REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Index to Form 10-K
December 31, 2002
Part I
Page No.
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Item 1 - Business 3
Item 2 - Properties 7
Item 3 - Legal Proceedings 7
Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 7
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 7
Item 6 - Selected Consolidated Financial Data 8
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 18
Item 8 - Consolidated Financial Statements and Supplementary Data 21
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 47
Part III
Item 10 - Directors and Executive Officers of the Registrant 47
Item 11 - Executive Compensation 47
Item 12 - Security Ownership of Certain Beneficial Owners and Management 48
Item 13 - Certain Relationships and Related Transactions 48
Item 14 - Controls and Procedures 48
Part IV
Item 15 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 49
Signatures 50
Certifications 52
1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the year ended December 31, 2002 Commission file number 333-83882
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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 Identification)
Incorporation or organization)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
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(address of principal executive offices) (zip code)
Registrant's telephone number including area code (650) 365-5341
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Units
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 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 XXXX NO
----------------------- --------------------------
As of December 31, 2002, the limited partnership Units purchased by
non-affiliates was 88,660,947 Units aggregating $91,238,920.
Documents incorporated by reference:
Portions of the Prospectus effective October 30, 2002, and post effective
Amendment No. 2 dated February 18, 2003, containing supplement No. 1 dated
January 31, 2003, (the "Prospectus"), are incorporated in Parts II, III, and IV.
Exhibits filed as part of Form S-11 Registration Statement #333-83882 are
incorporated by reference in part IV.
2
Part I
Item 1 - Business
Redwood Mortgage Investors VIII, a California Limited Partnership (the
"Partnership"), was organized in 1993 of which Michael R. Burwell, Gymno
Corporation and Redwood Mortgage Corp., both California Corporations, are the
general partners. The Partnership is organized to engage in business as a
mortgage lender, for the primary purpose of making loans secured primarily by
first and second deeds of trust on California real estate. Loans are arranged
and serviced by Redwood Mortgage Corp. The Partnership's objectives are to make
loans that will: (i) yield a high rate of return from mortgage lending; and (ii)
preserve and protect the Partnership's capital. Investors should not expect the
Partnership to provide tax benefits of the type commonly associated with limited
partnership tax shelter investments. The Partnership is intended to serve as an
investment alternative for investors seeking current income. However, unlike
other investments, which are intended to provide current income, an investment
in the Partnership will be less liquid, not readily transferable, and not
provide a guaranteed return over its investment life.
Initially, the Partnership offered a minimum of $250,000 and a maximum of
$15,000,000 in Units, of which $14,932,017 were sold. This initial offering
closed on October 31, 1996. Subsequently, the Partnership commenced a second
offering of up to $30,000,000 in Units commencing on December 4, 1996. This
offering sold $29,992,574 in Units and was closed on August 30, 2000. On August
31, 2000 the Partnership commenced its third offering for another 30,000,000
Units ($30,000,000). This offering sold $29,998,622 in Units and was closed on
April 23, 2002. On October 30, 2002 the Partnership commenced its fourth and
current offering of 50,000,000 Units ($50,000,000). As of December 31, 2002,
16,315,707 Units for $16,315,707 were sold in this fourth offering, bringing the
aggregate sale of Units to $91,238,920. Units in the fourth offering are being
offered on a "best efforts" basis, which means that no one is guaranteeing that
any minimum number of Units will be sold, through broker-dealer member firms of
the National Association of Securities Dealers, Inc. (See Section of the
prospectus entitled "TERMS OF THE OFFERING" and "PLAN OF DISTRIBUTION").
The Partnership began selling Units in February 1993, and began investing
in mortgages in April 1993. At December 31, 2002, the Partnership has
investments in loans with principal balances totaling $83,650,000. Interest
rates ranged from 7.50% to 18.00%. Currently First Trust Deeds comprise 55.13%
of the total amount of the loan portfolio, an increase of 3.21% over 2001 level
of 51.92%. Junior loans (2nd and 3rd Trust Deeds) make up 44.87%, a decrease of
3.21% over 2001 level of 48.08%. Loans secured by owner-occupied homes, combined
with loans secured by non-owner occupied homes, total 43.72% of the loan
portfolio. Loans secured by multi-family properties make up 7.86% of the total
loans. Commercial loans now comprise 48.42% of the portfolio, an increase of
2.63% from last year. Of the total loans, 73.81% are in six counties of the San
Francisco Bay Area, 16.56% are in counties adjacent to the San Francisco Bay
Area. The balance of loans 9.63% are in other counties located in California.
Loan size increased this year, and is now averaging $1,195,000 per loan, up
$106,000 from the average loan balance of $1,089,000 in 2001. This increase is
due to the ability of the Partnership by virtue of its increasing size to invest
in larger loans. The average loan as of December 31, 2002, represents 1.25% of
limited partner capital and 1.43% of outstanding loans, compared to December 31,
2001 when average loan size of 1.48% of limited partners capital and 1.32% of
outstanding loans. Some of the loans are fractionalized between affiliated
partnerships with objectives similar to those of the Partnership to further
reduce risk. Average equity per loan transaction, which is our loan plus any
senior loans, divided by the property's appraised value, subtracted from 100%,
stood at 39.39%, a decrease in equity of 0.94% from the previous year. This
average equity is considered conservative. Generally, the more equity, the more
protection for the lender. The general partners believe the Partnership's loan
portfolio is in good condition with six properties in foreclosure as of the end
of December 2002. Loan balances of these foreclosed properties represent 4.82%
of the loan portfolios. Of these foreclosures, four have entered into workout
agreements, with the borrowers making regular monthly payments.
Delinquencies are discussed under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
During the year the Partnership acquired two pieces of real estate, one
through foreclosure and the other in lieu of foreclosure. To protect its own
assets and reduce liability, the Partnership subsequently transferred the
property to two newly formed LLCs. One of the LLCs, Russian Hill Property
Company, is 100% owned by the Partnership and in the other, Stockton Street
Property Company, the Partnership owns controlling interest with an affiliate,
the other investor in the foreclosed loan. The Partnership intends to sell the
properties and dissolve the LLCs. The two LLCs are further discussed under Notes
to Consolidated Financial Statements (Note 5).
3
The Partnership's net income continued to take an upward trend. The net
income increased from $4,287,000 in 2000 to $6,093,000 in 2001 and to $7,486,000
in 2002. This was made possible largely through investment of additional capital
derived from sale of Units and to some extent, through the use of line of credit
facility investment into loans. The loan portfolio base increased from
$68,571,000 in 2000, to $82,790,000 in 2001, to $83,650,000 in 2002, an increase
of 22%. During December, 2002 the Partnership received loan payoffs of
approximately $9,000,000, which it was not able to replace with new loans until
2003. Mortgage interest income almost doubled from $6,261,000 in 2000 to
$11,416,000 in 2002, an increase of 82.34%. During the year 2002 the
Partnership's annualized yield on compounding accounts was 8.70% and 8.40% on
monthly distributing accounts.
Competition and General Economic Conditions.
The Partnership's major competitors in providing mortgage loans are banks,
savings and loan associations, thrifts, conduit lenders, mortgage brokers, and
other entities both larger and smaller than the Partnership. The Partnership is
competitive in large part because the general partners generate all of their
loans. The general partners have been in the business of making or investing in
mortgage loans in Northern California since 1978 and have developed a quality
reputation and recognition within the field.
Mortgage interest rates have fallen during the last 18 to 24 months. This
has been partially due to actions by the Federal Reserve Bank to reduce the
discount rate on borrowings charged to member banks, a slowing economy and low
rates of inflation. Although the general trend for interest rates has been down,
many lenders have tightened their credit and reduced their lending exposure in
various markets and property types. This credit tightening from competing
lenders would generally provide the Partnership with additional lending
opportunities at attractive interest rates. However, as a result of the slowing
economy, there are now fewer transactions in the marketplace, which could
potentially reduce the number of lending opportunities to the Partnership.
Continued rate reductions by the Federal Reserve Bank, a continued slowing
economy, and a low inflation rate could have the effect of reducing mortgage
yields in the future. Current loans with relatively high yields could be
replaced with loans with lower yields, which in turn could reduce the net yield
paid to the limited partners. In addition, if there is less demand by borrowers
for loans and, thus, fewer loans for the Partnership to invest in, it will
invest its excess cash, including proceeds from the offering of the Units, in
shorter-term alternative investments yielding considerably less than the current
investment portfolio.
4
Loan Portfolio.
A summary of the Partnership's Loan Portfolio as of December 31, 2002, is
set forth below (in thousands):
Loans as a Percentage of Appraised Values
First Trust Deeds $46,117
Appraised Value of Properties 89,766
--------------
Total Investment as a % of Appraisal 51.37%
==============
First Trust Deed Loans 46,117
Second Trust Deed Loans 30,930
Third Trust Deed Loans 6,603
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Total of Trust Deed Loans 83,650
Priority Positions due other Lenders:
First Trust Deed Loans due other Lenders 72,335
Second Trust Deed Loans due other Lenders 7,511
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Total Debt $163,496
==============
Appraised Property Value at Time of Loan 269,773
Total Debt as a % of Appraisal 60.61%
==============
Number of Loans Outstanding 70
Average Loan $1,195
Average Loan as a % of Loans Outstanding 1.43%
Largest Loan Outstanding 4,943
Largest Loan as a % of Loans Outstanding 5.91%
Loans as a Percentage of Total Loans Percent
- ----------------------------------------------- --------------
First Trust Deed Loans 55.13%
Second Trust Deed Loans 36.98%
Third Trust Deed Loans 7.89%
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Total Trust Deed Loan Percentage 100.00%
==============
Type of Loans by Property Amount Percent
- ----------------------------------------------- ------------- -------------
Owner Occupied Homes $12,854 15.37%
Non-Owner Occupied Homes 23,720 28.35%
Apartments 6,572 7.86%
Commercial 40,504 48.42%
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Total $83,650 100.00%
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5
The following is a distribution of loans outstanding as of December 31,
2002 by Counties (in thousands):
County Total Loans Percent
----------------------------- -------------- ---------------
San Francisco $22,767 27.22%
Santa Clara 18,427 22.03%
San Mateo 13,242 15.83%
Napa 8,131 9.72%
Stanislaus 5,475 6.54%
Los Angeles 4,495 5.37%
Alameda 3,862 4.62%
Marin 3,139 3.75%
Riverside 1,500 1.79%
El Dorado 900 1.08%
Lake 708 0.85%
Contra Costa 304 0.36%
San Diego 270 0.32%
Sonoma 250 0.30%
Merced 180 0.22%
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Total $83,650 100.00%
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Statement of Condition of Loans
Number of Loans in Foreclosure 6
Scheduled maturity dates of loans as of December 31, 2002 are as follows
(in thousands):
Year Ending
December 31,
------------------
2003 $44,101
2004 12,912
2005 11,879
2006 1,723
2007 8,198
Thereafter 4,837
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$83,650
==============
The scheduled maturities for 2003 include fifteen loans totaling
$18,765,000, and representing 22.43% of the portfolio, past maturity at December
31, 2002. Two of these totaling $7,000,000 were paid off in February 2003.
