REDWOOD MORTGAGE INVESTORS VII
(a California Limited Partnership)
Index to Form 10-K
December 31, 2003
Part I
Page No.
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Item 1 - Business 3
Item 2 - Properties 6
Item 3 - Legal Proceedings 6
Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 7
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 7
Item 6 - Selected Financial Data 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 15
Item 8 - Financial Statements and Supplementary Data 18
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40
Item 9a - Controls and Procedures 40
Part III
Item 10 - Directors and Executive Officers of the Registrant 40
Item 11 - Executive Compensation 41
Item 12 - Security Ownership of Certain Beneficial Owners and Management 42
Item 13 - Certain Relationships and Related Transactions 42
Item 14 - Principal Accountant Fees and Services 42
Part IV
Item 15 - Exhibits, Financial Statements and Schedules, and Reports on Form 8-K 43
Signatures 44
Certifications 45
1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the year ended December 31, 2003 Commission file number 33-30427
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REDWOOD MORTGAGE INVESTORS VII
(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 Identification)
incorporation or organization)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
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(address of principal executive offices) (zip code)
Registrant's telephone number including area code (650) 365-5341
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Units
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES XXXX NO
- ------------------------- ---------------------------
Through December 31, 2003, the limited partnership Units purchased by
non-affiliates was 119,983.59 Units computed at $100.00 a Unit for $11,998,359.
The offering was closed on September 30, 1992.
Documents incorporated by reference:
Portions of the Prospectus dated October 20, 1989, and Supplement #5 dated
February 14, 1992, filed on form S-11, are incorporated in Parts II, III, and
IV. Exhibits filed as part of Form S-11 Registration Statement #33-30427 are
incorporated in part IV.
2
Part I
Item 1 - Business
Redwood Mortgage Investors VII, a California limited partnership (the
"Partnership"), was organized in 1989 of which Michael R. Burwell and Gymno
Corporation, a California corporation, are the general partners. The address of
the Partnership and the general partners is 900 Veterans Blvd., Suite 500,
Redwood City, California 94063. The Partnership is organized to engage in
business as a mortgage lender, for the primary purpose of making loans secured
by deeds of trust on California real estate. Loans are arranged and serviced by
Redwood Mortgage Corp., an affiliate of the general partners. The Partnership's
objectives are to make investments, as referred to above, which will: (i)
provide the maximum possible cash returns which limited partners may elect to
(a) receive as monthly, quarterly or annual cash distributions or (b) have
credited to their capital accounts and applied to Partnership activities; and
(ii) preserve and protect the Partnership's capital. The Partnership's general
business is more fully described under the section entitled "Investment
Objectives and Criteria" pages 26-31 of the Prospectus, which is incorporated by
reference.
Originally, 60,000 Units were offered on a "best efforts" basis through
broker/dealer member firms of the National Association of Security Dealers, Inc.
In accordance with the terms of the Prospectus, the general partners increased
the number of Units for sale from 60,000 to 120,000 and elected to continue the
offering until September 30, 1992. The offering closed on September 30, 1992,
and the limited partners contributed capital totaled $11,998,359 of an approved
$12,000,000 issue, in Units of $100 each. At that date all the applicants had
been admitted into the Partnership with none left in the applicant status. The
final SR report (Report of Sales of Securities and use of proceeds therefrom)
was filed on September 21, 1992.
The Partnership began selling Units in October 1989 and began investing in
mortgages in December 1989. At December 31, 2003, the Partnership had a balance
in its secured loan portfolio totaling $8,280,826 with interest rates thereon
ranging from 6.125% to 11.50%.
