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FORM 10-Q
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Period Ended June 30, 2002
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Commission file number 333-41410
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REDWOOD MORTGAGE INVESTORS VIII
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(exact name of registrant as specified in its charter)
CALIFORNIA 94-3158788
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
650 El Camino Real, Suite G, Redwood City, CA 94063
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(address of principal executive office)
(650) 365-5341
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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 reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO NOT APPLICABLE XX
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's class
of common stock, as of the latest date.
NOT APPLICABLE
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
BALANCE SHEETS
JUNE 30, 2002 (unaudited) and DECEMBER 31, 2001 (audited)
ASSETS
June 30, December 31,
2002 2001
---------------- ---------------
(unaudited) (audited)
Cash and cash equivalents $3,828,787 $1,916,578
---------------- ---------------
Loans
Loans secured by deeds of trust, held to maturity 86,038,396 82,789,833
Loans, unsecured 3,967 3,967
---------------- ---------------
86,042,363 82,793,800
Less allowance for loan losses (2,652,573) (2,247,191)
---------------- ---------------
Net loans 83,389,790 80,546,609
---------------- ---------------
Interest and other receivables
Accrued interest and late fees 2,878,587 3,236,721
Advances on loans 389,868 194,655
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3,268,455 3,431,376
---------------- ---------------
Prepaid loan fees 0 6,123
---------------- ---------------
Total assets $90,487,032 $85,900,686
================ ===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ 0 $ 73,889
Note payable - bank line of credit 9,200,000 11,400,000
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Total liabilities 9,200,000 11,473,889
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Investors in applicant status 0 672,617
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Partners' capital:
Limited partners' capital, subject to redemption net of unallocated
syndication costs of $439,805 and $399,249 for 2002 and 2001,
respectively and formation loan receivable of $4,200,959 and
$4,126,430 for 2002 and 2001, respectively 81,216,254 73,688,241
General partners' capital, net of unallocated syndication costs
of $4,442 and $4,033 for 2002 and 2001, respectively 70,778 65,939
-------------- --------------
Total partners' capital 81,287,032 73,754,180
-------------- --------------
Total liabilities and partners' capital $90,487,032 $85,900,686
============== ==============
The accompanying notes are an integral part of the financial statements.
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
STATEMENTS OF INCOME
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2002 and 2001 (unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- --------------------------------------
2002 2001 2002 2001
---------------- --------------- ---------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues
Interest on loans $5,092,786 $4,330,580 $2,504,918 $2,192,041
Interest - interest bearing accounts 376 5,149 189 875
Late charges 19,711 5,448 6,947 1,742
Other 3,662 4,877 2,912 550
---------------- --------------- ---------------- ---------------
5,116,535 4,346,054 2,514,966 2,195,208
---------------- --------------- ---------------- ---------------
Expenses
Mortgage servicing fees 464,202 292,088 220,854 145,226
Interest on note payable - bank 223,722 637,841 89,319 251,592
Amortization of loan origination fees 6,124 6,771 2,740 3,386
Provision for losses on loans and real
estate acquired through 405,385 362,746 179,020 196,085
foreclosure
Asset management fees 155,629 65,450 79,659 40,618
Clerical costs through
Redwood Mortgage Corp. 131,461 116,345 66,266 59,541
Professional services 51,772 7,816 14,685 2,816
Printing, supplies and postage 15,502 14,430 11,692 10,180
Other 10,458 9,545 1,026 1,879
---------------- --------------- ---------------- ---------------
1,464,255 1,513,032 665,261 711,323
---------------- --------------- ---------------- ---------------
Other income (expense)
Interest credited to partners
in applicant status (866) (295) (8) (97)
---------------- --------------- ---------------- ---------------
Net income $3,651,414 $2,832,727 $1,849,697 $1,483,788
================ =============== ================ ===============
Net income: general partners (1%) $ 36,514 $ 28,327 $ 18,497 $ 14,838
limited partners 3,614,900 2,804,400 1,831,200 1,468,950
(99%)
---------------- --------------- ---------------- ---------------
Total - net income $3,651,414 $2,832,727 $1,849,697 $1,483,788
================ =============== ================ ===============
Net income per $1,000 invested by
limited partners for entire period
Where income is reinvested
and compounded $42.84 $44.36 $21.05 $22.02
================ =============== ================ ===============
Where partner receives income
in monthly distributions $42.10 $43.56 $20.93 $21.86
================ =============== ================ ===============
The accompanying notes are an integral part of the financial statements.
