<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
AMENDMENT NO. 3
Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): April 27, 1999
SUNDERLAND CORPORATION
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE
----------------------------------------------------------
(State or Other Jurisdiction of Incorporation
000-24803 52-2102142
----------------------------- ---------------------------------------
(Commission File Number) (IRS Employer Identification No.)
2901 El Camino Avenue, Las Vegas, Nevada 89102
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(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number, Including Area Code
(702) 227-0965
The undersigned hereby amends the following items, financial statements and
exhibits on Form 8-K/A dated August 16, 1999 as set forth in the pages attached
hereto.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
SUNDERLAND CORPORATION
PRO FORMA FINANCIAL INFORMATION
Effective April 27, 1999, Sunderland 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 (post-split)share of common stock of Sunderland.
Sunderland concurrently consummated a reorganization agreement with Capsource,
Inc. ("Capsource") whereby Sunderland acquired all the outstanding capital stock
of Capsource in exchange for 20,000 (post-split) shares of common stock of
Sunderland (referred to as the "Transactions").
The Del Mar Entities are 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. 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.
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
historical cost which was also equal to 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, the financial
statements of the Del Mar Entities and the accompanying pro forma statements of
operations have been restated for the effects of the stock split on a
retroactive basis.
The following unaudited pro forma condensed consolidated statements of
operations are to present the results of operations of the combined entities 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. These statements should be read in connection with those historical
financial statements which are included elsewhere herein. The pro forma
statements of operations are presented for information purposes only and are not
necessarily indicative of the results of operations that would have occurred had
the above transactions been consummated on January 1, 1998, or which may occur
in the future.
F-1
<PAGE>
SUNDERLAND CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
DEL MAR
SUNDERLAND MORTGAGE SUNDERLAND PRO FORMA PRO FORMA
CORPORATION AND HOLDINGS CAPSOURCE ACQUISITION ADJUSTMENTS RESULTS
------------ ------------ ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 2,360,751 $ 3,312,995 $ 115,240 $ -- $ -- $ 5,788,986
------------ ------------ ----------- ---------- ----------- -------------
Operating Expenses
Sales and marketing 519,486 407,685 -- -- -- 927,171
General and administrative 888,711 1,757,226 116,337 36 -- 2,762,310
Interest -- 24,765 -- -- -- 24,765
------------ ------------ ----------- ---------- ----------- -------------
Total Operating Expenses 1,408,197 2,189,676 116,337 36 -- 3,714,246
------------ ------------ ----------- ---------- ----------- -------------
Income (Loss) Before Income Taxes 952,554 1,123,319 (1,097) (36) -- 2,074,740
Income Tax Provision 323,868 -- -- -- (A) 381,544 705,412
------------ ------------ ----------- ---------- ----------- -------------
Net Income (Loss) $ 628,686 $ 1,123,319 $ (1,097) $ (36) $ (381,544) $ 1,369,328
------------ ------------ ----------- ---------- ----------- -------------
------------ ------------ ----------- ---------- ----------- -------------
Basic and Diluted Income (Loss)
Per Common Share $ 0.10 $ 0.23 $ 0.22
------------ ------------ -------------
------------ ------------ -------------
Weighted Average Shares Used in
Per Share Calculations 6,161,270 4,891,270 6,161,270
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
DEL MAR DEL MAR SUNDERLAND PRO FORMA PRO FORMA
MORTGAGE HOLDINGS CAPSOURCE ACQUISITION ADJUSTMENTS RESULTS
------------ ------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 6,865,529 $ 623,778 $ 218,670 $ -- (C)$ (301,353) $ 7,406,624
------------ ------------ ----------- ---------- ----------- -------------
Operating Expenses
Sales and marketing 536,077 -- -- -- -- 536,077
General and administrative 3,757,339 364,287 213,751 159 (B) 278
(C) (301,353) 4,034,461
Interest -- 115,956 -- -- 115,956
------------ ------------ ----------- ---------- ----------- -------------
Total Operating Expenses 4,293,416 480,243 213,751 159 (301,075) 4,686,494
------------ ------------ ----------- ---------- ----------- -------------
Income (Loss) Before Income Taxes 2,572,113 143,535 4,919 (159) (278) 2,720,130
Income Tax Provision -- -- -- -- (A) 924,844 924,844
------------ ------------ ----------- ---------- ----------- -------------
Net Income (Loss) $ 2,572,113 $ 143,535 $ 4,919 $ (159) $ (925,122) $ 1,795,286
------------ ------------ ----------- ---------- ----------- -------------
------------ ------------ ----------- ---------- ----------- -------------
Basic and Diluted Income (Loss)
Per Common Share $ 25.72 $ 0.03 $ -- $ 0.30
------------ ------------ ---------- -------------
------------ ------------ ---------- -------------
Weighted Average Shares Used in
Per Share Calculations 100,000 4,630,220 1,250,000 5,980,220
------------ ------------ ---------- -------------
------------ ------------ ---------- -------------
</TABLE>
F-2
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
A. Provision for has been provided for income taxes as though the combined
companies had been subject to income taxes using a federal tax rate of 34%
for both periods presented.
B. Amortization of goodwill related to acquisition of Capsource is calculated
over a sixty-month period.
C. To eliminate intercompany management and referral fees.
F-3
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash..............................................................................................$ 196,518
Accounts receivable (net of allowance for
doubtful accounts of $1,210)................................................................... 303,001
Other receivables................................................................................. 236,738
Due from related parties.......................................................................... 176,635
Investments in mortgage loans on real estate...................................................... 2,603,597
--------------
TOTAL CURRENT ASSETS................................................................... 3,516,489
Property and equipment (net of accumulated
depreciation of $14,129)....................................................................... 18,793
Other assets...................................................................................... 37,350
--------------
TOTAL ASSETS......................................................................................$ 3,572,632
--------------
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................................................................$ --
Income taxes payable.............................................................................. 323,868
Note payable...................................................................................... 350,000
--------------
TOTAL CURRENT LIABILITIES.............................................................. 673,868
--------------
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value; 20 million shares authorized;
no shares issued............................................................................. --
Common stock, $.0001 par value; 100 million shares authorized;
6,161,270 shares issued and outstanding shares............................................... 616
Additional paid-in capital...................................................................... 2,577,139
Retained earnings............................................................................... 756,655
Receivable from shareholder..................................................................... (435,646)
--------------
TOTAL STOCKHOLDERS' EQUITY............................................................. 2,898,764
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................................$ 3,572,632
--------------
</TABLE>
See Accompanying Notes to Financial Statements.