Currently, loans secured by First Trust Deeds comprise 45.09% of the amount
of funds in the secured loan portfolio followed by Second Trust Deeds of 46.76%
and Third Trust Deeds of 8.15%. Owner-occupied homes combined with non-owner
occupied homes total 29.50% of the secured loans. Commercial loans origination
decreased from last year, now comprising 53.99% of the secured portfolio, a
decrease of 9.88%. Loans to apartments totaled 16.51%. Of the total secured
loans, 72.24% are in five counties of the Bay Area. The County of Stanislaus
makes up 24.12% of the loans. Stanislaus County is an adjacent county to the San
Francisco Bay Area, located approximately 65 miles from San Francisco. The
balance of loans is primarily in Northern California. Loan size increased the
past year, and is now averaging $360,036 per loan, an increase of $103,077. Some
of the larger loans invested in by the Partnership are fractionalized between
other affiliated partnerships with objectives similar to those of the
Partnership to further reduce risk. Average equity per loan transaction, which
is our loan plus any senior loans, divided by the property's appraised value,
subtracted from 100%, stood at 39.21%. A 40% equity average on loan origination
is generally considered very conservative. Generally, the more equity, the more
protection for the lender. The Partnership's loan portfolio is in good condition
with no properties in foreclosure as of December 2003.
Delinquencies are discussed under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
For the year ended December 31, 2003 the Partnership did not take back any
collateral from defaulted borrowers. During the year 2002, the Partnership
acquired one piece of real estate property through foreclosure. To assist in
protecting its own assets and reduce liability, the Partnership subsequently
transferred the property to a newly formed LLC, Stockton Street Property
Company, LLC. The Partnership owned a minority interest of 34% together with
another partnership, an affiliate of the general partners, the other investor in
the foreclosed loan, who owned the majority interest of 66% and participated in
the original loan. Assets of this LLC were sold during 2003 and the Partnership
incurred a loss of approximately $42,000. The LLC will be dissolved when its
final tax return for year 2003 is filed. The LLC is further discussed under
Notes to Financial Statements (Note 6).
3
The Partnership took back two additional properties in prior years. One is
a commercial property currently in contract for sale, which is anticipated to
take place in late 2004. The Partnership anticipates that upon the sale of this
property we will sustain a loss of approximately $630,000, which the Partnership
previously set aside as reserves for real estate owned. The second property is a
parcel of land, which the Partnership is in the process of negotiating a sales
contract on. The general partners believe that the property is worth
considerably more than its carrying value.
Competition and General Economic Conditions
The Partnership's major competitors in providing mortgage loans are banks,
savings and loan associates, thrifts, conduit lenders, mortgage brokers, and
other entities both larger and smaller than the Partnership. The Partnership is
competitive in large part because the general partners generate all of their
loans. The general partners have been in the business of making or investing in
mortgage loans in Northern California since 1978 and have developed a quality
reputation and recognition within the field.
Mortgage interest rates have fallen during the last 24 to 36 months. This
has been partially due to actions by the Federal Reserve Bank to reduce the
discount rate on borrowings charged to member banks, a sluggish economy and low
rates of inflation. Although the general trend for interest rates has been down,
many lenders have tightened their credit and reduced their lending exposure in
various markets and property types. This credit tightening from competing
lenders would generally provide the Partnership with additional lending
opportunities at attractive interest rates. However, as a result of the slowing
economy, there are now fewer transactions in the marketplace, which could
potentially reduce the number of lending opportunities to the Partnership.
Continued rate reductions by the Federal Reserve Bank, a continued slowing
economy, and a continued low threat of inflation could have the effect of
reducing mortgage yields in the future. Current loans with relatively high
yields could be replaced with loans with lower yields, which in turn could
reduce the net yield paid to the limited partners. In addition, if there is less
demand by borrowers for loans and, thus, fewer loans for the Partnership to
invest in, it will invest its excess cash in shorter-term alternative
investments yielding considerably less than the current investment portfolio.
Secured Loan Portfolio
A summary of the Partnership's secured loan portfolio as of December 31,
2003 is set forth below.
