UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 2003
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Commission file number 33-30427
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REDWOOD MORTGAGE INVESTORS VII, a California Limited Partnership
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(exact name of registrant as specified in its charter)
California 94-3094928
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(State or other jurisdiction of I.R.S. Employer
incorporation of organization) Identification No.
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
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(address of principal executive office)
(650) 365-5341
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO NOT APPLICABLE X
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest date.
NOT APPLICABLE
1
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
BALANCE SHEETS
JUNE 30, 2003 and DECEMBER 31, 2002 (unaudited)
ASSETS
June 30, December 31,
2003 2002
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Cash $ 233,831 $ 1,057,845
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Loans
Loans, secured by deeds of trust 6,937,320 6,423,984
Loans, unsecured 211,969 216,770
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7,149,289 6,640,754
Less allowance for loan losses (734,945) (791,882)
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Net loans 6,414,344 5,848,872
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Interest and other receivables
Accrued interest 380,501 304,936
Advances on loans 6,283 17,230
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Total interest and other receivables 386,784 322,166
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Investment in limited liability company 1,352,277 1,212,722
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Real estate owned, held for sale 687,500 683,136
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Total assets $ 9,074,736 $ 9,124,741
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LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ 4,102 $ 2,593
Payable to affiliate 40,147 32,176
Deferred interest - 37,704
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Total liabilities 44,249 72,473
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Partners' capital
Limited partners' capital, subject to
redemption 9,018,509 9,040,290
General partners' capital 11,978 11,978
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Total partners' capital 9,030,487 9,052,268
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Total liabilities and partners' capital $ 9,074,736 $ 9,124,741
============= =============
The accompanying notes are an integral part of these financial statements.
2
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 and JUNE 30, 2002 (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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2003 2002 2003 2002
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Revenues
Interest - on loans $ 176,069 $ 273,185 $ 340,168 $ 568,337
Interest - interest bearing accounts 572 695 2,142 1,780
Late charges 6,001 1,349 12,628 5,849
Other income 4,544 3,419 5,554 14,726
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187,186 278,648 360,492 590,692
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Expenses
Mortgage servicing fees 17,147 44,658 33,301 96,325
Interest on line of credit 1,156 12,366 1,325 34,593
Clerical costs through Redwood
Mortgage Corp. 6,008 7,674 12,493 15,688
Asset management fees 8,505 8,754 17,022 17,635
Provisions for losses on loans and real estate (34,565) - (56,937) 5,731
Professional services 16,273 3,017 33,591 19,252
Printing, supplies and postage 2,683 3,858 4,269 5,093
Other 4,123 846 5,327 2,269
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21,330 81,173 50,391 196,586
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Net income $ 165,856 $ 197,475 $ 310,101 $ 394,106
============= ============= ============= =============
Net income: To general partners (1%) $ 1,659 $ 1,975 $ 3,101 $ 3,941
To limited partners (99%) 164,197 195,500 307,000 390,165
$ 165,856 $ 197,475 $ 310,101 $ 394,106
============= ============= ============= =============
Net income per $1,000 invested by limited
partners for entire period
-where income is reinvested and
compounded $16.31 $21.08 $34.30 $42.21
============= ============= ============= =============
-where partner receives income in monthly
distributions $16.22 $20.94 $33.82 $41.49
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
3
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 and 2002(unaudited)
SIX MONTHS ENDED JUNE 30,
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2003 2002
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Cash flows from operating activities
Net income $ 310,101 $ 394,106
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for (recovery of) losses on loans and real estate (56,937) 5,731
Early withdrawal penalty credited to income (1,057) (5,982)
Change in operating assets and liabilities
Accrued interest and advances on loans (64,618) 412,132
Accounts payable and other liabilities (28,224) (7,193)
Prepaid expenses - (9,983)
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Net cash provided by operating activities 159,265 788,811
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Cash flows from investing activities
Principal collected on loans 1,167,884 1,537,076
Loans originated (1,681,220) (710,262)
Payments for real estate held for sale (4,364) (3,022)
Proceeds from sale of real estate held for sale - 2,565
Investments in limited liability company (139,555) -
Proceeds from unsecured loans 4,801 7,500
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Net cash provided by (used in) investing activities (652,454) 833,857
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Cash flows from financing activities
Net decrease in line of credit - (1,000,000)
Partners withdrawals (330,825) (634,438)
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Net cash used in financing activities (330,825) (1,634,438)
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Net decrease in cash (824,014) (11,770)
Cash - beginning of year 1,057,845 389,844
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Cash - end of period 233,831 378,074
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Cash payments for interest $ 1,325 $ 34,593
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The accompanying notes are an integral part of these financial statements.