F-4
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM APRIL 27, 1999 (DATE OF REORGANIZATION) THROUGH
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<S> <C>
REVENUES
Loan origination and related fees...........................................................$ 2,318,212
Interest income............................................................................. 42,539
--------------
TOTAL REVENUES......................................................................... 2,360,751
--------------
OPERATING EXPENSES
Sales and marketing ........................................................................ 519,486
General and administrative.................................................................. 888,711
--------------
TOTAL OPERATING EXPENSES............................................................... 1,408,197
--------------
Income Before Provision for Income Taxes.......................................................... 952,554
Provision for Income Taxes........................................................................ 323,868
--------------
NET INCOME........................................................................................$ 628,686
--------------
--------------
PRIMARY AND FULLY DILUTED EARNINGS PER COMMON SHARE...............................................$ 0.10
--------------
--------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED
IN PER SHARE CALCULATION....................................................................... 6,161,270
--------------
--------------
</TABLE>
See Accompanying Notes to Financial Statements.
F-5
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 27, 1999 (DATE OF REORGANIZATION) THROUGH
JUNE 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 $ 2,564,490 $ 127,969 $ (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........... -- -- -- 628,686 -- 628,686
------------ --------- ------------- ------------- ------------ --------------
BALANCE AT JUNE 30, 1999............ 6,161,270 $ 616 $ 2,577,139 $ 756,655 $ (435,646) $ 2,898,764
------------ --------- ------------- ------------- ------------ --------------
------------ --------- ------------- ------------- ------------ --------------
</TABLE>
See Accompanying Notes to Financial Statements.
F-6
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 27, 1999 (DATE OF REORGANIZATION) THROUGH
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................................................................$ 628,686
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................................................... 2,203
Changes in operating assets and liabilities:
Increase in accounts receivable......................................................... (303,001)
Decrease in other receivables........................................................... 180,780
Increase in due from related party...................................................... (24,667)
Increase in income taxes payable........................................................ 323,868
-------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................... 807,869
-------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received in acquisition of Sunderland Acquisition Corporation........................... 416
Purchases of mortgage loans.................................................................. (611,767)
-------------
NET CASH USED BY INVESTING ACTIVITIES................................................... (611,351)
-------------
NET INCREASE IN CASH............................................................................... 196,518
CASH, BEGINNING BALANCE AT APRIL 27, 1999.......................................................... --
-------------
CASH, ENDING BALANCE AT JUNE 30, 1999..............................................................$ 196,518
-------------
-------------
</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.
See Accompanying Notes to Financial Statements.
F-7
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Sunderland Corporation (hereinafter referred to as "Sunderland"),
was incorporated in the state of Delaware on June 2, 1998.
Effective April 27, 1999, Sunderland Corporation 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).
Sunderland concurrently consummated a reorganization agreement with Capsource,
Inc. ("Capsource") whereby the Company acquired all the outstanding capital
stock of Capsource in exchange for 20,000 shares of Sunderland common stock
(referred to as the "Transactions").
The Del Mar Entities are 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. 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.
In connection with the transactions, 4,250,000 shares of common stock of
Sunderland held by the previous owners of Sunderland were retired leaving
750,000 shares before the issuance of additional shares related to the
transaction noted above and the 5-for-3 stock split. Effective as of the date of
consummation of the Transactions, Sunderland changed its name from "Sunderland
Acquisition Corporation" to "Sunderland Corporation." The accompanying financial
statements have been restated for the effects of the stock split for all periods
presented.
Sunderland, including the operations from the assets acquired from the Del Mar
Entities, and Capsource are collectively referred to herein as the "Company"
subsequent to the Transactions.
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.
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 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.
F-8
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
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 reduced by direct loan
origination costs, excluding loan processing costs, incurred to such loan
origination activities. Loan servicing fees are recorded as revenue when such
services are rendered. Servicing fees represent the interest spread between what
is paid to 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).
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 June 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.
RECENT ACCOUNTING PRONOUNCEMENTS--In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No.
130 established standards for reporting and display of comprehensive income and
its components in the financial statements. SFAS No. 130 is effective for the
fiscal
F-9
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provides for comparative purposes is required.
Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or cash flows.
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--INVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE
The Company has invested in mortgage loans which Del Mar Mortgage, Inc.
originated prior to the reorganization into Sunderland Corporation. The mortgage
loans are secured by first trust deeds on real estate. 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 was sufficient at June 30, 1999 to
realize their carrying value. Accordingly, an allowance for loan losses was not
required.
NOTE 4--NOTE PAYABLE
As of June 30, 1999, the Company owes a note payable of $350,000 representing a
liability acquired as part of the asset purchase agreement between the Company
and Del Mar Holdings, Inc. as it relates to the Transactions. The note payable
is an amount due to an unrelated party and is due July 1999.
NOTE 5--RELATED PARTY TRANSACTIONS
As of June 30, 1999, the Company has a balance due from related parties of
$176,635 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 June 30, 1999, a note receivable of $435,646 is due from the Company's
major shareholder in the form of a promissory note. The promissory note is
collateralized by this shareholder's stock in the Company, bears interest of 8%,
and the principal and interest is due on December 2001.
NOTE 6--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 7--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.
F-10
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
NOTE 8--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 June 30, 1999 approximates $78,000.
Future minimum rental payment required under the operating lease for the office
facility as of June 30, 1999, are as follows:
July 1, 1999 through December 31, 1999 $ 58,775
2000 200,194
2001 158,610
2002 161,640
2003 165,240
2004 41,610
-----------
Total future minimum operating lease payments $ 786,069
-----------
-----------
VOUCHER CONTROL SERVICE CONTRACT--In August of 1998, the Company entered into a
contract with Disbursement Management, Inc. (DMI) to provide construction
voucher control services. The Company will pay monthly fees to DMI based upon
the amount of disbursements for construction vouchers. The monthly fees range
from $26,500 to $35,000. The Company may terminate this contract any time after
August of 1999. DMI will have the option of canceling the contract three years
after its inception.
F-11
<PAGE>
DEL MAR MORTGAGE, INC. AND
DEL MAR HOLDINGS, INC.