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2002 (unaudited)
PARTNERS' CAPITAL
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LIMITED PARTNERS' CAPITAL
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Capital
Partners In Account Unallocated Formation
Applicant Limited Syndication Loan
Status Partners Costs Receivable Total
------------- ---------------- --------------- --------------- --------------
Balances at December 31, 2001 $ 672,617 $78,213,920 $ (399,249) $ (4,126,430) $73,688,241
Contributions on application 5,252,513 - - - -
Formation loan increases - - - (378,268) (378,268)
Formation loan payments - - - 291,053 291,053
Interest credited to partners
in applicant status 866 - - - -
Upon admission to Partnership:
Interest withdrawn (384) - - - -
Transfers to partners' capital (5,925,612) 5,920,365 - - 5,920,365
Net income - 3,614,900 - - 3,614,900
Syndication costs incurred - - (133,681) - (133,681)
Allocation of syndication costs - (89,100) 89,100 - -
Partners' withdrawals - (1,786,315) - - (1,786,315)
Early withdrawal penalties - (16,752) 4,025 12,686 (41)
------------- ---------------- --------------- --------------- --------------
Balances at June 30, 2002 $ 0 $85,857,018 $ (439,805) $ (4,200,959) $81,216,254
============= ================ =============== =============== ==============
The accompanying notes are an integral part of the financial statements
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2002 (unaudited)
PARTNERS' CAPITAL
----------------------------------------------------
GENERAL PARTNERS' CAPITAL
----------------------------------------------------
Capital
Account Unallocated
General Syndication Total Partners'
Partners Costs Total Capital
-------------- -------------- --------------- -----------------
Balances at December 31, 2001 $ 69,972 $ (4,033) $ 65,939 $ 73,754,180
Contributions on application - - - -
Formation loan increases - - - (378,268)
Formation loan payments - - - 291,053
Interest credited to partners in
applicant status - - - -
Upon admission to Partnership:
Interest withdrawn - - - -
Transfers to partners' capital 5,247 - 5,247 5,925,612
Net income 36,514 - 36,514 3,651,414
Syndication costs incurred - (1,350) (1,350) (135,031)
Allocation of syndication costs (900) 900 - -
Partners' withdrawals (35,613) - (35,613) (1,821,928)
Early withdrawal penalties - 41 41 -
-------------- -------------- --------------- -----------------
Balances at June 30, 2002 $ 75,220 $ (4,442) $ 70,778 $ 81,287,032
============== ============== =============== =================
The accompanying notes are an integral part of the financial statements
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (unaudited)
2002 2001
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Cash flows from operating activities
Net income $3,651,4 $2,832,727
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for doubtful accounts 405,385 362,746
Change in operating assets and liabilities
Accrued interest and advances, less
transfers to allowance for loan losses 101,555 (625,749)
Deferred interest - (82,253)
Prepaid loan fees 6,123 521
Accounts payable (73,889) (30,000)
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Net cash provided by operating activities 4,090,588 2,457,992
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Cash flows from investing activities
Loans made (22,875,382) (31,639,959)
Principal collected on loans 19,688,182 25,117,889
Payments for purchases of real estate - (3,652)
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Net cash used in investing activities (3,187,200) (6,525,722)
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Cash flows from financing activities
Borrowings (repayments) on line of credit, net (2,200,000) (3,575,000)
Contributions by partner applicants 5,252,513 9,982,341
Interest credited to partners in applicant status 866 295
Interest withdrawn by partners in applicant status (384) (128)
Partners' withdrawals (1,821,928) (1,557,802)
Syndication costs incurred (135,031) (144,160)
Formation loan lending (378,268) (757,859)
Formation loan collections 291,053 154,608
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Net cash provided by financing activities 1,008,821 4,102,295
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Net increase (decrease) in cash and cash equivalents 1,912,209 34,565
Cash and cash equivalents - beginning of year 1,916,578 1,459,725
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Cash and cash equivalents - end of year $3,828,787 $1,494,290
============= =============
Cash paid for interest $ 223,722 $ 637,841
============= =============
The accompanying notes are an integral part of these financial statements.
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (unaudited)
NOTE 1 - ORGANIZATION AND GENERAL
Redwood Mortgage Investors VIII, a California limited partnership (the
"Partnership"), was organized in 1993 of which Michael R. Burwell, an
individual, and Gymno Corporation and Redwood Mortgage Corp., both California
Corporations, are the general partners. The Partnership was organized to engage
in business as a mortgage lender for the primary purpose of making loans secured
by Deeds of Trust on California real estate. Loans are being arranged and
serviced by Redwood Mortgage Corp., a general partner. At December 31, 2001, the
Partnership was in its third offering stage, wherein contributed capital totaled
$69,003,330. As of June 30, 2002, the third offering closed and the contributed
capital totaled $74,923,213 in limited partner contributions of an approved
aggregate offerings of $75,000,000. As of June 30, 2002, and December 31, 2001,
$0 and $672,617, respectively, remained in applicant status, and total Units
sold were in the aggregate of $74,923,213 and $69,675,947, respectively.
A minimum of $250,000 and a maximum of $15,000,000 in Units, at $1 per
Unit, were initially offered through qualified broker-dealers. This initial
offering was closed in October 1996. In December 1996, the Partnership commenced
a second offering of an additional $30,000,000 in Units. This offering was
closed on August 30, 2000 and on August 31, 2000, the Partnership commenced a
third offering for an additional $30,000,000 in Units, which was closed in
April, 2002. As loans are identified, partners are transferred from applicant
status to admitted partners participating in loan operations. Each month's
income is distributed to partners based upon their proportionate share of
partners' capital. Some partners have elected to withdraw income on a monthly,
quarterly or annual basis.
A. Sales Commissions - Formation Loan
Sales commissions are not paid directly by the Partnership out of the
offering proceeds. Instead, the Partnership loans to Redwood Mortgage Corp., one
of the general partners, amounts to pay all sales commissions and amounts
payable in connection with unsolicited orders. This loan is referred to as the
"Formation Loan". It is unsecured and non-interest bearing.
The Formation Loan relating to the initial $15,000,000 offering totaled
$1,074,840, which was 7.2% of limited partners contributions of $14,932,017 at
December 31, 1996. It is to be repaid, without interest, in ten annual
installments of principal, which commenced on January 1, 1997, following the
year the initial offering closed.
The Formation Loan relating to the second offering ($30,000,000) totaled
$2,271,916, which was 7.6% of limited partners contributions of $29,992,574 at
December 31, 2000. It is to be repaid, without interest, in ten annual
installments of principal, which commenced on January 1, 2001, following the
year the second offering closed.
The Formation Loan relating to the third offering ($30,000,000) totaled
$2,217,952, which was 7.4% of the limited partners contributions of $29,998,622
at June 30, 2002. It is to be repaid, without interest, in ten annual
installments of principal, which will commence on January 1, 2003. The third
offering closed in April, 2002 and total amount subscribed by the limited
partners was $29,998,622.
Sales commissions range from 0% (Units sold by general partners) to 9% of
gross proceeds. The Partnership anticipates that the sales commissions will
approximate 7.6% based on the assumption that 65% of investors will elect to
reinvest earnings, thus generating full 9% commissions. The principal balance of
the Formation Loan will increase as additional sales of Units are made each
year. The amount of the annual installment payment to be made by Redwood
Mortgage Corp., during the offering stage, will be determined at annual
installments of one-tenth of the principal balance of the Formation Loan as of
December 31 of each year.
