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 September 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
SEPTEMBER 30, 2003 and DECEMBER 31, 2002 (unaudited)
ASSETS
September 30, December 31,
2003 2002
----------------- ---------------
Cash $ 992,773 $ 1,057,845
----------------- ---------------
Loans
Loans, secured by deeds of trust 7,691,339 6,423,984
Loans, unsecured 211,969 216,770
Less allowance for loan losses (738,317) (791,882)
----------------- ---------------
Net loans 7,164,991 5,848,872
----------------- ---------------
Interest and other receivables
Accrued interest 459,346 304,936
Advances on loans 6,497 17,230
----------------- ---------------
Total interest and other receivables 465,843 322,166
----------------- ---------------
Investment in limited liability company 779,527 1,212,722
Real estate held for sale, net 689,062 683,136
----------------- ---------------
Total assets $ 10,092,196 $ 9,124,741
================= ===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Bank line of credit $ 1,000,000 $ 0
Accounts payable 4,102 2,593
Payable to affiliate 48,997 32,176
Deferred interest - 37,704
--------------- ---------------
Total liabilities 1,053,099 72,473
--------------- ---------------
Partners' capital
Limited partners' capital, subject to redemption 9,027,119 9,040,290
General partners' capital 11,978 11,978
--------------- ---------------
Total partners' capital 9,039,097 9,052,268
--------------- ---------------
Total liabilities and partners' capital $ 10,092,196 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2003 and SEPTEMBER 30, 2002
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ----------------------------------
2003 2002 2003 2002
-------------- ------------- -------------- -------------
Revenues
Interest - on loans $ 186,005 $ 250,757 $ 526,173 $ 896,972
Interest - interest bearing accounts 39 354 2,181 2,134
Late charges 5,194 5,527 17,822 11,376
Other income 933 3,910 6,487 18,636
-------------- ------------- -------------- -------------
192,171 260,548 552,663 929,118
Expenses
Mortgage servicing fees 21,368 26,717 54,669 123,042
Interest on line of credit 5,737 13,839 7,062 48,432
Clerical costs through Redwood Mortgage Corp. 5,442 7,541 17,935 23,229
Asset management fees 8,490 8,650 25,512 26,285
Provisions for losses on loans and real estate 3,372 (5,250) (53,565) 78,359
Professional services 5,290 16,236 38,881 35,488
Printing, supplies and postage 1,268 1,603 5,537 6,696
Other (8) 434 5,319 2,703
-------------- ------------- -------------- -------------
50,959 69,770 101,350 344,234
-------------- ------------- -------------- -------------
Net income $ 141,212 $ 190,778 $ 451,313 $ 584,884
============== ============= ============== =============
Net income: To general partners (1%) $ 1,412 $ 1,908 $ 4,513 $ 5,849
To limited partners (99%) 139,800 188,870 446,800 579,035
-------------- ------------- -------------- -------------
$ 141,212 $ 190,778 $ 451,313 $ 584,884
============== ============= ============== =============
Net income per $1,000 invested by limited
partners for entire period
-where income is reinvested and compounded $15.52 $20.61 $50.35 $63.69
============== ============= ============== =============
-where partner receives income in monthly
distributions $15.44 $20.47 $49.26 $61.96
============== ============= ============== =============
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 NINE MONTHS ENDED SEPTEMBER 30, 2003 and 2002(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2003 2002
------------- -------------
Cash flows from operating activities
Net income $ 451,313 $ 584,884
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for (recovery of) losses on loans and real estate (53,565) 78,359
Early withdrawal penalty credited to income (1,437) (9,300)
Change in operating assets and liabilities
Accrued interest and advances on loans (143,677) 506,086
Accounts payable and other liabilities (19,374) (7,193)
Net cash provided by operating activities 233,260 1,152,836
------------- -------------
Cash flows from investing activities
Principal collected on loans 1,616,607 2,060,641
Loans originated (2,879,161) (1,867,781)
Payments for real estate held for sale (5,926) (194,220)
Proceeds from sale of real estate held for sale - 2,565
Distribution from limited liability company 433,195 -
Proceeds from unsecured loans - 11,124
------------- -------------
Net cash provided by (used in) investing activities (835,285) 12,329
------------- -------------
Cash flows from financing activities
Net increase/(decrease) in line of credit 1,000,000 (400,000)
Partners withdrawals (463,047) (887,851)
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Net cash provided by (used in) financing activities 536,953 (1,287,851)
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Net decrease in cash (65,072) (122,686)
Cash - beginning of year 1,057,845 389,844
------------- -------------
Cash - end of period 992,773 267,158
============= =============
Cash payments for interest $ 7,062 $ 48,432
============= =============
The accompanying notes are an integral part of these financial statements.
