UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended JuneSeptember 30, 2004
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: 333-106900
REDWOOD MORTGAGE INVESTORS VIII,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California 94-3158788
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063-1743
(Address of principal executive offices) (Zip Code)
(650) 365-5341
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 XX No
-------------- --------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No XX
-------------- -------------
1
Part I - Item 1. Financial Statements
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
JUNESEPTEMBER 30, 2004 and DECEMBER 31, 2003 (unaudited)
(in thousands)
ASSETS
JuneSeptember 30, December 31,
2004 2003
-------------- --------------------------------- ------------------
Cash and cash equivalents $ 9,0825,382 $ 8,921
-------------- --------------------------------- ------------------
Loans
Loans secured by deeds of trust 161,930189,880 147,174
Loans, unsecured 34 34
Allowance for loan losses (2,249)(2,039) (2,649)
-------------- --------------------------------- ------------------
Net loans 159,715187,875 144,559
-------------- --------------------------------- ------------------
Interest and other receivables
Accrued interest and late fees 5,2815,715 4,735
Advances on loans 265164 416
-------------- ---------------
5,546------------------ ------------------
5,879 5,151
-------------- --------------------------------- ------------------
Loan origination fees, net 2911 44
Real estate held for sale, net of allowance of $500$1,000 5,407 3,979
3,979
-------------- ---------------Prepaid expenses 4 -
------------------ ------------------
Total assets $ 178,351204,558 $ 162,654
============== ================================= ==================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ 20,00032,000 $ 22,000
Accounts payable 37314 224
Payable to affiliate 517594 448
-------------- --------------------------------- ------------------
Total liabilities 20,55432,908 22,672
-------------- --------------------------------- ------------------
Investors in applicant status 5881,558 1,210
-------------- --------------------------------- ------------------
Partners' capital
Limited partners' capital, subject to redemption net of unallocated
syndication costs of $1,012$1,055 and $875 for JuneSeptember 30, 2004 and December
31, 2003, , respectively; and formation loan receivable of $8,266$8,936 and $7,550
for JuneSeptember 30, 2004 and2004and December 31, 2003, respectively 157,071Respectively 169,942 138,649
General partners' capital, net of unallocated syndication costs of $10$11
and $9 for JuneSeptember 30, 2004 and December 31, 2003, respectively 138150 123
-------------- --------------------------------- ------------------
Total partners' capital 157,209170,092 138,772
-------------- --------------------------------- ------------------
Total liabilities and partners' capital $ 178,351204,558 $ 162,654
============== ================================= ==================
The accompanying notes are an integral part of the consolidated financial
statements.
2
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, 2004 AND 2003 (unaudited)
(in thousands, except for per limited partner amounts)
THREE MONTHS ENDED SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
-------------------------------- ------------------------------- ------------------------------
2004 2003 2004 2003
-------------- ------------- ------------- ---------------------------- -------------
Revenues
Interest on loans $ 3,6124,378 $ 2,9423,159 $ 7,34511,723 $ 5,7068,865
Interest-bank 15 23 19 406 8 25 48
Late fees 59 93 112 10060 55 172 155
Other 99 63 159 11360 52 219 165
-------------- ------------- --------------- -------------
4,504 3,274 12,139 9,233
-------------- ------------- -------------
3,785 3,121 7,635 5,959
------------- ------------- ---------------------------- -------------
Expenses
Mortgage servicing fees 340 241 693 447422 287 1,115 734
Interest expense 23 - 129 1223 7 352 8
Amortization of loan origination fees 1517 3 27 644 12
Provisions for losses on loans and real estate 160 133 442 245400 193 842 438
Asset management fees 150 111 291 209163 125 454 334
Clerical costs from Redwood Mortgage Corp. 77 72 152 14273 229 215
Professional services 51 22 106 6720 13 126 80
Broker expense - 100- - 181
Amortization of discount on imputed interest 57 49 114 98171 147
Other 34 29 70 7239 21 109 90
-------------- ------------- --------------- -------------
1,418 771 3,442 2,239
-------------- ------------- -------------
907 760 2,024 1,468
------------- ------------- ---------------------------- -------------
Net income $ 2,8783,086 $ 2,3612,503 $ 5,6118,697 $ 4,4916,994
============== ============= ============= ============================ =============
Net income: general partners (1%) $ 2931 $ 2425 $ 5687 $ 4570
limited partners (99%) 2,849 2,337 5,555 4,4463,055 2,478 8,610 6,924
-------------- ------------- ------------- ---------------------------- -------------
$ 2,8783,086 $ 2,3612,503 $ 5,6118,697 $ 4,4916,994
============== ============= ============= ============================ =============
Net income per $1,000 invested by limited
partners for entire period
-where income is reinvested and compounded $17.58 $19.20 $35.62 $39.48$17.54 $18.48 $53.78 $58.70
============== ============= ============= ============================ =============
-where partner receives income in periodic
distributions $17.47 $19.08 $35.11 $38.05$17.44 $18.37 $52.54 $57.22
============== ============= ============= ============================ =============
The accompanying notes are an integral part of the consolidated financial
statements.
3
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2004 AND 2003 (unaudited)
(in thousands)
SIXNINE MONTHS ENDED
JUNESEPTEMBER 30,
---------------------------------------------------------------------
2004 2003
---------------- --------------- --------------
Cash flows from operating activities
Net income $ 5,6118,697 $ 4,4916,994
Adjustments to reconcile net income to net cash provided by operating activities
Imputed interest income (114) (98)(171) (147)
Amortization of discount 114 98171 147
Amortization of loan origination fees 27 944 12
Provision for loanlosses on loans and real estate losses 442 245842 438
Change in operating assets and liabilities
Accrued interest and late fees (1,112) (297)(2,100) (2,490)
Advances on loans (7) (125)60 (240)
Other receivables - 238638
Loan origination fees (11)(12) -
Accounts payable (187) 19490 (224)
Payable to affiliate 69 (11)146 74
Deferred interest - (112)
----------------Prepaid expenses (4) -
--------------- --------------
Net cash provided by operating activities 4,832 4,632
----------------7,763 5,090
--------------- --------------
Cash flows from investing activities
Loans originated (50,212) (45,861)(86,044) (64,477)
Principal collected on loans 35,339 20,49741,768 22,861
Payments for development of real estate - (323)
----------------(694)
Proceeds from sale of real estate - 3,094
Reduction in minority interest - (433)
--------------- --------------
Net cash used in investing activities (14,873) (25,687)
----------------(44,276) (39,649)
--------------- --------------
Cash flows from financing activities
RepaymentsBorrowings on line of credit, net (2,000) -10,000 6,500
Repayments on note payable - (11)(1,147)
Contributions by partner applicants 16,366 24,74329,430 33,735
Partners' withdrawals (3,177) (2,338)(4,697) (3,738)
Syndication costs paid (237) (258)(332) (376)
Formation loan lending (1,174) (1,772)(2,073) (2,475)
Formation loan collections 424 293
----------------646 436
--------------- --------------
Net cash provided by financing activities 10,202 20,657
----------------32,974 32,935
--------------- --------------
Net increase (decrease)decrease in cash and cash equivalents 161 (398)(3,539) (1,624)
Cash and cash equivalents - beginning of year 8,921 7,188
---------------- --------------- --------------
Cash and cash equivalents - end of period $ 9,082 $ 6,790
================5,382 5,564
=============== ==============
Supplemental disclosures of cash flow information
Cash paid for interest $ 129352 $ 1
================8
=============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNESEPTEMBER 30, 2004 (unaudited)
NOTE 1 - GENERAL
In the opinion of the management of the partnership, the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
of normal, recurring adjustments, necessary to present fairly the consolidated
financial information included therein. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
included in the partnership's Form 10-K for the fiscal year ended December 31,
2003 filed with the Securities and Exchange Commission. The results of
operations for the threenine and sixthree month periods ended JuneSeptember 30, 2004 are not
necessarily indicative of the operating results to be expected for the full
year.