Several other 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 take advantage of the lower interest rate. The Partnership allows
borrowers to occasionally continue to make the payments on debt past maturity
for periods of time. Interest payments on twelve of these loans were delinquent.
These delinquencies were not considered serious enough to warrant the
commencement of foreclosure action.
6
Item 2 - Properties
During 2002, the Partnership acquired the real estate security on two of
its loans. In each instance, in order to reduce potential liabilities the
Partnership subsequently transferred the acquired real estate to two newly
formed LLCs. One property was transferred to Stockton Street Property Company,
LLC. This property acquired through foreclosure is comprised of six condominium
units. In order to sell these units, the Partnership was required to obtain a
"White Report" from the Department of Real Estate. That report was obtained in
February, 2003. Two of the condominiums were listed for sale in March, 2003. One
of the six units will require renovations estimated to cost approximately
$230,000 and that work is currently commenced. The remaining 4 units will be
placed for sale later in the year. The general partners have examined the
property with real estate professionals, reviewed the appraisal and concluded
that the property, upon sale, appears adequate to cover the sums due to the
Partnership. The Partnership's net investment in the Stockton Street Property
Company, LLC at December 31, 2002 was $2,378,000, net of the Partnership's share
of senior debt.
The other property was transferred to Russian Hill Property Company, LLC.
The real estate was held off the market so as to avoid becoming "stale" during
the winter of 2002. The general partners anticipate placing the property for
sale during 2003. The Partnership's net investment in the Russian Hill Property
Company, LLC was $3,913,000 net of a valuation allowance of $500,000.
Item 3 - Legal Proceedings
In the normal course of business, the Partnership may become involved in
various types of legal proceedings such as assignment of rents, bankruptcy
proceedings, appointment of receivers, unlawful detainers, judicial foreclosure,
etc., to enforce the provisions of the deeds of trust, collect the debt owed
under the promissory notes, or to protect, or recoup its investment from the
real property secured by the deeds of trust. None of these actions would
typically be of any material importance. As of the date hereof, the Partnership
is not involved in any legal proceedings other than those that would be
considered part of the normal course of business.
Item 4 - Submission of Matters to Vote of Security Holders (Partners)
No matters have been submitted to a vote of the Partnership.
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and
Related Unitholder Partnership Matters
50,000,000 Units at $1 each (minimum purchase of 2,000 Units) are currently
being offered ($75,000,000 in Units were previously offered and sold through a
series of offerings) through broker-dealer member firms of the National
Association of Securities Dealers on a "best efforts" basis (as indicated in
Part I item 1). Investors have the option of withdrawing earnings on a monthly,
quarterly, or annual basis or reinvesting and compounding the earnings. Limited
partners may withdraw from the Partnership in accordance with the terms of the
partnership agreement subject to possible early withdrawal penalties. There is
no established public trading market. As of December 31, 2002, 2006 limited
partners held 88,660,947 Units of limited partnership interest in the
Partnership.
A description of the Partnership Units, transfer restrictions and
withdrawal provisions is more fully described under the section of the
prospectus entitled "Description of Units" and "Summary of Limited Partnership
Agreement", pages 72 through 74 of the prospectus, a part of the referenced
registration statement, which is incorporated by reference.
7
Item 6 - Selected Consolidated Financial Data
Redwood Mortgage Investors VIII began operations in April 1993.
Financial condition and results of operation for the Partnership as of and
for the five years ended December 31, 2002 were (in thousands, except for
limited partner amounts):
Balance Sheets
Assets
December 31,
------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Cash $7,188 $1,917 $1,460 $1,603 $ 529
Loans
Loans secured by deeds of trust 83,650 82,790 68,571 35,693 31,906
Loans, unsecured - 4 54 49 49
Accrued interest and late fees 3,913 3,345 1,039 712 459
Advances on loans 279 195 172 33 211
Less allowance for losses (3,021) (2,247) (1,345) (834) (414)
Other receivables 888 - - - -
Investment in LLC 9,286 - - 373 304
Real estate owned (REO), net - - - - 66
Prepaid expenses and other assets 22 6 13 6 12
------------ ------------ ------------ ------------ ------------
$102,205 $86,010 $69,964 $37,635 $33,122
============ ============ ============ ============ ============
8
Liabilities and Partners Capital
December 31,
------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Liabilities
Accounts payable $ 449 $ 74 $ 30 $ 29 $ 3
Payable to affiliate 294 109 - - -
Note payable - bank - 11,400 16,400 - 5,947
- other 1,782 - - - -
Deferred interest 112 - 82 214 125
Minority interest 1,213 - - - -
Subscriptions to Partnership in
applicant status 2,578 673 225 330 -
------------ ------------ ------------ ------------ ------------
6,428 12,256 16,737 573 6,075
------------ ------------ ------------ ------------ ------------
Partners' capital
Limited partners subject to
redemption 95,690 73,687 53,180 37,030 27,025
General partners subject to
redemption 87 67 47 32 22
------------ ------------ ------------ ------------ ------------
Total partners' capital 95,777 73,754 53,227 37,062 27,047
------------ ------------ ------------ ------------ ------------
$102,205 $ 86,010 $ 69,964 $ 37,635 $ 33,122
============ ============ ============ ============ ============
9
Statements of Income
December 31,
------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Gross revenue $11,537 $9,035 $6,349 $4,426 $3,406
Expenses 4,050 2,941 2,056 1,482 1,127
------------ ------------ ------------ ------------ ------------
Income before interest credited to
partners in applicant status 7,487 6,094 4,292 2,944 2,279
Interest credited to partners in
applicant status 1 1 5 2 5
------------
------------ ------------ ------------ ------------
Net income $ 7,486 $6,093 $4,287 $2,942 $2,274
============ ============ ============ ============ ============
Net income to general partners (1%) 75 61 43 29 23
Net income to limited partners (99%) 7,411 6,032 4,244 2,913 2,251
------------ ------------ ------------ ------------ ------------
Total net income $ 7,486 $6,093 $4,287 $2,942 $2,274
============ ============ ============ ============ ============
Net income per $1,000 invested by
limited partners for entire period
(annualized)
- where income is compounded
and retained $87 $90 $86 $84 $84
============ ============ ============ ============ ============
- where partner receives income
in monthly distributions $84 $86 $83 $81 $81
============ ============ ============ ============ ============
The annualized yield, when income is compounded and retained for 1999 was
8.42%, for 2000 was 8.58%, for 2001 it was 8.98%, and for 2002 it was 8.69%. Our
average annualized yield, when income is compounded and retained, from inception
through December 31, 2002, was 8.44%.
10
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
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. 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 December 31, 2002, there were two
real estate properties acquired.
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. 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 Partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
Statement of Financial Accounting Standards Nos. 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
the amounts due are not insignificant, the carrying amount of the investment
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.
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.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Forward Looking Statements.
Some of the information in the Form 10-K 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 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. The fees received by the general
partners are paid pursuant to the partnership agreement and are determined at
the sole discretion of the general partner. In the past the general partner has
elected not to take the maximum compensation. The following is a list of various
Partnership activities for which related parties are compensated.
11
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 6 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. In 2000, 2001 and 2002, loan
brokerage commissions paid by the borrowers were $1,873,000, $1,155,000 and
$996,000, respectively.
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
are 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 $506,000, $552,000 and $1,098,000 were
incurred for the years ended December 31, 2000, 2001 and 2002, 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 $61,000, $158,000 and $325,000 were incurred by the Partnership for
years 2000, 2001 and 2002, 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 The general partners may be 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.
o Contributed Capital The general partners jointly or severally are
required to contribute 1/10 of 1% in cash contributions as proceeds from the
offerings are received from the limited partners. As of December 31, 2001 and
2002, a general partner, Gymno Corporation, had contributed $70,000 and $91,000,
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 sales. 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. Formation Loans made to Redwood Mortgage Corp. were on a
per offering basis.
The following table summarizes Formation Loan transactions through December
31, 2002 (in thousands):
1st Offering 2nd Offering 3rd Offering 4th Offering Total
------------- -------------- ------------- ------------- ------------
Limited partner contributions $ 14,932 $ 29,993 $ 29,999 $ 16,316 $ 91,239
============= ============== ============= ============= ============
Formation Loans made 1,075 2,272 2,218 1,300 6,865
Payments to date (595) (661) (211) - (1,467)
Early withdrawal penalties
applied (50) (63) (28) - (141)
------------- -------------- ------------- ------------- ------------
Balance December 31, 2002 $ 430 $ 1,548 $ 1,979 $ 1,300 $ 5,257
============= ============== ============= ============= ============
12
The amount of the annual installments paid by Redwood Mortgage Corp. are
determined at annual installment of one-tenth of the principal balance of the
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 over a period of ten years.
On December 31, 2002, the Partnership was in the offering stage of its
fourth offering, ($50,000,000). Contributed capital equaled $14,932,017 for the
first offering, $29,992,574 for the second offering, $29,998,622 for the third
offering, and $16,315,707 for the fourth offering, totaling an aggregate of
$91,238,920 as of December 31, 2002. Of this amount, $2,577,973 remained in
applicant status.
Results of Operations - For the years ended December 31, 2000, 2001, and 2002.
The net income increase of $1,345,000 (46%) for the year ended December 31,
2000, was primarily attributable to an increase in interest earned on loans of
$1,924,000, an increase in late fees of $38,000, a decrease in provision for
loan losses and real estate acquired through foreclosure of $33,000; offset by
expense increases due primarily to the increased size of the Partnership of
$147,000 for mortgage servicing fees, $361,000 for interest on line of credit,
$29,000 for clerical costs through Redwood Mortgage Corp., $19,000 for asset
management fees, and $32,000 for professional fees for 2000. The net income
increase of $1,806,000 (42%) for the year ended December 31, 2001 was due
primarily to an increase in interest earned on loans of $2,659,000, an increase
in late fees of $33,000, and a decrease in professional fees of $51,000; offset
by expense increases due primarily to the increased size of the Partnership loan
of $46,000 for mortgage servicing fees, $85,000 for interest expense, $596,000
for provisions for losses on loans, $97,000 for asset management fees, and
$127,000 for clerical cost from Redwood Mortgage Corp. The net income increase
of $1,393,354 (23%) for the year ended December 31, 2002 was due primarily to an
increase in interest earned on loans of $2,496,000, an increase in late fees of
$15,000, a decrease in interest expense of $456,000; offset by expense increases
due primarily to the increased size of the Partnership of $546,000 for mortgage
servicing fees, $323,000 for provisions for losses on loans and provisions for
losses on real estate, $167,000 for asset management fees, $25,000 for clerical
costs from Redwood Mortgage Corp., $53,000 for professional fees and $444,000
for broker expense.
