<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 000-24803
SUNDERLAND CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 52-2102142
- ---------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2901 El Camino Avenue, Las Vegas, Nevada 89102
-----------------------------------------------------------------
(Address of principal executive offices)
702/227-0965
-------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No __
State the number of shares outstanding of each of the issuer's classes of common
equity, as of October 5, 1999:
Common 6,121,270
<PAGE>
SUNDERLAND CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Sunderland Corporation:
Consolidated Balance Sheet as of June 30, 1999 (Unaudited) 1
Consolidated Statement of Operations for the period from April 27, 1999
(Date of Reorganization) through June 30, 1999 (Unaudited) 2
Consolidated Statement of Stockholders' Equity for the period from April
27, 1999 (Date of Reorganization) through June 30, 1999 3
Consolidated Statement of Cash Flows for the period from April 27, 1999
(Date of Reorganization) through June 30, 1999 (Unaudited) 4
Notes to Consolidated Financial Statements 5
Del Mar Mortgage, Inc. and Del Mar Holdings, Inc.:
Combined Statements of Operations for the period from April 1, 1999
through April 26, 1999, for the three months ended June 30, 1998, for
the period from January 1, 1999 through April 26, 1999 and for the six
months ended June 30, 1998 (Unaudited) 9
Combined Statement of Stockholders' Equity for the period from January 1,
1999 through April 26, 1999 (Unaudited) 10
Combined Statements of Cash Flows for the period from January 1, 1999
through April 26, 1999 and for the six months ended
June 30, 1998 (Unaudited) 11
Notes to Combined Financial Statements 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 17
Item 3 Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL INFORMATION
SUNDERLAND CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
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.
1
<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.
2
<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.
3
<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 transferred in reorganization........................................................... 416
Cash outlay for trust deed investments....................................................... (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.
4
<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 ("Sunderland" or the "Company"), was
incorporated in the state of Delaware on June 2, 1998. Through its subsidiaries,
the Company operates as a mortgage company licensed in the state of Nevada. The
Company is engaged in the origination, arrangement, and secondary purchase and
sale of loans secured by real property. In addition, construction loans, which
the Company arranges for investor-parties, are serviced by the Company during
the construction period. Through its predecessors, the Company has also invested
in short-term mortgage loans relating to construction projects and real estate
bridge financing.
REORGANIZATION AND BASIS OF PRESENTATION--Effective April 27, 1999, Sunderland
consummated an asset purchase agreement with Del Mar Mortgage, Inc. and Del Mar
Holdings, Inc. (collectively referred to as the "Del Mar Entities") whereby
Sunderland acquired certain assets and assumed certain liabilities of the Del
Mar Entities in exchange for 4,891,270 shares of Sunderland common stock (post
5-for-3 stock split). The shareholders of Del Mar Entities received 4,891,270
shares of common stock of Sunderland Corporation. Sunderland had 6,161,270
(post-split) common shares outstanding after the reorganization. As a result of
the transaction with Sunderland, the shareholders of the Del Mar Entities
received a majority of the common stock of Sunderland. Accordingly, the Del Mar
Entities were considered the acquirer for financial reporting purposes and their
financial statements have been restated for all periods presented to reflect the
common shares received by the stockholders of the Del Mar Entities, in a manner
similar to a stock split.
The Del Mar Entities were related entities under common management and
controlling ownership. Accordingly, the business combination between the Del Mar
Entities has been accounted for as a reorganization of entities under common
control.
Since the Del Mar Entities are considered the accounting acquirer in the
business combinations with Sunderland and Capsource, the assets not acquired,
net of the liabilities not assumed, have been accounted for as distributions to
the Del Mar Entities' shareholders.
Sunderland was a shell corporation with no operations and nominal assets prior
to the transaction. Accordingly, the transaction between the Del Mar Entities
and Sunderland has been accounted for as a reverse acquisition of the net assets
of Sunderland by the Del Mar Entities in exchange for the issuance of 1,250,000
shares of common stock. The assets of Sunderland have been recorded at their
historical cost which was also equal to their fair value.