Loans as a Percentage of Appraised Values
First Trust Deed Loans $ 3,733,346
Appraised Value of Properties at Time of Loan 5,490,043
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Total First Trust Deeds as a % of Appraisal 68.00%
=============
First Trust Deed Loans $ 3,733,346
Second Trust Deed Loans 3,872,480
Third Trust Deed Loans 675,000
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8,280,826
Priority positions due other Lenders at Time of Loan
First Trust Deed Loans due other Lenders 4,063,952
Second Trust Deed Loans due other Lenders 255,329
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Total Debt $12,600,107
=============
Appraised Property Value at Time of Loan $20,728,514
Total Loans as a % of Appraisal based on appraisals and prior
liens at date of loan 60.79%
=============
Number of Secured Loans Outstanding 23
Average Secured Loan 360,036
Average Secured Loan as a % of Secured Loans Outstanding 4.35%
Largest Secured Loan Outstanding 1,000,000
Largest Secured Loan as a % of Secured Loans Outstanding 12.08%
4
Secured Loans as a Percentage of Total Secured Loans Percent
------------------------------------------------------------------- -------------
First Trust Deed Loans 45.09%
Second Trust Deed Loans 46.76%
Third Trust Deed Loans 8.15%
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Total Trust Deed Loan Percentage 100.00%
Secured Loans by Type of Property Amount Percent
------------------------------------------------ -------------- -------------
Owner Occupied Homes $ 853,869 10.31%
Non-Owner Occupied Homes 1,589,092 19.19%
Apartments 1,367,327 16.51%
Commercial 2,410,861 29.12%
Land 2,059,677 24.87%
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Total $ 8,280,826 100.00%
==============
The following is a distribution of secured loans outstanding as of December
31, 2003 by Counties.
Total
California County Secured Loans Percent
------------------------------------------- ------------- -----------
San Francisco Bay Area Counties
Alameda $ 3,652,963 44.11%
San Francisco 853,142 10.30%
Santa Clara 774,489 9.35%
San Mateo 568,867 6.88%
Contra Costa 132,568 1.60%
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5,982,029 72.24%
San Francisco Bay Area Adjacent Counties
Stanislaus 1,997,161 24.12%
Other California Counties
Sacramento 224,164 2.70%
Shasta 77,472 0.94%
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Total $ 8,280,826 100.00%
============= ===========
Statement of Condition of Secured Loans: Number of Secured Loans in
Foreclosure 0Scheduled maturity dates of secured loans as of December 31,
2003are as follows:
Year Ending December 31, Amount
----------------------------------- ------------
2004 $ 2,334,650
2005 2,622,109
2006 809,894
2007 1,521,152
2008 199,415
Thereafter 793,606
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Total $ 8,280,826
============
5
The Partnership's largest loan in the principal amount of $1,000,000
represents 12.08% of outstanding secured loans and 10.77% of Partnership assets.
Larger loans sometimes increase above 10% of the secured loan portfolio or
Partnership assets as these amounts decrease due to limited partner withdrawals
and loan payoffs.
The scheduled maturities for 2004 include seven loans totaling
approximately $2,207,200 past maturity at December 31, 2003. Interest payments
on four of these past maturity loans totaling $1,985,357 were categorized as
delinquent over 90 days. These three delinquent past maturity loans were made to
a developer who is selling the property. A portion of the property has a pending
sales contract. The Partnership believes that there is adequate security for
their indebtedness and that the sales effort is reasonable and adequate. Several
other past maturity borrowers were in process of refinancing their loans through
other institutions, as this was an opportune time for them to do so and take
advantage of the lower interest rate. The Partnership allows borrowers to
occasionally continue to make the payments on debt past maturity for periods of
time. The Partnership, in most instances, receives the benefit of a higher
interest rate than would otherwise be available in the currently existing loan
marketplace.
Overall, the loan portfolio had five loans with principal outstanding of
$2,259,756 where interest payments were overdue in excess of 90 days. The
principal outstanding represents 27.29% of the Partnership's secured portfolio
as of December 31, 2003.