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (unaudited)
NOTE 1 - ORGANIZATION AND GENERAL (Continued)
The following summarizes Formation Loan transactions to June 30, 2002:
Initial Subsequent Current
Offering of Offering of Offering of
$15,000,000 $30,000,000 $30,000,000 Total
--------------- -------------- -------------- ----------------
Limited partner contributions $14,932,017 $29,992,574 $29,998,622 $ 74,923,213
=============== ============== ============== ================
Formation Loan made $1,074,840 $2,271,916 $2,217,952 $ 5,564,708
Payments to date (541,675) (562,916) (122,835) (1,227,426)
Early withdrawal penalties applied (49,487) (61,180) (25,656) (136,323)
--------------- -------------- -------------- ----------------
Balance June 30, 2002 $ 483,678 $1,647,820 $2,069,461 $ 4,200,959
=============== ============== ============== ================
Percent loaned of partners'
contributions 7.2% 7.6% 7.4% 7.4%
=============== ============== ============== ================
The Formation Loan, which is receivable from Redwood Mortgage Corp., one of
the general partners, has been deducted from limited partners' capital in the
balance sheet. As amounts are collected from Redwood Mortgage Corp., the
deduction from capital will be reduced.
B. 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.
Through June 30, 2002, syndication costs of $1,825,964 had been incurred by
the Partnership with the following distribution:
Syndication
Costs
-----------------
Costs incurred $ 1,825,964
Early withdrawal penalties applied (70,545)
Allocated and amortized to date (1,311,172)
-----------------
June 30, 2002 balance $ 444,247
=================
Syndication costs attributable to the initial offering ($15,000,000) were
limited to the lesser of 10% of the gross proceeds or $600,000 with any excess
being paid by the general partners. Applicable gross proceeds were $14,932,017.
Related expenditures totaled $582,365 ($569,865 syndication costs plus $12,500
organization expense) or 3.90%.
Syndication costs attributable to the subsequent second offering
($30,000,000) were limited to the lesser of 10% of the gross proceeds or
$1,200,000 with any excess being paid by the general partners. Gross proceeds of
the second offering were $29,992,574. Syndication costs totaled $597,784 or 2.0%
of contributions.
As of June 30, 2002, the third offering had incurred syndication costs of
$658,315 which includes $41,843 for the fourth offering pending approval by the
Securities & Exchange Commission (2.19% of contributions). The syndication costs
payable by the Partnership were estimated to be $1,200,000 if the maximum Units
were sold (4% of $30,000,000). The general partners will pay any syndication
expenses (excluding selling commissions) in excess of ten percent of the gross
proceeds or $1,200,000, whichever is higher.
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Accrual Basis
Revenues and expenses are accounted for on the accrual basis of accounting
wherein revenue is recognized as earned and expenses are recognized as incurred.
Once a loan is categorized as impaired, interest is no longer accrued thereon.
Any subsequent payments on impaired loans are applied to the outstanding
balances on the Partnership's books.
B. Management Estimates
In preparing the 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 date and revenues and expenses
for the related 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 acquired through foreclosure. Actual results could
differ significantly from these estimates.
C. Loans, Secured by Deeds of Trust
The Partnership has both the intent and ability to hold the loans to
maturity, (i.e., held for long-term investment). Loans are valued at cost for
financial statement purposes with interest thereon being accrued by the
effective interest method.
Financial Accounting Standards Board Statements (SFAS) 114 and 118 provide
that 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
amounts due are not insignificant, the carrying amount of the investment (cost)
shall be 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.
At June 30, 2002, and at December 31, 2001, loans categorized as impaired
by the Partnership were $0, and $710,235, respectively, with a reduction in the
carrying value of the impaired loans of $0, and $87,903, respectively. The
reduction in the carrying value of the impaired loans is included in the
allowance for loan losses. During the year ended December 31, 2001, $66,037 was
received as cash payments on these loans.
As presented in Note 9 to the financial statements, the average loan to
appraised value of security at the time the loans were consummated for loans
existing at June 30, 2002, and at December 31, 2001 was 60.85%, and 59.67%,
respectively. When loans are valued for impairment purposes, the allowance is
updated to reflect the change in the valuation of collateral security. However,
this loan to value ratio has the tendency to minimize reductions for impairment.
D. Cash and Cash Equivalents
The Partnership considers all highly liquid financial instruments with a
maturity of three months or less to be cash equivalents.
E. Real Estate Owned, Held for Sale
Real estate owned, held for sale, includes real estate acquired through
foreclosure and is stated at the lower of the recorded investment in the
property, net of any senior indebtedness, or at the property's estimated fair
value, less estimated costs to sell. At June 30, 2002, and December 31, 2001
there were no properties acquired by the Partnership as real estate owned (REO).
F. Income Taxes
No provision for Federal and State income taxes (other than an $800 state
minimum tax) is made in the financial statements since income taxes are the
obligation of the partners if and when income taxes apply.
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------
G. Allowance for Loan Losses
Loans and the related accrued interest, fees, and advances are analyzed on
a continuous basis for recoverability. Delinquencies are identified and followed
as part of the loan system. A provision is made for loan losses to adjust the
allowance for loan losses to an amount considered by management to be adequate,
with due consideration to collateral values, to provide for unrecoverable loans
and receivables, including impaired loans, other loans, accrued interest, late
fees and advances on loans, and other accounts receivable (unsecured). The
composition of the allowance for loan losses as of June 30, 2002, and December
31, 2001 was as follows:
June 30, December 31,
2002 2001
---------------- ----------------
Impaired loans $ 0 $ 87,903
Unspecified loans 2,648,606 2,155,321
Loans, unsecured 3,967 3,967
---------------- ----------------
$2,652,573 $ 2,247,191
================ ================
Allowance for loan losses reconciliation: Activity in the allowance for
loan losses is as follows for the six months through June 30, 2002, and for the
year ending December 31, 2001
June 30, December 31,
2002 2001
---------------- ---------------
Beginning Balance $2,247,191 $1,344,938
Provision for loan losses 405,385 956,639
Write-offs (3) (54,386)
---------------- ---------------
Ending Balance $2,652,573 $2,247,191
================ ===============
H. Net Income Per $1,000 Invested
Amounts reflected in the statements of income as net income per $1,000
invested by limited partners for the entire period are actual 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
monthly distributions of their net income. Individual income is allocated each
month based on the limited partners' pro rata share of partners' capital.
Because net income 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.