The business combination with Capsource has been accounted for as a purchase
business combination. The cost of Capsource is based upon the fair value of the
20,000 common shares issued to the Capsource shareholder, which was $12,360 or
$0.62 per share. The acquisition resulted in the recognition of $1,390 of
goodwill. Goodwill is being amortized over a period of 5 years using the
straight-line method.
Following the above transactions, the new Sunderland shareholders approved a
5-for-3 stock split of Sunderland's common stock, resulting in 6,161,270 common
shares outstanding after the stock split. The above amounts and the accompanying
financial statements have been restated for the effects of the stock split on a
retroactive basis.
The Company has continued the loan origination segment of the various business
operations formerly conducted by Del Mar Mortgage, Inc. through Capsource, a
wholly owned subsidiary. Capsource operates as a mortgage company licensed in
the state of Nevada. Capsource is engaged in the origination, arrangement, and
secondary purchase and sale of loans secured by real property.
The following unaudited pro forma consolidated information is to present the
results of operations of the combined companies as though the above transactions
had been effective on January 1, 1998. The pro forma results of operations are
based upon assumptions that Sunderland Corporation believes are reasonable and
are based on the historical operations of Del Mar Mortgage, Inc., Del Mar
Holdings, Inc., Suncerland and Capsource adjusted for the effects of the
reorganization and the purchases described above. The pro forma information is
presented for informational purposes only and is not necessarily indicative of
results of operations that would have occurred had the above transactions been
consummated on January 1, 1998, or which may occur in the future:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues........................... $5,788,986 $4,036,105
Net income......................... 1,369,328 850,508
Basic and diluted income per
common share..................... $ 0.22 $ 0.14
</TABLE>
INTERIM CONSOLIDATED FINANCIAL STATEMENTS--The accompanying consolidated
financial statements are unaudited and include the accounts of the Company and
its subsidiary which is wholly-owned. All significant inter-company transactions
and balances have been eliminated in consolidation. In the opinion of
management, all necessary adjustments (which include only normal recurring
adjustments) have been made to the accompanying financial statements in order to
present fairly the financial position, results of operations and cash flows for
the period presented.
5
<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 are reduced by direct loan
origination costs, excluding loan processing costs. Loan servicing fees are
recorded as revenue when such services are rendered. Servicing fees represent
the interest spread between what is paid the investor and what the borrower pays
for the use of the money. This can vary from loan to loan. Extension fees are
recorded as revenue at the extension grant date.
CASH--The Company invests its cash in high quality financial institutions, which
at times may be in excess of the Federal Deposit Insurance Corporation insurance
limits.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided principally on the
straight-line method over the estimated useful lives of the assets. The cost of
repairs and maintenance is charged to expense as incurred. Expenditures for
property betterments and renewals are capitalized. Upon sale or other
disposition of depreciable asset, cost and accumulated depreciation are removed
from the accounts and any gain or loss is reflected in other income (expense).
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.
6
<PAGE>
SUNDERLAND CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
NOTE 2--ACCOUNTS RECEIVABLE
The Company services loans which have been arranged for the investor parties
through a servicing agreement. The servicing agreement stipulates that all
extension fees charged on behalf of the investors shall be retained by the
Company as part of the loan servicing fees. Accounts receivable represent
extension and loan origination fees earned but not yet funded.
NOTE 3--INVESTMENT IN MORTGAGE LOANS ON REAL ESTATE
The Company has invested in mortgage loans secured by first and second real
estate deeds of trust. These loans have maturities of one year or less with
interest rates ranging from 12% to 14% payable monthly, with principal due at
maturity. The underlying value of the trust deeds securing the mortgage loans is
considered sufficient to realize their carrying value. Accordingly, an allowance
for loan losses was not required.
NOTE 4--NOTE PAYABLE
The note payable of $350,000 is due to an unrelated party on 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.