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JANUARY 1, FOR THE SIX
1999 THROUGH MONTHS ENDED
APRIL 26, 1999 JUNE 30, 1998
-------------- --------------
<S> <C> <C>
Revenues
Loan origination and related fees.........................................$ 2,633,050 $ 3,258,529
Interest income........................................................... 488,885 323,348
Other income.............................................................. 191,060 12,100
-------------- --------------
Total Revenues....................................................... 3,312,995 3,593,977
-------------- --------------
Operating Expenses
Sales and marketing....................................................... 407,685 268,039
General and administrative................................................ 1,757,226 1,908,869
Interest expense.......................................................... 24,765 59,246
-------------- --------------
Total Operating Expenses............................................. 2,189,676 2,236,154
-------------- --------------
Net Income......................................................................$ 1,123,319 $ 1,357,823
-------------- --------------
-------------- --------------
Primary and Fully Diluted Earnings
Per Common Share.............................................................$ 0.23 $ 0.28
-------------- --------------
-------------- --------------
Weighted Average Number of Common
Shares Used in Primary and Fully
Diluted Per Share Calculation................................................ 4,891,270 4,891,270
-------------- --------------
-------------- --------------
</TABLE>
BASIS OF COMBINED STATEMENTS OF OPERATIONS PRESENTATION: The condensed combined
statements of operations for Del Mr Mortgage, Inc. and Del Mar Holdings, Inc.
noted above have been presented on a historical basis. The combined statements
of operations cover periods relating to the six months ended June 30, 1998, and
from January 1, 1999 through April 26, 1999. These statements are intended to
report the combined result of operations prior to the reorganization effective
April 27, 1999 as discussed in the notes to the combined financial statements.
These statements should be read in conjunction with the Sunderland Corporation
consolidated statement of operations for period from April 27, 1999 through June
30, 1999 and the accompanying notes thereto.
See Accompanying Notes to Financial Statements
F-12
<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
F-13
<PAGE>
DEL MAR MORTGAGE, INC. AND
DEL MAR HOLDINGS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JANUARY 1, FOR THE SIX
1999 THROUGH MONTHS ENDED
APRIL 26, 1999 JUNE 30, 1998
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................$ 1,123,319 $ 1,357,823
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........................................ 884 6,365
Changes in operating assets and liabilities:
Increase in accounts receivable...................................... (72,556) (349,385)
Increase in other assets............................................. (235,253) (265,909)
Decrease in due fromto related party................................ (1,255,304) (955,564)
Increase (decrease) in accounts payable.............................. (139,271) 64,362
-------------- -------------
NET CASH USED BY OPERATING ACTIVITIES................................ (578,181) (142,308)
-------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of furniture and equipment....................................... 18,067 (12,282)
Purchase of mortgage loans................................................ -- (1,976,741)
Cash received from principal of trust deed investments.................... 636,894 --
-------------- -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES..................... 654,961 (1,989,023)
-------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES
Distribution to the shareholders.......................................... (534,490) --
Payments of capital lease obligations..................................... (221) (603)
Proceeds from issuance of common stock.................................... -- 3,206,242
-------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES..................... (534,711) 3,205,639
-------------- -------------
NET INCREASE (DECREASE) IN CASH................................................. (457,931) 1,074,308
CASH, BEGINNING BALANCE......................................................... 457,931 689,908
-------------- -------------
CASH, ENDING BALANCE............................................................$ -- $ 1,764,216
-------------- -------------
-------------- -------------
</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
F-14
<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 $702,532 for the six months
ended June 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
F-15
<PAGE>
DEL MAR MORTGAGE, INC. AND
DEL MAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
APRIL 26, 1999
(UNAUDITED)
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.
F-16
<PAGE>
[HANSEN, BARNETT & MAXWELL LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Stockholder
Del Mar Mortgage, Inc.
We have audited the accompanying balance sheet of Del Mar Mortgage, Inc. as of
December 31, 1998 and the related statements of operations, stockholder's
equity, and cash flows for the years ended December 31, 1998 and 1997. These
financial statements are the responsibility of the Company's 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 financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Del Mar Mortgage, Inc. as of
December 31, 1998 and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
April 9, 1999 (Except for Note 1,
Reorganization and Basis of Presentation,
as to which the date is September 2, 1999)
F-17
<PAGE>
DEL MAR MORTGAGE, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash......................................................................................$ 102,816
Cash held in trust........................................................................ 421,622
Accounts receivable, net of allowances of $219,000........................................ 401,526
Trust accounts receivable................................................................. 1,009,410
--------------
TOTAL CURRENT ASSETS................................................................... 1,935,374
--------------
PROPERTY AND EQUIPMENT
Furniture and equipment................................................................... 58,118
Leasehold improvements.................................................................... 1,754
--------------
TOTAL PROPERTY AND EQUIPMENT........................................................... 59,872
Less: Accumulated depreciation............................................................ 22,319
--------------
NET PROPERTY AND EQUIPMENT............................................................. 37,553
--------------
TOTAL ASSETS....................................................................................$ 1,972,927
--------------
--------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses.....................................................$ 34,701
Current portion of capital lease obligations.............................................. 4,103
Trust liabilities......................................................................... 1,431,032
--------------
TOTAL CURRENT LIABILITIES.............................................................. 1,469,836
--------------
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS.................................................. 13,718
--------------
TOTAL LIABILITIES............................................................................... 1,483,554
--------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock--$0.0001 par value; 100,000,000 shares authorized,
100,000 shares issued and outstanding................................................... 10
Additional paid-in capital................................................................ 361,394
Retained earnings......................................................................... 127,969
--------------
TOTAL STOCKHOLDER'S EQUITY................................................................ 489,373
--------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY......................................................$ 1,972,927
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
DEL MAR MORTGAGE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
REVENUES
Construction loan origination and servicing fees..........................$ 5,181,148 $ 3,714,196
Single family residence loan origination fees............................. 251,458 712,082
Extension fees............................................................ 1,084,451 372,105
Interest income........................................................... 339,273 70,932
Miscellaneous fees........................................................ 9,199 7,984
--------------- ---------------
TOTAL REVENUES........................................................ 6,865,529 4,877,299
--------------- ---------------
OPERATING EXPENSES
Sales and marketing....................................................... 536,077 642,558