4
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2003 (unaudited)
NOTE 1 - GENERAL
In the opinion of the management of the Partnership, the accompanying
unaudited financial statements contain all adjustments, consisting of normal,
recurring adjustments, necessary to present fairly the financial information
included therein. These financial statements should be read in conjunction with
the audited financial statements included in the Partnership's Form 10-K for the
fiscal year ended December 31, 2002 filed with the Securities and Exchange
Commission. The results of operations for the six month period ended June 30,
2003 are not necessarily indicative of the operating results to be expected for
the full year.
note 2 - Summary of Significant Accounting Policies
Loans, secured by deeds of trust
At June 30, 2003 and December 31, 2002 there were loans categorized as
impaired by the Partnership in the total aggregate amount of $96,716 and
$96,716, respectively. In addition, the impaired loans had accrued interest and
advances totaling $7,841 and $7,841 at June 30, 2003 and December 31, 2002,
respectively. The reduction in carrying value of the impaired loans of $6,620
and $6,620 at June 30, 2003 and December 31, 2002, respectively, is included in
the allowance for loan losses. The average recorded investment in the impaired
loans was $96,716 and $493,074 for the six months ended June 30, 2003 and the
year ended December 31, 2002, respectively.
At June 30, 2003 and December 31, 2002, the Partnership had eight loans
past due 90 days or more totaling $2,857,439 and $2,913,212 (41.19% and 45.35%
of the secured loan portfolio), respectively. 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.
Allowance for loan losses
The composition of the allowance for loan losses as of June 30, 2003 and
December 31, 2002 was as follows:
June 30, December 31,
2003 2002
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Impaired loans $ 6,620 $ 6,620
Specified loans 163,731 163,731
General 476,263 533,200
Unsecured loans 88,331 88,331
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$ 734,945 $ 791,882
============= =============
Activity in the allowance for loan losses is as follows for the three
months ended June 30, 2003 and the year ended December 31, 2002:
June 30, December 31,
2003 2002
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Beginning balance $ 791,882 $ 887,578
Provision for loan losses - 20,394
Recoveries (56,937) (40,433)
Restructures - (64,210)
Write-offs - (11,447)
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$ 734,945 $ 791,882
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5
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2003 (unaudited)
note 2 - Summary of Significant Accounting Policies (continued)
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the financial statements since income taxes are the
obligation of the partners if and when income taxes apply.
Reclassifications
Certain reclassifications, not affecting previously reported net income or
total partners' capital, have been made to the previously issued financial
statements to conform to the current year classification.
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.
Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported 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.
note 3 - General Partners and Related Parties
The following are commissions and fees, which will be 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.
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. Additional service fees are recorded upon the receipt of any
subsequent payments on impaired loans.
6
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2003 (unaudited)
note 3 - General Partners and Related Parties (continued)
Asset management fees
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually).
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 parties related to the general partners.
Operating expenses
Redwood Mortgage Corp., an affiliate of the general partners, is reimbursed
by the Partnership for all operating expenses actually incurred by it on behalf
of the Partnership, including without limitation, out-of-pocket general and
administration expenses of the Partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
note 4 - Real Estate Held for Sale
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell as of June 30, 2003 and December 31, 2002:
June 30, December 31,
2003 2002
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Costs of properties $ 1,267,586 $ 1,263,222
Reduction in value (580,086) (580,086)
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Real estate held for sale $ 687,500 $ 683,136
============== ==============
note 5 - Investment in Limited Liability Company
As a result of acquiring real property through foreclosure, the Partnership
transferred its interest (principally land and building) to a limited liability
company ("LLC"), Stockton Street Property Company LLC, which is owned 34% by the
Partnership and 66% by an affiliate. Development costs are being capitalized;
thus, there was no income or expense recognized by Stockton Street Property
Company during the six months through June 30, 2003 and the year ended December
31, 2002. During 2003, the LLC completed construction and now intends to sell
the property. The Partnership expects to realize a profit from the venture.
Summarized financial information of the LLC at June 30, 2003 and December
31, 2002 is as follows:
June 30, December 31,
2003 2002
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Assets $ 1,950,701 $ 1,814,186
Liabilities (598,424) (601,464)
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Total $ 1,352,277 $ 1,212,722
============= ==============
7
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2003 (unaudited)
note 6 - Bank Line of Credit
The Partnership has a bank line of credit secured by its loan portfolio of
up to $3,500,000 at .25% over prime. The balances outstanding as of June 30,
2003 and December 31, 2002 were $0; and the interest rate was 4.25% (4.00% prime
+ .25%) at June 30, 2003. This line of credit expires December 2007 and requires
the Partnership to meet certain financial covenants. As of June 30, 2003, the
Partnership was in compliance with all loan covenants.