The increase in interest on loans of $1,924,000 (44%), $2,659,000 (42%) and
$2,496,000 (28%) for the years ended December 31, 2000, 2001 and 2002,
respectively, was due primarily to the increased size of the Partnership loan
portfolio, which increased from $35,693,000 at December 31, 1999, to $68,571,000
at December 31, 2000, to $82,790,000 at December 31, 2001 and $83,650,000 at
December 31, 2002. The average outstanding loan balance for 2002 was
approximately $87,000,000 but was significantly reduced by loan payoffs in
December, 2002. The lower percentage rate of interest increase (28%) on loans in
2002 is reflective of the lower interest rate environment in 2002 as compared to
2000 and 2001 and a smaller increase in outstanding loans than previous years.
This was also offset in 2002 by "additional interest" received on one loan of
$888,000 during 2002.
The late charge income increases of $38,000 (136%), $33,000 (50%), $15,000
(15%) for the years ended 2000, 2001 and 2002, respectively, is largely
attributed to the growth in the loan portfolio.
The increase in interest on the line of credit of $361,000 (69%), and
$85,000 (10%) during the years ended 2000 and 2001 is reflective of higher
credit line usage in 2000 and 2001 offset by significantly lower borrowing rates
in the latter part of 2001. Our credit line is tied to prime and the prime rate
declined from 9.5% to 4.75 during 2001. The decrease of $456,000 (48%) in
interest expense in 2002 is primarily due to the lower prime interest rates
existing throughout 2002 and approximately 20% average lower credit line usage
during the year. The Partnership utilized its bank line of credit less during
2002 than 2001.
The increase in mortgage servicing fees for 2000, 2001 and 2002 of $147,000
(41%), $46,000 (9%) and $546,000 (99%). Mortgage servicing fees increased
primarily due to increases in the outstanding loan portfolio. During 2002,
additional servicing fees were earned related to impaired loans. The Partnership
does not accrue servicing fees to Redwood Mortgage Corp. on impaired loans.
Rather, servicing fees on impaired loans are incurred as borrower payments are
received.
The decrease of $33,000 (8%) in 2000 in provisions for losses on loans and
real estate was due to low expectation of loan losses in 2000. The increase in
provisions for losses on loans in 2001 of $596,000 (159%) is primarily due to
the loan portfolio increasing in amount and due to recognition that we were in
more difficult economic times. The increase in provisions for losses on loans
and real estate of $323,000 (34%) in 2002 reflects the general partners'
estimate of appropriate allowances for anticipated losses. As the Partnership's
loan portfolio has increased and since the Partnership acquired two properties
in 2002, the provisions for loss have also been increased.
13
The increase in management fees of $19,000 (45%), $97,000 (150%) and
$167,000 (106%) for 2000, 2001 and 2002, respectively, is due to the increase in
capital under management in 2000, 2001 and 2002. In addition, the general
partners began collecting the full asset management fees of .375% during 2002 as
compared to .25% in 2001 and .125% in 2000.
The increase in clerical costs of $29,000 (34%), $127,000 (112%) and
$25,000 (10%) for 2000, 2001 and 2002, respectively, is due primarily to an
increase in the Partnership size and in 2001 to an upgrade of computer hardware
and software.
The increase in brokerage fees of $444,000 in 2002 from $0 in 2000 and 2001
is due to the Partnership having an obligation to pay one-half of "additional
interest" collected on one of its loans to a non-affiliated real estate broker.
This expense ends with the full collection of the "additional interest"
anticipated to be in 2003.
Partnership capital continued to increase as the Partnership received new
limited partner capital contributions of $14,887,000, $19,712,000 and
$21,563,000 and retained the earnings of limited partners that have chosen to do
so of $2,751,000, $3,892,000 and $4,716,000 for the years 2000, 2001 and 2002,
respectively. The Partnership ceased raising funds during the period of May 2002
through October 2002 while it was in application status for a fourth offering of
Units. The fourth offering commenced October 30, 2002 and funds raised will be
used to increase the Partnership's capital base and provide funds for additional
mortgage loans.
The Partnership began funding loans on April 14, 1993 and as of December
31, 2002, had credited earnings to limited partners who elected to retain
earnings at an average annualized yield of 8.44%. Limited partners who elected
to have their earnings distributed monthly had an average annualized yield of
8.17% since inception through December 31, 2002.
In 1995, the Partnership established a line of credit with a commercial
bank secured by its loan portfolio. Since its inception, the credit limit has
increased from $3,000,000 to $20,000,000. The size of the credit line facility
could again increase as the Partnership's capital increases. This added source
of funds may help in maximizing the Partnership's yield by permitting 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. As of December 31, 2000, 2001 and 2002, the outstanding
balance on the line of credit was $16,400,000, $11,400,000 and $0, respectively.
Cash generated from interest earnings, late charges, amortization on principal,
loan payoffs and capital contributed by limited partners was utilized to pay
down the credit line in full at year ended December 31, 2002.
During 2001, and through December 31, 2002, the Federal Reserve reduced
interest rates by cutting the Federal Funds Rate twelve times to 1.25%. The
effect of the previous cuts 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% to 1.50%
lower than similar loans during 2002. 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, the general partners
expect to replace paid off loans with loans at somewhat lower interest rates. At
this time, the general partners believe that the average loan portfolio interest
rate will decline approximately .50% to .75% over the year 2003. 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 7.5% and 8.25% in 2003.
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 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 we will on occasion take back real estate security. During
2001, and continuing in 2002, the Northern California real estate market slowed
and the national and local economies have slipped into recession. As of December
31, 2002, six notices of default are currently filed beginning the process of
foreclosing six of our loans. The principal amounts of the six foreclosed loans
total $4,029,000 or 4.82% of the loan portfolio. Four of these borrowers have
entered into workout agreements, with the borrowers making regular monthly
payments.
14
The Partnership has also entered into workout agreements with borrowers who
are past maturity or delinquent in their regular payments. The Partnership had
workout agreements on approximately 6 loans totaling $5,209,000 as of December
31, 2002. 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 rise during difficult economic times and conversely fall
during good economic times. The number and amount of foreclosures existing at
December 31, 2002, 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
2002, the Partnership filed some foreclosure proceedings to enforce the terms of
our loans. In some of these instances the borrowers have been able to remedy the
foreclosures we have filed. As of December 31, 2002, we have existing
foreclosure proceedings against six loans totaling $4,029,000. Of the
foreclosures, four have entered into workout agreements, which call for regular
monthly payments. The Partnership did not acquire any properties through
foreclosure in 2000 and 2001. During 2002, we completed foreclosure of two loans
resulting in the acquisition of two real estate properties. The Partnership's
principal balances were $6,565,000 after excluding an affiliated Partnership's
interest in one of the properties. In 2003, we may acquire additional real
estate through the foreclosure process. 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 acquired through foreclosure of $3,521,000 through December 31,
2002. These provisions for losses were made to guard against collection losses.
The total cumulative provision for losses as of December 31, 2002, 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.
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. 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. Excess cash flow is invested in new loan opportunities,
when available, 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. However an investor may elect to receive such
distributions on a monthly, quarterly or annual basis. 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, and such amounts will be added to such limited partners'
capital accounts.
15
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 compound their earnings, and those that chose to
distribute:
2000 2001 2002
------------- -------------- ---------------
Compounding $2,751,000 $3,892,000 $4,716,000
Distributing $1,245,000 $1,962,000 $2,517,000
As of December 31, 2000, December 31, 2001, December 31, 2002, limited
partners electing to receive cash distributions of earnings represented 31%, 34%
and 35%, 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.
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 most limited partners has yet to expire, as of
December 31, 2002, many limited partners may not as yet avail themselves of this
provision for liquidation. Earnings and capital liquidations including early
withdrawals during the three years ended December 31, 2002 were:
2000 2001 2002
------------- -------------- ---------------
Cash distributions $1,245,000 $1,962,000 $2,517,000
Capital liquidation* $ 762,000 $1,425,000 $1,049,000
------------- -------------- ---------------
Total $2,007,000 $3,387,000 $3,566,000
============= ============== ===============
* 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 past
three years ended December 31, 2002, capital liquidated subject to the 10%
penalty for early withdrawal was:
2000 2001 2002
-------------- -------------- --------------
$310,000 $730,000 $244,000
This represents 0.58%, 0.99%, and 0.26% of the limited partners' ending
capital for the years ended December 31, 2000, 2001, and 2002, 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
December 31, 2002, approximately 73.81% of the loans held were in the six San
Francisco Bay Area Counties, 16.57% were in counties adjacent to the San
Francisco Bay Area and the balance (9.63%) were in other counties throughout
California. 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, and now 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.
16
As contained in a collection of real estate statistics listed in the San
Francisco Chronicle dated December 20, 2002 Bay Area home prices rose again. The
article states, "Despite a struggling economy, the median home price in the Bay
Area in November rose 13% on a year-over-year basis, though the price has
leveled since its all-time high this summer, a real estate information firm
reported Thursday. Driven by historically low interest rates, the number of
homes sold increased 24.4% between November 2001 and November 2002; however,
that comparison is somewhat skewed given that sales plunged after September 11,
2001.
The median home price in the nine Bay Area counties was $416,000 in
November, compared with $368,000 last November, said DataQuick Information
Systems in La Jolla (San Diego County). Compared with October, the median rose
2%, and the number of sales fell 12.8%. In July and August, the Bay Area median
hit a record high $417,000. Last fall, in the wake of a sagging economy and the
terrorist attacks, home prices and sales cooled considerably. But beginning in
January, prices and sales shot up around the country as interest rates plummeted
and consumers looked for an alternative to the gyrating stock market. At the
same time, many economists have suggested a housing bubble is brewing and
predict home prices may fall, particularly in expensive markets such as San
Francisco and Boston. The median price of a single-family home nationwide is
$159,600, according to the National Association of Realtors. (DataQuick's
figures include both single-family homes and condos.) `The days of rapid
appreciation have ended,' said Ken Rosen, a real estate and economics professor
at UC Berkeley. He noted that home prices have appreciated far faster than
personal income in the Bay Area in recent years. `Next year, we may see a small
rise (in home prices), but there could be some significant weakness if interest
rates go up and the economy gets worse,' Rosen said. On the other hand,
DataQuick researcher John Karevoll said he sees no evidence of a major price dip
in the Bay Area despite an uptick in the number of notices of default, the first
step in the foreclosure process. `Housing is in a fairly good state,' Karevoll
said. `Default activity would have to double for it to be a concern.'
The typical monthly mortgage payment Bay Area residents committed to in
November was $1,843. The peak was $2,124 in May 2000. Marin County posted the
highest median home price - $602,000 - in November. Solano County had the lowest
median price - $291,000 - but it experienced the biggest year-over-year
percentage price increase. In November 2001, the county's median was $247,000.