General and administrative................................................ 3,757,339 2,697,008
Referral fees--related party.............................................. -- 1,536,452
--------------- ---------------
TOTAL OPERATING EXPENSES.............................................. 4,293,416 4,876,018
--------------- ---------------
INCOME BEFORE PROVISION FOR INCOME TAXES...................................... 2,572,113 1,281
PROVISION FOR INCOME TAXES.................................................... -- 1,513
--------------- ---------------
NET INCOME (LOSS).............................................................$ 2,572,113 $ (232)
--------------- ---------------
--------------- ---------------
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE..............................$ 25.72 $ --
--------------- ---------------
--------------- ---------------
WEIGHTED-AVERAGE COMMON SHARES USED
IN PER SHARE CALCULATION................................................... 100,000 100,000
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
DEL MAR MORTGAGE, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- --------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE--DECEMBER 31, 1996............ 100,000 $ 10 $ 2,490 $ 128,201 $ 130,701
Net Loss ............................. -- -- -- (232) (232)
----------- --------- ------------- ------------ --------------
BALANCE--DECEMBER 31, 1997............ 100,000 10 2,490 127,969 130,469
Net Income ........................... -- -- 2,572,113 -- 2,572,113
Distribution of receivable from
Del Mar Holdings, Inc. to the
shareholder, December 31,
1998................................ -- -- (2,213,209) -- (2,213,209)
------------ --------- ------------- ------------ --------------
BALANCE--DECEMBER 31, 1998........... 100,000 $ 10 $ 361,394 $ 127,969 $ 489,373
----------- --------- ------------- ------------ --------------
----------- --------- ------------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
DEL MAR MORTGAGE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................................................$ 2,572,113 $ (232)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation....................................................... 11,167 7,690
Changes in operating assets and liabilities:
Increase in accounts receivable.................................... (297,245) (70,403)
(Increase) decrease in due from related party...................... (2,212,226) 49,017
Increase (decrease) in accounts payable and
accrued expenses................................................ 1,528 (32,426)
Increase (decrease) in due to related party........................ (159,404) 159,404
--------------- --------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES................... (84,067) 113,050
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment..................................... (495) (13,175)
--------------- --------------
NET CASH USED BY INVESTING ACTIVITIES.............................. (495) (13,175)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations................................... (3,763) (843)
--------------- --------------
NET CASH USED BY FINANCING ACTIVITIES.............................. (3,763) (843)
--------------- --------------
NET INCREASE (DECREASE) IN CASH............................................... (88,325) 99,032
CASH, BEGINNING BALANCE....................................................... 191,141 92,109
--------------- --------------
CASH, ENDING BALANCE..........................................................$ 102,816 $ 191,141
--------------- --------------
--------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes..............................................$ 1,513 $ 23,746
--------------- --------------
--------------- --------------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
In 1998, a receivable from Del Mar Holdings, Inc. in the amount of $2,213,209
was distributed to the Company's shareholder and accounted for as a
distribution of equity.
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
DEL MAR MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Del Mar Mortgage, Inc. (the "Company") was incorporated in the
State of Nevada in April 1995. The Company operates as a mortgage company
licensed in the states of Nevada and Arizona. 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.
REORGANIZATION AND BASIS OF PRESENTATION--Effective April 27, 1999, Sunderland
Corporation ("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
Mortgage, Inc. received 100,000 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. Normally the financial statements of the Del Mar Entities would be
restated on a combined basis for all periods presented; however, as further
explained in Note 8, the State of Nevada issued an order temporarily taking
possession of Del Mar Mortgage, Inc. which resulted in the Del Mar Entities
being required to maintain separate financial statements through December 31,
1998.
Since the Del Mar Entities are considered the accounting acquirer in the
business combinations with Sunderland and Capsource, the assets of the Del Mar
Entities not acquired, net of the liabilities not assumed, have been accounted
for as distributions to the Del Mar Entities' shareholders in 1999.
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 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.
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.
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 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 assets, cost and accumulated depreciation are removed
from the accounts and any gain or loss is reflected in general and
administrative expense.
F-22
<PAGE>
DEL MAR MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
ADVERTISING COSTS--Advertising costs incurred in the normal course of operations
are expensed currently.
INCOME TAXES--The Company elected during 1998, to convert from a C-Corporation
to an S-Corporation for federal income tax purposes. As an S-Corporation,
elements of income and expense are passed through to the stockholder to be
included in his individual income tax return. Accordingly, no income tax effects
are included in the 1998 financial statements. For financial reporting purposes,
the S-Corporation election was deemed terminated on April 27, 1999. As a result,
net income and distributions to the shareholder for 1998 have been included in
the financial statements as additional paid-in capital as though the Company
distributed its earnings to the owner followed by a contribution to the capital
of the Company.
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 December 31, 1996. 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 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.
RECENT ACCOUNTING PRONOUNCEMENTS--In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No.
130 established standards for reporting and display of comprehensive income and
its components in the financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or cash flows.
NOTE 2--ACCOUNTS RECEIVABLE
The Company services loans which have been arranged for investor
parties through a servicing agreement. The servicing agreement stipulates that
all extension fees charged in behalf of the investors shall be retained by the
Company as part of the loan service fees. Accounts receivable represent
extension and loan origination fees earned but not yet funded.
NOTE 3--RELATED PARTY TRANSACTIONS
During 1997, the Company paid Shustek Investments, Inc., a related party which
is wholly-owned by the Company's shareholder, referral fees for loans originated
by the Company from customers which were referred by Shustek Investment, Inc.
The referral fees ranged from 33% to 100% of the loan origination fees charged
by the Company. Total payments for such referral fees for the year ended
December 31, 1997 totaled $1,536,452.
The practice of paying referral fees to Shustek Investments, Inc. was
discontinued at the end of 1997 when an arrangement was established with Del Mar
Holdings, Inc., a related party which is majority-owned by the Company's
shareholder. Under this arrangement, Del Mar Holdings, Inc. collected a majority
of the Company's revenues and paid a majority of its expenses which resulted in
a balance due from Del Mar Holdings, Inc. at December 31, 1998 of $2,213,209. At
December 31, 1998, the receivable from Del Mar Holdings, Inc. was transferred to
the Company's shareholder. The transfer was accounted for as a noncash equity
distribution.
The Company and its employees participate in an employee savings and profit
sharing plan (Plan) under section 401(k) of the Internal Revenue Code sponsored
by an entity wholly-owned by the Company's sole shareholder. The Company may
make discretionary contributions to this Plan on behalf of the employees. No
discretionary contributions have been made by the Company for the years ended
December 31, 1998 and 1997.
F-23
<PAGE>
DEL MAR MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 4--CAPITAL LEASES
The Company is obligated under various capital leases for certain equipment that
expire at various dates over the next four years. Capital lease obligations
totaling $17,821 require minimum monthly lease payments ranging from $71 to $400
with implicit interest rates of 9.50%.