In addition, one loan with principal outstanding of $96,716 was considered
impaired at December 31, 2003, which means that interest is no longer being
accrued and that payments received will be applied to reduce the outstanding
loan balances, including accrued interest and advances. That is, interest
accruals are no longer recorded thereon. This represents 1.17% of the total
secured loan portfolio.
Item 2 - Properties
The Partnership did not take back any collateral from borrowers in 2003.
During 2002, the Partnership took back the collateral security on one of its
loans through foreclosure. This loan was originally fractionalized and owned
with another affiliated Partnership. In order to reduce potential liabilities
the Partnership transferred at its book value the real estate taken back to a
newly formed Limited Liability Company called Stockton Street Property Company,
LLC. The real estate security was six condominium units. Management of the LLC
was through its managing member, Michael Burwell, a general partner of the
Partnership. By the end of 2003 all the units were sold resulting in a loss to
the Partnership of approximately $42,000. It is anticipated that in 2004 the
Stockton Street Property Company, LLC will be closed and its operations will
cease.
The Partnership also owns (through previous foreclosure) two other
properties; a commercial property and an undeveloped parcel of land. The land is
located in East Palo Alto. The land is owned with two other affiliated
partnerships. The Partnership's net investment in the land at December 31, 2003
is $62,703. Currently the Partnership is in the process of negotiating a sale
with an interested buyer. The Partnership's net investment of $62,703 is less
than 1% of Partnership assets. The general partners believe that the property is
worth considerably more than its net investment.
The second property is a commercial property located in Walnut Creek,
California. The property is currently pending sale. We anticipate that the sale
will occur in the last quarter of 2004. Management has set aside loss reserves
in the amount of $630,169, which they believe are adequate in amount to cover
anticipated losses.
Item 3 - Legal Proceedings
In the normal course of business the Partnership may become involved in
various types of legal proceedings such as assignments of rents, bankruptcy
proceedings, appointments of receivers, unlawful detainers, judicial
foreclosures, etc., to enforce the provisions of the deeds of trust, collect the
debt owed under the promissory notes or to protect or recoup its investment from
the real property secured by the deeds. As of the date hereof, the Partnership
is not involved in any legal proceedings other than those that would be
considered part of the normal course of business.
6
Item 4 - Submission of Matters to a Vote of Security Holders (Partners)
No matters have been submitted to a vote of the Partnership.
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related
Unitholder Matters
120,000 Units at $100 each (minimum 20 Units) were offered through
broker-dealer member firms of the National Association of Securities Dealers on
a "best efforts" basis (as indicated in Part I item 1). Investors have the
option of withdrawing earnings on a monthly, quarterly, or annual basis or
reinvesting and compounding the earnings. Limited partners may withdraw from the
Partnership in accordance with the terms of the Partnership Agreement subject to
possible early withdrawal penalties. There is no established public trading
market.