The median is the price at which half of sales are above and half are below.
Sales in Santa Clara County, where the high-tech tumble has pushed unemployment
to 7.8%, showed the largest jump, from 1,284 last November to 1,894 last month.
But that falls short of the county's typical November sales count of between
1,900 and 2,300. Re/Max real estate agent Bruce Scheer in Cupertino said
DataQuick's numbers don't tell the whole story. Although sales in the county are
up nearly 48% year over year, the number of homes on the market is up more than
60%. `There's a lot more inventory, and sales have slowed,' Scheer said, `I
think people are worried that the economy is going to get worse, and they think
that if they wait to sell their home, they'll get less for it.'"
The San Francisco Chronicle dated December 20, 2002 further analyzed the
home sale price by county comparing sales of November 2001 versus November 2002
as follows:
Homes sold Percent Median* Percent
County Nov. `01 Nov. `02 change Nov. `01 Nov. `02 change
------------------- ----------- ---------- ---------- ----------- ------------ ----------
Alameda 1,309 1,771 35.3% $352 $407 15.6%
Contra Costa 1,464 1,599 9.2 308 352 4.3
Marin 309 334 8.1 513 602 17.3
Napa 159 171 7.5 341 398 16.7
San Francisco 355 493 38.9 492 568 15.4
San Mateo 531 620 16.8 490 522 6.5
Santa Clara 1,284 1,894 47.5 421 446 5.9
Solano 635 733 15.4 247 291 17.8
Sonoma 598 650 8.7 319 342 7.2
=========== ========== ========== =========== ============ ==========
Bay Area 6,644 8,265 24.4% $368 $416 13.0%
*in thousands
17
In spite of the slowing economy, commercial lending opportunities exist
which the Partnership may advantage itself of. Office vacancy is very high. The
San Francisco Business Times dated October 10, 2002 states "Grubb & Ellis has
reported a slight decrease in office vacancy in San Francisco for the third
quarter, breaking a two-year losing streak. The commercial real estate firm said
vacancy dropped to 21.9% with 127,000 square feet of positive absorption. Colin
Yasukochi, research director of Grubb & Ellis' San Francisco office, said office
demand has turned positive for the first time in two years. He reported 1.3
million square feet of gross leasing activity in the quarter. The five biggest
deals of the quarter:
o Zurich Insurance took 77,000 square feet at 560 Mission street;
o Gensler Architecture signed a 57,000-square-foot lease at 2 Harrison Street;
o Law firm Clifford Chance opening its Bay Area headquarters at One market with
47,000 square feet;
o Bank of the West and PayMap each signed leases of at least 50,000 square feet.
`The sustained gross leasing activity bodes well for more positive news in
the fourth quarter,' Yasukochi said. `However, over 650,000 square feet of
mostly vacant new space scheduled for delivery in that same quarter will likely
cause vacancy to rise.' He predicts a sustained recovery is two to three years
away."
To the Partnership, stabilizing vacancy rates may mean that we are at the
vacancy rate bottom. High levels of space exist, and as tenants leases expire
they may be able to negotiate lower rental rates. This could lead to lower cash
flows for owners, which may mean we could experience higher delinquencies or
foreclosures on commercial properties.
On or about March 19, 2003 the United States entered into an armed conflict
with Iraq. While the general partners do not anticipate that this conflict will
affect the real estate market in Northern California, a prolonged military
conflict could have adverse effects on the economy of the United States, which
could eventually impact the local real estate market.
As of December 31, 2002, the Partnership had an average loan to value ratio
computed as of the date the loan was made of 60.61%. This did 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.
The foregoing analysis of year 2002 issues includes forward-looking
statements and predictions about possible or 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 future events. No assurance can be given that any of these
statements or predictions will ultimately prove to be correct or substantially
correct.
Item 7a - 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 a note payable on
our line of credit as of December 31, 2002. The presentation, for each category
of information, aggregates the assets and liabilities by their maturity dates
for maturities occurring in each of the years 2003 through 2007 and separately
aggregates the information for all maturities arising after 2007. The carrying
values of these assets and liabilities approximate their fair market values as
of December 31, 2002 (in thousands).
2003 2004 2005 2006 2007 Thereafter Total
----------- ----------- ----------- ----------- ----------- ------------- -----------
Interest earning assets:
Money market accounts $ 5,971 $ 5,971
Average interest rate 1.05% 1.05%
Loans secured by deeds of trust $44,101 $12,912 $11,879 $ 1,723 $ 8,198 $ 4,837 $83,650
Average interest rate 12.14% 10.73% 11.60% 11.64% 10.46% 11.51% 11.64%
Interest bearing liabilities
Note payable to bank - - - - - - -
Average interest rate 4.00% - - - - - 4.00%
18
Market Risk.
The Partnership's note payable to the bank for its 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 note payable. 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.
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
December 31, 2002) 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.
PORTFOLIO REVIEW - For the years ended December 31, 2000, 2001 and 2002.
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 December 31, 2000,
2001 and 2002 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 $55,555,000 (81.0%), $68,291,000
(82.5%), and $61,741,000 (73.81%) of the outstanding loan portfolio. The
remainder of the portfolio represented loans secured by real estate located
primarily in Northern California. No Partnership loan equals or exceeds 10% of
the Partnership's assets.
As of December 31, 2000, approximately 38.25% ($26,225,000), was invested
in loans secured by single family homes (1-4 units), approximately 12.34%
($8,459,000), was invested in loans secured by multifamily dwellings (apartments
over 4 units), approximately 40.95% ($28,082,000), was invested in loans secured
by commercial properties, and approximately 8.47% ($5,806,000) was invested in
loans secured by land. As of December 31, 2001, approximately, 45.35%
($37,542,000), was invested in loans secured by single family homes (1-4 units),
approximately 8.86% ($7,337,000) was invested in loans secured by multifamily
dwellings (apartments over 4 units), approximately 38.78% ($32,105,000) was
invested in loans secured by commercial properties, and approximately 7.01%
($5,806,000) was invested in loans secured by land. As of December 31, 2002,
approximately, 43.72% ($36,574,000), was invested in loans secured by single
family homes (1-4 units), approximately 7.86% ($6,572,000) was invested in loans
secured by multi-family dwellings (apartments over 4 units), approximately,
38.36% ($32,089,000) was invested in loans secured by commercial properties, and
approximately 10.06% ($8,415,000) was invested in loans secured by land.
19
As of December 31, 2002, the Partnership held 70 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 December 31, 2002.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of December 31, 2002 (in thousands)
# of Loans Amount Percent
------------- ------------ -----------
1st Mortgages 31 $ 46,117 55%
2nd Mortgages 32 30,930 37%
3rd Mortgages 7 6,603 8%
============= ============ ===========
Total 70 $ 83,650 100.00%
Maturing 12/31/03 and prior 28 $ 44,101 52.72%
Maturing prior to 12/31/04 13 12,912 15.44%
Maturing prior to 12/31/05 8 11,879 14.20%
Maturing after 12/31/05 21 14,758 17.64%
============= ============ ===========
Total 70 $ 83,650 100.00%
Average Loan $ 1,195 1.43%
Largest Loan 4,943 5.91%
Smallest Loan 27 0.03%
Average Loan-to-Value 60.61%
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.
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 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
December 31, 2002 the general partners have determined that the allowance for
loan losses of $3,021,000 (3.15% 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 December 31, 2002, 20 loans were delinquent over 90 days
amounting to $28,650,000, of which $9,454,500 had been brought current in
February, 2003. Additionally, $2,957,000 of these delinquent loans were subject
to workout agreements, which require the borrower to make regular monthly loan
payments and/or payments plus additional catch up amounts.
20
Item 8 - Consolidated Financial Statements and Supplementary Data
A - Consolidated Financial Statements
The following financial statements of Redwood Mortgage Investors VIII are
included in Item 8:
o Independent Auditors' Report
o Consolidated Balance Sheets - December 31, 2002, and December 31, 2001
o Consolidated Statements of Income for the years ended December 31,
2002, 2001 and 2000
o Consolidated Statements of Change In Partners' Capital for the years
ended December 31, 2002, 2001 and 2000
o Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
o Notes to Consolidated Financial Statements
B - Consolidated Financial Statement Schedules
The following consolidated financial statement schedules of Redwood
Mortgage Inventors VIII are included in Item 8.
o Schedule II - Valuation and Qualifying Accounts
o Schedule IV - Loans on Real Estate
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
21
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2002
22
ARMANINO McKENNA LLP
CERTIFIED PUBLIC ACCOUNTANTS
12667 Alcosta Boulevard, Suite 500
San Ramon, CA 94583
(925) 790-2600
INDEPENDENT AUDITORS' REPORT
To the Partners
Redwood Mortgage Investors VIII
Redwood City, California
We have audited the accompanying consolidated balance sheets of Redwood
Mortgage Investors VIII (a California limited partnership) as of December 31,
2002 and 2001 and the related consolidated statements of income, changes in
partners' capital and cash flows for each of the three years in the period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements and schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Redwood
Mortgage Investors VIII as of December 31, 2002 and 2001and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. Schedule II and IV are
presented for purposes of additional analysis and are not a required part of the
basic consolidated financial statements. Such information has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken as a
whole.