I. Late Fee Revenue
The Partnership recognizes late fee revenue when it is earned. Late fees
are charged at 6% of the monthly balance, and are accrued net of an allowance
for uncollectible late fees. For the six months ended June 30, 2002, and for the
year ended December 31, 2001, late fee revenue of $19,711 and $98,817,
respectively, was recorded.
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (unaudited)
NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES
The following are commissions and/or fees, which are paid to the general
partners.
A. 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 6 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. In the six month period ended June 30, 2002 and the twelve month
period ended December 31, 2001, loan brokerage commissions paid by the borrowers
were $515,939 and $1,155,636, respectively.
B. Mortgage Servicing Fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) 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 loan is located. Mortgage
servicing fees of $464,202 and $552,323 were incurred for the six months through
June 30, 2002, and for the year ended December 31, 2001, respectively.
C. Asset Management Fee
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% annually). Management fees of $155,629 and $157,999 were incurred for the six
months through June 30, 2002, and for year 2001, respectively.
D. 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.
E. Operating Expenses
One of the general partners, Redwood Mortgage Corp. is reimbursed by the
Partnership for all operating expenses actually incurred by it 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. Such
reimbursements are reflected as expenses in the statements of income.
F. General Partners' Contributed Capital
The general partners jointly or severally were to contribute 1/10 of 1% of
the cash contributions as proceeds from the offerings are received from the
limited partners. As of June 30, 2002 and December 31, 2001 a general partner,
Gymno Corporation, had contributed $75,220 and $69,972, respectively, as capital
in accordance with Section 4.02(a) of the partnership agreement.
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (unaudited)
NOTE 4 - OTHER PARTNERSHIP PROVISIONS
The Partnership is a California limited partnership. The rights, duties and
powers of the general and limited partners of the Partnership are governed by
the limited partnership agreement and Sections 15611 et seq. of the California
Corporations Code.
The general partners are in complete control of the Partnership business,
subject to the voting rights of the limited partners on specified matters. Any
one of the general partners acting alone has the power and authority to act for
and bind the Partnership.
A majority of the outstanding limited partnership interests may, without
the permission of the general partners, vote to: (i) terminate the Partnership,
(ii) amend the limited partnership agreement, (iii) approve or disapprove the
sale of all or substantially all of the assets of the Partnership and (iv)
remove or replace one or all of the general partners.
The approval of all limited partners is required to elect a new general
partner to continue the Partnership business where there is no remaining general
partner after a general partner ceases to be a general partner other than by
removal.
A. Applicant Status
Subscription funds received from purchasers of Units are not admitted to
the Partnership until appropriate lending opportunities are available. During
the period prior to the time of admission, which is anticipated to be between
1-90 days, purchasers' subscriptions will remain irrevocable and will earn
interest at money market rates, which are lower than the anticipated return on
the Partnership's loan portfolio.
During the periods ending June 30, 2002, and December 31, 2001, interest
totaling $866 and $800, respectively, was credited to partners in applicant
status. As loans were made and partners were transferred to regular status to
begin sharing in income from loans secured by deeds of trust, the interest
credited was either paid to the investors or transferred to partners' capital
along with the original investment.
B. Term of the Partnership
The term of the Partnership is approximately 40 years, unless sooner
terminated as provided. The provisions provide for no capital withdrawal for the
first year. For years two through five, limited partners may withdraw their
capital balance subject to the penalty provision set forth in (E) below.
Thereafter, partners have the right to withdraw over a five-year period, or
longer.
C. Election to Receive Monthly, Quarterly or Annual Distributions
At subscription, investors elect either to receive monthly, quarterly or
annual distributions of earnings allocations, or to allow earnings to compound.
Subject to certain limitations, a compounding investor may subsequently change
his election, but an investor's election to have cash distributions is
irrevocable.
D. Profits and Losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts after 1% of the profits and losses are
allocated to the general partners.
E. Liquidity, Capital Withdrawals and Early Withdrawals
There are substantial restrictions on transferability of Units and
accordingly an investment in the Partnership is non-liquid. Limited partners
have no right to withdraw from the Partnership or to obtain the return of their
capital account for at least one year from the date of purchase of Units. In
order to provide a certain degree of liquidity to the limited partners after the
one-year period, limited partners may withdraw all or part of their capital
accounts from the Partnership in four quarterly installments beginning on the
last day of the calendar quarter following the quarter in
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (unaudited)
NOTE 4 - OTHER PARTNERSHIP PROVISIONS (Continued)
which the notice of withdrawal is given, subject to a 10% early withdrawal
penalty. The 10% penalty is applicable to the amount withdrawn as stated in the
notice of withdrawal and will be deducted from the capital account.
After five years from the date of purchase of the Units, limited partners
have the right to withdraw from the Partnership on an installment basis.
Generally this is done over a five-year period in twenty (20) quarterly
installments. Once a limited partner has been in the Partnership for the minimum
five-year period, no penalty will be imposed if withdrawal is made in twenty
(20) quarterly installments or longer. Notwithstanding the five-year (or longer)
withdrawal period, the general partners may liquidate all or part of a limited
partner's capital account in four quarterly installments beginning on the last
day of the calendar quarter following the quarter in which the notice of
withdrawal is given. This withdrawal is subject to a 10% early withdrawal
penalty applicable to any sums withdrawn prior to the time when such sums could
have been withdrawn without penalty.
The Partnership will not establish a reserve from which to fund withdrawals
and, accordingly, the Partnership's capacity to return a limited partner's
capital is restricted to the availability of Partnership cash flow.
F. Guaranteed Interest Rate For Offering Period
During the period commencing with the day a limited partner is admitted to
the Partnership and ending 3 months after the initial through third offering
termination dates, which in all cases will be August, 2002, the general partners
shall guarantee an earnings rate equal to the greater of actual earnings from
mortgage operations or 2% above The Weighted Average Cost of Funds Index for the
Eleventh District Savings Institutions (Savings & Loan & Thrift Institutions) as
computed by the Federal Home Loan Bank of San Francisco on a monthly basis, up
to a maximum interest rate of 12%. To date, actual realization exceeded the
guaranteed amount for each month.
NOTE 5- 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.