Formation Loans
The following summarizes Formation Loan transactions to JuneSeptember 30, 2004
(in thousands):
1st 2nd 3rd 4th 5th Total
------------ ----------- ------------ ----------- ----------- -----------
Limited partner
contributions $ 14,932 $ 29,993 $ 29,999 $ 49,985 $ 22,71035,753 $ 147,619160,662
============ =========== ============ =========== =========== ===========
Formation loan made $ 1,075 $ 2,272 $ 2,218 $ 3,777 $ 1,6272,526 $ 10,96911,868
Discount on imputed
interest (36) (385) (333) (739) (210) (1,703)Interest (30) (360) (316) (730) (386) (1,822)
------------ ----------- ------------ ----------- ----------- -----------
Formation loan, net 1,039 1,887 1,885 3,038 1,417 9,2661,045 1,912 1,902 3,047 2,140 10,046
Repayments to date (737) (924) (469) (312) (22) (2,464)(762) (971) (516) (404) (34) (2,687)
Early withdrawal
penalties applied (70) (102) (67)(71) (105) (69) - - (239)(245)
------------ ----------- ------------ ----------- ----------- -----------
Formation loan, net 232 861 1,349 2,726 1,395 6,563212 836 1,317 2,643 2,106 7,114
Unamortized discount
on imputed interest 36 385 333 739 210 1,70330 360 316 730 386 1,822
------------ ----------- ------------ ----------- ----------- -----------
Balance
JuneSeptember 30, 2004 $ 268242 $ 1,2461,196 $ 1,6821,633 $ 3,4653,373 $ 1,6052,492 $ 8,2668,936
============ =========== ============ =========== =========== ===========
Percent loaned 7.2% 7.6% 7.4% 7.6% 7.2%7.1% 7.4%
============ =========== ============ =========== =========== ===========
The Formation Loan has been deducted from limited partners' capital in the
consolidated balance sheets. As amounts are collected from Redwood Mortgage
Corp., the deduction from capital will be reduced. Interest has been imputed at
the market rate of interest in effect at the date of the offerings' close.
During the sixnine month periods ended JuneSeptember 30, 2004 and 2003, amortization
expense of $114,000$171,000 and $98,000$147,000 was recorded related to the discount on the
imputed interest.
Syndication costs
The partnership bears its own syndication costs, other than certain sales
commissions, including legal and accounting expenses, printing costs, selling
expenses, and filing fees. Syndication costs are charged against partners'
capital and are being allocated to the individual partners consistent with the
partnership agreement.
5
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNESEPTEMBER 30, 2004 (unaudited)
NOTE 1 - GENERAL (continued)
Through JuneSeptember 30, 2004, syndication costs of $2,790,000$2,885,000 had been
incurred by the partnership with the following distribution (in thousands):
Costs incurred $ 2,7902,885
Early withdrawal penalties applied (97)(99)
Allocated and amortized to date (1,671)
------------
June(1,720)
-------------
September 30, 2004 balance $ 1,022
============1,066
=============
Syndication costs attributable to the fifth offering ($75,000,000) will be
limited to the lesser of 10% of the gross proceeds or $3,000,000 with any excess
to be paid by the general partners. As of JuneSeptember 30, 2004, the fifth offering
had incurred syndication costs of $321,000 (1.4%$416,000 (1.2% of contributions).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The partnership's consolidated financial statements include the accounts of
its 100%-owned subsidiary, Russian Hill Property Company, LLC ("Russian") and
its 66%-owned subsidiary, Stockton Street Property Company, LLC ("Stockton").
All significant intercompany transactions and balances have been eliminated in
consolidation.
Reclassifications
Certain reclassifications, not affecting previously reported net income or
total partner capital, have been made to the previously issued consolidated
financial statements to conform to the current year presentation.
Loans secured by deeds of trust
At JuneSeptember 30, 2004 and December 31, 2003, the partnership had fourteenthirteen
and sixteen loans, past due 90 days or more in interest payments ("90 day Past
Due Loans") totaling $21,202,000$27,801,000 and $27,182,000, respectively. Included in the
90 day Past Due Loans are sevennine loans and eight loans totaling $8,281,000$11,129,000 and
$10,469,000 at JuneSeptember 30, 2004 and December 31, 2003, respectively, which are
past maturity (see Note 7). A Past Maturity Loanpast maturity loan is a loan in which the
principal and any accrued interest is due and payable, but the borrower has
failed to make such payment of principal and accrued interest. The partnership
does not consider the seven Past Maturity Loansnine past maturity loans to be impaired because, in the
opinion of management, there is sufficient collateral to cover the amount
outstanding to the partnership and the partnership is still accruing interest on
these loans. At JuneSeptember 30, 2004 and December 31, 2003, loans categorized as
impaired by the partnership were $0.
6
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNESEPTEMBER 30, 2004 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for loan losses
The composition of the allowance for loan losses as of JuneSeptember 30, 2004
and December 31, 2003 was as follows (in thousands):
JuneSeptember 30, December 31,
2004 2003
------------------------------ --------------
Impaired loans $ - $ -
Specified loans 49 49
General 2,2001,990 2,600
Unsecured loans - -
------------------------------ --------------
$ 2,2492,039 $ 2,649
============================== ==============
Activity in the allowance for loan losses is as follows for the sixnine months
through JuneSeptember 30, 2004 and for the year ended December 31, 2003 (in
thousands):
JuneSeptember 30, December 31,
2004 2003
------------------------------ --------------
Beginning balance $ 2,649 $ 3,021
Restructured loans - -
Additions charged to income 442842 782
Write-offs (842)(952) (1,154)
--------------Transferred to real estate held for
sale reserve (500) -
---------------- --------------
$ 2,2492,039 $ 2,649
============================== ==============
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the consolidated financial statements since income taxes
are the obligation of the partners if and when income taxes apply.
Net income per $1,000 invested
Amounts reflected in the consolidated statements of income as net income
per $1,000 invested by limited partners for the entire period are amounts
allocated to limited partners who held their investment throughout the period
and have elected to either leave their earnings to compound or have elected to
receive periodic distributions of their net income. Individual income is
allocated each month based on the limited partners' pro rata share of partners'
capital. Because the net income percentage varies from month to month, amounts
per $1,000 will vary for those individuals who made or withdrew investments
during the period, or selected other options.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
7
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNESEPTEMBER 30, 2004 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities, and disclosures of contingent assets and liabilities, at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Such estimates relate principally to the
determination of the allowance for loan losses, including the valuation of
impaired loans and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.
note 3 - General Partners and Related Parties
The following are commissions and/or fees, which are paid to the general
partners.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, Redwood Mortgage Corp. may collect an amount equivalent
to 12% of the loaned amount until six months after the termination date of the
offering. Thereafter, loan brokerage commissions (points) will be limited to an
amount not to exceed 4% of the total partnership assets per year. The loan
brokerage commissions are paid by the borrowers and thus, are not an expense of
the partnership.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued thereon. Additional service fees are recorded upon the receipt of
any subsequent payments on impaired loans.
Asset management fees
The general partners receive monthly fees for managing the partnership's
loan portfolio and operations up to 1/32 of 1% of the "net asset value" (3/8 of
1% annual), which is the partnership's total assets less its total liabilities.
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to the general partners.
Operating expenses
Redwood Mortgage Corp., a general partner, is reimbursed by the partnership
for all operating expenses incurred on behalf of the partnership, including
without limitation, out-of-pocket general and administration expenses of the
partnership, accounting and audit fees, legal fees and expenses, postage and
preparation of reports to limited partners.
8
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNESEPTEMBER 30, 2004 (unaudited)
note 4 - Real Estate Held for Sale
During 2002, a single-family residence that secured a partnership loan
totaling $4,402,000, including accrued interest and advances, was transferred
via a statutory warranty deed to a new entity named Russian Hill Property
Company, LLC ("Russian"). Russian is wholly owned by the partnership. Russian
was formed by the partnership to complete the development and sale of the
property. The assets, liabilities and operating results of Russian have been
consolidated into the accompanying consolidated financial statements of the
partnership. Costs related to the sale and development of this property were
capitalized during 2003. Commencing January 2004, costs related to sales and
maintenance of the property are being expensed. As of JuneSeptember 30, 2004 and
December 31, 2003, the partnership had advanced approximately $124,000 and
$94,000, respectively, to Russian for sales and maintenance costs. At JuneSeptember
30, 2004 and December 31, 2003, the partnership's total investment in Russian
was $3,979,000, net of a valuation allowance of $500,000.
In September, 2004, the partnership acquired a single family residence
through a foreclosure sale. At the time the partnership took ownership of the
property, the partnership's investment totaled $1,928,000 including accrued
interest and advances. The borrower began a substantial renovation of the
property, which was not completed at the time of foreclosure. As the property
cannot be occupied, the partnership is evaluating its options with respect to
the property. The partnership may decide to complete the existing renovation
work prior to the property's sale, sell the property prior to completion or
pursue additional development of the property. The Partnership's decision will
be based on certain third party reports, which are not available as of the date
hereon. A reserve of $500,000 to cover potential losses has been made for this
property, based upon management's estimate of the fair value of the property.
September 30, December 31,
2004 2003
----------------- ----------------
Cost of properties $ 6,407,000 $ 4,479,000
Reduction in value (1,000,000) (500,000)
----------------- ----------------
Real estate held for sale $ 5,407,000 $ 3,979,000
================= ================
note 5 - Bank Line of Credit
The partnership has a bank line of credit expiring November 25, 2005, of up
to $32,000,000 at prime, secured by its loan portfolio. The outstanding balances
were $20,000,000$32,000,000 and $22,000,000 at JuneSeptember 30, 2004 and December 31, 2003,
respectively. The interest rate was 4.00%4.50% (prime) at JuneSeptember 30, 2004. The
line of credit calls for certain financial covenants. To the best of its
knowledge, the partnership was in compliance with these covenants for the sixnine
month period ended JuneSeptember 30, 2004 and for the year ended December 31, 2003.