Should the general partners choose not to renew the line of credit, any
balance then outstanding would be converted to a three-year term loan.
note 7 - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Secured loans had a carrying value of $6,937,320 and $6,423,984, at June
30, 2003 and December 31, 2002, respectively. The fair value of these loans of
$6,710,931 and $6,030,669, 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.
note 8 - Asset Concentrations and Characteristics
The loans are secured by recorded deeds of trust. At June 30, 2003 and
December 31, 2002 there were 24 and 25 secured loans outstanding, respectively,
with the following characteristics:
June 30, December 31,
2003 2002
--------------- ---------------
Number of secured loans outstanding 24 25
Total secured loans outstanding $ 6,937,320 $ 6,423,984
Average secured loan outstanding $ 289,055 $ 256,959
Average secured loan as percent of total 4.17% 4.00%
Average secured loan as percent of Partners' capital 3.20% 2.84%
Largest secured loan outstanding $ 1,000,000 $ 1,000,000
Largest secured loan as percent of total 14.41% 15.57%
Largest secured loan as percent of Partners' capital 11.07% 11.05%
Number of counties where security is located (all California) 9 11
Largest percentage of loans in one county 31.52% 41.38%
Average secured loan to appraised value of security at time
loan was consummated 63.28% 65.86%
Number of secured loans in foreclosure 2 2
Amount of secured loans in foreclosure $ 500,000 $ 236,807
8
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2003 (unaudited)
note 8 - Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at June 30, 2003 and
December 31, 2002:
June 30, December 31,
2003 2002
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First trust deeds $ 3,179,518 $ 3,269,897
Second trust deeds 3,684,631 2,939,753
Third trust deeds 73,171 214,334
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Total loans 6,937,320 6,423,984
Prior liens due other lenders 5,864,520 5,475,725
-------------- --------------
Total debt $12,801,840 $11,899,709
============== ==============
Appraised property value at time of loan $20,230,341 $18,069,602
Total investments as percent of appraisals 63.28% 65.86%
Investments by type of property
Owner occupied homes $ 965,868 $ 1,037,474
Non-owner occupied homes 111,345 575,051
Apartments 1,759,955 708,648
Commercial 4,100,152 4,102,811
-------------- --------------
$ 6,937,320 $ 6,423,984
============== ==============
Scheduled maturity dates of secured loans as of June 30, 2003 are as
follows:
Year Ending December 31,
----------------------------------
2003 $3,145,046
2004 127,450
2005 940,125
2006 96,716
2007 1,521,356
Thereafter 1,106,627
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Total $6,937,320
=============
The scheduled maturities for 2003 above include approximately $2,368,129 in
6 loans, which are past maturity at June 30, 2003. Interest payments on five of
these loans with an aggregate principal balance of $2,234,608 were categorized
as delinquent over 90 days.
Cash deposits per bank at June 30, 2003 of $323,750, before clearing
deposits in transit and outstanding checks, were in one bank. The balance
exceeded FDIC insurance limits (up to $100,000 per bank) by $223,750. The
Partnership's main bank is the same financial institution that has provided the
Partnership with the $3,500,000 limit line of credit.
The Partnership has a substantial amount of its loan receivable balance due
from one borrower. This borrower accounted for approximately 29% of the total
Partnership loan balance at June 30, 2003.
9
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2003 (unaudited)
note 9 - Commitments and Contingencies
Workout agreements
The Partnership has negotiated various contractual workout agreements with
borrowers whose loans are past maturity or who are delinquent in making
payments. Under the terms of these workout agreements the Partnership is not
obligated to make any additional monetary advances for the maintenance or repair
of the collateral securing the loans as of June 30, 2003 and December 31, 2002.
As of June 30, 2003 the Partnership had three loans under workout agreements
totaling $269,979.
Construction loans
Periodically the Partnership makes construction loans. These projects are
at various stages of completion. The Partnership approves the borrowers up to a
maximum loan balance; however, disbursements are made during completion phases
throughout the construction process. At June 30, 2003, all the construction
loans were paid off.
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.
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 and revenue and expenses for
the reporting period. Such estimates relate principally to the determination of
(1) the allowance for loan losses (i.e. the amount of allowance established
against loans receivable as an estimate of potential loan losses) including the
accrued interest and advances that are estimated to be unrecoverable based on
estimates of amounts to be collected plus estimates of the value of the property
as collateral and (2) the valuation of real estate acquired through foreclosure.