4
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 nine month period ended September
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 September 30, 2003 and December 31, 2002, the Partnership had eight and
nine loans past due 90 days or more totaling $2,659,053 and $2,913,212 (34.57%
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.
At September 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 September 30, 2003 and December 31, 2002,
respectively. The reduction in carrying value of the impaired loans of $6,620
and $6,620 at September 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 nine months ended September
30, 2003 and the year ended December 31, 2002, respectively.
Allowance for loan losses
The composition of the allowance for loan losses as of September 30, 2003
and December 31, 2002 was as follows:
September 30, December 31,
2003 2002
----------------- -----------------
Impaired loans $ 6,620 $ 6,620
Specified loans 163,731 163,731
General 479,635 533,200
Unsecured loans 88,331 88,331
----------------- -----------------
$ 738,317 $ 791,882
================= =================
Activity in the allowance for loan losses is as follows for the nine months
ended September 30, 2003 and the year ended December 31, 2002:
September 30, December 31,
2003 2002
----------------- -----------------
Beginning balance $ 791,882 $ 887,578
Provision for loan losses - 20,394
Recoveries (53,565) (40,433)
Restructures - (64,210)
Write-offs - (11,447)
----------------- -----------------
$ 738,317 $ 791,882
================= =================
5
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 periods. Such estimates relate principally to the
determination of the allowance for loan losses, including the valuation of
impaired loans and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.
note 3 - General Partners and Related Parties
The following are commissions and 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, Redwood Mortgage Corp., as an affiliate of 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
SEPTEMBER 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%(3/8 of 1% annually) of the
"net asset value", which is the Partnership's total assets less its total
liabilities.
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to 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 September 30, 2003 and December 31, 2002:
September 30, December 31,
2003 2002
----------------- ---------------
Costs of properties $ 1,269,148 $ 1,263,222
Reduction in value (580,086) (580,086)
----------------- ---------------
Real estate held for sale $ 689,062 $ 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 nine months through September 30, 2003 and the year ended
December 31, 2002. During 2003, the LLC completed construction and now it is
selling the property.
Summarized financial information of the LLC at September 30, 2003 and
December 31, 2002 is as follows:
September 30, December 31,
2003 2002
----------------- ----------------
Assets $ 994,175 $ 1,814,186
Liabilities (214,648) (601,464)
----------------- ----------------
Total $ 779,527 $ 1,212,722
================= ================
7
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 September
30, 2003 and December 31, 2002 were $1,000,000 and $0, respectively; and the
interest rate was 4.25% (4.00% prime + .25%) at September 30, 2003. This line of
credit expires December 2007 and requires the Partnership to meet certain
financial covenants. As of September 30, 2003 and December 31, 2002, 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 $7,691,339 and $6,423,984, at
September 30, 2003 and December 31, 2002, respectively. The fair value of these
loans of $7,555,393 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 September 30, 2003 and
December 31, 2002, there were 24 and 25 secured loans outstanding, respectively,
with the following characteristics:
September 30, December 31,
2003 2002
---------------- -----------------
Number of secured loans outstanding 24 25
Total secured loans outstanding $ 7,691,339 $ 6,423,984
Average secured loan outstanding $ 320,472 $ 256,959
Average secured loan as percent of total 4.17% 4.00%
Average secured loan as percent of partners' capital 3.55% 2.84%
Largest secured loan outstanding $ 1,000,000 $ 1,000,000
Largest secured loan as percent of total 13.00%* 15.57%*
Largest secured loan as percent of partners' capital 11.06%* 11.05%*
Number of counties where security is located (all California) 8 11
Largest percentage of loans in one county 35.17% 41.38%
Average secured loan to appraised value of security at time
loan was consummated 60.69% 65.86%
Number of secured loans in foreclosure 0 2
Amount of secured loans in foreclosure $ 0 $ 236,807
* 6.76% and 8.71% of outstanding loans and Partners' capital at loan inception.