The partnership requested an increase of $10,000,000 to this credit facility and
the credit increase was approved in November, 2004.
note 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Secured loans carrying value was $161,930,000$189,880,000 and $147,174,000 at JuneSeptember
30, 2004 and December 31, 2003, respectively. The fair value of these loans of
$163,158,000$191,856,000 and $148,748,000, respectively, was estimated based upon projected
cash flows discounted at the estimated current interest rates at which similar
loans would be made. The applicable amount of the allowance for loan losses
along with accrued interest and advances related thereto should also considered
in evaluating the fair value versus the carrying value.
9
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNESEPTEMBER 30, 2004 (unaudited)
NOTE 7 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands)
Most loans are secured by recorded deeds of trust. At JuneSeptember 30, 2004
and December 31, 2003 there were 8685 and 81 secured loans outstanding,
respectively, with the following characteristics:
JuneSeptember 30, December 31,
2004 2003
---------------- --------------- --------------
Number of secured loans outstanding 8685 81
Total secured loans outstanding $ 161,930189,880 $ 147,174
Average secured loan outstanding $ 1,8832,234 $ 1,817
Average secured loan as percent of total 1.16%1.18% 1.23%
Average secured loan as percent of partners' capital 1.20% 1.31%partnership assets 1.09% 1.12%
Largest secured loan outstanding $ 16,010 $ 16,010
Largest secured loan as percent of total loans 9.89%8.43% 10.88%
Largest secured loan as percent of total partnership assets 8.98%7.83% 9.84%
Number of counties where security is located (all California) 2119 20
Largest percentage of secured loans in one county 25.79%24.20% 26.47%
Average secured loan to appraised value of security based on
appraised values and senior liens(1)liens at time loan was consummated 53.75%54.88% 53.97%
Number of secured loans in foreclosure status 54 3
Amount of secured loans in foreclosure $ 4,9977,439 $ 2,931
- ---------------------------------
(1) A senior lien(s) is a recorded encumbrance that is senior in right of
payment and priority to the partnership's loan.
10
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNESEPTEMBER 30, 2004 (unaudited)
NOTE 7 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands) (continued)
The following secured loan categories were held at JuneSeptember 30, 2004, and
December 31, 2003:
JuneSeptember 30, December 31,
2004 2003
---------------- ------------------------------
First Trust Deeds $ 103,093116,983 $ 84,437
Second Trust Deeds 55,55964,908 61,247
Third Trust Deeds 3,2787,989 1,490
---------------- ------------------------------
Total secured loans 161,930189,880 147,174
Senior liens due other lenders at inception of loan 122,090134,471 116,870
---------------- ------------------------------
Total debt $ 284,020324,351 $ 264,044
---------------- ------------------------------
Appraised property value at inception of loan $ 528,379590,997 $ 489,219
---------------- ------------------------------
Total secured loans as a percent of appraisals 53.75%54.88% 53.97%
---------------- ------------------------------
Secured loans by type of property
Owner occupied homes $ 13,52813,225 $ 13,656
Non-owner occupied homes 65,11691,853 52,975
Apartments 24,03224,320 22,649
Commercial 53,86256,415 52,502
Land 5,3924,067 5,392
---------------- ------------------------------
$ 161,930189,880 $ 147,174
================ ==============================
The interest rates on the loans range from 8.50% to 18.00%14.00% at JuneSeptember 30,
2004. During the quarter ended September 30, 2004 a single loan with a coupon
rate of 18% was paid off. This brought the range of interest rates to a spread
of 5.5%, which is typical of our portfolio.
Scheduled maturity dates of loans as of JuneSeptember 30, 2004 are as follows:
Year Ending
December 31, Amount
------------------------- ----------------------------
2004 $ 31,48228,916
2005 50,58149,958
2006 52,84980,879
2007 16,38415,940
2008 1,6301,629
Thereafter 9,004
---------------12,558
-------------
$ 161,930
===============189,880
=============
The scheduled maturities for 2004 include nine Past Maturity Loanspast maturity loans totaling
$9,881,000,$11,129,000, and representing 6.07%5.86% of the portfolio Juneat September 30, 2004.
Interest payments on seveneight of these loans with an aggregate principal balance of
$8,281,000$10,835,000 were categorized as 90 days or more delinquent on interest payments.
Several borrowers are in process of selling the properties or refinancing their
loans through other institutions, as this is an opportune time for them to do so
and/or take advantage of lower interest rates. Occasionally the partnership
allows borrowers to continue to make the payments on debt past maturity for
periods of time. Of these nine Past Maturity Loans,past maturity loans, the partnership has begun
foreclosure proceedings by filing a notice of default, on threefour with aggregate
principal balances totaling $3,297,000.
These three foreclosures are included in the total number of foreclosures
initiated by the partnership, which as of June 30, 2004 total five.$7,439,000.
11
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNESEPTEMBER 30, 2004 (unaudited)
NOTE 7 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands) (continued)
Cash deposits at JuneSeptember 30, 2004 of $9,277,000,$4,490,000, before clearing deposits
in transit and outstanding checks, were in one bank. The balances exceeded FDIC
insurance limits (up to $100,000 per bank) by $9,177,000.$4,390,000. This bank is the same
financial institution that has provided the partnership with the $32,000,000
limit line of credit (LOC). As and when deposits in the partnership's bank
accounts increase significantly beyond the insured limit, the funds are
typically either placed in new loans when available, or used to pay-down the
line of credit balance to the extent of borrowings or held as cash.
NOTE 8 - COMMITMENTS & CONTINGENCIES
Construction/Rehabilitation Loans
The partnership makes construction and rehabilitation loans which are not
fully disbursed at loan inception. The partnership has approved the borrowers up
to a maximum loan balance; however, disbursements are made periodically during
completion phases of the construction or rehabilitation or at such other times
as required under the loan documents. At JuneSeptember 30, 2004 there were
$22,996,000$22,674,000 of undisbursed loan funds which will be funded by a combination of
borrower monthly mortgage payments, line of credit draw-downs,draws, retirements of
principal on current loans, cash and capital contributions from investors. The
partnership does not maintain a separate cash reserve to hold the undisbursed
obligations, which are intended to be funded.
Workout Agreements
The partnership has negotiated various contractual workout agreements with
borrowers whose loans are past maturity or who are delinquent in making
payments. The partnership is not obligated to fund additional money on these
loans as of JuneSeptember 30, 2004. There are fivefour loans totaling $3,461,000$8,402,000 in
workout agreements as of JuneSeptember 30, 2004.
Legal proceedings
The partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the partnership.
12
Part I - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the consolidated financial statements, management is required
to make estimates based on the information available that affect the reported
amounts of assets and liabilities as of the balance sheet dates and revenues and
expenses for the reporting periods. Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
acquired through foreclosure. At JuneSeptember 30, 2004, there was onewere two real estate
propertyproperties owned by the partnership.
Loans and related accrued interest, fees, and advances are analyzed on a
regular basis for recoverability. Delinquencies are identified and followed as
part of the loan system. Provisions are made to adjust the allowance for loan
losses and real estate held for sale to an amount considered by management to be
adequate, with due consideration to original collateral values at loan inception
and to provide for unrecoverable accounts receivable, including impaired loans,
other loans, accrued interest, late fees and advances on loans, and other
accounts receivable (unsecured).
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses and real
estate. Actual results could vary from the aforementioned provisions for losses.
If the probable ultimate recovery of the carrying amount of a loan, with due
consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the loan is
reduced to the present value of future cash flows discounted at the loan's
effective interest rate. If a loan is collateral dependent, it is valued at the
estimated fair value of the related collateral.
If events and/or changes in circumstances cause management to have serious
doubts about the collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances,
including accrued interest and advances.
Forward Looking Statements.
Some of the information in the Form 10-Q may contain forward looking
statements. Uses of words such as "will", "may", "anticipate", "estimate",
"continue" or other forward looking words, discuss future expectations or
predictions. The analysis of 2004 includes forward looking statements and
predictions about the possible future events, results of operations and
financial condition. As such, this analysis may prove to be inaccurate because
of assumptions made by the general partners or the actual development of the
future events. No assurance can be given that any of these statements or
predictions will ultimately prove to be correct or substantially correct.
Related Parties.
The general partners of the partnership are Redwood Mortgage Corp., Gymno
Corporation and Michael R. Burwell. Most partnership business is conducted
through Redwood Mortgage Corp. which arranges, services and maintains the loan
portfolio for the benefit of the partnership. Michael R. Burwell is President
and Chief Financial Officer of Redwood Mortgage Corp. and Gymno Corporation. The
following is a list of various partnership activities for which related parties
are compensated.