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. 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 value, 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 further
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.
10
Forward Looking Statements.
Some of the information in the Form 10-Q may contain forward looking
statements. Uses of words such as "will", "may", "anticipate", "estimate",
"continue" or other forward looking words, discuss future expectations or
predictions. The analysis of 2003 includes forward looking statements and
predictions about the possibility of 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 Gymno Corporation and Michael
R. Burwell. Most Partnership business is conducted through Redwood Mortgage
Corp., an affiliate of the general partner, which arranges, services and
maintains the loan portfolio for the benefit of the Partnership. The fees
received by the affiliate to the general partners are paid pursuant to the
partnership agreement and are determined at the sole discretion of the affiliate
to the general partner. In the past, the affiliate to the general partners has
elected not to take the maximum compensation. The following is a list of various
Partnership activities for which related parties are compensated.
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. Loan brokerage commissions paid by
the borrowers were $48,775 and $6,400 for the six months ended June 30, 2003 and
2002, and $6,000 and $2,500 for the three months ended June 30, 2003 and 2002,
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
is 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 $33,301 and $96,325 were incurred for the
six months ended June 30, 2003 and 2002, and $17,147 and $44,658 were incurred
for the three months ended June 30, 2003 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 $17,022 and $17,635 were incurred by the Partnership for the six
months ended June 30, 2003 and 2002, and $8,505 and $8,754 were incurred for the
three months ended June 30, 2003 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 An affiliate of the Partnership, Redwood Mortgage
Corp., is reimbursed by the Partnership for all operating expenses actually
incurred by it on behalf of the Partnership, including without limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees, legal fees and expenses, postage and preparation of reports to
limited partners. Such reimbursements are reflected as expenses in the statement
of income.
o Contributed Capital The general partners jointly and severally
contributed 1/10 of 1% in cash contributions as proceeds from the offerings were
received from the limited partners. As of June 30, 2003 and 2002, a general
partner, Gymno Corporation, had contributed $11,978 as capital in accordance
with Section 4.02(a) of the partnership agreement.
11
Results of Operations - For the six and three months ended June 30, 2003
and 2002
The net income decrease of $84,005 (21.32%) for the six months, and $31,619
(16%) for the three months ended June 30, 2003 versus June 30, 2002 was due
primarily to a decrease in interest earned on loans of $228,169 (40%) for the
six months and $97,116 (36%) for the three months, an increase in late charges
of $6,779 (116%) for the six months and $4,652 (345%)for the three months, and a
decrease in other income of $9,172 (62%) for the six months and an increase of
$1,125 (33%) for the three months; offset by expense increases/decreases.
Significant expense decreases for the six and three month period ended June 30,
2003 versus June 30, 2002 included lower mortgage servicing fees of $63,024 for
the six months and $27,511 for the three months, a decrease in the provision for
losses on loans and real estate of $62,668 for the six months and $34,565 for
the three months, a decrease in interest expense of $33,268 for the six months
and $11,210 for the three months, and an increase in professional fees of
$14,339 for the six months and $13,256 for the three months.
The decrease in interest on loans of $228,169 (40%) for the six months, and
$97,116 (36%) for the three months ended June 30, 2003 versus June 30, 2002 was
due primarily to a reduction of the loan portfolio to $6,937,320 from
$9,522,503, and a reduction in average portfolio interest rate as compared to
the first half of 2002.
The decrease in interest on the line of credit of $33,268 (96%) for the six
months, and $11,210 (91%) for the three months ended June 30, 2003 versus June
30, 2002 is due to lower overall usage of the line of credit during the first
half of 2003. The Partnership utilized its bank line of credit less during the
first half of 2003 compared to the first half of 2002. The outstanding balances
of $0 at June 30, 2003 versus $907,000 at June 30, 2002 are reflective of the
overall lower credit line usage. Cash generated from interest earnings, late
charges, amortization of principal and loan payoffs was utilized to pay down the
credit line.
The decrease in mortgage servicing fees of $63,024 (65%) for the six
months, and $27,511 (62%) for the three months ended June 30, 2003 versus June
30, 2002 is attributable to a decrease in loan portfolio to $6,937,320 from
$9,522,503. In addition, higher mortgage servicing fees during the six and three
months through June 30, 2002 was due to collection of servicing fees on impaired
loans during the first half of 2002. 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.
Loan loss recoveries were $56,937 for the six months, and $34,565 for the
three months ended June 30, 2003, as compared to a loan loss provision of $5,731
for the six months, and $0 for the three months ended June 30, 2002. No further
provision was made as the general partners felt that the allowance for loan
losses of $734,945 as of June 30, 2003 was more than adequate to offset any
potential loss in loans or real estate.