NOTE 6 - NOTE PAYABLE - BANK LINE OF CREDIT
The Partnership renewed its bank line of credit which will expire on June
30, 2004, of up to $20,000,000 at the bank's prime rate of interest. This line
of credit is secured by its loan portfolio. The line balances were $9,200,000
and $11,400,000 at June 30, 2002, and December 31, 2001, respectively. The
interest rate was 5.0% and 5.0% at June 30, 2002 and December 31, 2001,
respectively.
Should the general partners choose not to renew the line of credit at its
maturity, the balance would be converted to a three year fully amortized loan.
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (unaudited)
NOTE 7 - INCOME TAXES
The following reflects a reconciliation from net assets (Partners' Capital)
reflected in the financial statements to the tax basis of those net assets:
June 30, December 31,
2002 2001
---------------- ---------------
Net Assets - partners' capital per financial statements $ 81,287,032 $ 73,754,180
Non-amortized syndication costs 444,247 403,282
Allowance for loan losses 2,652,573 2,247,191
Formation loans receivable 4,200,959 4,126,430
---------------- ---------------
Net assets tax basis $ 88,584,811 $ 80,531,083
================ ===============
In 2001 approximately 48% of taxable income was allocated to tax exempt
organizations, (i.e., retirement plans). Such plans do not have to file income
tax returns unless their "unrelated business income" exceeds $1,000. Applicable
amounts become taxable when distribution is made to participants.
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
financial instruments:
(a) Cash and Cash Equivalents. The carrying amount equals fair value. All
amounts, including interest bearing, are subject to immediate withdrawal.
(b) Secured loans (see note 2(c)) carrying value was $86,038,396 and
$82,789,833 at June 30, 2002 and December 31, 2001, respectively. The fair value
of these investments of $87,111,203 and $84,000,435 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 is also
considered in evaluating the fair value versus the carrying value.
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (unaudited)
NOTE 9- ASSET CONCENTRATIONS AND CHARACTERISTICS
Most loans are secured by recorded deeds of trust. At June 30, 2002 and
December 31, 2001 there were 72 and 76 secured loans outstanding, respectively,
with the following characteristics:
June 30, December 31,
2002 2001
-------------------- ----------------
Number of secured loans outstanding 72 76
Total secured loans outstanding $ 86,038,396 $ 82,789,833
Average secured loan outstanding $ 1,194,978 $ 1,089,340
Average secured loan as percent of total 1.39% 1.32%
Average secured loan as percent of partners' capital 1.47% 1.48%
Largest secured loan outstanding $ 4,750,000 $ 7,000,000
Largest secured loan as percent of total 5.52% 8.46%
Largest secured loan as percent of partners' capital 5.84% 9.49%
Number of counties where security is located (all California) 14 12
Largest percentage of secured loans in one county 37.39% 41.40%
Average secured loan to appraised value of security
at time loan was consummated 60.85% 59.67%
Number of secured loans in foreclosure status 6 3
Amount of secured loans in foreclosure $ 5,694,697 $1,050,790
The following loan categories were held at June 30, 2002, and December 31, 2001:
June 30, December 31,
2002 2001
----------------- ------------------
First Trust Deeds $ 42,550,087 $ 42,984,020
Second Trust Deeds 36,542,010 34,640,619
Third Trust Deeds 6,946,299 5,165,194
----------------- ------------------
Total loans 86,038,396 82,789,833
Prior liens due other lenders 88,105,593 67,944,616
----------------- ------------------
Total debt $ 174,143,989 $ 150,734,449
----------------- ------------------
Appraised property value at time of loan $ 286,205,631 $ 252,604,011
----------------- ------------------
60.85% 59.67%
----------------- ------------------
Investments by type of property
Owner occupied homes $11,939,128 $11,018,765
Non-owner occupied homes 28,316,362 26,523,195
Apartments 8,446,275 7,336,898
Commercial 37,336,631 37,910,975
----------------- ------------------
$86,038,396 $82,789,833
================= ==================
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (unaudited)
NOTE 9- ASSET CONCENTRATIONS AND CHARACTERISTICS (Continued)
The interest rates on the loans range from 7.50% to 18.00% at June 30, 2002.
Scheduled maturity dates of loans as of June 30, 2002 are as follows:
Year Ending
December 31, Amount
---------------- -------------------
2002 $43,423,989
2003 21,297,877
2004 7,113,136
2005 5,985,295
2006 2,640,778
Thereafter 5,577,321
-------------------
$86,038,396
===================
The scheduled maturities for 2002 include twenty-two loans totaling
$28,851,574, which are past maturity at June 30, 2002. Interest payments on
eight of these loans were 90 days or more delinquent.
Cash deposits at June 30, 2002 of $3,211,804 were in one bank with interest
bearing balances totaling $1,208. The balances exceeded FDIC insurance limits
(up to $100,000 per bank) by $3,111,804. This bank is the same financial
institution that has provided the Partnership with the $20,000,000 limit line of
credit (LOC). As and when deposits in the Partnership's bank accounts increase
significantly beyond the insured limit, the funds are either placed on new loans
or used to pay-down the line of credit balance.
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 June 30, 2002. There are approximately 11 loans totaling $11,067,761
in workout agreements as of June 30, 2002.
NOTE 10: COMMITMENTS & CONTINGENCIES
Construction Loans
The Partnership has construction loans, which are at various stages of
completion of the construction process at June 30, 2002. The Partnership has
approved the borrowers up to a maximum loan balance; however, disbursements are
made during completion phases throughout the construction process. At June 30,
2002, there were $6,605,000 of undistributed construction loans which will be
funded by a combination of borrower monthly mortgage payments, line of credit
draw-downs, and retirement of principal on current loans.