13
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, the partnership may
collect an amount equivalent to 12% of the loaned amount until six months after
the termination date of the offering. Thereafter, the loan brokerage commissions
(points) will be limited to an amount not to exceed 4% of the total partnership
assets per year. The loan brokerage commissions are paid by the borrowers, and
thus, are not an expense of the partnership. Loan brokerage commissions paid by
the borrowers were $1,343,000$2,061,000 and $1,252,000$1,660,000 for the sixnine month periods ended
JuneSeptember 30, 2004 and 2003, and $895,000$718,000 and $679,000$408,000 for the three month
periods ended JuneSeptember 30, 2004 and 2003, respectively.
13
o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the partnership's loans
isare paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Mortgage servicing fees of 693,000$1,115,000 and $447,000$734,000 were incurred for
the sixnine month periods ended JuneSeptember 30, 2004 and 2003, and $340,000$422,000 and
$241,000$287,000 were incurred for the three month periods ended JuneSeptember 30, 2004 and
2003, respectively.
o Asset Management Fees The general partners receive monthly fees for
managing the partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $291,000$454,000 and $209,000$334,000 were incurred by the Partnershippartnership for the sixnine
month periods ended JuneSeptember 30, 2004 and 2003, and $150,000$163,000 and $111,000$125,000 were
incurred for the three month periods ended JuneSeptember 30, 2004 and 2003,
respectively.
o Other Fees The partnership agreement provides that the general partners
may receive other fees such as reconveyance, mortgage assumption and mortgage
extension fees. Such fees are incurred by the borrowers and are paid to the
general partners.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective partnership interests. The allocation
to the general partners (combined) shall be a total of 1%.
o Operating Expenses Redwood Mortgage Corp. is reimbursed by the
partnership for all operating expenses actually incurred on behalf of the
partnership, including without limitation, out-of-pocket general and
administration expenses of the partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
o Contributed Capital The general partners jointly and severally were to
contribute 1/10 of 1% in cash contributions as proceeds from the offerings are
received from the limited partners. As of JuneSeptember 30, 2004 and December 31,
2003, a general partner, Gymno Corporation, had contributed $149,000$162,000 and
$133,000, respectively, as capital in accordance with Section 4.02(a) of the
partnership agreement.
o Sales Commission - "Formation Loan" to Redwood Mortgage Corp. Sales
commissions relating to the capital contributions by limited partners are not
paid directly by the partnership out of the offering proceeds. Instead, the
partnership loans to Redwood Mortgage Corp., a general partner, amounts
necessary to pay all sales commissions and amounts payable in connection with
unsolicited orders. The loan is referred to as the "Formation Loan". It is
unsecured and non-interest bearing and is applied to reduce limited partners'
capital in the consolidated balance sheets. The sales commissions range between
0 (for units sold by the general partners) and 9%. It is estimated that the
total amount of the formation loan will approximate 7.6% based on the assumption
that 65% of the investors will reinvest earnings, which qualify for the higher
commission percentage.
The amount of the annual installments paid by Redwood Mortgage Corp. are
determined at annual installments of one-tenth of the principal balance of theeach
formation loan at December 31 of each year until the offering period is closed.
Thereafter, the remaining formation loan is paid in ten equal amortizing
payments.payments over a period of ten years.
14
Results of Operations - For the sixnine and three months ended JuneSeptember 30,
2004 and 2003
The following increases/(decreases) took place in the partnership's
operating results for the sixnine and three month periods ended JuneSeptember 30, 2004
versus 2003 and are summarized hereunder:
Changes during the Changes during the
sixnine months ended three months ended
JuneSeptember 30, 2004 September 30, 2004
versus 2003 June 30, 2004 versus 2003
---------------------------- ------------------------------------------------- -----------------------
Net income $ 1,120,0001,703,000 $ 517,000
==============583,000
================ ===============
Revenue
Interest on loans 1,639,000 670,0002,858,000 1,219,000
Interest - bank (21,000) (8,000)(23,000) (2,000)
Late charges 12,000 (34,000)17,000 5,000
Other 46,000 36,000
--------------54,000 8,000
---------------- ---------------
$ 1,676,0002,906,000 $ 664,000
--------------1,230,000
---------------- ---------------
Expenses
Mortgage servicing fees 246,000 99,000381,000 135,000
Interest expense 128,000 23,000344,000 216,000
Amortization of loan origination fees 21,000 12,00032,000 14,000
Provision for losses on loans and real estate held for sale 197,000 27,000404,000 207,000
Asset management fees 82,000 39,000120,000 38,000
Clerical costs from Redwood Mortgage Corp. 10,000 5,00014,000 4,000
Professional services 39,000 29,00046,000 7,000
Broker expense (181,000) (100,000)-
Amortization of discount on imputed interest 16,00024,000 8,000
Other (2,000) 5,000
--------------19,000 18,000
---------------- ---------------
$ 556,0001,203,000 $ 147,000
--------------647,000
---------------- ---------------
Net income increase $ 1,120,0001,703,000 $ 517,000
==============583,000
================ ===============
Significant changes are as follows:
The increase in interest on loans of $1,639,000 (29%$2,858,000 (32%) for the sixnine month
period, and $670,000 (23%$1,219,000 (39%) for the three month period ended JuneSeptember 30, 2004
versus JuneSeptember 30, 2003, was due primarily to the increased size of the
partnership secured loan portfolio at JuneSeptember 30, 2004 as compared to
JuneSeptember 30, 2003 of $161,930,000$189,880,000 and $109,927,000,$127,177,000, respectively. The increase
in interest on loans for the sixnine month period and three month period ended
JuneSeptember 30, 2004 was mitigated by a lower average portfolio interest rate of
10.28%10.05% at JuneSeptember 30, 2004 versus 11%10.54% at JuneSeptember 30, 2003. Average loan
balances for the sixnine and three month periods ended JuneSeptember 30, 2004 and 2003
were $142,904,000$154,056,000 and $103,753,000$112,144,000 for the sixnine month periods, and $140,545,000$169,831,000
and $107,009,000$119,886,000 for the three month periods, respectively.
The increase in mortgage servicing fees of $381,000 (52%) for the nine
month period, and $135,000 (47%) for the three month period ended September 30,
2004 versus September 30, 2003 is primarily due to an increase in the size of
the loan portfolio from $127,177,000 as of September 30, 2003 to $189,880,000 as
of September 30, 2004.
15
The increase in interest expense of $128,000$344,000 and $23,000$216,000 for the sixnine and
three month periods ended JuneSeptember 30, 2004 versus JuneSeptember 30, 2003 is
substantially due to the larger average outstanding balance of the line of
credit during the secondthird quarter of 2004. This credit line usage was due
primarily to the partnership utilizing the credit line to fund a portion of loan
demand. TheTo a lesser extent the increase in mortgage servicing fees of $246,000 (55%) for the six month
period, and $99,000 (41%) for the three month period ended June 30, 2004 versus
June 30, 2003interest expense is primarily due to an increase ina slightly
higher rate charged by the sizebank as the credit line interest rate is tied to
prime, which increased by 1/4 of the loan portfolio
from $109,927,000 as of June 30, 20031% on September 1, 2004 to $161,930,000 as of June 30, 2004.
15
4.5%.
The increase in provision for losses on loans and real estate held for sale
of $197,000 (80%$404,000 (92%) for the sixnine month period, and $27,000 (20%$207,000 (107%) for the three
month period ended JuneSeptember 30, 2004 versus JuneSeptember 30, 2003 is due to an
increase in the overall portfolio size. The portfolio, when comparing June 30, 2004 to June
30, 2003, increasedsize and an increase in size from $109,927,000 in 2003 to $161,930,000 in 2004. A
loss was absorbed by the allowanceprovisions for loan
losses due to the short saleacquisition of oneproperty due to the foreclosure of the properties securing a partnership loan, and also through write-off of
previously accrued interest balance on one of the repaid loans, which management
considered to be uncollectible.loan. At
JuneSeptember 30, 2004, total allowance for losses on loans and real estate held for
sale equaled $2,749,000,$3,039,000, which the general partners consider to be adequate.
The increase in the asset management fees of $82,000$120,000 and $39,000$38,000 for the
sixnine and three month periods ended JuneSeptember 30, 2004 versus the respective
periods ended JuneSeptember 30, 2003 is due to an increase in the partners' capital
under management at JuneSeptember 30, 2004 and 2003 to $166,497,000$169,942,000 and
$125,443,000,$130,838,000, respectively.
The increase in professional fees of $39,000$46,000 and $29,000$7,000 for the sixnine and
three month periods ended JuneSeptember 30, 2004 versus JuneSeptember 30, 2003 is due to
the increased expense due to the larger partnership size.
The decrease in broker expense of $181,000 and $100,000$0 for the sixnine and three
month periods ended JuneSeptember 30, 2004 versus JuneSeptember 30, 2003 is due to all
brokerage fee obligations being paid in 2003.