The decrease in asset management fees of $613 (3%) for the six months, and
$249 (3%) for the three months ended June 30, 2003 versus the respective periods
ended June 30, 2002 is due to a decrease in the partners' capital under
management at June 30, 2003 and 2002 of $9,030,487 and $9,185,932, respectively.
The increase in professional fees of $14,339 (74%) for the six months, and
$13,256 (439%) for the three months ended June 30, 2003 versus June 30, 2002 is
due to timing of services provided in 2003 compared to 2002 in relation to its
audit and tax return processing and increases in the cost of such services.
Partnership capital continued to decrease as the limited partners capital
declined due to both earnings distribution and capital liquidations. For the six
and three months ended June 30, 2003 earnings and capital liquidated was
$110,116 and $218,663 for the six months, and $52,958 and $105,512 for the three
months, respectively, versus $158,736 and $477,743 for the six months, and
$78,288 and $227,321 for the three months, respectively for the corresponding
period in 2002.
At June 30, 2003, outstanding foreclosures remained at two ($500,000) from
the two ($986,372) that existed at June 30, 2002. These foreclosures are a
reflection of the difficult economic times at June 30, 2003 and June 30, 2002,
yet are not unusual in the general partners' experience.
12
The general partners received Mortgage Brokerage Commissions from the loan
borrowers of $48,775 and $6,000 for the six and three months ended June 30, 2003
as compared to $6,400 and $2,500 for the six and three months ended June 30,
2002. The increase is due to more loans written in the six and three months
ended June 30, 2003.
Beginning in 2001, and through June 30, 2003, the Federal Reserve reduced
interest rates by cutting the Federal Funds Rate several times to 1.00%. 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 early 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, but do not guarantee,
that the annualized yield will range between 6.30% and 7.30% in 2003.
Borrower foreclosures, as set forth under Results of Operations, are a
normal aspect of Partnership operations and the general partners anticipate that
they will not have a material effect on liquidity. As of June 30, 2003, there
were two properties totaling $500,000 in foreclosure, compared to two properties
totaling $986,372 at June 30, 2002. Cash is constantly being generated from
interest earnings, late charges, pre-payment penalties, amortization of
principal and loan pay-offs. Currently, cash flow exceeds Partnership expenses,
earnings and capital payout requirements. Excess cash flow will be invested in
new loan opportunities, when available, and will be used to reduce the
Partnership credit line or in other Partnership business.
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these properties,
the real estate held for sale expenses and sales activities, borrowers payment
records, etc. Data on the local real estate market and on the national and local
economy are studied. Based upon this information and other data, loss reserves
are increased or decreased. Borrower foreclosures are a normal aspect of
Partnership operations. The Partnership is not a credit based lender and hence
while it reviews the credit history and income of borrowers, and if applicable,
the income from income producing properties, the general partners expect that we
will on occasion take back real estate security. During 2001, and continuing in
2002 and 2003, the Northern California real estate market slowed and the
national and local economies have slipped into recession. As of June 30, 2003,
two notices of default are currently filed beginning the process of foreclosing
two loans. The principal amounts of the two foreclosed loans total $500,000 or
7.21% of our loan portfolio, versus two loans in foreclosure totaling $986,372
that existed at June 30, 2002. The Partnership also entered into workout
agreements with borrowers who are past maturity or delinquent in their regular
payments. The Partnership had workout agreements on approximately 3 loans
totaling $269,979 as of June 30, 2003. Typically, a workout agreement allows the
borrower to extend the maturity date of the balloon payment and allows the
borrower to make current monthly payments while deferring for periods of time,
past due payments, or 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 times and
conversely fall during good economic times. The number and amount of
foreclosures and workout agreements existing at June 30, 2003, 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. Because of the number of variables
involved, the magnitude of the possible swings 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. Management
provided ($56,937) and $5,731, as (recoveries) and provisions for losses on
loans and real estate for the six months ended June 30, 2003 and 2002,
respectively. The reserve for losses on loans and real estate had a balance of
$734,945 as of June 30, 2003. This balance reflects reduced expected loan or
real estate anticipated losses in 2003 and that current reserves are adequate to
handle potential losses. If conditions change, the Partnership may again
increase its provisions for loan and real estate losses.
13
The Partnership makes loans primarily in Northern California. As of June
30, 2003, approximately 65%, ($4,529,744) of the loans held by the Partnership
were in five of the six San Francisco Bay Area Counties. The remainder of the
loans held were secured primarily by Northern California real estate outside the
San Francisco Bay Area. Like the rest of the nation, the San Francisco Bay Area
has felt the recession and accompanying slow down in economic growth and
increasing unemployment. The technology companies of Silicon Valley, the airline
industry, the tourism industry and other industries are feeling the effects of
the overall United States recession, which includes lower earnings, losses and
layoffs.