ARMANINO McKENNA LLP
San Ramon, California
February 21, 2003
23
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 2002 AND 2001 (in thousands)
ASSETS
2002 2001
-------------- --------------
Cash and cash equivalents $ 7,188 $ 1,917
-------------- --------------
Loans
Loans secured by deeds of trust 83,650 82,790
Loans, unsecured - 4
Allowance for loan losses (3,021) (2,247)
-------------- --------------
Net loans 80,629 80,547
-------------- --------------
Interest and other receivables
Accrued interest and late fees 3,913 3,345
Advances on loans 279 195
Other receivables 888 -
-------------- --------------
5,080 3,540
-------------- --------------
Loan origination fees, net 22 6
Real estate held for sale (net of reserve of $500) 9,286 -
-------------- --------------
9,308 6
-------------- --------------
Total assets $ 102,205 $ 86,010
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ - $ 11,400
Accounts payable 449 74
Payable to affiliate 294 109
Deferred interest 112 -
Note payable 1,782 -
-------------- --------------
Total liabilities 2,637 11,583
-------------- --------------
Minority interest 1,213 -
-------------- --------------
Investors in applicant status 2,578 673
-------------- --------------
Partners' capital
Limited partners' capital, subject to redemption net of unallocated
syndication costs of $592 and $400 for 2002 and 2001, respectively; And
formation loan receivable of $5,257 and $4,126 for 2002
And 2001, respectively 95,690 73,687
General partners' capital, net of unallocated syndication costs
of $6 and $4 for 2002 and 2001, respectively 87 67
-------------- --------------
Total partners' capital 95,777 73,754
-------------- --------------
Total liabilities and partners' capital $ 102,205 $ 86,010
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements
24
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands, except for per limited partner amounts)
2002 2001 2000
--------------- -------------- ---------------
Revenues
Interest on loans $ 11,416 $ 8,920 $ 6,261
Late fees 114 99 66
Other 7 16 22
--------------- -------------- ---------------
11,537 9,035 6,349
--------------- -------------- ---------------
Expenses
Mortgage servicing fees 1,098 552 506
Interest expense 516 972 887
Amortization of loan origination fees 12 14 12
Provisions for losses on loans 780 957 376
Provisions for losses on real estate 500 - -
Asset management fees 325 158 61
Clerical costs from Redwood Mortgage Corp. 266 241 114
Professional services 66 13 64
Broker expense 444 - -
Other 44 35 42
--------------- -------------- ---------------
4,051 2,942 2,062
--------------- -------------- ---------------
Net income $ 7,486 $ 6,093 $ 4,287
=============== ============== ===============
Net income
General partners (1%) $ 75 $ 61 $ 43
Limited partners (99%) 7,411 6,032 4,244
--------------- -------------- ---------------
$ 7,486 $ 6,093 $ 4,287
=============== ============== ===============
Net income per $1,000 invested by limited partners
for entire period
Where income is reinvested and compounded $ 87 $ 90 $ 86
=============== ============== ===============
Where partner receives income in periodic distributions $ 84 $ 86 $ 83
=============== ============== ===============
The accompanying notes are an integral part of these consolidated financial
statements
25
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of changes in partners' capital
For the Years Ended December 31, 2002, 2001 and 2000 (in thousands)
Limited Partners
----------------------------------------------------------
Investors In Capital Unallocated Formation Total
Applicant Limited Syndication Loan Partners'
Status Partners' Costs Receivable Capital
-------------- ------------- -------------- ------------- -------------
Balances at December 31, 1999 $ 330 $ 39,531 $ (342) $ (2,159) $ 37,030
Contributions on application 14,887 - - - -
Formation loan increases - - - (1,102) (1,102)
Formation loan payments - - - 230 230
Interest credited to partners in applicant status 5 - - - -
Interest withdrawn (1) - - - -
Transfers to partners' capital (14,996) 14,981 - - 14,981
Net income - 4,244 - - 4,244
Syndication costs incurred - - (227) - (227)
Allocation of syndication costs - (248) 248 - -
Partners' withdrawals - (1,976) - - (1,976)
Early withdrawal penalties - (30) 10 20 -
-------------- ------------- -------------- ------------- -------------
Balances at December 31, 2000 225 56,502 (311) (3,011) 53,180
Contributions on application 19,712 - - - -
Formation loan increases - - - (1,462) (1,462)
Formation loan payments - - - 300 300
Interest credited to partners in applicant status 1 - - - -
Transfers to partners' capital (19,265) 19,245 - - 19,245
Net income - 6,032 - - 6,032
Syndication costs incurred - - (291) - (291)
Allocation of syndication costs - (178) 178 - -
Partners' withdrawals - (3,317) - - (3,317)
Early withdrawal penalties - (70) 24 46 -
-------------- ------------- -------------- ------------- -------------
Balances at December 31, 2001 673 78,214 (400) (4,126) 73,687
Contributions on application 21,563 - - - -
Formation loan increases - - - (1,677) (1,677)
Formation loan payments - - - 530 530
Interest credited to partners in applicant status 1 - - - -
Transfers to partners' capital (19,659) 19,659 - - 19,659
Net income - 7,411 - - 7,411
Syndication costs incurred - - (377) - (377)
Allocation of syndication costs - (178) 178 - -
Partners' withdrawals - (3,543) - - (3,543)
Early withdrawal penalties - (23) 7 16 -
-------------- ------------- -------------- ------------- -------------
Balances at December 31, 2002 $ 2,578 $ 101,540 $ (592) $ (5,257) $ 95,690
============== ============= ============== ============= =============
The accompanying notes are an integral part of these consolidated financial
statements
26
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of changes in partners' capital
For the Years Ended December 31, 2002, 2001 and 2000 (in thousands)
General Partners
---------------------------------------------------------
Capital Account Unallocated Total Total
General Syndication General Partners' Partners'
Partners' Costs Capital Capital
-------------------- --------------- ------------------- --------------
Balances at December 31, 1999 $ 35 $ (3) $ 32 $ 37,062
Contributions on application - - - -
Formation loan increases - - - (1,102)
Formation loan payments - - - 230
Interest credited to partners in applicant status - - - -
Capital contributed 15 - 15 14,996
Net income 43 - 43 4,287
Syndication costs incurred - (2) (2) (229)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (40) - (40) (2,016)
Early withdrawal penalties - - - -
-------------------- --------------- ------------------- --------------
Balances at December 31, 2000 51 (3) 48 53,228
Contributions on application - - - -
Formation loan increases - - - (1,462)
Formation loan payments - - - 300
Interest credited to partners in applicant status - - - -
Capital contributed 20 - 20 19,265
Net income 61 - 61 6,093
Syndication costs incurred - (3) (3) (294)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (59) - (59) (3,376)
Early withdrawal penalties - - - -
-------------------- --------------- ------------------- --------------
Balances at December 31, 2001 71 (4) 67 73,754
Contributions on application - - - -
Formation loan increases - - - (1,677)
Formation loan payments - - - 530
Interest credited to partners in applicant status - - - -
Capital contributed 22 - 22 19,681
Net income 75 - 75 7,486
Syndication costs incurred - (4) (4) (381)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (73) - (73) (3,616)
Early withdrawal penalties - - - -
-------------------- --------------- ------------------- --------------
Balances at December 31, 2002 $ 93 $ (6) $ 87 $ 95,777
==================== =============== =================== ==============
The accompanying notes are an integral part of these consolidated financial
statements
27
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of cash flows
For the Years Ended December 31, 2002, 2001 and 2000 (in thousands)
2002 2001 2000
---------------- ---------------- ---------------
Cash flows from operating activities
Net income $ 7,486 $ 6,093 $ 4,287
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan and real estate losses 1,280 957 376
Change in operating assets and liabilities -
Unsecured loans 4 50 (5)
Accrued interest and late fees (1,253) (2,306) (328)
Advances on loans (312) (23) (139)
Other receivables (888) - -
Loan origination fees (16) 7 6
Accounts payable 375 44 1
Payable to affiliate 185 109 -
Deferred interest 112 (82) (131)
---------------- ---------------- ---------------
Net cash provided by operating activities 6,973 4,849 4,067
---------------- ---------------- ---------------
Cash flows from investing activities
Loans originated (32,601) (47,512) (49,289)
Principal collected on loans 26,083 33,239 16,546
Payments for development of real estate (219) - -
Proceeds from disposition of real estate - - 360
---------------- ---------------- ---------------
Net cash used in investing activities (6,737) (14,273) (32,383)
---------------- ---------------- ---------------
Cash flows from financing activities
Borrowings (repayments) on line of credit, net (11,400) (5,000) 16,400
Repayments on note payable (7) - -
Contributions by partner applicants 21,586 19,713 14,892
Interest withdrawn by partners in applicant status - - (1)
Partners' withdrawals (3,616) (3,376) (2,017)
Syndication costs paid (381) (294) (229)
Formation loan lending (1,677) (1,462) (1,102)
Formation loan collections 530 300 230
---------------- ---------------- ---------------
Net cash provided by financing activities 5,035 9,881 28,173
---------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents 5,271 457 (143)
Cash and cash equivalents - beginning of year 1,917 1,460 1,603
---------------- ---------------- ---------------
Cash and cash equivalents - end of year $ 7,188 $ 1,917 $ 1,460
================ ================ ===============
Supplemental disclosures of cash flow information
Cash paid for interest $ 516 $ 972 $ 888
================ ================ ===============
The accompanying notes are an integral part of these consolidated financial
statements
28
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 1 - Organizational and General
Redwood Mortgage Investors VIII, a California Limited Partnership (the
"Partnership"), was organized in 1993. The general partners are Michael R.
Burwell, an individual, Gymno Corporation, and Redwood Mortgage Corp., both
California corporations. 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, 2002, the Partnership
was in its fourth offering stage, wherein contributed capital totaled
$91,238,920 of approved aggregate offerings of $125,000,000. As of December 31,
2002 and 2001, $ 2,578,000 and $673,000, respectively, remained in applicant
status, and total Partnership Units sold of 88,660,947 and were in the aggregate
of $91,239,000 and $69,676,000 respectively.
A minimum of $250,000 and a maximum of $15,000,000 in Partnership Units
were initially offered through qualified broker-dealers. This initial offering
closed in October 1996. In December 1996, the Partnership commenced a second
offering of an additional $30,000,000, which closed on August 30, 2000. On
August 31, 2000, the Partnership commenced a third offering for an additional
$30,000,000, which closed in April 2002. On October 31, 2002, the Partnership
commenced a fourth offering for an additional $50,000,000. As loans are
identified, partners are transferred from applicant status to admitted partners
participating in loan operations.
Sales commissions - formation loans
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 unsecured and
non-interest bearing and is referred to as the "formation loan."
The Formation Loan relating to the initial $15,000,000 offering totaled
$1,075,000, which was 7.2% of limited partners' contributions of $14,932,000. It
is being repaid, without interest, in ten annual installments of $107,000, 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
$2,272,000, which was 7.6% of limited partners' contributions of $29,993,000. It
is being repaid, without interest, in ten equal annual installments of $201,000,
which commenced on January 1, 2001, following the year the second offering
closed. Additional payments on this loan were also made during the offering
period.
The Formation Loan relating to the third offering ($30,000,000) totaled
$2,218,000, which was 7.4% of the limited partners' contributions of
$29,999,000. It is to be repaid, without interest, in ten annual installments of
$178,000, which will commence on January 1, 2003. Additional payments on this
loan were also made during the offering stage.
The Formation Loan relating to the fourth offering ($50,000,000) totaled
$1,300,000 as of December 31, 2002, which was 8.0% of the limited partners
contributions of $16,316,000 through December 31, 2002. An equal annual
repayment schedule on this loan, without interest, will commence in the year
subsequent to the closing of this offering.
For the fourth offering, sales commissions paid to brokers 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. 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.
29
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 1 - Organizational and General (continued)
Sales commissions - formation loans (continued)
The following summarizes Formation Loan transactions to December 31, 2002
(in thousands):
Initial Subsequent Third Fourth
Offering of Offering of Offering of Offering of
$15,000 $30,000 $30,000 $50,000 Total
------------- -------------- -------------- ------------- ------------
Limited Partner
Contributions $14,932 $29,993 $29,999 $16,316 $91,239
============= ============== ============== ============= ============
Formation Loan made $ 1,075 $ 2,272 $ 2,218 $ 1,300 $ 6,865
Repayments to date (595) (661) (211) - (1,467)
Early withdrawal
penalties applied (50) (63) (28) - (141)
------------- -------------- -------------- ------------- ------------
Balance,
December 31, 2002 $ 430 $ 1,548 $ 1,979 $ 1,300 $ 5,257
============= ============== ============== ============= ============
Percent loaned 7.2% 7.6% 7.4% 8.0% 7.5%
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.