The increase in amortization of loan origination fees of $21,000$32,000 and
$12,000$14,000 for the sixnine and three month periods ended JuneSeptember 30, 2004 versus the
respective periods ended JuneSeptember 30, 2003, is due to a revision of fee rates
on the increased line of credit ofwhen the credit line was increased to
$32,000,000.
The increase in other income of $46,000 and $36,000$54,000 for the six and threenine month periodsperiod ended
JuneSeptember 30, 2004 versus the respective periods ended JuneSeptember 30, 2003 is
made up of an increase of $30,000 in miscellaneous income, and an increase of
$16,000$24,000 in imputed interest on the formation loan. The corresponding effect of
imputed interest income is the increase of $16,000$24,000 in amortization of discount
on imputed interest expenses during the sixnine month period under review. The
increase in imputed interest is the result of increases in the formation loan
due to additional limited partnership investments.
Partnership capital continued to increase at a slower rate forduring the quarter ended
JuneSeptember 30, 2004, as the2004. The partnership received new limited partner capital
contributions of $16,349,000$29,393,000 and retained the earnings of limited partners that
have chosen to reinvest earnings of $3,407,000$5,278,000 for the sixnine month period ended
JuneSeptember 30, 2004, as compared to $24,694,000$33,667,000 and $2,847,000$4,398,000 for the sixnine month
period ended JuneSeptember 30, 2003. The increased partnership capital helped
increase loans outstanding to $161,930,000$189,880,000 at JuneSeptember 30, 2004, as compared to
$109,927,000$127,177,000 at JuneSeptember 30, 2003. The limited partner contributions of
$16,349,000$29,393,000 relates to the current offering while $24,694,000$33,667,000 related to the
fourth offering, which closed at the end of the third quarter of 2003.
The partnership utilized its bank line of credit significantly more during
the first halfnine months of 2004 when compared to the first halfcorresponding period of 2003.
The partnership's increase in usage was due to increased loan demand. Average
outstanding balance of the line of credit was $6,467,000$11,109,000 for the sixnine month
period ended JuneSeptember 30, 2004 versus $0$267,000 for the comparablecorresponding period of
2003. In addition, cash generated from interest earnings, late charges,
amortization of principal, loan payoffs and capital contributions by limited
partners was utilized to fund new loans and meet distributions and capital
liquidations to limited partners.
16
At JuneSeptember 30, 2004, outstanding foreclosuresloans with filed notices of default were
fivefour totaling $4,997,000$7,439,000 or 3.07%3.92% of outstanding secured loans compared to the
five totaling $3,740,000$4,361,000 or 3.40%3.43% of outstanding secured loans that existed at
JuneSeptember 30, 2003. Of theNone of these foreclosures at JuneSeptember 30, 2004, three have
entered into workout agreements. These foreclosures are a reflection of the
economic times that existed at JuneSeptember 30, 2004 and JuneSeptember 30, 2003, yet
are not unusual in the general partners' experience.
The general partners received mortgage brokerage commissions from the loan
borrowers of $1,343,000$2,061,000 and $895,000$718,000 for the sixnine and three month periods ended
JuneSeptember 30, 2004 as compared to $1,252,000$1,660,000 and $679,000$408,000 for the sixnine and three
month periods ended JuneSeptember 30, 2003. The increase is due to more loans
written in the sixnine and three month periods ended JuneSeptember 30, 2004 than the
six and three monthcorresponding periods during 2003.
16
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, borrowers' payment records, etc. Based upon this
information and other data, the allowance for loan losses is increased or
decreased. Borrower foreclosures are a normal aspect of partnership operations.
The partnership is not a credit based lender and hence while it reviews the
credit history and income of borrowers, and if applicable, the income from
income producing properties, the general partners expect that the partnership
will on occasion take back real estate security. During 2001 the Northern
California real estate market slowed and the national and local economies
slipped into recession. During 2002 and 2003 the economy has stabilized. During 2004
the economy and the Northern California real estate market strengthened. As of
JuneSeptember 30, 2004, the partnership had fourteenthirteen loans past due 90 days or more
on interest payments totaling $21,202,000. Five$27,801,000. Included within the past due 90 days
or more are four loans for which four notices of default are currently filed
beginning the process of foreclosing five of ourthese four loans. Of the fivefour foreclosed
loans, four totaling $3,693,000all are also categorized as delinquent and past maturity. The other foreclosed loan is less than 90 days delinquent but is
past maturity. The principal
amounts of the fivefour foreclosed loans total $4,997,000$7,439,000 or 3.07%3.92% of the secured
loan portfolio. ThreeNone of these foreclosed borrowers have entered into workout
agreements.
In addition to the three workout agreements with borrowers in foreclosure,
theat September 30, 2004.
The partnership also enteredenters into workout agreements with borrowers who are past
maturity or delinquent in their regular payments. The total number of
partnership workout agreements with borrowers is five,four, inclusive of matured,
foreclosed or 90-day delinquent loans. Typically, a workout agreement allows the
borrower to extend the maturity date of the balloon payment and/or allows the
borrower to make current monthly payments while deferring for periods of time,
past due payments, and allows time to pay the loan in full. These workout
agreements and foreclosures generally exist within our loan portfolio to greater
or lesser degrees, depending primarily on the health of the economy. The number
of foreclosures and workout agreements will generally rise during difficult
economic times and conversely fall during good economic times. The number and
amount of foreclosures existing at JuneSeptember 30, 2004, in management's opinion,
does not have a material effect on our results of operations or liquidity. These
workouts and foreclosures have been considered when management arrived at
appropriate loan loss reserves and based on our experience, are reflective of
our loan marketplace segment. In 2004, we may initiate further foreclosure on delinquent
borrowers or borrowers who become delinquent during the balance of the year. We
may take back additional real estate through the foreclosure process in 2004.
Borrower foreclosures are a normal aspect of partnership operations and the
general partners anticipate that they will not have a material effect on
liquidity. As a prudent guard against potential losses, the general partners
have made provisions for losses on loans and real estate held for sale of
$2,749,000$3,039,000 through JuneSeptember 30, 2004. These provisions for losses were made to
guard against collection losses. The total cumulative provision for losses as of
JuneSeptember 30, 2004 is considered by the general partners to be adequate. Because
of the number of variables involved, the magnitude of the swings possible and
the general partners' inability to control many of these factors, actual results
may and do sometimes differ significantly from estimates made by the general
partners.
Since January, 2001 and continuing through June, 2004, the Federal Reserve
reduced interest rates significantly by cutting the Federal Funds Rate to one
percent. These interest rate cuts significantly lowered long and short term
interest rates. On July 1, 2004, the Federal Reserve increased the Federal Funds
Rate by one quarter percentage point (1/4 of one percent) to 1.25%. This was the
first Federal Funds Rate increase in more than three years and may indicate that
the Federal Reserve has changed its interest rate policy to increased rates for
the foreseeable future. A 1/4 of one percent upward shift in the Federal Funds
Rate will have an almost negligible effect upon the interest rates the
partnership charges borrowers. If, however, there are future interest rate
increases or if they remain at their current levels, borrowers will no longer be
encouraged through continually declining interest rates to prepay their debts
through refinancing of their obligations. This could mean that the partnership
may begin experiencing less prepayments by borrowers in its portfolio. This
would reduce the need for the partnership to replace these prepaid loans with
new loans at lower interest rates. Additionally, the overall real estate
marketplace has become much more active in the last six months, particularly in
Northern California. This has translated into more loan activity for the
partnership, as demand for loans is strong from qualified borrowers. The general
partners believe that the average loan portfolio interest rate may decline as
some remaining borrowers that did not refinance their loans to lower interest
rates take advantage of the current low rates of interest available. Based upon
existing note rates in the portfolio and the partnership's expectations of
stable interest rates in the near future, the partnership anticipates that the
average loan portfolio interest rate will decline approximately 0.25% over the
remainder of 2004. From the general partners' experience, we anticipate that the
annualized yield for 2004 will range between 7.00% and 7.50%.
17
PORTFOLIO REVIEW - For the sixnine months ended JuneSeptember 30, 2004 and 2003
Loan Portfolio.
The partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of JuneSeptember 30, 2004
and 2003 the partnership's loans secured by real property collateral in the six
San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, and Marin) represented $124,071,000 (76.62%$143,815,000 (75.74%) and $79,757,000
(72.55%$98,207,000
(77.22%) of the outstanding secured loan portfolio. The remainder of the
portfolio represented loans secured by real estate located primarily in Northern
CaliforniaCalifornia.