As of June 30, 2003, the Partnership had an average loan to value ratio
computed as of the date the loan was made of 63%. This percentage does not
account for any increases or decreases in property values since the date the
loan was made, nor does it include any reductions in principal through
amortization of payments after the loan was made. This low loan to value ratio
will assist the Partnership in weathering loan delinquencies and foreclosures
should they eventuate.
PORTFOLIO REVIEW - For the six months ended June 30, 2003 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 June 30, 2003 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 $4,529,744 (65%) and $6,503,301 (68%) of
the outstanding loan portfolio. The remainder of the portfolio represented loans
secured by real estate located primarily in Northern California.
As of June 30, 2003, approximately 16% ($1,077,213), was invested in loans
secured by single family homes (1-4 units), approximately 25% ($1,759,955), was
invested in loans secured by multifamily dwellings (apartments over 4 units),
approximately 28% ($1,943,095), was invested in loans secured by commercial
properties, and approximately 31% ($2,157,057) was invested in loans secured by
land. As of June 30, 2002, approximately 14% ($1,371,159), was invested in loans
secured by single family homes (1-4 units), approximately 17% ($1,563,213) was
invested in loans secured by multifamily dwellings (apartments over 4 units),
approximately 42% ($4,023,523) was invested in loans secured by commercial
properties, and approximately 27% ($2,564,608) was invested in loans secured by
land.
As of June 30, 2003, the Partnership held 24 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 June 30, 2003:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of June 30, 2003
# of Loans Amount Percent
----------- ------------- -----------
1st Mortgages 12 $ 3,179,518 46%
2nd Mortgages 11 3,684,631 53%
3rd Mortgages 1 73,171 1%
========== ============= ===========
Total 24 $ 6,937,320 100%
Maturing 12/31/03 and prior 11 $ 3,145,046 45%
Maturing prior to 12/31/04 1 127,450 2%
Maturing prior to 12/31/05 2 940,125 14%
Maturing after 12/31/05 10 2,724,699 39%
========== ============= ===========
Total 24 $ 6,937,320 100%
Average Loan $ 289,055 4%
Largest Loan 1,000,000 14%
Smallest Loan 11,345 0.16%
Average Loan-to-Value 63%
14
Borrower Liquidity and Capital Resources.
At the time of subscription to the Partnership, limited partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound earnings in their capital account. For the six and
three months ended June 30, 2003 and 2002, the Partnership made distributions of
earnings to limited partners of $110,116 and $158,736 for the six months, and
$52,958 and $78,288 for the three months, respectively. Distribution of Earnings
to limited partners, which were not withdrawn for the six and three months ended
June 30, 2003 and 2002 were $196,884 and $231,429 for the six months, and
$111,239 and $117,212 for the three months, respectively. As of June 30, 2003
and 2002, limited partners electing to withdraw earnings represented 37% and 42%
of the limited partners' capital.
The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations (see liquidation provisions of
partnership agreement). For the six and three months ended June 30, 2003 and
2002, $13,190 and $74,772 for the six months, and $3,750 and $41,481 for the
three months, respectively, were liquidated subject to the 10% penalty for early
withdrawal. These withdrawals are within the normally anticipated range that the
general partners would expect in their experience in this and other
partnerships. The general partners expect that a small percentage of limited
partners will elect to liquidate their capital accounts over one year with a 10%
early withdrawal penalty. In originally conceiving the Partnership, the general
partners wanted to provide limited partners needing their capital returned a
degree of liquidity. Generally, limited partners electing to withdraw over one
year need to liquidate their investment to raise cash. The trend the Partnership
is experiencing in withdrawals by limited partners electing a one year
liquidation program represents a small percentage of limited partner capital as
of June 30, 2003 and 2002.
Additionally, for the six and three months ended June 30, 2003 and 2002,
$205,473 and $402,971 for the six months, and $101,762 and $185,840 for the
three months, respectively, were liquidated by limited partners who have elected
a liquidation program over a period of five years or longer. This ability to
withdraw after five years by limited partners has the effect of providing
limited partner liquidity. The general partners expect a portion of the limited
partners to take advantage of this provision. This has the anticipated effect of
the Partnership growing, primarily through reinvestment of earnings in years one
through five. The general partners expect to see increasing numbers of limited
partner withdrawals in years five through eleven, after which time the bulk of
those limited partners who have sought withdrawal have been liquidated. After
year eleven, liquidation generally subsides.