The receivable from a shareholder represents amounts advanced to the Company's
major shareholder. The promissory note is collateralized by this shareholder's
stock in the Company, bears interest of 8%,and the principal and interest are
due December 2001.
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.
7
<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:
<TABLE>
<S> <C>
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
-----------
-----------
</TABLE>
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 $35,000. The Company may terminate this contract any time after
August of 1999. DMI will have the option of canceling the contract three years
after its inception.
8
<PAGE>
DEL MAR MORTGAGE, INC. AND
DEL MAR HOLDINGS, INC.
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM APRIL 1, FOR THE THREE FROM JANUARY 1, FOR THE SIX
1999 THROUGH MONTHS ENDED 1999 THROUGH MONTHS ENDED
APRIL 26, 1999 JUNE 30, 1999 APRIL 26, 1999 JUNE 30, 1998
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues
Loan origination and related fees.....$ 1,475,494 $ 1,681,159 $ 2,633,050 $ 3,258,529
Interest income....................... 259,419 141,293 488,885 323,348
Other income.......................... 105,395 195,601 191,060 12,100
-------------- ------------- -------------- --------------
Total Revenues................... 1,840,308 2,018,053 3,312,995 3,593,977
-------------- ------------- -------------- --------------
Operating Expenses
Sales and marketing................... 238,084 203,372 407,685 268,039
General and administrative............ 975,641 1,140,733 1,757,226 1,908,869
Interest expense...................... 5,551 29,623 24,765 59,246
-------------- ------------- -------------- --------------
Total Operating Expenses......... 1,219,276 1,373,728 2,189,676 2,236,154
-------------- ------------- -------------- --------------
Net Income..................................$ 621,032 $ 644,325 $ 1,123,319 $ 1,357,823
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
Primary and Fully Diluted Earnings
Per Common Share.........................$ 0.13 $ 0.13 $ 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 4,891,270 4,891,270
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
</TABLE>
BASIS OF COMBINED STATEMENTS OF OPERATIONS PRESENTATION: The condensed combined
statements of operations for Del Mar Mortgage, Inc. and Del Mar Holdings, Inc.
noted above have been presented on a historical basis.
See Accompanying Notes to Financial Statements
9
<PAGE>
DEL MAR MORTGAGE, INC., AND
DEL MAR HOLDINGS, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 26, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL RECEIVABLE TOTAL
NUMBER OF PAID-IN RETAINED FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHAREHOLDER EQUITY
------------ --------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE--DECEMBER 31, 1998:
Del Mar Mortgage, Inc......... 100,000 10 361,394 127,969 -- 489,373
Del Mar Holdings, Inc......... 4,791,270 479 2,713,783 -- (535,646) 2,178,586
------------ --------- ------------- ------------- ------------ --------------
Combined Balance.............. 4,891,270 $ 489 $ 3,075,147 $ 127,969 $ (535,646) $ 2,667,959
Distribution of assets, net of
liabilities, to the Del Mar
Mortgage, Inc. and Del Mar
Holdings, Inc. shareholders,
April 26, 1999................. -- -- (1,633,976) -- -- (1,633,976)
Net Income for the period........ -- -- 1,123,319 -- -- 1,123,319
------------ --------- ------------- ------------- ------------ --------------
BALANCE--APRIL 26, 1999.......... 4,891,270 $ 489 $ 2,564,490 $ 127,969 $ (535,646) $ 2,157,302
------------ --------- ------------- ------------- ------------ --------------
------------ --------- ------------- ------------- ------------ --------------
</TABLE>
See Accompanying Notes to Financial Statements
10
<PAGE>
DEL MAR MORTGAGE, INC. AND
DEL MAR HOLDINGS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
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 from 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
11
<PAGE>
DEL MAR MORTGAGE, INC. AND
DEL MAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
APRIL 26, 1999
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--The accompanying combined financial statements include the
combined accounts of Del Mar Holdings, Inc. ("DMH") and Del Mar Mortgage, Inc.