As of JuneSeptember 30, 2004 and JuneSeptember 30, 2003, the Partnershippartnership held 8685
and 7975 secured loans, respectively, in the following categories (in thousands):
JuneSeptember 30, JuneSeptember 30,
2004 2003
------------------------------ --------------------------------------------------------- ---------------------------
Single family residence (1-4 units) $ 78,644 48.57%105,078 55.34% $ 35,988 32.74%53,683 42.21%
Multiple family dwellings (5+ units) 24,032 14.84% 22,919 20.85%24,320 12.81% 23,273 18.30%
Commercial 53,862 33.26% 45,375 41.28%56,415 29.71% 44,576 35.05%
Land 5,392 3.33%4,067 2.14% 5,645 5.13%4.44%
------------- ---------- ------------- ------------- ------------------------
Total $ 161,930189,880 100.00% $ 109,927127,177 100.00%
============= ========== ============= ============= ========================
As of JuneSeptember 30, 2004, the partnership held 8685 secured loans secured by
deeds of trust. The following table sets forth the priorities, asset
concentrations and maturities of the loans held by the partnership as of
JuneSeptember 30, 2004.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of JuneSeptember 30, 2004 (in thousands)
# of
Secured
Loans Amount Percent
-------------------------- --------------- -------------
1st Mortgages 49 $ 103,093 63.67%116,983 61.61%
2nd Mortgages 34 55,559 34.31%32 64,908 34.18%
3rd Mortgages 3 3,278 2.02%
==============4 7,989 4.21%
============ =============== =============
Total 8685 $ 161,930189,880 100.00%
Maturing 12/31/04 and prior 1411 $ 31,482 19.44%28,916 15.23%
Maturing prior to 12/31/05 19 50,581 31.24%18 49,958 26.31%
Maturing prior to 12/31/06 22 52,849 32.64%27 80,879 42.59%
Maturing after 12/31/06 31 27,018 16.68%
==============29 30,127 15.87%
============ =============== =============
Total 8685 $ 161,930189,880 100.00%
Average Loan $ 1,893 1.16%2,234 1.18%
Largest Loan 16,010 9.83%8.43%
Smallest Loan 50 0.03%
Average Loan-to-Value, based upon appraisals and
senior liens at date of inception of loan 53.75%54.88%
18
Borrower Liquidity and Capital Resources.
The partnership relies upon purchases of units, loan payoffs, borrowers'
mortgage payments, and, to a lesser degree, its line of credit for the source of
funds for loans and for the undisbursed portion of Construction Loans and
Rehabilitation Loans (see ASSET QUALITY). Recently, mortgage interest rates have
decreased somewhat from those available at the inception of the partnership. If
interest rates were to increase substantially, the yield of the partnership's
loans may provide lower yields than other comparable debt-related investments.
As such, additional limited partner unit purchases could decline, which would
reduce the overall liquidity of the partnership. Additionally, since the
partnership has made primarily fixed rate loans, if interest rates were to rise,
the likely result would be a slower prepayment rate for the partnership. This
could cause a lower degree of liquidity as well as a slowdown in the ability of
the partnership to invest in loans at the then current interest rates.
Conversely, in the event interest rates were to decline, the partnership could
see both or either of a surge of unit purchases by prospective limited partners,
and significant borrower prepayments, which, if the partnership can only obtain
the then existing lower rates of interest may cause a dilution of the
partnership's yield on loans, thereby lowering the partnership's overall yield
to the limited partners. The partnership to a lesser degree relies upon its line
of credit to fund loans. Generally, the partnership's loans are fixed rate,
whereas the credit line is a variable rate loan. In the event of a significant
increase in overall interest rates, the credit line rate of interest could
increase to a rate above the average portfolio rate of interest. Should such an
event occur, the general partners would desire to pay off the line of credit.
Retirement of the line of credit would reduce the overall liquidity of the
partnership. Cash is constantly being generated from borrower payments of
interest, principal and loan payoffs. Currently, cash flow greatly exceeds
partnership expenses and earnings requirements.cash distribution requirements to limited partners.
Excess cash flow is invested in new loan opportunities, and for funding the
undisbursed portion of Construction and Rehabilitation Loans, and is used to
reduce the partnership credit line or for other partnership business.
At the time of subscription to the partnership, limited partners must elect
either to receive monthly, quarterly or annual cash distributions from the
partnership, or to compound earnings in their capital account. If you initially
elect to receive monthly, quarterly or annual distributions, such election, once
made, is irrevocable. If the investor initially elects to compound earnings in
his/her capital account, in lieu of cash distributions, the investor may, after
three (3) years, change the election and receive monthly, quarterly or annual
cash distributions. Earnings allocable to limited partners, who elect to
compound earnings in their capital account, will be retained by the partnership
for making further loans or for other proper partnership purposes,purposes; and such
amounts will be added to such limited partners' capital accounts.
During the sixnine and three month periods ended JuneSeptember 30, 2004 and 2003,
the partnership, after allocation of syndication costs, made the following
allocation of earnings both to the limited partners who elected to compound
their earnings, and those that chose to distribute:
SixNine months ended June 30, Three months ended
JuneSeptember 30, ------------------------------- -------------------------------September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
------------- --------------------------- ------------- -------------- -------------
Compounding $3,408,000 $2,847,000 $1,752,000 $1,500,000$ 5,278,000 $ 4,398,000 $ 1,870,000 $ 1,551,000
Distributing $2,058,000 $1,510,000 $1,053,000 $ 792,0003,194,000 $ 2,392,000 $ 1,136,000 $ 882,000
As of JuneSeptember 30, 2004 and JuneSeptember 30, 2003, limited partners electing
to receive cash distributions of earnings represented 38% and 36%, respectively
of the limited partners' outstanding capital accounts. These percentages have
remained relatively stable. The general partners anticipate that after all
capital has been raised, the percentage of limited partners electing to withdraw
earnings will decrease due to the dilution effect which occurs when compounding
limited partners' capital accounts grow through earnings reinvestment.compounded earnings.
19
The partnership also allows the limited partners to withdraw their capital
account subject to certain limitations and penalties (see "Withdrawal From
Partnership" in the Limited Partnership Agreement). Once a limited partner's
initial five-year hold period has passed, the general partners expect to see an
increase in liquidations due to the ability of limited partners to withdraw
without penalty. This ability to withdraw five years after a limited partner's
investment has the effect of providing limited partner liquidity and the general
partners expect a portion of the limited partners to avail themselves of this
liquidity. This has the anticipated effect of increasing the net capital of the
partnership, primarily through retained earnings during the offering period. The general partners expect to see increasing numbers of limited
partner withdrawals during a limited partner's 5th through 10th anniversary, at
which time the bulk of those limited partners who have sought withdrawal have
been liquidated. Since the five-year hold period for many limited partners has
yet to expire, as of JuneSeptember 30, 2004, many limited partners may not as yet
avail themselves of this provision for liquidation. Earnings and capital
liquidations including early withdrawals during the sixnine and three months ended
JuneSeptember 30, 2004 and 2003 were:
SixNine months ended June 30, Three months ended
JuneSeptember 30, ------------------------------- --------------------------------September 30,
------------------------------ ------------------------------
2004 2003 2004 2003
-------------- ------------- ---------------------------- ------------- -------------
Cash distributions $ 2,058,0003,194,000 $ 1,510,0002,392,000 $ 1,053,0001,136,000 $ 792,000882,000
Capital liquidation* $ 1,107,0001,469,000 $ 808,0001,318,000 $ 480,000362,000 $ 457,000
--------------509,000
------------- ---------------------------- ------------- -------------
Total $ 3,165,0004,663,000 $ 2,318,0003,710,000 $ 1,533,000 $1,249,000
==============1,498,000 $ 1,391,000
============= ============================ ============= =============
* These amounts represent gross of early withdrawal penalties.
Additionally, limited partners may liquidate their investment over a
one-year period subject to certain limitations and penalties. During the sixnine
and three months ended JuneSeptember 30, 2004 and 2003, capital liquidated subject
to the 10% penalty for early withdrawal was:
Six months ended June 30, Three months ended June 30,
------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- --------------- -------------
$ 445,000 $ 311,000 $ 117,000 $ 198,000
Nine months ended Three months ended
September 30, September 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
$ 542,000 $ 527,000 $ 97,000 $ 216,000
This represents 0.280.30 %, 0.26%0.40%, 0.07%0.05% and 0.17% of the limited partners'
ending capital as of JuneSeptember 30, 2004 and 2003, respectively. These
withdrawals are within the normally anticipated range and represent a small
percentage of limited partner capital.
In some cases in order to satisfy broker dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the partnership on a basis which utilizes a per unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the partnership to integrate with
certain software used by the broker dealers and other reporting entities. In
those cases, the partnership will report to broker dealers, Trust Companies and
others a "reporting" number of units based upon a $1.00 per unit calculation.
The number of reporting units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the partnership account statement
provided to investors. The reporting units are solely for broker dealers
requiring such information for their software programs and do not reflect actual
units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the partnership. Each investor's
capital account balance is set forth periodically on the partnership account
statement provided to investors. The amount of partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per unit estimated value
of the client's investment in the partnership in accordance with NASD Rule 2340.