In some cases in order to satisfy Broker Dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the Partnership on a basis which utilizes a per Unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the Partnership to integrate with
certain software used by the Broker Dealers and other reporting entities. In
those cases, the Partnership will report to Broker Dealers, Trust Companies and
others a "reporting" number of Units based upon a $1.00 per Unit calculation.
The number of reporting Units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the Partnership account statement
provided to investors. The reporting Units are solely for Broker Dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the Partnership. Each investor's
capital account balance is set forth periodically on the Partnership account
statement provided to investors. The amount of Partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per Unit estimated value
of the client's investment in the Partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the Partnership
Units, such determination may not be representative of the ultimate price
realized by an investor for such Units upon sale. No public trading market
exists for the Partnership's Units and none is likely to develop. Thus, there is
no certainty that the Units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
Partnership, which may include early withdrawal penalties (See the section of
the Prospectus entitled "Risk Factors - Purchase of Units is a long term
investment").
15
Current Economic Conditions.
As contained in a collection of real estate statistics listed in the San
Francisco Chronicle dated May 16, 2003, mortgage rates are at their lowest in 30
years. The article stated, "The average 30-year fixed mortgage dropped to 5.45%
for the week ending today down from 5.62% last week, according to Freddie Mac,
the government-sponsored entity that buys and repackages mortgages for sale to
the equity market. Freddie Mac has kept weekly mortgage rate records since 1971,
when Richard Nixon was in the White House. Fifteen-year fixed mortgages hit a
12-year low, dipping to an average 4.84%, down from 4.97% last week. One-year
adjustable rate mortgages, known as ARMs, edged up slightly to 3.67% this week
from 3.66% last week. This time last year, the average 30-year rate was 6.89%,
the 15-year rate was 6.37% and the ARM rate was 4.81%. For the year so far, the
average 30-year rate is at 5.83%, under the 5.9% average in 1963, Freddie Mac
said."
According to the San Francisco Chronicle of the week of June 21, 2003, the
mortgage defaults dropped across the U.S. The article stated, "Fewer California
and U.S. homeowners defaulted on their mortgages in the first quarter, as
plunging interest rates helped trim monthly house payments, a mortgage banking
group reported Friday. At the same time, however, soaring personal bankruptcies
and persistent job losses - largely in the Midwest - helped push the U.S.
foreclosure rate to a record 1.20%, the Mortgage Bankers Association said. "We
saw very modest improvement (in mortgage delinquencies) this quarter, because we
didn't see the improvement in the economy we would have expected," said Doug
Duncan, chief economist at the Washington D.C., trade group. "If economy
continues to muddle along ... we won't see rapid improvement in delinquencies."
In California, 2.66% of homeowners were late on their mortgage payments by at
least 30 days in the first three months of the year on a non-seasonally adjusted
basis, compared with 3.10% a year ago. Nationwide, 4.52% of homeowners were
delinquent on home payments, versus 4.65% in the first quarter of 2002. U.S.
data are compiled on a seasonally adjusted basis to account for differences in
state laws regarding foreclosure. Much of the decrease in defaults can be
attributed to historically low interest rates, which have allowed consumers to
refinance and slash their monthly house payments."
On the commercial scene, the San Francisco Business Times for the week of
June 27, 2003 stated, "Preliminary second quarter numbers from two brokerage
houses concurred that commercial vacancy was basically as flat as the Indian
bread over the last quarter, ticking up a mere 0.1% from March. Newmark & Co.
Real Estate said that total vacancy was 17.1%, versus 17% last quarter, while
Grubb & Ellis saw vacancy at 24.1%, up slightly from 24%. "I think what it's
saying is we really have not had significant job growth to take down some of the
vacant space, " said Monica Finnegan, managing principal with Newmark, "Even if
we have some slight absorption, we have another level of lay-offs at another
organization." Colin Yasukochi, regional manager of research and client services
for California at Grubb & Ellis, saw the numbers as potentially more sweet bread
than sourdough, noting that they might indicate the market is finally
stabilizing. The article further stated "The direction of rents themselves is
also a source of discrepancy in the reports, though ironically so. The seemingly
less optimistic Newmark said direct rent was $21.88 in second quarter, actually
up slightly from $21.74 last quarter. "Some of the high rise, premier buildings
are still trying to capture higher rents," Finnegan said. "So you're looking at
average rents that reflect Class A across the board." Meanwhile, Grubb reported
that Class A rents citywide, declined from $28.40 to $28.10, and Yasukochi said
they could continue to erode slightly over the next few quarters."