("DMM"), which are under common management of DMH. The combined group is
collectively referred to as the "Company". The combined financial statements
have been presented on a combined basis due to common control and management.
All significant intercompany balances and transactions have been eliminated.
Del Mar Holdings, Inc. was incorporated in the state of Nevada in October 1997.
The Company operates as a management company in the state of Nevada.
Del Mar Mortgage, Inc. was incorporated in the state of Nevada in April 1995.
The Company operates as a mortgage company licensed in the state of Nevada. The
Company is engaged in the origination, arrangement, and secondary purchase and
sale of loans secured by real property. In addition, the Company services
construction loans during the construction period which it has arranged for
investor parties.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures during the
reporting period. Accordingly, actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS--The accompanying financial statements are
unaudited and, in the opinion of management, all necessary adjustments (which
include only normal recurring adjustments) have been made to present fairly the
results of operations and cash flows for the periods presented.
REVENUE RECOGNITION--The Company recognizes revenue primarily from loan
origination fees and extension fees. Loan origination fees are recorded as
revenue at the close of escrow. Extension fees are recorded as revenue at the
extension grant date.
ADVERTISING COSTS--Advertising costs incurred in the normal course of operations
are expensed currently.
NOTE 2--RELATED PARTY TRANSACTIONS
The Company incurred management fees expense of $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
for as
12
<PAGE>
DEL MAR MORTGAGE, INC. AND
DEL MAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
APRIL 26, 1999
(UNAUDITED)
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.
PART I. FINANCIAL INFORMATION (continued)
SUNDERLAND CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the combined financial statements and the accompanying
notes thereto included in Item 1 of this Quarterly Report the Form 8-K/A filed
October 5, 1999.
Forward Looking Statements
When used in this Quarterly Report on Form 10-QSB the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated," or similar
expressions are intended to identify "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties, including but not limited to
changes in interest rates, the Company's dependence on debt financing and
securitizations to fund operations, risks associated with the Year 2000 issue,
and fluctuations in operating results. Such factors, which are discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinion or statements expressed herein with respect to future periods. As a
result, the Company wishes to caution readers not to place undue reliance on any
such forward looking statements, which speak only as of the date made.
The following financial review and analysis is intended to assist in
understanding and evaluating the financial condition and results of operations
of the Company for the six months ended June 30, 1999 and 1998. This information
should be read in conjunction with the financial statements statements and
accompanying notes included in this quarterly report.
OVERVIEW
Sunderland Corporation is a newly-created company resulting from the acquisition
by Sunderland Acquisition Corporation, which had no operations, revenues or
liabilities, of Capsource, Inc., an operating Nevada mortgage lending company,
on April 27, 1999 in exchange for 20,000 (post-split) shares of common stock of
Sunderland. Simultaneously, Sunderland Acquisition Corporation acquired certain
assets and assumed certain liabilities of Del Mar Mortgage, Inc., a Nevada
mortgage company, and Del Mar Holdings, Inc., a Nevada corporation, (the "Del
Mar Entities") in exchange for 4,891,270 (post-split) shares of common stock of
Sunderland. Upon effectiveness of these transactions, the Company changed its
name to Sunderland Corporation and effected a 5-for-3 forward stock split of its
common stock.
13
<PAGE>
Because Del Mar Holdings and Del Mar Mortgage and are related entities under
common management and controlling ownership, the business combination between
them has been accounted for as a reorganization of entities under common
control. The reorganization reflects the combined financial statements of the
Del Mar Entities and the restatement of their stockholders' equity for the
shares issued by Sunderland in a manner similar to a stock split. Only certain
assets of the Del Mar Entities were acquired by Sunderland; however, since the
Del Mar Entities are considered the accounting acquirer in the business
combinations with Sunderland and Capsource, the assets not acquired, net of the
liabilities not assumed, have been accounted for as distributions to the Del Mar
Entities' shareholders. The transaction between the Del Mar Entities and
Sunderland has been accounted for as a reverse acquisition of Sunderland by the
Del Mar Entities and the assets of Sunderland have been recorded at historical
cost since Sunderland was a shell corporation with no operations and only
nominal assets prior to the transaction.