20
While the general partners have set an estimated value for the partnership
units, such determination may not be representative of the ultimate price
realized by an investor for such units upon sale. No public trading market
exists for the partnership units and none is likely to develop. Thus, there is
no certainty that the units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
partnership, which may include early withdrawal penalties (See the section of
the prospectus entitled "Risk Factors - Purchase of Units is a Long Term
Investment").
Current Economic Conditions.
On July 1, and again on September 1, 2004, the Federal Reserve increased
the Federal Funds Rate by one quarter percentage point (1/4 of one percent) each
time to 1.50%. These were the first Federal Funds Rate increases in more than
three years and may indicate that the Federal Reserve has changed its interest
rate policy to increased rates for the foreseeable future. A 1/2 of one percent
upward shift in the Federal Funds Rate will have an almost negligible effect
upon the interest rates the partnership charges borrowers. If, however, there
are future interest rate increases or if they remain at their current levels,
borrowers will no longer be encouraged through continually declining interest
rates to prepay their debts through refinancing of their obligations. This could
mean that the partnership may begin experiencing less prepayments by borrowers
in its portfolio. This would reduce the need for the partnership to replace
these prepaid loans with new loans at lower interest rates. Additionally, the
overall real estate marketplace has become much more active in the last nine
months, particularly in Northern California. This has translated into more loan
activity for the partnership, as demand for loans is strong from qualified
borrowers. The general partners believe that the average loan portfolio interest
rate may decline as some remaining borrowers that did not refinance their loans
to lower interest rates take advantage of the current low rates of interest
available. Based upon existing note rates in the portfolio and the partnership's
expectations of stable interest rates in the near future, the partnership
anticipates that the average loan portfolio interest rate will decline
approximately 10 to 25 basis points over the remainder of 2004. From the general
partners' experience, we anticipate that the annualized yield for 2004 will
range between 7.00% and 7.50%.
The partnership makes loans primarily in Northern California. As of
JuneSeptember 30, 2004, approximately 76.62%75.74%, ($124,071,000)143,815,000) of the loans held by
the partnership were in six San Francisco Bay Area Counties. The remainder of
the loans held was secured primarily by Northern California real estate outside
the San Francisco Bay Area. Like the rest of the nation, the San Francisco Bay
Area has felt the recession and accompanying slow down in economic growth and increasing unemployment.
In 2004 the Northern California economy has begun to rebound. Unemployment
is still a concern as job creation is an important aspect of continued economic
expansion. The unemployment rate in California was 6.3%5.9% as of June,September, 2004 as
compared to an unemployment rate of 6.9%6.7% in June,September, 2003. This decrease in
unemployment indicates improvement but is still higher than many economists
would like. The Labor Department reported that the consumer price index rose
0.3%0.6% in June,September, 2004 and for the first sixnine months of this year, consumer
prices went up at an annual rate of 4.9%3.5%, compared with a rate of 1.9% for all
of 2003. Core prices have risen at a more moderate 2.6% rate so far this year. In July and September, 2004, the Federal Reserve, after more than three
years of lowering its core interest rates, raised its core interest rate .25% in
each of these months to 1.25%1.50%. This marks a dramatic change in policy from
lowering interest rates to a probable policy of raising interest rates over the
foreseeable future. Real estate prices are, in part, directly impacted by the
cost of money. The value of real estate is important to the partnership as real
estate collateral is backing each of our loans. At current interest rates,
demand for residential real estate is at all time highs. DataQuick Information
Systems reported all time high numbers in June,July and August, 2004 for many tracked
California real estate categories. These included a record $382,000$520,000 median sales
price for a California home,San Francisco Bay Area home. In July, 2004 there was a record 14,184total of
12,862 house and condominium sales in the nine county San Francisco Bay Area
marketplace,marketplace. In August, 2004 there were 12,674 sales recorded. This was due to
strong demand, increased inventory and a record $545,000 median home sales price in the San Francisco Bay Area.continued low mortgage interest rates.
Home affordability in the San Francisco, Bay Area, as measured by the affordability index
has declinedstood at 11% for September, 2004, down from 32% to 22% as both real estate prices and12% in August, 2004. Many buyers are
expecting interest rates to rise over the next year so they are doing their
buying now rather than later. Interest rates have risen in the year ended May,cooperated, dropping to an
average of 5.75% as of September 16, 2004 from 5.83% as of September 9, 2004. A lower number of households being
able to afford homes will serve to mitigate future price increases in
residential real estate particularly if interest rates continue to rise. Freddie
Mac, which has said it expects 30-year mortgages to range between 6% and 7% in
2004, said the housing market should remain buoyant for at least the rest of the
year.
For the partnership, stable and rising residential real estate values are good
as the partnership is more collateral dependent than credit dependent in its
loan underwriting decisions. A strong and active real estate marketplace also
serves to produce a substantial number of real estate financing opportunities
which the partnership may compete for.
21
The San Francisco Bay Area commercial real estate marketplace is improving.on the
rebound. Grubb and Ellis reports that downtown San Francisco building sales
through the third quarter of 2004 are tracking to beat $2.4 billion, which was
the all time high set in 2000. Additionally, Grubb and Ellis reports that there
has been five consecutive quarters of positive net rental absorption or 1.1
million square feet over these same five quarters and 670,000 square feet in
2004. Vacancy in office buildingsrates declined to 18.2%21.2% or 2.9 percentage points from the peak in
the second quarter of 2004 as
reported2002. Grubb and Ellis also reports that asking rents
increased albeit a minimally by Colliers International. Cushman Wakefield reported office21 cents per square foot. CB Richard Ellis
reports overall vacancy of
20.5% in 2004 versus 22.9% in 2003. These reduced vacancies continue a trend
which began inconsiderably lower at 17.4% and puts absorption at
884,421 square feet for 2004. In any case, the third quarter of 2003.commercial market is improving.
Improved occupancies in commercial properties will assist the owners of those
properties in handling their debt payments. Improved occupancies will help stabilize
commercial real estate values, which is a benefit to the partnership.
For partnership loans outstanding as of JuneSeptember 30, 2004, the partnership
had an average loan to value ratio of 53.75%54.88%, computed based on appraised values
and senior liens as of the date the loan was made. This percentage does not
account for any increases or decreases in property values since the date the
loan was made, nor does it include any reductions in principal on senior
indebtedness through amortization of payments after the loan was made. This low
loan to value ratio will assist the partnership in weathering loan delinquencies
and foreclosures should they eventuate.
21
Part I - Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table contains information about the cash held in money
market accounts, loans held in the partnership's portfolio and on our line of
credit as of JuneSeptember 30, 2004. The presentation, for each category of
information, aggregates the assets and liabilities by their maturity dates for
maturities occurring in each of the years 2004 through 2008 and separately
aggregates the information for all maturities arising after 2008. The carrying
values of these assets and liabilities approximate their fair market values as
of JuneSeptember 30, 2004 (in thousands):
2004 2005 2006 2007 2008 Thereafter Total
-------------------------------------------------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 7,7273,121 $ 7,7273,121
Average interest rate 1.00% 1.00%0.99% 0.99%
Loans secured by deeds of
trust $ 31,482 50,581 52,849 16,384 1,630 9,00428,916 49,958 80,879 15,940 1,629 12,558 $ 161,930189,880
Average interest rate 11.16% 10.40% 9.77% 10.22%10.91% 10.41% 9.56% 10.17% 9.94% 9.74% 10.28%9.68% 10.05%
Loans, unsecured 34 34
Average interest rate - -
Interest bearing liabilities:
Line of credit $ 20,00032,000 $ 20,00032,000
Average interest rate 4.00% 4.00%4.50% 4.50%
Market Risk.
The partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the partnership's primary market risk exposure with
respect to its obligations is to changes in interest rates, which will affect
the interest cost of outstanding amounts on the line of credit. The partnership
may also suffer market risk tied to general trends affecting real estate values
that may impact the partnership's security for its loans.
22
The partnership's primary market risk in terms of its profitability is the
exposure to fluctuations in earnings resulting from fluctuations in general
interest rates. The majority of the partnership's mortgage loans, (100% as of
JuneSeptember 30, 2004) earn interest at fixed rates. Changes in interest rates may
also affect the value of the partnership's investment in mortgage loans and the
rates at which the partnership reinvests funds obtained from loan repayments and
new capital contributions from limited partners. If interest rates increase, the
interest rates the partnership obtains from reinvested funds will generally
increase, but the value of the partnership's existing loans at fixed rates will
generally tend to decrease. The risk is mitigated by the fact that the
partnership does not intend to sell its loan portfolio, rather such loans are
held until they are paid off. If interest rates decrease, the amounts becoming
available to the partnership for investment due to repayment of partnership
loans may be reinvested at lower rates than the partnership had been able to
obtain in prior investments, or than the rates on the repaid loans. In addition,
interest rate decreases may encourage borrowers to refinance their loans with
the partnership at a time where the partnership is unable to reinvest in loans
of comparable value.