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (unaudited)
NOTE 11: SELECTED FINANCIAL INFORMATION (UNAUDITED)
Calendar Quarter
--------------------------------------------------------------
First Second Third Fourth Annual
------------- ------------ ------------- ------------ -------------
Revenues
2002 $2,601,569 2,514,966 - - -
2001 $2,150,846 2,195,208 2,264,539 2,424,607 9,035,200
2000 $1,093,746 1,372,840 1,884,128 1,998,105 6,348,819
Expenses
2002 $ 798,994 665,261 - - -
2001 $ 801,709 711,323 675,633 756,078 2,944,743
2000 $ 159,573 336,539 763,182 797,307 2,056,601
Other income (expenses)
2002 $ (858) (8) - - -
2001 $ (198) (97) (270) 3,441 2,876
2000 $ (4,460) (127) (64) (106) (4,757)
Net income allocated to general partners
2002 $ 18,017 18,497 - - -
2001 $ 13,489 14,838 15,886 17,175 60,933
2000 $ 9,297 10,362 11,209 12,007 42,875
Net income allocated to limited partners
2002 $1,783,700 1,831,200 - - -
2001 $1,335,450 1,468,950 1,572,750 1,655,250 6,032,400
2000 $ 920,416 1,025,812 1,109,673 1,188,685 4,244,586
Net income per $1,000 invested
Where income is
Reinvested
2002 $ 21 $ 21 - - -
2001 $ 22 $ 22 $ 22 $ 24 $ 90
2000 $ 21 $ 21 $ 21 $ 23 $ 86
Withdrawn
2002 $ 21 $ 21 - - -
2001 $ 22 $ 22 $ 22 $ 21 $ 87
2000 $ 20 $ 21 $ 21 $ 21 $ 83
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002 (unaudited)
NOTE 12: RECENT PRONOUNCEMENTS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 amends existing
accounting guidance on asset impairment and provides a single accounting model
for long-lived assets to be disposed of. Among other provisions, the new rules
change the criteria for classifying an asset as held-for-sale. The standard also
broadens the scope of business to be disposed of that qualify for reporting as
discontinued operations, and changes the timing of recognizing losses on such
operations. The Partnership will adopt SFAS No. 144 in fiscal year 2002.
Management does not feel that the adoption of this standard will have a material
effect on the Partnership's results of operations or financial position.
NOTE 13: SUBSEQUENT EVENTS
The Partnership is awaiting approval from the Securities & Exchange
Commission of a new offering for an additional 50,000,000 Units ($50,000,000).
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Policies.
In preparing the 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 date, and revenue and expenses
for the related period. 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 June 30, 2002, there was no real estate acquired through foreclosure.
Loans and related accrued interest, fees, and advances are analyzed on a
continuous basis for recoverability. Delinquencies are identified and followed
as part of the loan system. Provisions are made for loan losses to adjust the
allowance for doubtful accounts to an amount considered by management to be
adequate, with due consideration to collateral values and to provide for
unrecoverable loans and receivables, 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 doubtful accounts.
Actual results could vary from the aforementioned provisions for losses.
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 foregoing analysis of 2002 includes forward looking statements
and predictions about 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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
As of June 30, 2002, the Partnership's third offering, ($30,000,000) was
closed. Contributed capital totaled $14,932,017 for the first offering,
$29,992,574 for the second offering, and $29,998,622 for the third offering, an
aggregate of $74,923,213 as of June 30, 2002. Of this amount, $0 remained in
applicant status. We are in the process of issuing a fourth offering in the
amount of $50,000,000. This Fourth offering of $50,000,000 will be used to
increase the Partnership's capital base and provide funds for additional
mortgage loans.
Results of Operations.
The Partnership began funding loans on April 14, 1993 and as of June 30,
2002, had distributed earnings since inception to limited partners who have
chosen to compound and retain earnings at an average annualized yield of 8.44%.
Limited partners that chose to have earnings paid out have, since inception,
received an annualized yield of 8.18%.
The net income increase of $818,687 (29%) for the six months ended June 30,
2002, and $365,909 (25%) for the three months ended June 30, 2002, compared to
the corresponding periods in 2001,, was primarily attributable to the increase
in loans held by the Partnership:
6 months through June 30 3 months through June 30
-------------------------------------- ------------------------------------
2002 2001 2002 2001
----------------- ----------------- ---------------- ----------------
Loans outstanding $ 86,038,396 $ 75,093,062 $ 86,038,396 $ 75,093,062
Interest earned on loans $ 5,092,786 $ 4,330,580 $ 2,504,918 $ 2,192,041
The Partnership's ability to increase its loans was due to an increase in
the capital raised, the compounding of earnings by those limited partners who
have chosen to retain their earnings in the Partnership and by leveraging the
loans through the use of a credit line from a commercial bank. During the six
and three month periods ended June 30, 2002, the Partnership received from
limited partners, new capital contributions and reinvested compounding limited
partner earnings, net of syndication cost of:
6 months through June 30 3 months through June 30
-------------------------------------- -------------------------------------
2002 2001 2002 2001
----------------- ---------------- ----------------- ---------------
Capital contribution $ 5,247,266 $ 9,853,602 $ 180,986 $4,766,290
Compounding or
retainment of earnings $ 2,292,238 $ 1,824,585 $1,161,727 $ 956,286
The reduction in capital contributions for both the six months and three
months ended June 30, 2002, is due to the completion of the third offering of
Units in April, 2002.
In 1995, the Partnership established a line of credit with a commercial
bank secured by its loan portfolio. This credit line is in an amount of up to
$20,000,000. As of June 30, 2002, the Partnership had borrowed $9,200,000 at an
interest rate of prime +.25% (5.0%). For the six (and three months) through June
30, 2002 and 2001, interest on note payable-bank was $223,722 and $637,841,
($89,319and $251,592), respectively. The decrease in interest on notes
payable-bank has been attributed to a lower overall credit facility utilization
and more significantly, a lowering of the interest rate charged from 9.25% to
7.25% during the six months ended June 30, 2001 to 5% for the six months ended
June 30, 2002. This added source of funds will help in maximizing the
Partnership's yield by allowing the Partnership to minimize the amount of funds
in lower yield investment accounts when appropriate loans are not available.
Additionally, the loans made by the Partnership bear interest at a rate in
excess of the rate payable to the bank which extended the line of credit. The
amount to be retained by the Partnership, after payment of the line of credit
cost, will be greater than without the use of the line of credit. At June 30,
2002 and 2001, the outstanding balance on the line of credit was $9,200,000 and
$12,825,000, respectively. The Partnership renewed the line of credit for a two
year term effective July 1, 2002, at a rate of prime only.