The business combination between the Del Mar Entities and Capsource has been
accounted for under the purchase method of accounting resulting in recognition
of $1,390 in goodwill to be amortized over five years.
As part of the transactions, the Company assumed $350,000 in liabilities of Del
Mar Holdings.
RESULTS OF OPERATIONS:
The following table represents the Company's unaudited consolidated results of
operations for the three and six months ended June 30, 1999 and has been
presented in the following table on a pro forma basis giving effect to the
reorganization and acquisitions as if they had become effective at the beginning
of each period. The combined results of operations for Del Mar Mortgage, Inc.
and Del Mar Holdings, Inc. for the three and six months ended June 30, 1998 has
also been presented on a pro forma comparative purposes.
<TABLE>
<CAPTION>
Pro Forma Consolidated Pro Forma Combined Del Mar Mortgage, Inc.
Sunderland Corporation and Del Mar Holdings, Inc
------------------------------------------- -----------------------------------------
For the Three For the Six For the Three For the Six
Months Ended Months Ended Months Ended Months Ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 1998
--------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Revenues $ 4,201,059 100% $ 5,788,986 100% $ 2,018,053 100% $ 3,593,977 100%
Sales and marketing expense 757,570 18% 927,171 16% 203,372 10% 268,039 7%
General and administrative expense 1,864,352 44% 2,762,310 48% 1,140,733 57% 1,908,869 53%
Interest expense 5,551 0% 24,765 0% 29,623 1% 59,246 2%
Income before income taxes 1,573,586 37% 2,074,740 36% 644,325 32% 1,357,823 38%
Provision for income taxes (1) 535,019 13% 705,412 12% 219,071 11% 461,660 13%
Net income $ 1,038,567 25% $ 1,396,328 24% $ 425,254 21% $ 896,163 25%
Earnings per share:
Primary and fully diluted $ 0.17 $ 0.22 $ 0.07 $ 0.15
Weighted average number of common shares 6,161,270 6,161,270 6,161,270 6,161,270
</TABLE>
(1) Provisions for income taxes have been added using a tax rate of 34%.
COMPARISON OF PRO FORMA SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
Revenue. The Company reported revenues of $5.8 million for the six months ended
June 30, 1999, an increase from $3.6 million in the same period for 1998. The
increase in revenue was primarily due to an increase in fees charged on loan
origination and an increase in loan funding activities outside the State of
Nevada.
14
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses of $0.9 million for
the six months ended June 30, 1999 increased from $0.3 million in the same
period for 1998. The increase in sales and marketing expenses is due to an
increase in commissions paid primarily related to the increase in loans
originated as discussed above.
General and Administrative Expenses. General and administrative expenses of $2.8
million for the six months ended June 30, 1999 increased from $1.9 million in
the same period for 1998. The increase in general and administrative expenses is
primarily due to increased salary and office expenses from the Company's growth
in loan volume.
Income before Income Taxes. As a result of the foregoing factors,
income before income taxes of $2.0 million for the six months ended June 30,
1999, increased from $1.4 million in the same period for 1998. Provision for
income taxes was not made during 1998 to the historical financial statements as
the Del Mar Entities were not subject to income taxes. However, pro forma
provisions for income taxes for the six months ended June 30, 1999 and 1998 were
$0.7 million and $0.5 million respectively.
CAPITAL AND LIQUIDITY
Liquidity is a measure of a company's ability to meet potential cash
requirements, including ongoing commitments to fund lending activities and for
general purposes. Cash for originating loans and general operating expenses is
primarily obtained through cash flows from operations and private investors.
The Company has significant ongoing liquidity needs to support its
existing business and continued growth. The Company's liquidity is actively
managed on a periodic basis and the Company's financial status, including its
liquidity, is reviewed periodically by the Company's management. This process is
intended to ensure the maintenance of sufficient funds to meet the needs of the
Company.