8
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (unaudited)
note 8 - Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at September 30, 2003
and December 31, 2002:
September 30, December 31,
2003 2002
----------------- -----------------
First trust deeds $ 3,723,875 $ 3,269,897
Second trust deeds 3,894,293 2,939,753
Third trust deeds 73,171 214,334
----------------- -----------------
Total loans 7,691,339 6,423,984
Prior liens due other lenders 6,181,232 5,475,725
----------------- -----------------
Total debt $ 13,872,571 $ 11,899,709
================= =================
Appraised property value at time of loan $ 22,857,946 $ 18,069,602
Total investments as percent of appraisals 60.69% 65.86%
Investments by type of property
Owner occupied homes $ 879,496 $ 1,037,474
Non-owner occupied homes 913,753 575,051
Apartments 1,798,982 708,648
Commercial 4,099,108 4,102,811
----------------- -----------------
$ 7,691,339 $ 6,423,984
================= =================
The interest rates on the loans range from 13.00% to 6.125% at September
30, 2003.
Scheduled maturity dates of secured loans as of September 30, 2003 are as
follows:
Year Ending December 31,
----------------------------------
2003 $2,510,149
2004 337,448
2005 1,753,958
2006 759,067
2007 1,521,254
Thereafter 809,463
---------------
Total $7,691,339
===============
The scheduled maturities for 2003 above include approximately $2,368,721 in
6 loans, which are past maturity at September 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 September 30, 2003 of $88,020, before clearing
deposits in transit and outstanding checks, were in one bank. The balance did
not exceed the FDIC insurance limits (up to $100,000 per bank). This 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 26% of the total
Partnership loan balance at September 30, 2003.
9
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2003 and December 31,
2002. As of September 30, 2003 the Partnership had two loans under workout
agreements totaling $64,952.
Construction loans
The partnership has construction loans, which are at various stages of
completion of the construction process and loans, which are not fully disbursed
at September 30, 2003. The partnership has approved the borrowers up to a
maximum loan balance; however, disbursements are made during completion phases
throughout the construction process or incrementally upon certain conditions
being met. At September 30, 2003, there were $698,165 of undistributed loans
which will be funded by a combination of borrower monthly mortgage payments,
line of credit draw-downs, retirement of principal on current loans, cash and
capital contributions from investors.
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 dates and revenue and expenses
for the reporting periods. Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
acquired through foreclosure.
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.
10
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-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, Redwood Mortgage
Corp. 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 $64,877 and $24,661 for the
nine months ended September 30, 2003 and 2002, and $16,102 and $18,261 for the
three months ended September 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 $54,669 and $123,042 were incurred for the
nine months ended September 30, 2003 and 2002, and $21,368 and $26,717 were
incurred for the three months ended September 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 $25,512 and $26,285 were incurred by the Partnership for the nine
months ended September 30, 2003 and 2002, and $8,490 and $8,650 were incurred
for the three months ended September 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
statements of income.
11
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 September 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.
Results of Operations - For the nine and three months ended September 30, 2003
and 2002
The net income decrease of $133,571 (23%) for the nine months, and $49,566
(26%) for the three months ended September 30, 2003 versus September 30, 2002
was due primarily to a decrease in interest earned on loans of $370,799 (41%)
for the nine months and $64,752 (26%) for the three months, an increase in late
charges of $6,446 for the nine months and a decrease of $333 for the three
months, and a decrease in other income of $12,149 for the nine months and $2,977
for the three months; offset by expense increases/decreases. Significant expense
decreases for the nine and three month periods ended September 30, 2003 versus
September 30, 2002 included lower mortgage servicing fees of $68,373 for the
nine months and $5,349 for the three months, a decrease in the provision for
losses on loans and real estate of $131,924 for the nine months and an increase
of $8,622 for the three months, a decrease in interest expense of $41,370 for
the nine months and $8,102 for the three months, and an increase in professional
fees of $3,393 for the nine months and a decrease of $10,946 for the three
months.
The decrease in interest on loans of $370,799 (41%) for the nine months,
and $64,752 (26%) for the three months ended September 30, 2003 versus September
30, 2002 was due primarily to a reduction of the loan portfolio from $9,201,968
at September 30, 2002 to $7,691,339 at September 30, 2003, and a reduction in
average portfolio interest rate as compared to the first three quarters of 2002.
Also during the nine months ended September 30, 2002, additional interest was
collected from some loans that were previously considered impaired.