Future minimum capital lease obligations as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999..........................................$ 5,181
2000.......................................... 5,652
2001.......................................... 5,652
2002.......................................... 4,777
--------
Total......................................... 21,262
Less amount representing interest............................. 3,441
--------
Capital lease obligations..................................... 17,821
Less current portion due...................................... 4,103
--------
Long-term portion of capital lease obligations................$ 13,718
--------
--------
</TABLE>
The carrying value of equipment leased under capital leases at December 31, 1998
and 1997 totals $16,403 and $22,427, respectively, which is net of accumulated
depreciation of $5,924 and $1,439, respectively.
NOTE 5--LOANS SERVICED FOR OTHERS
The Company services loans for others which are not shown on the balance sheet.
The balance of these loans at December 31, 1998 and 1997 approximated
$163,000,000 and $83,919,000, respectively. In connection with the loans
serviced for others, amounts held in trust for undistributed principal and
interest collections, and interest receivables for both investors and borrowers
aggregated $1,431,032 and $5,570,639 at December 31, 1998 and 1997,
respectively.
Loans serviced for others include construction loans that are originated by the
Company.
NOTE 6--COLLATERALIZED MORTGAGE OBLIGATIONS
The Company offers High Yield Collateralized Mortgage obligation certificates
(CMO's), collateralized by deeds of trust through a private placement offering
limited to the state of Nevada for a maximum amount of $20,000,000. As of
December 31, 1998, the Company has raised approximately $5,000,000 through this
private placement offering which is not shown on the balance sheet. The Company
had not yet offered the CMO's as of December 31, 1997. Even though the Company
is the issuer, the assets and liabilities associated with the CMO's is not on
the Company's balance sheet because the certificates do not give rise to any
recourse liability to the Company and are secured solely by the Collateral Pool.
They are accounted for as trust activities.
The proceeds from this offering are used for the funding and acquisition of
loans in accordance with the Indenture Agreement related to the offering or used
in connection with loans held by the Indenture Trustee as part of the collateral
pool (e.g., payments on senior encumbrances).
NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable and accrued
liabilities, approximate fair value because of the short-term maturity of these
instruments.
NOTE 8--COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS--The Company operates from a leased office facility under a
noncancellable operating lease with a company owned by the Company's sole
shareholder. The lease requires the Company to pay certain
F-24
<PAGE>
DEL MAR MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
escalation clauses for real estate taxes, operating expense, usage and common
area charges. Rent expense for leased office facility charged to operations for
the year ended December 31, 1998 and 1997 approximated $159,000 and $43,000,
respectively.
Future minimum rental payments required under the operating lease for leased
office facility as of December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999.......................................... $ 148,500
2000.......................................... 99,000
2001.......................................... 57,750
---------
Total future minimum operating lease payments......... $ 305,250
---------
---------
</TABLE>
UNFUNDED LOAN COMMITMENTS--The Company originated construction loans which are
funded by investor parties based on scheduled draws. The future funding of these
scheduled draws represent an unfunded loan commitment for the Company. As of
December 31, 1998 and 1997, unfunded loan commitments approximated $6,113,000
and $34,721,000, respectively.
LEGAL MATTERS--The Company is involved in several legal matters arising in the
ordinary course of business. Management is vigorously defending itself through
its legal counsel. In one case, the party has claimed damages in excess of
$790,000. The case is still in discovery. Losses, if any, that may be sustained
are not presently determinable. The Company's president has agreed to indemnify
the Company for any loss that may be incurred. Management believes that losses,
if any, would not be material to the Company's financial position, results of
operations or liquidity.
On February 11, 1999, the State of Nevada, Department of business and Industry,
Financial Institutions Division (the Division), issued an Order Taking
Possession of Mortgage Companies, alleging certain violations of State statutes,
and whereby the Division established a conservator to oversee the Company's
operations. On February 16, 1999, the Company filed a complaint against the
Division resulting from its actions. Negotiations between the Company and the
Division were concluded on March 26, 1999 resulting in the dismissal of the
order and the removal of the conservator.
VOUCHER CONTROL SERVICE CONTRACT--In August of 1998, the Company entered into a
contract with Disbursement Management, Inc. (DMI) to provide construction
voucher control services. The Company will pay monthly fees to DMI based upon
the amount of disbursements for construction vouchers. The monthly fees range
from a minimum of $26,500 to $35,000. The Company may terminate this contract
any time after August of 1999. DMI will have the option of canceling the
contract three years after its inception.
F-25
<PAGE>
[HANSEN, BARNETT & MAXWELL LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Stockholders
Del Mar Holdings, Inc.
We have audited the accompanying balance sheet of Del Mar Holdings, Inc. as of
December 31, 1998 and the related statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 1998 and for the period
from October 23, 1997 (date of inception) through December 31, 1997. These
financial statements are the responsibility of the Company's 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 financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Del Mar Holdings, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
year ended December 31, 1998 and for the period from October 23, 1997 (date of
inception) through December 31, 1997, in conformity with generally accepted
accounting principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
May 21, 1999 (Except for Note 1,
Reorganization and Basis of Presentation,
as to which the date is September 2, 1999)
F-26
<PAGE>
DEL MAR HOLDINGS, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash.......................................................................................$ 355,115
Other receivables.......................................................................... 11,709
Investment in mortgage loans on real estate................................................ 2,460,724
Other current assets....................................................................... 3,038
---------------
TOTAL CURRENT ASSETS.................................................................. 2,830,586
---------------
PROPERTY AND EQUIPMENT
Furniture and equipment.................................................................... 18,067
Less accumulated depreciation.............................................................. (1,687)
---------------
NET PROPERTY AND EQUIPMENT............................................................ 16,380
---------------
TOTAL ASSETS.....................................................................................$ 2,846,966
---------------
---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses......................................................$ 218,380
Note payable............................................................................... 350,000
Short-term loan............................................................................ 100,000
---------------
TOTAL CURRENT LIABILITIES............................................................. 668,380
---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock--$0.0001 par value; 100,000,000 shares authorized;
4,791,270 shares issued and outstanding.................................................. 479
Additional paid-in capital................................................................. 2,713,753
Receivable from shareholder................................................................ (535,646)
---------------
TOTAL STOCKHOLDERS' EQUITY............................................................ 2,178,586
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................................$ 2,846,966
---------------
---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
DEL MAR HOLDINGS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD FROM OCTOBER 23, 1997 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