The partnership does not hedge or otherwise seek to manage interest rate
risk. The partnership does not enter into risk sensitive instruments for trading
purposes.
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the loan portfolio as affected by
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
22
The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the partnership is not subject to these regulations and has
not adopted all of these practices. Rather, the general partners, in connection
with the periodic closing of the accounting records of the partnership and the
preparation of the financial statements, determine whether the allowance for
loan losses is adequate to cover potential loan losses of the partnership. As of
JuneSeptember 30, 2004 the general partners have determined that the allowance for
loan losses and real estate held for sale of $2,749,000 (1.75%$3,039,000 (1.79% of net assets) is
adequate in amount. Because of the number of variables involved, the magnitude
of the swings possible and the general partners' inability to control many of
these factors, actual results may and do sometimes differ significantly from
estimates made by the general partners. As of JuneSeptember 30, 2004, fourteenthirteen loans
were delinquent over 90 days on interest payments amounting to $21,202,000. Of these,
$2,535,000 delinquent loans were$27,801,000.
Loans subject to workout agreements.agreements totaled $8,402,000 and are included in the
delinquent and matured loans.
The partnership also makes loans requiring periodic disbursements of funds.
As of JuneSeptember 30, 2004, there were twelve such loans. These loans include
ground up construction of buildings and loans for rehabilitation of existing
structures. Interest on these loans is computed using a simple interest method
and only on the amounts disbursed on a daily basis.
A summary of the status of the partnership's loans which are periodically
disbursed, as of JuneSeptember 30, 2004, is set forth below:
Complete Construction Rehabilitation
----------------------- ---------------------------------------------
Disbursed funds $ 16,018,00017,401,000 $ 31,033,00036,490,000
Undisbursed funds $ 14,473,00012,440,000 $ 8,341,00010,234,000
--------------- ---------------
Total commitments $ 30,491,00029,841,000 $ 39,374,00046,724,000
=============== ===============
23
Construction Loans are determined by the management to be those loans made
to borrowers for the construction of entirely new structures or dwellings,
whether residential, commercial or multifamily properties. The partnership has
approved the borrowers up to a maximum loan balance; however, disbursements are
made in phases throughout the construction process. As of JuneSeptember 30, 2004,
the partnership had commitments for Construction Loans totaling $30,491,000,$29,841,000, of
which $16,018,000$17,401,000 in Construction Loans had been disbursed and had an additional
$14,473,000$12,440,000 yet to be disbursed. The $30,491,000$29,841,000 of Construction Loans committed
exceeds 10% of the loan portfolio which is in excess of the partnership's limit
on Construction Loan funding. The partnership will not make any additional
Construction Loan obligations until such time as the aggregate amount of the
outstanding Construction Loan commitments is less than 10% of the loan
portfolio. During October, 2004, one of these loans with a total commitment of
$3,185,000 paid off.
The partnership also makes loans, the proceeds of which are used to
remodel, add to and/or rehabilitate an existing structure or dwelling, whether
residential, commercial or multifamily properties and which, in the
determination of management, are not construction loans. These loans are
referred to by management as Rehabilitation Loans. As of JuneSeptember 30, 2004 the
partnership had funded $31,033,000$36,490,000 in Rehabilitation Loans and $8,341,000$10,234,000
remains to be disbursed for a combined total of $39,374,000.$46,724,000. While the
partnership does not classify Rehabilitation Loans as Construction Loans,
Rehabilitation Loans do carry some of the same risks as Construction Loans.
There is no limit on the amount of Rehabilitation Loans the partnership may
make.
Part I - Item 4. CONTROLS AND PROCEDURES
As of JuneSeptember 30, 2004, the general partners of the partnership carried
out an evaluation, under the supervision and with the participation of the
general partner's management, including the general partner's President and
Chief Financial Officer, of the effectiveness of the design and operation of the
partnership's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon the evaluation, the President and Chief Financial Officer of
the general partner concluded that the partnership's disclosure controls and
procedures are effective. There were no significant changes in the partnership's
internal controls on the other factors that could significantly affect these
controls subsequent to the date of their evaluation.
2324
Part II - COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
The partnership has no officers or directors. The partnership is managed by
the general partners. There are certain fees and other items paid to management
and related parties.
A more complete description of management compensation is found in the
Prospectus part of Form S-11 and subsequent amendments related to the offering
of partnership interests dated October 7, 2003, page 5, under the section
"Compensation of the General Partners and the Affiliates," which is incorporated
by reference. Such compensation is summarized below.
The following compensation has been paid to the general partners and
affiliates for services rendered during the sixnine months ended JuneSeptember 30,
2004. All such compensation is in compliance with the guidelines and limitations
set forth in the Prospectus.
Description of Compensation
Entity Receiving Compensation and Services Rendered Amount
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
I. Redwood Mortgage Corp. Loan Servicing Fee for servicing loans...........................$693,000loans....................... $1,115,000
General Partners
&/or Affiliates Asset Management Fee for managing assets.........................$291,000assets..................... $454,000
General Partners 1% interest in profits............................................$56,000profits....................................... $87,000
Less allocation of syndication costs ..............................$1,000
-----------
$55,000........................ $1,000
------------
$86,000
Redwood Mortgage Corp. Portion of early withdrawal penalties applied to reduce
Formation Loan.............................................$34,000Loan............................................... $41,000
General Partners Organization and Offering Expenses.....................................$0Expenses........................... $0
&/or Affiliates
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED BY COMPANIES RELATED TO
THE GENERAL PARTNERS WITH THE PARTNERSHIP (EXPENSES OF BORROWERS NOT OF THE
PARTNERSHIP)
Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection
with the review, selection, evaluation, negotiation, and
extension of the loans paid by the borrowers and not by
the partnership...........................$1,343,000partnership.............................................. $2,061,000
Redwood Mortgage Corp. Processing and Escrow Fees for services in connection with
notary, document preparation, investigation, and escrow
fees payable by the borrowers and not by the partnership.......................................................$20,000partnership..... $28,000
Gymno Corporation Reconveyance Fee...................................................$8,534Fee............................................. $9,756
Redwood Mortgage Corp. Assumption or Extension Fees...........................................$0Fees................................. $0
III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN
EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE
CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . . . . . . . . . . . $152,000
24$229,000
25
PART III - OTHER INFORMATION
Item 1. Legal Proceedings
Refer to notesNotes to consolidated financial statements No.Consolidated Financial Statements - Note 8 discussed
earlier
Item 2. Changes in the Securities
S-11, effective October 7, 2003 and Supplement No. 2 dated May 4, 2004
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(99.1) Certification of Michael R. Burwell, General Partner
(99.2) Certification of Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Redwood
Mortgage Corp. and Gymno Corporation, General Partners
(b) Form 8-K
Not Applicable
2526
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 16th15th day of
AugustNovember 2004.
REDWOOD MORTGAGE INVESTORS VIII
By: /S/ Michael R. Burwell
---------------------------------------------------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
-------------------------------------------------------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer
By: Redwood Mortgage Corp.
By: /S/ Michael R. Burwell
-------------------------------------------------------------------------------------
Michael R. Burwell,
President, Secretary/Treasurer
2627
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity indicated on the 16th15th day of AugustNovember 2004.
Signature Title Date
/S/ Michael R. Burwell
- -----------------------------------------------
Michael R. Burwell General Partner August 16,November 15, 2004
/S/ Michael R. Burwell
- -----------------------------------------------
Michael R. Burwell President of Gymno Corporation, August 16,November 15, 2004
(Principal Executive Officer);
Director of Gymno Corporation;
Secretary/Treasurer of Gymno
Corporation (Principal Financial
and Accounting Officer)
/S/ Michael R. Burwell
- -----------------------------------------------
Michael R. Burwell President, Secretary/Treasurer August 16,November 15, 2004
of Redwood Mortgage Corp.
(Principal Financial and
Accounting Officer); Director
of Redwood Mortgage Corp.
2728
Exhibit 99.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of JuneSeptember 30, 2004 (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
August 16,November 15, 2004
2829
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-Q for the period ending JuneSeptember 30, 2004 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
August 16,November 15, 2004
2930
Exhibit 99.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, and Redwood Mortgage Corp., General Partner,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of JuneSeptember 30, 2004 (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- ---------------------------------------
Michael R. Burwell, President and Chief
Financial Officer of Gymno Corporation,
General Partner, and Redwood Mortgage
Corp., General Partner
August 16,November 15, 2004
3031
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-Q for the period ending JuneSeptember 30, 2004 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General
Partner of the Partnership, and Redwood Mortgage Corp., General Partner of the
Partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
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Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner,
and Redwood Mortgage Corp., General Partner
August 16,November 15, 2004
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