A description of the Partnership Units, transfer restrictions and
withdrawal provisions is more fully described under the section entitled
"Description of Units" and "Summary of Limited Partnership Agreement", pages 47
to 50 of the Prospectus, a part of the referenced Registration Statement, which
is incorporated by reference.Item 6 - Selected Financial DataRedwood Mortgage
Investors VII began operations in December 1989. Financial condition and results
of operation for the Partnership as of and for the five years ended December 31,
2003 were:
Balance Sheets
Assets
December 31,
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2003 2002 2001 2000 1999
------------- ------------- -------------- -------------- --------------
Cash and cash equivalents $ 321,114 $ 1,057,845 $ 389,844 $ 269,000 $ 388,770
Loans
Loans, secured by deeds of trust 8,280,826 6,423,984 10,091,195 12,794,297 11,011,660
Loans, unsecured 232,551 216,770 10,091,195 12,794,297 163,085
Less allowance for loan losses (680,469) (791,882) (887,578) (850,548) (828,563)
Interest and other receivables
Accrued interest and late fees 489,995 304,936 666,189 363,321 357,177
Advances on loans 6,484 17,230 50,665 29,825 31,669
Real estate held for sale, net 633,053 683,136 872,133 816,094 307,931
Real estate owned in process - - - - 525,510
Investment in LLC - 1,212,722 - - -
------------- ------------- -------------- -------------- --------------
$ 9,283,554 $ 9,124,741 $ 11,356,179 $ 13,610,410 $ 11,957,239
============= ============= ============== ============== ==============
7
Liabilities and Partners' Capital
December 31,
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2003 2002 2001 2000 1999
------------ ------------ ------------- ------------- ------------
Liabilities
Line of credit $ 200,000 $ - $ 1,907,000 $ 3,500,000 $ 800,000
Accounts payable 4,102 2,593 11,295 4,102 32,234
Deferred interest - 37,704 2,322 - 115,709
Payable to affiliate 51,288 32,176 3,316 - -
------------ ------------ ------------- ------------- ------------
255,390 72,473 1,923,933 3,504,102 947,943
Partners' capital
General partners 11,973 11,978 11,978 11,978 11,978
Limited partners subject
to redemption 9,016,191 9,040,290 9,420,268 10,094,330 10,997,318
------------ ------------ ------------- ------------- ------------
Total partners' capital 9,028,164 9,052,268 9,432,246 10,106,308 11,009,296
------------ ------------ ------------- ------------- ------------
$9,283,554 $9,124,741 $11,356,179 $13,610,410 $11,957,239
============ ============ ============= ============= ============
Statements of Income
December 31,
----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------- ------------- ------------
Gross revenue $ 782,280 $ 1,078,186 $ 1,192,381 $ 1,437,964 $ 1,663,245
Expenses 189,639 314,704 371,184 537,818 753,664
------------ ------------ ------------- ------------- ------------
Net income $ 592,641 $ 763,482 $ 821,197 $ 900,146 $ 909,581
============ ============ ============= ============= ============
Net income to general partners (1%) 5,926 7,635 8,212 9,001 9,096
Net income to limited partners (99%) 586,715 755,847 812,985 891,145 900,485
------------ ------------ ------------- ------------- ------------
$ 592,641 $ 763,482 $ 821,197 $ 900,146 $ 909,581
============ ============ ============= ============= ============
Net income per $1,000 invested by
limited partners for entire period:
- where income is compounded
and reinvested $ 67 $ 85 $ 85 $ 85 $ 79
============ ============ ============= ============= ============
- where partner receives income
in monthly distributions $ 65 $ 82 $ 82 $ 82 $ 76
============ ============ ============= ============= ============
The annualized yield, when income is compounded and retained, for 1999 was
7.86%, for 2000 the annualized yield was 8.52%, for 2001 the annualized yield
was 8.50%, for 2002 the annualized yield was 8.44%, and for 2003 the annualized
yield was 6.66%. Average annualized yield from inception through December 31,
2003, when income is compounded and retained, was 7.81%.
The annualized yield, when income is distributed monthly, for 1999 was
7.59%, for 2000 the annualized yield was 8.21%, for 2001 the annualized yield
was 8.19%, for 2002 the annualized yield was 8.13% and for 2003 the annualized
yield was 6.47%. Average annualized yield from inception through December 31,
2003, when income is distributed monthly was 7.55%.
8
Item 7 - Management Discussion and Analysis of Financial Condition and
Results of Operations
Management Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet dates and income and expenses
during 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.
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.
Forward Looking Statements.
Some of the information in the Form 10-K may contain forward looking
statements. Uses of words such as "will", "may", "anticipate", "estimate",
"continue" or other forward looking words, discuss future expectations or
predictions. The foregoing analysis of 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 partners, 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 partners. 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.