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 individual partners consistent with the
partnership agreement.
Through December 31, 2002, syndication costs of $2,071,000 had been
incurred by the Partnership with the following distribution (in thousands):
Costs incurred $2,071
Early withdrawal penalties applied (72)
Allocated to date (1,401)
---------------
December 31, 2002 balance $ 598
===============
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 $14,932,000.
Related expenditures totaled $582,000 ($570,000 syndication costs plus $12,000
organization expense) or 3.9%.
Syndication costs attributable to the 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
$29,993,000. Syndication costs totaled $598,000 or 2% of contributions.
30
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 1 - Organizational and General (continued)
Syndication costs (continued)
Syndication costs attributable to the third 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 third offering were
$29,999,000. Syndication costs totaled $643,000 or 2% of contributions.
Syndication costs attributable to the fourth offering ($50,000,000) will be
limited to the lesser of 10% of the gross proceeds or $2,000,000 with any excess
to be paid by the general partners. As of December 31, 2002, the fourth offering
had incurred syndication costs of $260,000 (1.6% of contributions).
Term of the partnership
The Partnership is scheduled to terminate on December 31, 2032, unless
sooner terminated as provided.
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.
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 classification.
Management estimates
The preparation of consolidated 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reported period. 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.
Loans, secured by deeds of trust
Loans generally are stated at their outstanding unpaid principal balance
with interest thereon being accrued by the effective interest method.
Statement of Financial Accounting Standards Nos. 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
the amounts due are not insignificant, the carrying amount of the investment
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.
31
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 2 - Summary of Significant Accounting Policies (continued)
Loans, secured by deeds of trust (continued)
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. At December 31, 2002 and 2001, loans
categorized as impaired by the Partnership were $0 and $710,000, respectively,
with a reduction in the carrying value of the impaired loans of $0 and $88,000,
respectively. The reduction in the carrying value of the impaired loans is
included in the allowance for loan losses. The average impaired recorded
investment in impaired loans was $355,000 for 2002 and 2001, and was $0 for
2000.
At December 31, 2002, the Partnership had twenty loans, past due 90 days or
more totaling $28,650,000, of which $9,454,500 had been brought current in
February, 2003. The Partnership does not consider these loans to be impaired
because there is sufficient collateral to cover the amount outstanding to the
Partnership and is still accruing interest on these loans. As presented in Note
11 to the consolidated financial statements, the average loan to appraised value
of security at the time the loans were consummated for loans outstanding at
December 31, 2002 and 2001 was 60.61% and 59.67%, respectively. When loans are
considered impaired, the allowance for loan losses is updated to reflect the
change in the valuation of collateral security. However, a low loan to value
ratio has the tendency to minimize reductions for impairment.
During 2002, the Partnership restructured three previously impaired loans
into two new loans with a lower interest rate. The amount restructured was
$1,090,000. Had the loans been current in accordance with their original terms
and had been outstanding throughout the entire year, the Partnership would have
recognized gross interest income of $85,000 for the year ended December 31,
2002. The Partnership recognized $61,000 of interest income on the restructured
loans for the year ended December 31, 2002.
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. 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 Partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
The composition of the allowance for loan losses as of December 31, 2002
and 2001 was as follows (in thousands):
2002 2001
--------------- ---------------
Impaired loans $ - $ 88
Specified loans 120 -
General 2,901 2,155
Unsecured loans - 4
--------------- ---------------
$ 3,021 $ 2,247
=============== ===============
32
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 2 - Summary of Significant Accounting Policies (continued)
Allowance for loan losses (continued)
Activity in the allowance for loan losses is as follows for the years ended
December 31:
2002 2001 2000
------------- ------------- -------------
Beginning balance $ 2,247 $ 1,345 $ 834
Restructured loans 11 - -
Additions charged to income 780 873 469
Write-offs (17) 29 42
------------- ------------- -------------
$ 3,021 $ 2,24 $ 1,345
============= ============= =============
Cash and cash equivalents
The Partnership considers all highly liquid financial instruments with
maturities of three months or less at the time of purchase to be cash
equivalents.
Real estate held for sale
Real estate held for sale includes real estate acquired through foreclosure
and is stated at the lower of the recorded investment in the loan, plus any
senior indebtedness, or at the property's estimated fair value, less estimated
costs to sell. During 2002, there were two properties acquired by the
Partnership. Both of these properties are held in limited liability
corporations, which are majority owned by the Partnership (see Note 5).
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposition of Long Lived Assets," the
Partnership periodically compares the carrying value of real estate to expected
undiscounted future cash flows for the purpose of assessing the recoverability
of the recorded amounts. If the carrying value exceeds future undiscounted cash
flows, the assets are reduced to estimated fair value. The Partnership increased
the allowance for losses on real estate held for sale by $500,000 during the
year ended December 31, 2002.
Loan origination fees
The Partnership capitalizes fees for obtaining bank financing. The fees are
amortized over the life of the financing using the straight-line method.
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 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.
33
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 2 - Summary of Significant Accounting Policies (continued)
Late fee revenue
Late fees are generally charged at 6% of the monthly installment payment
past due. During 2002, 2001 and 2000, late fee revenue of $114,000, $99,000 and
$66,000, respectively, was recorded. The Partnership has a recorded late fee
receivable at December 31, 2002 and 2001 of $133,000 and $80,000, respectively.
An allowance for uncollectible late fees of $58,000 and $0 at December 31, 2002
and 2001, respectively is reflected in the allowance for loan losses.
Recently issued accounting pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 46 "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (FIN 46). FIN 46 is effective immediately for any
variable interest entities created after January 31, 2003 and is effective
beginning in the third quarter of 2002 to any variable interest entities created
prior to the issuance of the interpretation. FIN 46 provides a new framework to
identify variable interest entities and determining when an entity should
include the assets, liabilities, non-controlling interests and the results of
activities of a variable interest entity in its financial statements. The
implementation of FIN 46 is not anticipated to have any significant effect on
the Partnership.
note 3 - 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.
Applicant status
Subscription funds received from purchasers of Partnership 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 2002, 2001 and 2000, interest totaling $1,000, $800 and $5,000,
respectively, were 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.
34
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 3 - Other Partnership Provisions (continued)
Election to receive monthly, quarterly or annual distributions
At subscription, investors elect 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.
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.
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of Partnership 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 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 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 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.
Guaranteed interest rate for offering period
For the first three offerings, the general partners guaranteed 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%. The interest rate was guaranteed during the period commencing with
the day a limited partner was admitted to the Partnership and ended three months
after the initial through third offering termination date, which in all cases
was August 2002. Through August 2002, actual earnings exceeded the guaranteed
amount for each month.
35
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 4 - 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, 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 2002, 2001 and 2000, loan brokerage commissions paid by the
borrowers were $996,000, $1,156,000 and $1,878,000, respectively.
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. Mortgage servicing fees of
$1,098,000, $552,000 and $506,000 were incurred for 2002, 2001 and 2000,
respectively. The Partnership has a payable to Redwood Mortgage Corp. for
servicing fees of $294,000 and $109,000 at December 31, 2002 and 2001,
respectively.
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% annual). Asset management fees of $325,000, $158,000 and $61,000 were
incurred for 2002, 2001 and 2000, respectively.
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 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. During 2002, 2001 and 2000,
operating expenses totaling $266,000, $241,000 and $114,000 respectively, were
reimbursed to Redwood Mortgage Corp.
Contributed capital
The general partners jointly or severally are to contribute 1/10 of 1% of
limited partners' contributions in cash contributions as proceeds from the
offerings are received from the limited partners. As of December 31, 2002 and
2001, Gymno Corporation, a general partner, had capital in accordance with
Section 4.02(a) of the Partnership Agreement.
36
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 5 - Real Estate Held for Sale
During 2002, the Partnership contributed its interests in two foreclosed
real properties into two limited liability companies ("LLCs"). The Partnership's
investments in the LLCs are reflected at the lower of cost or fair value,
including estimated costs of property disposition.
The following schedule reflects the cost of the LLCs' properties and recorded
reductions to estimated fair values:
Costs of properties $ 9,786
Reduction in value (500)
-------------
Real estate held for sale $ 9,286
=============
Russian
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 was formed by the Partnership to complete the
development and sale of the property. The assets and liabilities of Russian have
been consolidated into the accompanying consolidated balance sheets of the
Partnership. Costs related to the sale of this property are being capitalized;
thus, there was no income or expense recognized by Russian during 2002. As of
December 31, 2002, the Partnership had advanced approximately $37,000 to Russian
for sales costs. At December 31, 2002, the Partnership's total investment in
Russian was $3,913,000, net of a valuation allowance of $500,000.
Stockton
During 2002, six condominium units that secured a Partnership loan totaling
$2,163,000, including accrued interest and advances, were transferred via a
statutory warranty deed to a new entity named Stockton Street Property Company,
LLC ("Stockton"). In addition, senior debt was assumed by Stockton on the
property in the amount of $1,789,000 (see Note 7). Stockton was formed by the
Partnership and an affiliate to complete development and sales of the
condominium units. The Partnership is co-manager of Stockton along with the
other member and is to receive 66% of the profits or losses. As such, the assets
and liabilities of Stockton have been consolidated into the accompanying
consolidated balance sheets of the Partnership. Development costs are being
capitalized; thus, there was no income or expense recognized by Stockton during
2002. As of December 31, 2002, advances of approximately $238,000 were made for
construction and other related development costs and $87,000 of interest expense
was capitalized. At December 31, 2002, the Partnership's total investment in
Stockton was $5,373,000.
note 6 - Bank Line of Credit
The Partnership has a bank line of credit expiring July 10, 2004, of up to
$20,000,000 at prime secured by its loan portfolio. The outstanding balances
were $0 and $11,400,000 at December 31, 2002 and 2001, respectively. The
interest rate was 4.25% (prime) at December 31, 2002. The line of credit calls
for certain financial covenants. The Partnership was in compliance with these
covenants for the years ended December 31, 2002 and 2001.
Should the general partners choose not to renew the line of credit, the
balance then outstanding would be converted to a three-year term loan.
37
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 7 - Note Payable
The Partnership assumed a bank loan of $1,789,000 in connection with the
foreclosure on a property (see Note 5). As of December 31, 2002, $1,782,000 was
outstanding on this note. The loan is secured by the property and bears interest
at 5.68% at December 31, 2002.