The decrease in interest on the line of credit of $41,370 (85%) for the
nine months, and $8,102 (59%) for the three months ended September 30, 2003
versus September 30, 2002 is due to lower overall usage of the line of credit
during the first three quarters of 2003. The Partnership utilized its bank line
of credit less during the first nine months of 2003 compared to the
corresponding period in 2002. The outstanding balance on the line was zero for
most of 2003 and rose to $1,000,000 at September 30, 2003 versus $1,507,000 at
September 30, 2002. Cash generated from interest earnings, late charges,
amortization of principal and loan payoffs are utilized to pay down the credit
line when possible.
The decrease in mortgage servicing fees of $68,373 (56%) for the nine
months, and $5,349 (20%) for the three months ended September 30, 2003 versus
September 30, 2002 is attributable to a decrease in loan portfolio to $7,691,339
at September 30, 2003 from $9,201,968 at September 30, 2002. In addition, higher
mortgage servicing fees during the nine and three months through September 30,
2002 was due to collection of servicing fees on impaired loans during the first
three quarters 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 $53,565 for the nine months, and the loan loss
provision was $3,372 for the three months ended September 30, 2003, as compared
to a loan loss provision of $78,359 for the nine months, and recoveries of
$5,250 for the three months ended September 30, 2002. The general partners
believe that the allowance for loan losses and real estate held for sale of
$1,318,403 as of September 30, 2003 was more than adequate to offset any
potential loss in loans or real estate.
The decrease in asset management fees of $773 (3%) for the nine months, and
$160 (2%) for the three months ended September 30, 2003 versus the respective
periods ended September 30, 2002 is due to a decrease in the partners' capital
under management at September 30, 2003 and 2002 to $9,039,097 from $9,119,979,
respectively.
The increase in professional fees of $3,393 (10%) for the nine months, and
a decrease of $10,946 for the three months ended September 30, 2003 versus
September 30, 2002 is due to timing of services provided in 2003 compared to
2002 and increases in the cost of such services.
12
Partnership capital continued to decrease as the limited partners capital
declined due to both earnings distribution and capital liquidations. For the
nine and three months ended September 30, 2003 earnings and capital liquidated
was $159,354 and $300,615 for the nine months, and $49,239 and $81,951 for the
three months, respectively, versus $231,150 and $660,152 for the nine months,
and $72,414 and $182,409 for the three months, respectively for the
corresponding periods in 2002.
At September 30, 2003, there were no foreclosures, compared to one
($31,807) that existed at September 30, 2002.
The general partners received Mortgage Brokerage Commissions from the loan
borrowers of $64,877 and $16,102 for the nine and three months ended September
30, 2003 as compared to $24,661 and $18,261 for the nine and three months ended
September 30, 2002. The increase is due to more loans written in the nine and
three months ended September 30, 2003.
Since January 2001, and through September 30, 2003, the Federal Reserve has
reduced interest rates significantly by cutting the Federal Funds Rate to 1.00%.
The effect of the cuts has greatly reduced short-term interest rates and to a
lesser extent reduced long-term interest rates. New loans will be originated at
then existing interest rates. In the future, the general partners anticipate
that interest rates likely will change from their current levels. The general
partners cannot at this time predict at what levels interest rates will be in
the future. The general partners anticipate that new loans will be placed at
rates approximately 1% lower than similar loans during 2002. The lowering of
interest rates has encouraged those borrowers that hold higher interest rate
loans than those currently available to seek refinancing of their existing
obligations to take advantage of these lower rates. The Partnership may face
prepayments in the existing portfolio from borrowers taking advantage of these
lower rates. However, demand for loans from qualified borrowers continues to be
strong and as prepayments occur, we expect to replace these 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 expected 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 for compounding
limited partners will range between 6.30% and 7.30% for the year 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 September 30, 2003,
there were no properties in foreclosure, compared to one property totaling
$31,807 at September 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 2002, the
Northern California real estate market slowed and the national and local
economies have slipped into recession. Economic trends have begun to slowly move
upward in 2003. As of September 30, 2003, no notices of default are currently
filed. 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 2 loans totaling $64,952 as of September 30,
2003. 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, or allows time
13
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 workout agreements existing at
September 30, 2003, in management's opinion, does not have a material effect on
our results of operations or liquidity. These workouts 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 ($53,565) and $78,359, as (recoveries) and
provisions for losses on loans and real estate for the nine months ended
September 30, 2003 and 2002, respectively. The reserve for losses on loans and
real estate had a balance of $1,318,403 as of September 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.