REVENUES
Related party management and referral fees..................................$ 301,353 $ --
Interest income from mortgage loans......................................... 307,425 --
Other....................................................................... 15,000 --
------------- -------------
TOTAL REVENUES......................................................... 623,778 --
------------- -------------
OPERATING EXPENSES
General and administrative expenses......................................... 364,287 429,562
Interest expense............................................................ 115,956 --
------------- -------------
TOTAL OPERATING EXPENSES............................................. 480,243 429,562
------------- -------------
NET INCOME........................................................................$ 143,535 $ (429,562)
------------- -------------
------------- -------------
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE..................................$ 0.03 $ (0.10)
------------- -------------
------------- -------------
WEIGHTED AVERAGE COMMON SHARES USE IN PER SHARE CALCULATION....................... 4,630,220 4,333,762
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
DEL MAR HOLDINGS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------- ADDITIONAL RECEIVABLE TOTAL
NUMBER OF PAID-IN FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHAREHOLDER EQUITY
------------ ------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE--OCTOBER 23, 1997 (DATE
OF INCEPTION)......................... -- $ -- $ -- $ -- $ --
Issuance for services, January
through July 1997 (prior to
formation), $0.10 per share............. 4,255,003 426 425,074 -- 425,500
Issuance for cash, October through
December 1997, $5.00 per share.......... 122,867 12 614,321 -- 614,333
Net loss for the period.................. -- -- (429,562) -- (429,562)
------------ ------------- ------------- ---------------- -------------
BALANCE--DECEMBER 31, 1997............... 4,377,870 438 609,833 -- 610,271
Issuance for cash, January through
August 1998, $5.35 per share.......... 413,400 41 2,211,025 -- 2,211,066
Conversion of payable to Del Mar
Mortgage, Inc. to equity, Decem-
ber 31, 1998, $5.35 per share.......... 413,801 41 2,213,168 -- 2,213,209
Distribution of receivable from
related party to a shareholder,
December 31, 1998,
$5.08 per share........................ (413,801) (41) (2,101,046) -- (2,101,087)
Distribution of mortgage loans to
a shareholder, December 31, 1998....... -- -- (362,762) -- (362,762)
Cash advances to shareholder............. -- -- -- (535,646) (535,646)
Net income for the year.................. -- -- 143,535 -- 143,535
------------ ------------- ------------- ---------------- -------------
BALANCE--DECEMBER 31, 1998............... 4,791,270 $ 479 $ 2,713,753 $ (535,646) $ 2,178,586
------------ ------------- ------------- ---------------- -------------
------------ ------------- ------------- ---------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
DEL MAR HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD FROM OCTOBER 23, 1997 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...........................................................$ 143,535 $ (429,562)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation............................................................. 1,687 --
Interest and loan extension fee added to note payable.................... 100,000 --
Services paid for with common stock...................................... -- 425,500
Changes in current assets and current liabilities:
Other receivables........................................................ (11,709) --
Other current assets..................................................... (3,038) --
Accounts payable and accrued expenses.................................... 214,889 3,491
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES...................... 445,364 (571)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of mortgage loans................................................. (2,643,491) (179,995)
Purchase of furniture and equipment......................................... (18,067) --
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (2,661,558) (179,995)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances to related party................................................... (1,636,087) (465,000)
Collection of revenue and fees of Del Mar Mortgage, Inc. in
excess of payments made for Del Mar Mortgage, Inc......................... 2,213,209 --
Advances to shareholder..................................................... (535,646) --
Proceeds from note payable and short-term loans............................. 100,000 530,000
Principal payments on short-term loans...................................... (280,000) --
Proceeds from issuance of common stock...................................... 2,211,066 614,333
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................................ 1,709,780 679,333
------------- -------------
NET INCREASE (DECREASE) IN CASH................................................. (143,652) 498,767
CASH AT BEGINNING OF PERIOD .................................................... 498,767 --
------------- -------------
CASH AT END OF PERIOD...........................................................$ 355,115 $ 498,767
------------- -------------
------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest......................................................$ 19,447 $ --
------------- -------------
------------- -------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES During the
year ended December 31, 1998, $2,213,209 payable to Del Mar Mortgage, Inc.
was converted to stockholders' equity by the major shareholder of the
Company, $2,101,087 due from a company owned by the major shareholder was
distributed to that shareholder and $362,762 of mortgage loans were
distributed to the same shareholder.
During the period ended December 31, 1997, the Company issued 4,255,003 for
$425,500 of services.
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
DEL MAR HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Del Mar Holdings, Inc. (the "Company") was incorporated in the
State of Nevada on October 23, 1997. The Company provides mortgage management
and administrative services to Del Mar Mortgage, Inc., a company related through
common ownership and management. Del Mar Mortgage, Inc. pays the Company
referral fees from loans originated outside the State of Nevada. The Company
also invests in short-term mortgage loans originated by Del Mar Mortgage, Inc.
relating to construction projects and real estate bridge financing.
REORGANIZATION AND BASIS OF PRESENTATION--Effective April 27, 1999, Sunderland
Corporation ("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
Holdings, Inc. received 4,791,270 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. Normally the financial statements of the Del Mar Entities would be
restated on a combined basis for all periods presented; however, as further
explained in Note 7, the State of Nevada issued an order temporarily taking
possession of Del Mar Mortgage, Inc. which resulted in the Del Mar Entities
being required to maintain separate financial statements through December 31,
1998.
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 in 1999.
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.
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 assets, cost and accumulated depreciation are removed
from the accounts and any gain or loss is reflected in general and
administrative expenses.
INCOME TAXES--Upon formation in October 1997, the Company elected to be taxed as
an S-Corporation for federal income tax purposes. As an S-Corporation, elements
of income and expense are passed through to the stockholders to be included in
their individual income tax returns. Accordingly, no income tax effects are
included in the financial statements. For financial reporting purposes, the
S-Corporation election was deemed
F-31
<PAGE>
DEL MAR HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
terminated on April 27, 1999. As a result, net loss and distributions to the
shareholder have been included in the financial statements as additional paid-in
capital as though the Company distributed its losses to the shareholders.
FAIR VALUES OF FINANCIAL INSTRUMENTS--The carrying amounts of cash, other
receivables, investment in mortgage loans on real estate, accounts payable and
accrued expenses, notes payable and the short-term loan approximate their fair
values because of the short-term maturity of these instruments.
NOTE 2--RECEIVABLE FROM SHAREHOLDER
As of December 31, 1998, the receivable from a shareholder of $535,646
represents amounts advanced to the Company's major shareholder. This receivable
was subsequently collateralized by the major shareholder's shares of common
stock of Sunderland Corporation. The outstanding balance bears no interest and
is due on demand.