Future maturities on the note payable are as follows (in thousands):
2003 $ 22
2004 23
2005 24
2006 26
2007 27
Thereafter 1,660
------------
$ 1,782
============
note 8 - Income Taxes
The following reflects a reconciliation of partners' capital reflected in
the consolidated financial statements to the tax basis of Partnership capital
(in thousands):
2002 2001
------------- --------------
Partners' capital per consolidated
financial statements $ 95,777 $ 73,754
Non-amortized syndication costs 598 403
Allowance for loan losses 3,521 2,247
Formation loans receivable 5,257 4,126
------------- --------------
Partners' capital - tax basis $105,153 $ 80,530
============= ==============
In 2002 and 2001, approximately 47% and 48% of taxable income was allocated
to tax-exempt organizations (i.e., retirement plans), respectively. Such
organizations generally do not have to file income tax returns.
note 9 - 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 carrying value was $83,650,000 and $82,790,000 at
December 31, 2002 and 2001, respectively. The fair value of these loans of
$84,976,000 and $84,000,000, 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 be
considered in evaluating the fair value versus the carrying value.
38
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 10 - Non-cash Transactions
During 2002, the Partnership foreclosed on two properties (see Note 5),
which resulted in an increase in real estate held for sale and notes payable of
$8,354,000 and $1,789,000, respectively and a decrease in loans receivable,
accrued interest and advances of $5,986,000, $383,000 and $196,000,
respectively.
During 2002, the Partnership restructured three loans that resulted in an
increase to loans receivable and the allowance for loan losses of $345,000 and
$11,000, respectively and a decrease to accrued interest and advances of
$302,000 and $32,000, respectively.
note 11 - Asset Concentrations and Characteristics
The loans are secured by recorded deeds of trust. At December 31, 2002 and
2001, there were 70 and 76 secured loans outstanding, respectively, with the
following characteristics (dollars in thousands):
2002 2001
--------------- ---------------
Number of secured loans outstanding 70 76
Total secured loans outstanding $ 83,650 $82,790
Average secured loan outstanding $ 1,195 $ 1,089
Average secured loan as percent of total 1.43% 1.32%
Average secured loan as percent of partners' capital 1.25% 1.48%
Largest secured loan outstanding $ 4,943 $ 7,000
Largest secured loan as percent of total 5.91% 8.46%
Largest secured loan as percent of partners' capital 5.16% 9.49%
Number of counties where security is located (all California) 15 12
Largest percentage of secured loans in one county 27.22% 41.40%
Average secured loan to appraised value of security 60.61% 59.67%
at time loan was consummated
Number of secured loans in foreclosure status 6 3
Amount of secured loans in foreclosure $ 4,029 $ 1,051
39
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 11 - Asset Concentrations and Characteristics (continued)
The following secured loan categories were held at December 31, 2002 and
2001 (in thousands):
2002 2001
--------------- --------------
First trust deeds $ 46,117 $ 42,984
Second trust deeds 30,930 34,641
Third trust deeds 6,603 5,165
--------------- --------------
Total loans 83,650 82,790
Prior liens due other lenders 79,846 67,945
--------------- --------------
Total debt $ 163,496 $ 150,735
=============== ==============
Appraised property value at time of loan $ 269,773 $ 252,604
Total investments as a percent of appraisals 60.61% 59.67%
Investments by type of property
Owner occupied homes $ 12,854 $ 11,019
Non-owner occupied homes 23,720 26,523
Apartments 6,572 7,337
Commercial 40,504 37,911
--------------- --------------
$ 83,650 $ 82,790
=============== ==============
The interest rates on the loans range from 7.50% to 14.00% at December 31, 2002.
Scheduled maturity dates of secured loans as of December 31, 2002 are as
follows:
Year Ending December 31,
------------------------------------
2003 $44,101
2004 12,912
2005 11,879
2006 1,723
2007 8,198
Thereafter 4,837
--------------
$83,650
==============
The scheduled maturities for 2002 include fifteen loans totaling
$18,765,000 (22.4%), which are past maturity at December 31, 2002. Interest
payments on thirteen of these loans were delinquent. Two of these loans totaling
$7,000,000 were paid off subsequent to year-end.
40
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 11 - Asset Concentrations and Characteristics (continued)
Cash deposits at December 31, 2002 of $7,370,000 were in one bank. The
balances exceeded FDIC insurance limits (up to $100,000 per bank) by
approximately $7,270,000. This bank is the same financial institution that has
provided the Partnership with the $20,000,000 maximum line of credit. 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.
note 12 - Commitments and Contingencies
Construction loans
The Partnership has construction loans, which are at various stages of
completion. The Partnership has approved the borrowers up to a maximum loan
balance; however, disbursements are made during completion phases throughout the
construction process. At December 31, 2002, there was $2,338,000 of
undistributed construction loans.
Workout agreements
The Partnership has negotiated various workout agreements with borrowers.
The Partnership is not obligated to fund additional money as of December 31,
2002. There are approximately six loans totaling $5,209,000 in workout
agreements as of December 31, 2002.
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.
41
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 13 - Selected Financial Information (Unaudited)
Calendar Quarter
------------------------------------------------------------------------
(in thousands, except for Net income per $1,000 invested amounts)
First Second Third Fourth Annual
----------- ----------- ----------- ------------- ------------
Revenues
2002 $2,602 $2,515 $3,165 $ 3,266 $11,548
2001 2,151 2,195 2,265 2,425 9,035
2000 1,094 1,373 1,884 1,998 6,349
Expenses
2002 799 665 1,311 1,287 4,062
2001 802 711 676 753 2,942
2000 164 337 763 798 2,062
Net income allocated to general partners
2002 18 18 19 20 75
2001 13 14 15 17 61
2000 9 10 11 12 43
Net income allocated to limited partners
2002 1,784 1,831 1,836 1,960 7,411
2001 1,335 1,469 1,573 1,655 6,032
2000 920 1,026 1,110 1,188 4,244
Net income per $1,000 invested
Where income is reinvested
2002 21 21 21 24 87
2001 22 22 22 24 90
2000 21 21 21 23 86
Where income is withdrawn
2002 21 21 21 21 84
2001 20 22 22 20 86
2000 20 21 21 21 83
note 14 -Subsequent Events
Subsequent to year-end and through the date of this report, the Partnership
has received $5,799,000 of new investor money for the current offering and had
admitted $2,379,000 of partners in applicant status into the Partnership.
42
SCHEDULE II
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2002
(in thousands)
Col A Col B Col. C Col. D Col E
Description Balance at Additions Deductions Balance at
-------------------------------
Beginning Charged to Charged to End of Period
of Period Costs & Other
Expenses Accounts
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002
Deducted from asset accounts
Allowance for loan losses $ 2,247 $ 780 $ 11(a) $ (17)(b) $ 3,021
Cumulative write-down of
real estate held for sale (REO) - 500 - - 500
-------------- ---------------- --------------- -------------- ----------------
$ 2,247 $ 1,280 $ 11 $ (17)(b) $ 3,521
============== ================ =============== ============= ================
Note (a) - Represents restructuring of loans.
Note (b) - Represents write-offs of loans.
43
SCHEDULE IV
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
mortgage loans on real estate
rule 12-29 loans on real estate
December 31, 2002
(in thousands)
Col. A Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J
Desc. Interest Final Periodic Prior Face Amt of Carrying Amt. Pr. Amt. Type of Geog. County
Rate Maturity Payment Liens Mortgage Mortgage Subject to Lien Location
Date Terms Orig. Amt Investment Delinquency
Comm. 14.00% 04/01/06 $ 12 $ - $ 700 $ 399 $ - 1st San Francisco
Res. 13.50% 07/01/00 7 - 579 579 143 1st San Francisco
Comm. 12.50% 10/01/02 4 - 150 27 - 1st San Francisco
Comm. 11.00% 10/01/07 6 - 650 631 - 1st San Francisco
Res. 18.00% 03/01/00 11 579 951 762 233 2nd San Francisco
Res. 14.00% 02/01/01 11 - 910 910 255 1st San Francisco
Res. 11.50% 12/01/00 23 910 953 2,331 574 2nd San Francisco
Res. 12.00% 05/01/03 12 - 1,210 1,210 194 1st Marin
Land 11.00% 01/01/01 13 363 1,800 1,392 92 2nd Stanislaus
Land 11.00% 07/01/01 24 358 2,600 2,600 167 2nd Stanislaus
Res. 10.25% 09/01/09 8 668 850 834 - 2nd Santa Clara
Apts. 12.50% 11/15/02 4 47 39 304 - 2nd Contra Costa
Land 11.00% 11/01/00 2 2,968 222 190 51 3rd Stanislaus
COMM. 11.50% 02/01/05 4 493 400 396 - 2nd San Francisco
Land 11.50% 07/01/01 5 2,600 476 476 32 2nd Stanislaus
Comm. 12.00% 12/01/01 28 - 4,970 4,495 - 1st Los Angeles
Comm. 10.50% 06/01/06 7 - 775 764 - 1st San Mateo
Apts. 12.00% 08/01/03 40 - 4,000 4,000 480 1st San Francisco
Comm. 12.00% 05/01/07 9 2,916 799 796 - 2nd Santa Clara
Res. 12.00% 03/01/01 13 - 1,325 1,325 133 1st Marin
Apts. 12.50% 04/01/02 1 4,000 290 289 33 2nd San Francisco
Comm. 13.00% 11/01/02 2 310 205 205 16 2nd Alameda
Comm. 12.50% 01/01/04 0 845 692 692 - 2nd San Francisco
Res. 12.50% 11/01/02 11 - 1,675 1,647 - 1st Napa
Comm. 11.50% 04/01/02 46 - 4,750 4,750 182 1st San Francisco
Comm. 12.00% 04/01/02 23 4,750 2,250 2,250 135 2nd San Francisco
Res. 12.00% 05/01/03 16 7,741 4,117 1,524 - 3rd Santa Clara
Res. 11.50% 05/01/02 6 - 606 604 - 1st Marin
Apts. 11.50% 06/01/06 2 - 182 180 - 1st Merced
Res. 13.25% 12/01/02 20 582 2,188 2,188 98 2nd Santa Clara
Res. 13.25% 01/01/03 20 - 3,516 3,515 - 1st Napa
Comm. 11.50% 08/01/06 4 - 350 310 - 1st San Mateo
Res. 11.00% 08/01/03 7 665 800 800 - 2nd Santa Clara
Res. 13.25% 03/01/03 14 - 3,368 2,998 - 1st San Mateo
44
SCHEDULE IV (continued)
Col. A Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J
Desc. Interest Final Periodic Prior Face Amt of Carrying Amt Pr. Amt. Type of Geog. County
Rate Maturity Payment Liens Mortgage Mortgage Subject to Lien Location
Date Terms Orig. Amt Investment Delinquency
Res. 11.00% 11/01/04 4 1,132 423 89 - 3rd San Mateo
Res. 10.25% 11/01/04 13 2,484 1,500 1,499 - 2nd San Mateo
Res. 11.50% 12/01/06 1 167 70 70 - 2nd Stanislaus
Res. 10.25% 12/01/04 3 978 300 300 - 2nd San Francisco
Comm. 12.50% 01/01/03 10 7,000 2,455 2,455 102 3rd San Francisco
Land 9.50% 02/01/04 8 - 987 987 - 1st Santa Clara
Res. 11.00% 02/01/04 6 65 708 708 - 2nd Lake
Apts. 11.00% 03/01/07 1 179 100 99 - 2nd Alameda
Land 12.50% 03/01/05 3 - 270 270 - 1st San Diego
Comm. 11.00% 03/01/07 16 - 1,600 1,592 - 1st Alameda
Res. 10.00% 12/01/02 3 - 318 316 32 1st San Mateo
Comm. 7.50% 02/28/07 5 - 770 770 - 1st Santa Clara
Comm. 7.50% 02/28/07 2 - 320 320 - 1st Alameda
Res. 10.25% 04/01/05 14 - 1,650 1,650 - 1st Napa
Apts. 10.50% 12/31/02 15 15,440 1,700 1,700 - 2nd San Mateo
Comm. 13.00% 06/01/05 41 10,000 4,550 4,943 - 2nd Santa Clara
Comm. 10.50% 08/01/04 32 - 3,600 3,600 - 1st Santa Clara
Res. 10.25% 08/01/04 4 1,648 263 256 - 2nd Santa Clara
Res. 10.50% 08/01/07 18 3,500 2,000 1,997 - 2nd San Francisco
Res. 13.25% 02/01/04 2 638 431 184 - 2nd Santa Clara
Res. 10.50% 09/01/07 2 1,468 805 196 - 3rd Santa Clara
Res. 11.50% 09/01/05 12 - 1,300 1,300 - 1st Alameda
Res. 10.50% 09/01/05 3 494 346 346 - 2nd Alameda
Res. 10.50% 09/01/05 2 710 269 269 - 2nd San Mateo
Res. 11.00% 09/01/04 7 - 493 747 - 1st Stanislaus
Res. 10.25% 10/01/04 11 1,102 1,250 1,250 - 1st&3rd Santa Clara
Res. 10.50% 10/01/05 16 - 1,781 1,781 - 1st San Mateo