As of September 30, 2003, the Partnership had an average loan to value
ratio computed as of the date the loan was made of 61%. 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 nine months ended September 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 September 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 $5,295,139 (69%) and $6,122,683 (67%) of
the outstanding loan portfolio. The remainder of the portfolio represented loans
secured by real estate located primarily in Northern California
As of September 30, 2003, approximately 23% ($1,793,249), was invested in
loans secured by single family homes (1-4 units), approximately 23%
($1,798,982), was invested in loans secured by multifamily dwellings (apartments
over 4 units), approximately 36% ($2,715,484), was invested in loans secured by
commercial properties, and approximately 18% ($1,383,624) was invested in loans
secured by land. As of September 30, 2002, approximately 26% ($2,406,124), was
invested in loans secured by single family homes (1-4 units), approximately 7%
($608,647) was invested in loans secured by multifamily dwellings (apartments
over 4 units), approximately 44% ($4,022,589) was invested in loans secured by
commercial properties, and approximately 23% ($2,164,608) was invested in loans
secured by land.
14
As of September 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 September 30, 2003:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of September 30, 2003
# of Loans Amount Percent
----------- ------------ -----------
1st Mortgages 11 $3,723,875 48%
2nd Mortgages 12 3,894,293 51%
3rd Mortgages 1 73,171 1%
=========== ============ ===========
Total 24 $7,691,339 100%
Maturing 12/31/03 and prior 9 $2,510,149 33%
Maturing prior to 12/31/04 2 337,448 4%
Maturing prior to 12/31/05 3 1,753,958 23%
Maturing after 12/31/05 10 3,089,784 40%
=========== ============ ===========
Total 24 $7,691,339 100%
Average Loan $320,472 4%
Largest Loan 1,000,000 13%
Smallest Loan 11,723 0.15%
Average Loan-to-Value 61%
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 nine and
three months ended September 30, 2003 and 2002, the Partnership made
distributions of earnings to limited partners of $159,354 and $231,150 for the
nine months, and $49,239 and $72,414 for the three months, respectively.
Distribution of earnings to limited partners, which were not withdrawn for the
nine and three months ended September 30, 2003 and 2002 were $287,445 and
$347,885 for the nine months, and $90,561 and $116,456 for the three months,
respectively. As of September 30, 2003 and 2002, limited partners electing to
withdraw earnings represented 35% 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 nine and three months ended September 30, 2003
and 2002, $17,940 and $116,253 for the nine months, and $4,750 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 September 30, 2003 and 2002.
15
Additionally, for the nine and three months ended September 30, 2003 and
2002, $282,675 and $543,899 for the nine months, and $77,201 and $140,928 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").
Current Economic Conditions.
The Partnership makes loans primarily in Northern California. As of
September 30, 2003, approximately 69%, ($5,295,139) 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 contained in an article in the San Francisco Chronicle dated October 4,
2003, mortgage rates are down again while home sales are soaring. The article
stated, "Rates on benchmark 30-year mortgages dropped for the fourth week in a
row, good news for people thinking about refinancing their home mortgage. For
the week ending October 3, the average rate on 30-year mortgages dipped to
5.77%, down from last week's rate of 5.98%, Freddie Mac, the mortgage giant,
reported Thursday in its weekly nation-wide survey of mortgage rates. This
week's rate was the lowest since the middle of July, when rates on 30-year
mortgage averaged 5.67%. Rates on 30-year mortgages slid to 5.21%, the lowest
level in more than four decades, in the middle of June. But in late June, those
rates started marching back up. They have retreated in the past four weeks. Even
with the recent gyration in mortgage rates, sales of both new homes and
previously owned ones soared in August and are on track to set record highs this
year. And, home-mortgage refinancing activity remains healthy, economists said."
16
According to the San Francisco Chronicle of the week of September 9, 2003,
house prices were showing steady appreciation across the U.S. The article
stated, "Defying gloom and doom predictions of impending deflation, the value of
the average U.S. home continues to appreciate at more than twice the rate of
inflation. In the latest nationwide survey of prices of existing houses, average
values rose by 5.56% from the second quarter of 2002 through the second quarter
of 2003. The study was done by the Office of Federal Housing Enterprise
Oversight (OFHEO), which monitors the market value changes of millions of
individual properties financed or refinanced by giant investors Fannie Mae and
Freddie Mac. Dozens of local markets experienced much higher average gains than
5.56%, including double-digit appreciation rates in large swaths of California
and Florida." The article also stated "Houses in the District of Columbia
appreciated at 10.1% on average, while California houses gained an average of
9.4%. Formerly superheated markets, such as San Francisco where values rose at
20% and more per year during the dot-com boom, continue to readjust. San Jose
houses gained an average 1.6% in resale value from 2002 to 2003 but lost 0.56%
during the last quarter measured by the study. San Francisco houses gained an
average 3.81% during the year, but rose by just 0.22% during the quarter ending
June 30." These articles and statistics imply that interest rates are
stabilizing near historical lows and that the real estate market for
single-family residences is strong, but that the San Francisco Bay Area values
are continuing to fall slightly as they readjust from the robust markets of the
late 1990's and early 2000.