NOTE 3--INVESTMENT IN MORTGAGE LOANS ON REAL ESTATE
The Company has invested in mortgage loans originated by Del Mar Mortgage, Inc.
The mortgage loans are 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. At December 31,
1998, mortgage loans secured by second trust deeds with a face amount of
$362,762 were distributed to the major shareholder of the Company at their
carrying amount which was considered their fair value. The underlying value of
the trust deeds securing the remaining mortgage loans was considered sufficient
to realize their carrying value. Accordingly, an allowance for loan losses was
not required at December 31, 1998.
NOTE 4--NOTE PAYABLE AND SHORT-TERM LOAN
The note payable totaling $350,000 at December 31, 1998 is due December 1999 to
an unrelated party. The note was issued in November 1997 with an interest rate
of 10% and a principal amount of $250,000. Interest of $25,000 and a loan
extension fee (recognized as additional interest) of $75,000 were added to the
loan during 1998.
The short-term loan totaling $100,000 at December 31, 1998, represents a
short-term, non-interest bearing advance due on demand. The advance was repaid
in January 1999.
NOTE 5--STOCKHOLDERS' EQUITY
From January through July 1997, certain individuals made preparations to form
the Company and for an initial public offering of the Company's common stock.
The individuals were compensated for their services by the Company issuing
4,255,003 shares of common stock when the Company was incorporated. The shares
issued were valued at $425,500, or $0.10 per share, based upon the value of the
services rendered and management's estimate of value of the Company's stock as
if the Company had been formed when the services were rendered.
NOTE 6--COMMITMENTS AND CONTINGENCIES
The Company is involved in various routine legal proceedings arising in the
ordinary course of business. Management believes that these proceedings are
without merit and will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.
F-32
<PAGE>
DEL MAR HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 7--RELATED PARTY TRANSACTIONS
The Company has an arrangement with Del Mar Mortgage, Inc. (Mortgage), whereby
the Company paid certain expenses, such as processing payroll and other
operating activities for and on behalf of Mortgage. The Company also charges
Mortgage for mortgage management and administrative services provided by the
Company. In addition, the Company collected $3,008,542 of revenue and fees from
customers of Mortgage for and on behalf of Mortgage. These transactions resulted
in a net amount payable to Mortgage of $2,213,209 at December 31, 1998. The
major shareholder converted this payable into additional paid-in capital on
December 31, 1998.
The Company has paid expenses and other payments of $1,636,087 and $465,000
during the year ended December 31, 1998 and 1997, respectively, for and on
behalf of Shustek Investments, Inc., a company related through common ownership.
These advances resulted in $2,101,087 due from Shustek Investments, Inc. at
December 31, 1998 which was distributed to the major shareholder of the Company
on December 31, 1998.
On February 11, 1999, the State of Nevada, Department of Business and Industry,
Financial Institutions Division (the Division), issued an order taking
possession of Mortgage. The Division alleged that certain violations of State
statutes had occurred and established a conservator to oversee Mortgage's
operations. On February 16, 1999, Mortgage filed a complaint against the
Division resulting from its actions. Negotiations between Mortgage and the
Division were concluded on March 26, 1999 resulting in the dismissal of the
order and the removal of the conservator.
NOTE 8--SUBSEQUENT EVENT
As explained in Note 1, an agreement was reached effective April 27, 1999 with
Sunderland Corporation whereby the Company sold its investment in mortgage loans
on real estate, receivable from shareholder and other current assets for
4,791,270 shares of Sunderland Corporation common stock. In addition, Sunderland
Corporation assumed a $350,000 note payable.
F-33
<PAGE>
[HANSEN, BARNETT & MAXWELL LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder
CapSource, Inc.
We have audited the accompanying balance sheets of CapSource, Inc. as of
December 31, 1998, and the related statements of income, stockholder's equity,
and cash flows for the year ended December 31, 1998, and for the period April
30, 1997 (date of inception) through December 31, 1997. These financial
statements are the responsibility of the Company's 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
which 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 financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CapSource, Inc. as of December
31, 1998, and the results of its operations and its cash flows for the period
April 30, 1997 (date of inception) through December 31, 1997, and for the year
ended December 31, 1998 in conformity with generally accepted accounting
principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City,
Utah April 7, 1999 (Except for Note 1,
Business Combination, and Note 3, as to
which the date is September 2, 1999)
F-34
<PAGE>
CAPSOURCE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ --------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash....................................................................... $ 8,650 $ 9,747
------------ --------------
TOTAL CURRENT ASSETS................................................ 8,650 9,747
PROPERTY AND EQUIPMENT
Furniture and fixtures..................................................... 987 987
Office equipment........................................................... 2,771 2,770
------------- --------------
TOTAL PROPERTY AND EQUIPMENT........................................ 3,758 3,757
Less: Accumulated depreciation............................................. (1,017) (829)
------------- --------------
NET PROPERTY AND EQUIPMENT.......................................... 2,741 2,928
COST OF MORTGAGE LICENSE, NET OF AMORTIZATION..................................... 1,000 1,075
------------- --------------
TOTAL ASSETS........................................................$ 12,391 $ 13,750
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES...............................................................$ -- $ --
STOCKHOLDER'S EQUITY
Common stock--no par value; 2,500 shares authorized;
100 shares issued and outstanding....................................... 5,022 5,022
Retained earnings.......................................................... 7,369 8,728
------------- --------------
TOTAL STOCKHOLDER'S EQUITY.......................................... 12,391 13,750
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........................................$ 12,391 $ 13,750
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
CAPSOURCE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE THREE MONTHS FOR THE FROM APRIL 30,
ENDED MARCH 31, YEAR ENDED 1997, (DATE OF
---------------------------------- DECEMBER 31, INCEPTION) THROUGH
1999 1998 1998 DECEMBER 31, 1997
---------------- --------------- -------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Brokerage fees........................$ 114,487 $ 53,442 $ 213,764 $ 37,424
Other fees............................ 737 821 3,285 4,700
Interest Income....................... 16 405 1,621 --
---------------- --------------- -------------- --------------
TOTAL REVENUE...................... 115,240 54,668 218,670 42,124
---------------- --------------- -------------- --------------
OPERATING EXPENSES
Consulting and other.................. 101,000 46,589 186,356 30,235
Referral fees......................... -- 1,483 5,932 250
Rent.................................. 2,482 1,721 6,962 3,388
Other general and administrative
expenses........................... 12,855 3,625 14,501 4,442