The Company has historically relied upon the cash flow from operations
to provide for its capital requirements. Management believes that cash generated
from operations, together with cash and trust deed investments on hand at June
30, 1999 will be sufficient to provide for its capital requirements for at least
the next 12 months. The Company may seek additional equity financing in the
latter part of 1999 through an offering of its common stock, and contemplates
that offering, before expenses relating to the offering, will be no less than
$15 million and no more than $20 million. Further, the Company will be actively
seeking initial credit line arrangements of no less than $100 million. There can
no assurance that the Company will be able to complete a secondary offering or
obtain credit lines.
During the six months ended June 30, 1999, cash flows from operating activities
provided $0.2 million compared to using $0.1 million during the same period
during 1998. Investing activities consisted primarily of collections of mortgage
loans of $0.6 million and purchases of mortgage loans in the amount of $0.6
million.
At June 30, 1999, Sunderland had $0.2 million of cash and had $3.5 million in
current assets. At that same date, current liabilities were $0.7 million.
Stockholders' equity of $2.9 million included a receivable from a shareholder of
$0.4 million. Accordingly, Sunderland appears to have sufficient working capital
and capital to meet its operating needs in the near term without additional
external financing.
Year 2000
GENERAL. Many of the world's computers, software programs and other equipment
using microprocessors or embedded chips currently have date field that use two
digits rather than four digits to define the applicable year. These computers,
programs and chips may be unable to properly interpret dates beyond the year
1999; for example, computer software that has date sensitive programming using a
two digit format may recognize a date using "00" as the year 1900 rather than
the year 2000. Such errors could potentially result in a system failure or
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to process transactions or engage in similar normal
business activities, which, in turn, could lead to disruptions in the Company's
operations or performance.
15
<PAGE>
The Company's assessments of the cost and timeliness of completion of Year 2000
modifications set forth below are based on management's best estimates, which
are derived using numerous assumptions relating to future events, including,
without limitation, the continued availability of certain internal and external
resources and third party readiness plans. Furthermore, as the Company's Year
2000 initiative (described below) progresses, the Company continues to revise
its estimates of the likely problems and costs associated with the Year 2000
problem and to adapt its contingency plan. However, there can be no assurance
that any estimate or assumption will prove to be accurate.
THE COMPANY'S YEAR 2000 INITIATIVE. The Company is conducting a comprehensive
Year 2000 initiative with respect to its internal business -critical systems.
This initiative encompasses information technology ("IT") systems and
applications, as well as non-IT systems and equipment with embedded technology,
such as fax machines and telephone systems, which may be impacted by the Year
2000 problem. Business-critical systems encompass internal accounting systems,
including general ledger, accounts payable and financial reporting applications;
and loan servicing systems; as well as the underlying technology required to
support the software. The initiative includes assessing, remediating or
replacing, testing and upgrading the Company's business-critical IT systems.
Based upon a review of the contemplated and planned stages of the initiative,
and testing done to date, the Company does not anticipate any material
difficulties in achieving Year 2000 readiness with respect to its internal
business-critical systems, and the Company anticipates that Year 2000 with
respect to virtually all its internal business-critical systems will be achieved
by mid 1999.
In addition to its own internal IT systems and non-IT systems, the Company may
be at risk from Year 2000 failures caused by or occurring to third parties.
These third parties can be classified into two groups. The first group includes
borrowers, lenders, vendors and other service providers with whom the Company
has a direct contractual relationship. The second group, while encompassing
certain members of the first group, is comprised of third parties providing
services or functions to large segments of society, both domestically and
internationally such as airlines, utilities and national stock exchanges.
As is the case with most other companies, the actions the Company can take to
avoid any adverse effects from the failure of companies, particularly those in
the second group, to become Year 2000 ready is extremely limited.
There can be no assurance that the systems of the Company or those third parties
will be timely converted. Furthermore, there can be no assurance that a failure
to convert by another company, or a conversion that is not compatible with the
Company's systems or those of other companies on which the Company's systems
rely, would not have a material adverse effect on the Company.