9
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. For the years ended December 31,
2001, 2002 and 2003 loan brokerage commissions paid by borrowers were $84,137,
$24,661 and $111,927, 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 $94,396, $163,531 and $73,062 were incurred
for the years ended December 31, 2001, 2002 and 2003, respectively.
These servicing fees were charged at 1%, on an annual basis, of the
outstanding principal balances. If the maximum mortgage servicing fee of 1.5%,
on an annual basis, had been charged to the Partnership, then net income would
have been reduced by approximately $36,531. Reducing net income reduces the
annualized yields. An increase or decrease in this fee within the limits set by
the Partnership's agreement directly impacts the yield to the limited partners.
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 $37,233, $34,869 and $34,011 were incurred by the Partnership for
the years ended December 31, 2001, 2002 and 2003, respectively.
o Other Fees The partnership agreement provides that the general partners
may receive other fees such as reconveyance, mortgage assumption and mortgage
extension fees. Such fees are incurred by the borrowers and are paid to the
general partners.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective Partnership interests. The allocation
to the general partners (combined) shall be a total of 1%.
o Operating Expenses 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.
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 December 31, 2003 and 2002, a general
partner, Gymno Corporation, had contributed $11,973 as capital in accordance
with Section 4.02(a) of the partnership agreement.
Results of Operations - For the three years ended December 31, 2001, 2002 and
2003.
On September 30, 1992, the Partnership had sold 119,983.59 Units and its
contributed capital totaled $11,998,359 of the approved $12,000,000 issue, in
Units of $100 each. As of that date, the offering was formally closed. At
December 31, 2003, Partners' Capital totaled $9,028,164.
The net income decrease of $78,949 (8.77%) for the year ended December 31,
2001 was due primarily to a decrease in interest earned on loans of $233,624, a
decrease in late fees of $2,724, and a decrease in other income of $9,235, an
increase in clerical costs of $11,281, and an increase in professional services
of $1,800; offset by decreases in mortgage servicing fees of $16,317, interest
on line of credit of $129,416, asset management fees of $1,167, provision for
losses on loans and real estate of $28,293 and other expenses of $4,522.
10
The net income decrease of $57,715 (7.03%) for the year ended December 31,
2002 was due primarily to decreases in interest on loans of $134,757; offset by
decreases in various expenses; interest on line of credit of $73,500, clerical
costs of $7,741, asset management fees of $2,364, provision for losses on loans
and real estate of $57,410 and other expenses of $890. Net income was also
affected by increases in late fees of $16,425 and other income of $4,137; offset
by expense increases in mortgage servicing fees of $69,135 and professional
services of $16,290.
Net income decrease of $170,841 (22.38%) for the year ended December 31,
2003 was due primarily to decreases in interest income of $289,092, late fees of
$867 and other income of $5,947; offset by expense decreases in mortgage
servicing fees of $90,469, interest on line of credit of $45,752 and clerical
costs of $7,558. There were also increases in professional services of $3,594
and other expenses of $14,238.
The decline in interest revenues from $1,172,474 in 2001 to $1,037,717 in
2002 and to $748,625 in 2003 is primarily attributable to the lower average
secured loan portfolio balance from $10,478,000 to $9,138,000 to $7,266,000 for
the years 2001, 2002 and 2003, respectively, and the effects of declining
interest rates. The declining average loan balance in 2002 was due to the take
back of collateral on one loan with a principal balance of $954,000, and less
credit line usage coupled with significant loan payoffs in the last months of
2002. The reduced average loan balance in 2003 was due to low outstanding loan
balances in early 2003 while the Partnership sought replacement loans for those
paid off in late 2002. Overall in 2003 the outstanding secured loan balance
increased from $6,424,000 to $8,281,000 from January 1, 2003 to December 31,
2003.
Late fee income was $8,495 in 2001, $24,920 in 2002 and $24,053 in 2003.