---------------- --------------- -------------- --------------
TOTAL OPERATING EXPENSES........... 116,337 53,438 213,751 38,315
---------------- --------------- -------------- --------------
NET INCOME (LOSS).........................$ (1,097) $ 1,230 $ 4,919 $ 3,809
---------------- --------------- -------------- --------------
---------------- --------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
CAPSOURCE, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------------ RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
-------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
BALANCE--APRIL 30, 1997 (DATE OF INCEPTION) -- $ -- $ -- $ --
Common stock issued for cash .......................... 100 5,022 -- 5,022
Net income............................................. -- -- 3,809 3,809
-------------- ------------- -------------- -------------
BALANCE--DECEMBER 31, 1997............................ 100 $ 5,022 $ 3,809 $ 8,831
Net income............................................. -- -- 4,919 4,919
-------------- ------------- -------------- -------------
BALANCE--DECEMBER 31, 1998............................ 100 5,022 8,728 13,750
Net loss (Unaudited).................................. -- -- (1,360) (1,360)
-------------- ------------- -------------- -------------
BALANCE--MARCH 31, 1999 (UNAUDITED)................... 100 $ 5,022 $ 7,368 $ 12,390
-------------- ------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
CAPSOURCE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE THREE MONTHS FOR THE FROM APRIL 30,
ENDED MARCH 31, YEAR ENDED 1997, (DATE OF
-------------------------- DECEMBER 31, INCEPTION) THROUGH
1999 1998 1998 DECEMBER 31, 1997
----------- ------------- -------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...............................$ (1,360) $ 1,230 $ 4,919 $ 3,809
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization............................... 75 75 300 125
Depreciation............................... 188 188 752 77
----------- ------------- -------------- ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.................................... (1,097) 1,493 5,971 4,011
----------- ------------- -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of mortgage license.................... -- -- -- (1,500)
Purchase of property and equipment.............. -- (2,215) (2,215) (1,542)
----------- ------------- -------------- ------------
NET CASH USED IN INVESTING ACTIVITIES........... -- (2,215) (2,215) (3,042)
----------- ------------- -------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock issued for cash........................... -- -- -- 5,022
----------- ------------- -------------- ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES.................................... -- -- -- 5,022
----------- ------------- -------------- ------------
NET INCREASE IN CASH ................................. (1,097) (722) 3,756 5,991
CASH AT BEGINNING OF PERIOD........................... 9,747 5,991 5,991 --
----------- ------------- -------------- ------------
CASH AT END OF PERIOD.................................$ 8,650 $ 5,269 $ 9,747 $ 5,991
----------- ------------- -------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
CAPSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY--On April 30, 1997, CapSource, Inc. (the Company) was
incorporated under the laws of the State of Nevada. The Company has elected
S-Corporation status under the Internal Revenue Code. The Company is engaged in
the business of mortgage services, specifically the origination and the buying
and selling of mortgages, principally in the greater Las Vegas area.
BUSINESS COMBINATION--Effective April 27, 1999, Sunderland Corporation
("Sunderland") consummated a business combination with the Company whereby
Sunderland acquired all of the outstanding capital stock of CapSource in
exchange for 20,000 shares of Sunderland common stock (post 5-for-3 stock
split). The business combination between Sunderland 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.
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 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.
INTERIM FINANCIAL STATEMENTS--The accompanying financial statements as of March
31, 1999 and for the three months then ended are unaudited and, in the opinion
of management, all necessary adjustments (which include only normal recurring
adjustments) have been made to present fairly the financial position, results of
operations and cash flows for the period presented.
ACCOUNTING POLICY--Revenues and expenses are recognized on the accrual basis in
accordance with generally accepted accounting principles.
CASH EQUIVALENTS--Cash equivalents include highly liquid short-term investments
with original maturities of three months or less, readily convertible to known
amounts of cash.
PROPERTY AND EQUIPMENT--Property and equipment are carried at cost and
depreciated over five years using the straight-line method. Depreciation expense
for the three months ended March 31, 1999, the year ended December 31, 1998, and
the period ended December 31, 1997 was $188, $752, and $77, respectively.
MORTGAGE LICENSE--The mortgage license is recorded at its cost of $1,500 and is
amortized over five years using the straight-line method. Amortization expense
for the three months ended March 31, 1999, the year ended December 31, 1998, and
the period ended December 31, 1997 was $75, $300, and $125, respectively.
ADVERTISING--The Company follows the policy of charging the costs of advertising
to expense as incurred. Advertising expense for the period April 30, 1997 (date
of inception) through December 31, 1997, for the year ended December 31, 1998,
and for the three months ended March 31, 1999 was $0, $2,919, and $0,
respectively.
INCOME TAXES--The Company is treated as an S-Corporation for income tax
purposes. Elements of income and expense are passed through to the stockholders
to be included in their personal income tax returns. Accordingly, no income tax
effects are included in the financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial Accounting
Standards Board (FASB) issued Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME (FAS 130). FAS 130 establishes standards for reporting and
display of comprehensive income and its components in the financial statements.
FAS 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial
F-39
<PAGE>
CAPSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
statements for earlier periods provided for comparative purposes is required.
The adoption of this standard has no impact on the Company's results of
operations, financial position or cash flows.
NOTE 2--LEASE COMMITMENTS
During 1997, the Company rented its office space on a month-to-month basis. In
1998, the Company entered into a 12-month noncancellable lease. The minimum
lease payment is $575 per month. On June 30, 1999, when this lease expires, the
Company has the option to continue leasing its office space on a month-to-month
basis. This lease is classified as an operating lease. The Company's future
minimum obligation under this lease amounts to $3,450, payable in 1999.
Rent expense for the period April 30, 1997 (date of inception) through December
31, 1997, and for the year ended December 31, 1998, and for the three months
ended March 31, 1999 was $3,388, $6,962, and $2,482, respectively.
NOTE 3--SUBSEQUENT EVENT
As explained in Note 1, an agreement was reached effective April 27, 1999 with
Sunderland Corporation whereby all of the outstanding capital stock of the
Company was acquired by Sunderland in exchange for 20,000 shares of Sunderland
common stock. The transaction was accounted for under the purchase method of
accounting.
F-40
<PAGE>
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Sunderland Corporation
By: /s/ Stephen J. Byrne
(Print name and title of signing officer)
Stephen J. Byrne, President
Dated: October 6, 1999