The Partnership's income and expenses, accruals and delinquencies are
within the normal range of the general partners' expectations, based upon their
experience in managing similar partnerships over the last twenty-four years.
Mortgage servicing fees increased from $145,226 to $220,854, and from $292,088
to $464,202, for the three and six months through June 30, 2001 and 2002,
respectively. The mortgage servicing fees increased primarily due to increase in
the outstanding loan portfolio. Asset management fees increased from $40,618 to
$79,659, and from $65,450 to $155,629, for the three and six months through June
30, 2001 and 2002, respectively. The asset management fee increase was due
primarily to the increase in partners' capital which the general partners are
managing and the general partners raising the amount of the management fee
collected from .25% in 2001 to .375% of net Partnership assets in 2002. This
increase in asset management fee was equal to the allowable fee payable to the
general partners of .375% of net Partnership assets. Clerical costs through
Redwood Mortgage Corp. increased from $59,541 to $66,266, and from $116,345 to
$131,461, for the three and six months through June 30, 2001 and 2002,
respectively. This increase in costs was due to the increased costs attributable
to managing the larger Partnership and increased number of limited partners.
Increases in the provision for loan losses and losses on real estate acquired
through foreclosure will be discussed in the paragraph below entitled Allowance
for Losses. All other Partnership expenses fluctuated within a narrow range
commonly expected to occur, except for interest on note payable - bank which was
discussed earlier in the Management Discussion and Analysis of Financial
Condition and Results of Operations. Cash is constantly being generated from
interest earnings, late charges, pre-payment penalties, amortization of
principal and loan pay-offs. Currently, cash flow exceeds Partnership expenses
and earnings requirements. Excess cash flow will be invested in new loan
opportunities, when available, and will be used to reduce the Partnership credit
line or for other Partnership business.
During 2001, the Federal Reserve reduced interest rates by cutting the
Federal Funds Rate eleven times to 1.75%. In May 2002, the Federal Reserve met
and did not change interest rates. The effect of the previous cuts during 2001
has greatly reduced short-term interest rates and to a lesser extent reduced
long-term interest rates. The general partners anticipate that new loans will be
placed at rates approximately 1% lower than similar loans during the first half
of 2001. The lowering of interest rates has encouraged those borrowers that have
mortgages with higher interest rates than those currently available to seek
refinancing of their obligations. The Partnership may face prepayments in the
existing portfolio from borrowers taking advantage of these lower rates.
However, demand for loans from qualified borrowers continues to be strong and as
prepayments occur, we expect to replace paid off loans with loans at somewhat
lower interest rates. At this time, we believe that the average loan portfolio
interest rate will decline approximately .25% to .50% over the year 2002.
Nevertheless, based upon the rates payable in connection with the existing
loans, and anticipated interest rates to be charged by the Partnership and the
general partners' experience, the general partners anticipate that the
annualized yield will range between eight and nine percent in 2002.
Allowance for Losses. The general partners regularly review the loan
portfolio, examining the status of delinquencies, the underlying collateral
securing these loans, borrowers' payment records, etc. Based upon this
information and other data, the allowance for loan losses are 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 we will on occasion take
back real estate security. The Partnership has been fortunate in not taking back
any real estate security over the last three years. During 2001, and continuing
in 2002, the Northern California real estate market slowed and the national and
local economies have slipped into recession. During 2001 and 2002 we have had to
file some foreclosure proceedings to enforce the terms of our loans. In most of
these instances the borrowers have been able to remedy the foreclosures we have
filed. As of June 30, 2002, we have commenced foreclosure proceedings against
six loans totaling $5,694,697. Of the foreclosures, 4 have entered into workout
agreements which call for regular monthly payments. As of June 30, 2002 we have
not acquired any real estate, however, in July 2002, the Partnership did acquire
one property through foreclose. The Partnership's principal balance at
foreclosure was $1,870,018. There is a likely chance that in 2002 we may acquire
some additional real estate through the foreclosure process. Borrower's
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 loan losses of $405,385 and $362,746, ($179,020 and $196,085),
for the six (and three months) through June 30, 2002, and 2001, respectively.
These provisions for loan losses were made to guard against collection losses.
The total cumulative provision for loan losses as of June 30, 2002, is
$2,652,573 and 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.
At the time of subscription to the Partnership, limited partners must elect
whether to receive monthly, quarterly or annual cash distributions from the
Partnership, or to retain earnings in their capital account. If you initially
elect to receive distributions, such election, once made, is irrevocable.
However limited partners may change their election regarding whether they want
to receive such distributions on a monthly, quarterly or annual basis. If
limited partners initially elect to retain earnings in their capital account, in
lieu of cash distributions, they may, after three (3) years, change the election
and receive monthly, quarterly or annual cash distributions. Earnings allocable
to limited partners who elect to retain earnings in their capital account, will
be retained by the Partnership for making further loans or for other proper
Partnership purposes, and such amounts will be added to such limited partners'
capital accounts.
During the periods stated below, the Partnership, after allocation of
syndication costs, made the following allocation of earnings both to the limited
partners who elected to retain their earnings, and those that chose to
distribute:
6 months ended June 30 3 months through June 30
-------------------------------- ---------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Compounding $ 2,292,238 $ 1,824,585 $ 1,161,727 $ 956,286
Distributing $ 1,233,562 $ 890,715 $ 624,923 $ 468,114
As of the periods stated above, limited partners electing to withdraw
earnings represented 35%, 34%, 35% and 31%, 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 retainment.
The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations (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 which the general partners then
expect a portion of the limited partners to avail themselves of. This has the
anticipated effect of the Partnership growing, primarily through reinvestment of
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
most limited partners has yet to expire, as of June 30, 2002, many limited
partners may not as yet avail themselves of this provision for liquidation.