The increase in 2002 and 2003 mainly involves collection of additional late
charges in excess of amounts recorded when some larger loans paid-off.
The fluctuation in other income from $11,412 in 2001 to $15,549 in 2002 and
to $9,602 in 2003 was mainly because of fluctuations in transfer fees received,
and in early withdrawal penalties gained and reduction in interest on money
market deposits. Included in other income during 2002 was collection of early
withdrawal penalties of $11,619, compared to $3,756 for year 2001 and $1,815 for
year 2003.
Mortgage servicing fees were $94,396 in 2001, $163,531 in 2002 and $73,062
in 2003. The increase in 2002 is primarily attributable to additional servicing
fees earned related to impaired loans. The Partnership does not accrue servicing
fees to Redwood Mortgage Corp. on impaired loans. Rather, servicing fees on
impaired loans are incurred as borrower payments are received. Reduction in
mortgage servicing fees overall is also attributed to the overall reduction in
the average mortgage loan portfolio size from $10,478,000 in 2001, to $9,138,000
for 2002 and to $7,266,000 in 2003. These servicing fees were charged at 1%, on
an annual basis, of the outstanding principal balances. If the maximum mortgage
servicing fee of 1.5%, on an annual basis, had been charged to the Partnership,
then net income would have been reduced by approximately $36,531. Reducing net
income reduces annualized yields. An increase or decrease in this fee within the
limits set by the Partnership's agreement directly impacts the yield to the
limited partners.
Reduction in interest expense on bank line of credit is because of lesser
utilization of the credit facility in 2002 and 2003. The Partnership used loan
pay-off proceeds received to pay down the line of credit to $0 at December 31,
2002, and to a balance of $200,000 at December 31, 2003. The line of credit
balance was $1,907,000 at December 31, 2001
Decrease in asset management fees from $37,233 in 2001 to $34,869 in 2002
and to $34,011 in 2003 was due to a decrease in limited partners' capital under
management due to partner withdrawals offset by the earnings retained in the
Partnership by investors who choose to compound their earnings. Limited
partners' capital balances were $9,420,268, $9,040,290 and $9,016,191, at
December 31, 2001, 2002 and 2003, respectively.
Increase in professional fees from $23,868 in 2001 to $40,158 in 2002 and
to $43,752 in 2003 was due to increased costs of services provided in relation
to audit and tax return processing.
No provision for losses on loans was required in 2003 as the general
partners felt the allowance for loan losses of $680,469 as of December 31, 2003,
was adequate to offset any potential loss in loans or real estate. A negative
provision of ($20,039) and ($18,299) in 2002 and 2003 was due to loan loss
recoveries during these two years. A provision of $37,371 was provided for in
2001.
11
Decrease in clerical costs from $38,313 in 2001, to $30,572 in 2002 and to
$23,014 in 2003, was due to a reduction in Partnership size from $9,432,246 in
2001, to $9,052,268 in 2002 and to $9,028,164 in 2003. The decline in
Partnership capital is due to capital and earnings withdrawals by limited
partners.
Other expenses decreased from $11,779 in 2001, to $10,889 in 2002, but
increased to $25,127 in 2003. This substantial increase of $14,238 over the 2002
total was due to increased expenses of $13,980 on real estate held for sale.
During the year 2003 the Partnership's annualized yield on compounding
accounts was 6.66% and on monthly distributing accounts it was 6.47%.
Beginning in 2001, the Federal Reserve reduced interest rates significantly
by cutting the Federal Funds Rate 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 similar to those placed during 2003. 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. As prepayments occur, the general
partners expect to replace paid off loans with loans at somewhat lower interest
rates. Loan demand from qualified borrowers is adequate to generally keep the
partners capital fully invested. At this time, the general partners believe that
the average loan portfolio interest rate will stabilize over the year 2004.