The Company does not anticipate that it will incur additional expenditures in
connection with any modifications necessary to achieve Year 2000 readiness. The
Company estimates that is has incurred minimal costs of less than $10,000
related to its Year 2000 initiative through December 31, 1998.
ITEM 3. QUANTITAVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
SUNDERLAND CORPORATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings against the Company and the Company is unaware of
such proceedings contemplated against it.
16
<PAGE>
ITEM 2. CHANGES IN SECURITIES
As more fully discussed in the Form 8-K, Sunderland concurrently consummated the
following related Transactions: (i) the acquisition of all of the outstanding
capital stock of Capsource for 12,000 shares of common stock of Sunderland; (ii)
the acquisition of certain assets of Del Mar Mortgage for 60,000 shares of
common stock of Sunderland to be distributed to its sole shareholder, Michael V.
Shustek; and (iii) the acquisition of certain assets of Del Mar Holdings for
2,874,762 shares of common stock of Sunderland to be distributed to its
respective shareholders. In connection with the Transactions, 4,250,000 shares
of the 5,000,000 shares of common stock of Sunderland held by Sunderland's
previous 100% owners, Mr. James M. Cassidy, his wholly owned affiliate, Pierce
Mill Associates, and Cassidy & Associates, a law firm in which Mr. Cassidy is a
principal, have been retired. As of the effective date of the Transactions, the
officer and director of Sunderland resigned and certain other persons became the
officers and directors of the Company, as described in the Form 8-K. Subsequent
to the Transactions, effective as of the date of consummation of the
Transactions, the Company changed its name to "Sunderland Corporation", and
effected a 5 for 3 stock split of its issued and outstanding common stock. The
Transactions are more fully set forth in the agreements that were attached and
filed as exhibits to the Form 8-K (collectively, the "TRANSACTION DOCUMENTS").
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Board of Directors of the Company submitted the Transactions, the Name
Change and the Stock Split to a vote of its shareholders. The shareholders have
approved the Transactions, the Name Change and the Stock Split. The Transaction
Documents have been previously filed by the Company as Exhibits to the Form 8-K,
and the amendment to the Company's Articles of Incorporation to reflect the Name
Change and the Stock Split is attached as an exhibit to this Form 10-QSB.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Report on Form 8-K and 8-K/A filed during the second quarter 1999:
A Current Report on Form 8-K filed May 4, 1999 regarding change in control of
registrant, consummation of merger between Sunderland Corporation and Capsource,
Inc., and consummation of acquisition of certain assets of Del Mar Mortgage,
Inc., and Del Mar Holdings, Inc.
An amendment to Form 8-K dated May 4, 1999 was filed on August 16, 1999
regarding financial statements for Capsource, Inc., Del Mar Mortgage, Inc., and
Del Mar Holdings, Inc.
An amendment to Form 8-K/A dated August 16, 1999 was filed October 6, 1999 to
revise the financial statement information included therein.
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 thereunto duly authorized.
SUNDERLAND CORPORATION
By: /s/ Stephen J. Byrne
STEPHEN J. BYRNE, President
Dated: October 6, 1999
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1999, AND STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 196,518
<SECURITIES> 0
<RECEIVABLES> 304,211
<ALLOWANCES> 1,210
<INVENTORY> 0
<CURRENT-ASSETS> 3,516,489
<PP&E> 32,922
<DEPRECIATION> 14,129
<TOTAL-ASSETS> 3,572,632
<CURRENT-LIABILITIES> 673,868
<BONDS> 0
0
0
<COMMON> 616
<OTHER-SE> 2,898,148
<TOTAL-LIABILITY-AND-EQUITY> 3,572,632
<SALES> 0
<TOTAL-REVENUES> 5,788,986
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,689,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,765
<INCOME-PRETAX> 2,074,740
<INCOME-TAX> 705,412
<INCOME-CONTINUING> 1,396,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,396,328
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
</TABLE>
