 and
1998 were $1.2 million and $0.7 million respectively.
CAPITAL AND LIQUIDITY
Liquidity is a measure of a company's ability to meet potential cash
requirements, including ongoing commitments to fund lending activities and
for general purposes. Cash for originating loans and general operating
expenses is primarily obtained through cash flows from operations and private
investors.
The Company has significant ongoing liquidity needs to support its existing
business and continued growth. The Company's liquidity is actively managed on
a periodic basis and the Company's financial status, including its liquidity,
is reviewed periodically by the Company's management. This process is
intended to ensure the maintenance of sufficient funds to meet the needs of
the Company.
The Company has historically relied upon the cash flow from operations to
provide for its capital requirements. Management believes that cash generated
from operations, together with cash and trust deed investments on hand at
September 30, 1999 will be sufficient to provide for its capital requirements
for at least the next 12 months. The Company may seek additional equity
financing in the latter part of 1999 through an offering of its common stock,
and contemplates that offering, before expenses relating to the offering,
will be no less than $15 million and no more than $20 million. Further, the
Company will be actively seeking initial credit line arrangements of no less
than $100 million. There can be no assurance that the Company will be able to
complete a secondary offering or obtain credit lines.
During the nine months ended September 30, 1999, cash flows from operating
activities provided $1.6 million compared to $1.8 million during the same
period in 1998. Investing activities consisted primarily of purchases of
trust deed investments in the amount of $2.0 million compared to $4.4 million
during the same period in 1998.
At September 30, 1999, Sunderland had $0.2 million of cash and had $5.1
million in current assets. At that same date, current liabilities were $1.4
million. Stockholders' equity of $3.8 million included a receivable from a
shareholder of $0.4 million. Accordingly, Sunderland appears to have
sufficient working capital and capital to meet its operating needs in the
near term without additional external financing.
YEAR 2000
GENERAL. Many of the world's computers, software programs and other equipment
using microprocessors or embedded chips currently have date fields that use
two digits rather than four digits to define the applicable year. These
computers, programs and chips may be unable to properly interpret dates
beyond the year 1999; for example, computer software that has date sensitive
programming using a two digit format may recognize a date using "00" as the
year 1900 rather than the year 2000. Such errors could potentially result in
a system failure or miscalculation causing disruptions of operations,
including, among other things, a temporary inability to process transactions
or engage in similar normal business activities, which, in turn, could lead
to disruptions in the Company's operations or performance.
15
<PAGE>
The Company's assessments of the cost and timeliness of completion of Year
2000 modifications set forth below are based on management's best estimates,
which are derived using numerous assumptions relating to future events,
including, without limitation, the continued availability of certain internal
and external resources and third party readiness plans. Furthermore, as the
Company's Year 2000 initiative (described below) progresses, the Company
continues to revise its estimates of the likely problems and costs associated
with the Year 2000 problem and to adapt its contingency plan. However, there
can be no assurance that any estimate or assumption will prove to be accurate.
THE COMPANY'S YEAR 2000 INITIATIVE. The Company is conducting a comprehensive
Year 2000 initiative with respect to its internal business-critical systems.
This initiative encompasses information technology ("IT") systems and
applications, as well as non-IT systems and equipment with embedded
technology, such as fax machines and telephone systems, which may be impacted
by the Year 2000 problem. Business-critical systems encompass internal
accounting systems, including general ledger, accounts payable and financial
reporting applications; and loan servicing systems; as well as the underlying
technology required to support the software. The initiative includes
assessing, remediating or replacing, testing and upgrading the Company's
business-critical IT systems. Based upon a review of the contemplated and
planned stages of the initiative, and testing done to date, the Company does
not anticipate any material difficulties in achieving Year 2000 readiness
with respect to its internal business-critical systems, and the Company
anticipates that Year 2000 with respect to virtually all its internal
business-critical systems will be achieved by latter 1999.
In addition to its own internal IT systems and non-IT systems, the Company
may be at risk from Year 2000 failures caused by or occurring to third
parties. These third parties can be classified into two groups. The first
group includes borrowers, lenders, vendors and other service providers with
whom the Company has a direct contractual relationship. The second group,
while encompassing certain members of the first group, is comprised of third
parties providing services or functions to large segments of society, both
domestically and internationally such as airlines, utilities and national
stock exchanges.
As is the case with most other companies, the actions the Company can take to
avoid any adverse effects from the failure of companies, particularly those
in the second group, to become Year 2000 ready is extremely limited.
There can be no assurance that the systems of the Company or those third
parties will be timely converted. Furthermore, there can be no assurance that
a failure to convert by another company, or a conversion that is not
compatible with the Company's systems or those of other companies on which
the Company's systems rely, would not have a material adverse effect on the
Company.
The Company does not anticipate that it will incur additional expenditures in
connection with any modifications necessary to achieve Year 2000 readiness.
The Company estimates that is has incurred minimal costs of less than $10,000
related to its Year 2000 initiative through December 31, 1998.
PART II. OTHER INFORMATION
SUNDERLAND CORPORATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings against the Company and the Company is unaware
of such proceedings contemplated against it.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Report on Form 8-K/A filed during the third quarter 1999:
An amendment to Form 8-K/A dated August 16, 1999 was filed October 7, 1999 to
revise the financial statement information included therein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SUNDERLAND CORPORATION
By: /s/ Lance K. Bradford
LANCE K. BRADFORD, Chief Financial Officer
Date: October 18, 1999
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 164,670
<SECURITIES> 0
<RECEIVABLES> 694,401
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,128,307
<PP&E> 37,897
<DEPRECIATION> 14,129
<TOTAL-ASSETS> 5,188,552
<CURRENT-LIABILITIES> 1,416,832
<BONDS> 0
0
0
<COMMON> 616
<OTHER-SE> 3,771,104
<TOTAL-LIABILITY-AND-EQUITY> 5,188,552
<SALES> 5,333,907
<TOTAL-REVENUES> 5,445,705
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,170,490
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,275,215
<INCOME-TAX> 773,573
<INCOME-CONTINUING> 1,501,642
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,501,642
<EPS-BASIC> .24
<EPS-DILUTED> .24
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