To the Partnership, lower interest rates may mean more borrowers coming
forward for equity loans or for refinancing. Declines in defaults will stabilize
delinquencies and foreclosures. Stabilizing commercial vacancies and little
appreciation in rental rates may mean that we are at the vacancy rate bottom.
16
Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, secured loans held in the Partnership's portfolio and our line
of credit as of June 30, 2003. 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 June 30, 2003:
2003 2004 2005 2006 2007 Thereafter Total
----------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 106,712 $ 106,712
Average interest rate 0.90% 0.90%
Loans secured by deeds
of trust $3,145,046 127,450 940,125 96,716 1,521,356 1,106,627 $6,937,320
Average interest rate 11.28% 8.00% 9.87% 6.50% 6.82% 9.05% 9.63%
Interest bearing
liabilities:
Line of credit $ 0 $ 0
Average interest rate 4.25% 4.25%
Market Risk.
The Partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the Partnership's primary market risk exposure with
respect to its obligations is to changes in interest rates, which will affect
the interest cost of outstanding amounts on the line of credit. The Partnership
may also suffer market risk tied to general trends affecting real estate values
that may impact the Partnership's security for its loans.
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
June 30, 2003) 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.
Controls and Procedures.
Within the 90 days prior to the date of this report, the general partner of
the Partnership carried out an evaluation, under the supervision and with the
participation of the general partner's management, including the general
partner's President and Chief Financial Officer, of the effectiveness of the
design and operation of the Partnership's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the President
and Chief Financial Officer of the general partner concluded that the
Partnership's disclosure controls and procedures are effective. There were no
significant changes in the Partnership's internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
17
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 certain of these practices. Rather, the general partners, in
connection with the periodic closing of the accounting records of the
Partnership and the preparation of the financial statements, determine whether
the allowance for loan losses is adequate to cover potential loan losses of the
Partnership. As of June 30, 2003 the general partners have determined that the
allowance for loan losses of $734,935 (8.14% 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 June 30, 2003, 8 loans were delinquent over 90 days
amounting to $2,857,439.
18
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
The Partnership has no officers or directors. The Partnership is managed by
the general partners. There are certain fees and other items paid to management
and related parties.
A more complete description of management compensation is found in the
Prospectus part of Form S-11 and subsequent amendments related to the offering
of Partnership interests, pages 12-13, under the section "Compensation of the
General Partners and the Affiliates", which are incorporated by reference. Such
compensation is summarized below.
The following compensation has been paid to the general partners and
affiliates for services rendered during the six months ended June 30, 2003. 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. Loan Servicing Fee for servicing loan ..........................$33,301
General Partners
&/or Affiliates Asset Management Fee for managing assets .......................$17,022
General Partners 1% interest in profits ..........................................$3,101
II. FEES PAID BY BORROWERS ON LOANS PLACED BY COMPANIES RELATED TO THE
GENERAL PARTNERS WITH THE PARTNERSHIP (EXPENSES OF BORROWERS NOT OF THE
PARTNERSHIP)
Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection
with the review, selection, evaluation, negotiation, and
extension of the loan paid by the borrowers and not by the
Partnership ....................................................$48,775
Redwood Mortgage Corp. Processing and Escrow Fees for services in connection with
notary, document preparation, credit investigation, and
escrow fees paid by the borrowers and not by the Partnership ....$1,587
Gymno Corporation, Inc. Reconveyance Fee ..................................................$241
III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN
EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE
STATEMENT OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $12,493
19
PART 2
OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership periodically is a defendant in various legal actions.
Please refer to Note 9 of the Financial Statements.
Item 2. Changes in the Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99.1) Certification of Michael R. Burwell, General Partner
(99.2) Certification of Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno
Corporation, General Partner
(b) Form 8-K
Not Applicable
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 14th day of August
2003.
REDWOOD MORTGAGE INVESTORS VII
By: /S/ Michael R. Burwell
-----------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
---------------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 14th day of August 2003.
Signature Title Date
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell General Partner August 14, 2003
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell President, Secretary/Treasurer August 14, 2003
of Gymno Corporation (Principal
Financial and Accounting
Officer); Director of Gymno
Corporation
21
Exhibit 99.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly 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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
___________________________________
Michael R. Burwell, General Partner
August 14, 2003
22
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VII
(the "Partnership") on Form 10-Q for the period ending June 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
___________________________________
Michael R. Burwell, General Partner
August 14, 2003
23
Exhibit 99.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly 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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
_________________________________
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
August 14, 2003
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Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VII
(the "Partnership") on Form 10-Q for the period ending June 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General
Partner of the Partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
_______________________________________
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner
August 14, 2003
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