On the commercial scene, according to the San Francisco Business Times for
the week of October 3, 2003, the San Francisco real estate market is showing
signs of life. The article stated, "San Francisco's office market, among the
most depressed in the nation, appears to have finally started to recover.
Slowly. Third-quarter numbers released this week from three major San Francisco
brokerage firms show leasing creeping upward, vacancy dropping slightly and
rents stabilizing after almost three years of free fall. Numbers from Newmark &
Co. Real Estate, for example, showed "positive absorption" - the amount of new
leases compared to new vacancies - of 415,000 square feet citywide in the third
quarter, with the vacancy rate declining to 16.7% from 17% overall and to 18.3%
from 19.3% among Class A buildings. Numbers from two other real estate firms
show the same trend, with Cushman & Wakefield reporting more than 500,000 square
feet absorbed, and Grubb & Ellis Co. showing 100,000 square feet absorption.
Both those firms also saw the vacancy rate declining 0.1% citywide." The article
also stated, "Newmark managing principal Monica Finnegan said the numbers make
her cautiously optimistic that the market has bottomed out, but she is still
keeping an eye out for what happens in the fourth quarter. Still, Newmark says
in its report that "we expect several consecutive years of positive absorption
beginning in 2004." Newmark's outlook is buoyed by federal employment statistics
that show the rate of job loss in San Francisco slowing dramatically, with jobs
falling 1.9% in the year to August, compared to declines of 5.8% in August 2002
and 4.9% in August 2001." The commercial real estate market seems to be
stabilizing but it will take a long time to absorb the large vacancies that have
built up in this recession. Values have decreased but lowered capitalization
rates have helped keep commercial property values from large reductions.
To the Partnership, lower interest rates may mean more borrowers coming
forward for equity loans or for refinancing. Stabilizing commercial vacancies
and little appreciation in rental rates may mean that the economy is at the
vacancy rate bottom.
For Partnership loans outstanding, as of September 30, 2003, the
Partnership had an average loan to value ratio computed as of the date the loan
was made of 61%. 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.
17
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 September 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 September 30, 2003:
2003 2004 2005 2006 2007 Thereafter Total
-------------- ----------- ------------ ----------- ------------ ------------ --------------
Interest earning assets:
Money market accounts $ 6,753 $ 6,753
Average interest rate 0.55% 0.55%
Loans secured by deeds
of trust $2,510,149 337,448 1,753,958 759,067 1,521,254 809,463 $7,691,339
Average interest rate 11.11% 9.24% 9.35% 8.68% 8.13% 8.71% 9.55%
Interest bearing liabilities:
Line of credit $1,000,000 $1,000,000
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
September 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.
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.
18
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 September 30, 2003 the general partners have determined that
the allowance for loan losses of $738,317 (8.17% 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 September 30, 2003, 8 loans were delinquent over 90
days amounting to $2,659,053.
Controls and Procedures.
As of September 30, 2003, 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.
19
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 nine months ended September 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 ............................ $54,669
General Partners
&/or Affiliates Asset Management Fee for managing assets ......................... $25,512
General Partners 1% interest in profits ........................................... $4,513
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 .................................................. $64,877
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 ............ $1,991
Gymno Corporation, Inc. Reconveyance Fee ................................................. $316
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 . . . . . . . . . . . . . . . . . . . . . . . . . . $17,935
20
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
21
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
November 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 November 2003.
Signature Title Date
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell General Partner November 14, 2003
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell President, Secretary/Treasurer November 14, 2003
of Gymno Corporation (Principal
Financial and Accounting
Officer); Director of Gymno
Corporation
22
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 September 30, 2003 (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
November 14, 2003
23
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 September 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
November 14, 2003
24
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 September 30, 2003 (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
November 14, 2003
25
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 September 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
November 14, 2003
26