Comm. 10.50% 10/01/07 4 - 441 441 - 1st San Mateo
Res. 10.50% 10/01/07 2 245 159 207 - 2nd San Mateo
Res. 12.00% 07/01/03 4 2,450 368 368 - 2nd San Mateo
Land 11.25% 06/01/04 23 - 2,500 2,500 - 1st San Mateo
Comm. 11.25% 12/01/07 9 718 900 900 - 1st&3rd El Dorado
Res. 10.00% 11/01/05 11 500 1,320 1,320 - 2nd Napa
Comm. 10.00% 12/01/07 2 1,802 250 250 - 2nd Sonoma
Res. 12.75% 07/01/04 1 749 650 99 - 2nd Santa Clara
Comm. 10.00% 01/01/08 13 - 1,500 1,500 - 1st Riverside
------------------------------------------------------------------
Total $ 731 $ 79,846 $ 87,692 $ 83,650 $ 2,951
==================================================================
45
SCHEDULE IV
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
mortgage loans on real estate
rule 12-29 loans on real estate (continued)
December 31, 2002
(in thousands)
Reconciliation of carrying amount (cost) of loans at close of periods
Year ended December 31,
------------------------------------------------------
2002 2001 2000
----------------- ----------------- ---------------
Balance at beginning of year $ 82,790 $ 68,571 $ 35,693
Additions during period:
New loans 32,601 47,512 49,289
Other 1,060 - 135
----------------- ----------------- ---------------
Total Additions 33,661 47,512 49,424
----------------- ----------------- ---------------
Deductions during period:
Collections of principal 26,083 33,239 16,546
Foreclosures 5,986 - -
Cost of loans sold - - -
Amortization of premium - - -
Other 732 54 -
----------------- ----------------- ---------------
Total Deductions 32,801 33,293 16,546
----------------- ----------------- ---------------
Balance at close of year $ 83,650 $ 82,790 $ 68,571
================= ================= ===============
46
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10 - Directors and Executive Officers of the Registrant
The Partnership has no Officers or Directors. Rather, the activities of the
Partnership are managed by three general partners, one of whom is an individual,
Michael R. Burwell. The other two general partners are Gymno Corporation and
Redwood Mortgage Corp. Both are California corporations, formed in 1986 and
1978, respectively. Mr. Burwell is one of the two shareholders of Gymno
Corporation, a California corporation, on an equal (50-50) basis. Redwood
Mortgage Corp. is a subsidiary of the Redwood Group Ltd., whose principal
stockholder is D. Russell Burwell, the other shareholder of Gymno Corporation.
Item 11 - Executive Compensation
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
As indicated above in Item 10, 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 (S-11) dated October 30, 2002, 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 year ended December 31, 2002. All
such compensation is in compliance with the guidelines and limitations set forth
in the prospectus.
Entity Receiving Compensation Description of Compensation and Services Rendered Amount
----------------------------------------------------------------------------------------------------------------
I. Redwood Mortgage Corp. Mortgage Servicing Fee for servicing loans.....................$1,098,000
(General Partner)
General Partners &/or Affiliates Asset Management Fee for managing assets.........................$325,000
General Partners 1% interest in profits............................................$75,000
Less allocation of syndication costs...............................$2,000
-----------------
$73,000
General Partners &/or Affiliates Portion of early withdrawal penalties applied to
reduce Formation Loan.............................................$16,000
47
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY
COMPANIES RELATED TO THE GENERAL PARTNERS (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...........................................$996,000
Redwood Mortgage Corp. Processing and Escrow Fees for services in borrowers
connection with notary, document preparation, credit
investigation, and escrow fees payable by the
and not by the Partnership......................................................$23,000
Gymno Corporation Reconveyance Fee.................................................................$4,000
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 . . . . . . . . . . . . . . . . . . .$266,000
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The general partners own a combined total of 1% of the Partnership
including a 1% portion of income and losses.
Item 13 - Certain Relationships and Related Transactions
Refer to footnotes 3 and 4 of the Notes to Consolidated Financial
Statements in Part II item 8, which describes related party fees and data.
Also refer to the Prospectus dated October 30, 2002, (incorporated herein
by reference) on page 5 "Compensation of General Partners and Affiliates".
Item 14 - Controls and Procedures
Based on their evaluation of the effectiveness of the Partnership's
disclosure controls and procedures, as of a date within 90 days prior to the
date of the filing of this report, the President and Chief Financial Officer of
Gymno Corporation and Redwood Mortgage Corp., the Partnership's general
partners, have concluded that the Partnership's disclosure controls and
procedures are effective and sufficient to ensure that the Partnership record,
process, summarize, and report information required to be disclosed in its
periodic reports filed under the Securities Exchange Act within the time periods
specified by the Securities and Exchange Commission's rules and forms.
Subsequent to the date of such evaluation, there have not been any
significant changes in the Partnership's internal controls or in other factors
that could significantly affect these controls, including any corrective action
with regard to significant deficiencies and material weaknesses.
48
Part IV
Item 15 - Exhibits, Financial Statements Schedules, and Reports on Form 8-K
A. Documents filed as part of this report are incorporated:
1. In Part II, Item 8 under A - Consolidated Financial Statements.
2. The Consolidated Financial Statement Schedules are listed in Part
II - Item 8 under B - Consolidated Financial Statement Schedules.
3. Exhibits.
Exhibit No. Description of Exhibits
- ------------------ ------------------------------------------------------
3.1 Limited Partnership Agreement
3.2 Form of Certificate of Limited Partnership Interest
3.3 Certificate of Limited Partnership
10.1 Escrow Agreement
10.2 Servicing Agreement
10.3 (a) Form of Note secured by Deed of Trust for
Construction Loans, which provides for principal and
interest payments. (b) Form of Note secured by Deed of
Trust for Commercial and Multi-Family loans which
provides for principal and interest payments (c) Form
of Note secured by Deed of Trust for Commercial and
Multi-Family loans which provides for interest only
payments (d) Form of Note secured by Deed of Trust for
Single Family Residential Loans, which provides for
interest and principal payments. (e) Form of Note
secured by Deed of Trust for Single Family Residential
loans, which provides for interest only payments.
10.4 (a) Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing to accompany
Exhibits 10.3 (a), and (c).
(b) Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing to accompany
Exhibit 10.3 (b).
(c) Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing to accompany
Exhibit 10.3 (c).
10.5 Promissory Note for Formation Loan
10.6 Agreement to Seek a Lender
All of these exhibits were previously filed as the exhibits to Registrant's
Registration Statement on Form S-11 (Registration No. 333-41410 and incorporated
by reference herein).
B. Reports of Form 8-K.
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
C. See A (3) above.
D. See A (2) above. Additional reference is made to the prospectus (filed
as part of the S-11 registration statement) dated October 30, 2002,
supplement No. 1 dated January 31, 2003 (post effective amendment No. 2
to the S-11 registration statement), for financial data related to
Gymno Corporation, and Redwood Mortgage Corp., the Corporate General
Partners.
49
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 31st day of March,
2003.
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,
and Principal Financial Officer
By: Redwood Mortgage Corp.
By: /S/ Michael R. Burwell
--------------------------------------------
Michael R. Burwell, President, Secretary/Treasurer
50
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 31st day of March, 2003.
Signature Title Date
/S/ Michael R. Burwell
- ----------------------------
Michael R. Burwell General Partner March 31, 2003
/S/ Michael R. Burwell
- ----------------------------
Michael R. Burwell President of Gymno Corporation, March 31, 2003
(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 of March 31, 2003
Redwood Mortgage Corp.
(Principal Financial and
Accounting Officer);
Director of Redwood Mortgage Corp.
51
Exhibit 99.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner of the Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual 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 consolidated financial statements, and other
financial information included in this annual 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 annual 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 annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (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
annual 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
March 31, 2003
52
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 Annual Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-K for the period ending December 31, 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
Partnership.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
March 31, 2003
53
Exhibit 99.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner of the Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this annual 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 annual 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 annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) presented in this annual 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
annual 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
March 31, 2003
54
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 Annual Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-K for the period ending December 31, 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 and 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
Partnership.
/s/ Michael R. Burwell
- ----------------------------------
Michael R. Burwell, President, and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2003
55
Exhibit 99.3
PRESIDENT'S CERTIFICATION
I, Michael R. Burwell, president of Redwood Mortgage Corporation, General
Partner, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual 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 consolidated financial statements, and other
financial information included in this annual 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 annual 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 annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (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
annual 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,
Redwood Mortgage Corporation,
General Partner
March 31, 2003
56
Exhibit 99.3
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 Annual Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-K for the period ending December 31, 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, Redwood Mortgage
Corporation, General Partner, 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, President,
Redwood Mortgage Corporation,
General Partner
March 31, 2003
57