Earnings and capital liquidations including early withdrawals during the six and
three months through June 30, 2002 were:
Six months through June 30, Three months through June 30,
----------------------------------- -------------------------------------
2002 2001 2002 2001
---------------- --------------- --------------- ----------------
Earnings liquidation $1,233,562 $ 890,715 $ 624,923 $ 468,114
Capital liquidation* 569,505 671,701 248,250 360,493
---------------- --------------- --------------- ----------------
Total $1,803,067 $ 1,562,416 $ 873,173 $ 828,607
================ =============== =============== ================
* These amounts are 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 six and
three months through June 30, 2002 and 2001, capital liquidated subject to the
10% penalty for early withdrawal was:
Six months through June 30, Three months through June 30,
---------------------------------- -------------------------------------
2002 2001 2002 2001
-------------- ---------------- -------------- ----------------
$174,859 $333,517 $57,460 $182,870
This represents 0.22%, 0.52%, .07% and .29% of the limited partners' ending
capital as of June 30, 2002 and 2001, respectively. These withdrawals are within
the normally anticipated range and represent a small percentage of limited
partner capital.
Current Economic Conditions. The Partnership makes loans primarily in
Northern California. As of June 30, 2002, approximately 80.15% of the loans held
were in the six San Francisco Bay Area Counties. The remainder of the loans held
were 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
also felt the recession and accompanying slow down in economic growth and
increasing unemployment. The technology companies of Silicon Valley, the airline
industry, the tourism industry and other industries are feeling the effects of
the overall United States recession, which includes lower earnings, losses and
layoffs.
Despite fears over failing businesses, ongoing job losses and dwindling
stock portfolios, the real estate market seems to be doing remarkably well.
According to the California Association of Realtors president Robert Bailey,
"Residential real estate in California, particularly in the San Francisco Bay
Area, continued to rebound aggressively last month (April 2002) compared to
2001." Sales in the San Francisco Bay Area increased 73% in April 2002 compared
to a year ago and surged nearly 120% in Santa Clara County. The median price of
homes sold in Santa Clara County in April 2002 was $552,250 according to the
California Association of Realtors. The median price of an existing single
family detached home in California during April 2002 was $321,950, a 26.1%
increase over the $255,310 median for April 2001 the association's report says.
"Low inventory, favorable mortgage interest rates and rapidly rising home price
appreciation will continue to intensify the pace of home sales in the coming
months", says Leslie Appleton-Young, the association's vice president and chief
economist. For the Partnership, these statistics imply that the values of the
homes secured by mortgages in our portfolio should remain firm and assist in
reducing losses if the take back of collateral through the foreclosure process
should eventuate. It also implies increased loan activity, as the number of real
estate transactions is increasing, leaving more loan opportunities for lenders.
Commercial property vacancy rates have continued to climb. According to BT
Commercial overall San Francisco Bay Area vacancy rates have risen to almost
20%, up from 16.6% in the last quarter of 2001. Rental rates plunged 9% from $30
per square foot in the fourth quarter of 2001 to $27.24 in the first quarter of
2002. Average asking rates in the San Francisco Bay Area the first quarter a
year ago were $57.24. To the Partnership, these higher vacancy rates may mean
that we could experience higher delinquencies and foreclosures if our borrowers'
tenants' leases expire or their rental space becomes available through business
failures.
For Partnership loans outstanding, as of June 30, 2002, the Partnership had
an average loan to value ratio computed as of the date the loan was made of
60.85%. 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 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.
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.
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").
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 August 31, 2000, pages 20-23, 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 six months ended June 30, 2002. 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........................................ $464,202
General Partners &/or Affiliates Asset Management Fee for
managing assets........................................ $155,629
General Partners 1% interest in profits................................. $36,514
Less allocation of syndication costs .................. $900
-----------
$35,614
Redwood Mortgage Corp. Portion of early withdrawal penalties
applied to reduce Formation Loan....................... $12,686
General Partners &/or Affiliates Organization and Offering Expenses..................... $0
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.................. $515,939
Redwood Mortgage Corp. Processing and Escrow Fees for services in credit
connection with notary, document preparation,
investigation, and escrow fees payable by the
borrowers and not by the Partnership................... $10,200
Gymno Corporation, Inc. Reconveyance Fee....................................... $1,126
Redwood Mortgage Corp. Assumption or Extension Fees........................... $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
STATEMENT OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $131,461
PART 2
OTHER INFORMATION
Item 1. Legal Proceedings
Refer to notes to financial statements No. 5 discussed earlier
Item 2. Changes in the Securities
Not Applicable
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
On April 30, 2001, the Partnership filed with Securities and Exchange
Commission (S.E.C.), Post-Effective Amendment No. 1 to the S-11 Registration
Statement (the "Amendment"). The Amendment, containing Supplement No. 1 to the
Prospectus ("Supplement") was filed to update the financial statements of the
Partnership and the Corporate General Partners, Gymno Corporation and Redwood
Mortgage Corp., as well as the operations of the Partnership. Post-Effective
Amendment No. 2 to the S-11 Registration Statement was filed on January 30, 2002
("Amendment 2"). Amendment 2 containing Supplement No. 2 to the Prospectus was
filed to update the financial statements of Redwood Mortgage Corp. as well as
the operations of the Partnership. On March 6, 2002, Form S-11 Registration
Statement was filed with the Securities & Exchange Commission for an additional
$50,000,000 offering.
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
Gymno Corporation, General Partner
(b) Form 8-K
Not Applicable
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 14th day of
August, 2002.
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
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 14th day of August, 2002.
Signature Title Date
/S/ Michael R. Burwell
- ---------------------------
Michael R. Burwell General Partner August 14, 2002
/S/ Michael R. Burwell
- ---------------------------
Michael R. Burwell President of Gymno Corporation, August 14, 2002
(Principal Executive Officer);
Director of Gymno Corporation
/S/ Michael R. Burwell
- ---------------------------
Michael R. Burwell Secretary/Treasurer of Gymno August 14, 2002
Corporation (Principal Financial
and Accounting Officer);
Director of Gymno Corporation
/S/ Michael R. Burwell
- ---------------------------
Michael R. Burwell President, Secretary/Treasurer August 14, 2002
of Redwood Mortgage Corp.
(Principal Financial and
Accounting Officer); Director
of Redwood Mortgage Corp.
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 June 30, 2002 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
company.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
August 14, 2002
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 June 30, 2002 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, 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
company.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner
August 14, 2002