Based upon the rates payable in connection with the existing loans, and
anticipated interest rates to be charged by the Partnership and the general
partners' experience, the general partners anticipate that the annualized yield
will range between 6% and 7% in 2004.
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 Owned ("REO") 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. 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, the
Northern California real estate market slowed and the national and local
economies have slipped into recession. During 2002 and 2003, the economy has
stabilized, but is still stagnant. 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 December 31, 2003, there were no properties in foreclosure. The
Partnership enters into workout agreements with borrowers who are past maturity
or delinquent in their regular payments. The Partnership had workout agreements
on two loans totaling $64,936 as of December 31, 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 workout agreements existing at December 31, 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 $37,371,
($20,039) and ($18,299), as provisions (recoveries) for losses on loans and real
estate for the years ended December 31, 2001, 2002 and 2003, respectively. The
provision for losses on loans and real estate was decreased by $28,293 to
$37,371 in 2001, by $57,410 to ($20,039) in 2002. The Partnership recorded an
additional reduction of loan loss reserves of $18,299 in 2003. These decreases
reflect reduced expected loan and REO anticipated losses in the various years
and that current reserves for losses are adequate to handle potential losses. If
conditions change, the Partnership may again increase its provisions for loan
losses.
12
The Partnership may restructure loans. This is done either through the
modification of an existing loan or by rewriting a whole new loan. A
modification could involve, among other conditions, an extension in maturity
date, a reduction in repayment amount, a change in interest rate, or granting of
additional loan funds.
During 2003 the Partnership restructured two loans into one existing loan
with a lower interest rate. This resulted in an increase to loans receivable of
$107,198 and a decrease to accrued interest and late fees and advances of
$88,685 and $18,513, respectively. During 2002 the Partnership restructured four
loans into two new loans with a lower interest rate. This resulted in an
increase to loans receivable and the allowance for loan losses of $420,969 and
$47,489, respectively, and a decrease to accrued interest and advances of
$345,796 and $27,684, respectively.
Borrower Liquidity and Capital Resources.
The partnership relies upon loan payoffs, borrowers' mortgage payments,
and, to a lesser degree, its line of credit for the source of funds for loans.
Recently, mortgage interest rates have decreased somewhat from those available
at the inception of the partnership. If interest rates were to increase
substantially, the yield of the partnership's loans may provide lower yields
than other comparable debt-related investments. Additionally, since the
partnership has made primarily fixed rate loans, if interest rates were to rise,
the likely result would be a slower prepayment rate for the partnership. This
could cause a lower degree of liquidity as well as a slowdown in the ability of
the partnership to invest in loans at the then current interest rates.
Conversely, in the event interest rates were to decline, the partnership could
see significant borrower prepayments, which, if the partnership can only obtain
the then existing lower rates of interest may cause a dilution of the
partnership's yield on loans, thereby lowering the partnership's overall yield
to the limited partners. The partnership to a lesser degree relies upon its line
of credit to fund loans. Generally, the partnership's loans are fixed rate,
whereas the credit line is a variable rate loan. In the event of a significant
increase in overall interest rates, the credit line rate of interest could
increase to a rate above the average portfolio rate of interest. Should such an
event occur, the general partners would desire to pay off the line of credit.
Retirement of the line of credit would reduce the overall liquidity of the
partnership. Cash is constantly being generated from borrower payments of
interest, principal and loan payoffs. Currently, cash flow greatly exceeds
partnership expenses and earnings requirements. Excess cash flow is invested in
new loan opportunities, when available, and is used to reduce the partnership
credit line or for other partnership business.
At the time of subscription to the Partnership, limited partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound earnings in their capital account. For the years
ended December 31, 2001, 2002 and 2003, the Partnership made distributions of
earnings to limited partners of $374,689, $303,020, and $211,610, respectively.
Distribution of earnings to limited partners, which were not withdrawn after
allocation of syndication costs for the years ended December 31, 2001, 2002 and
2003 were $438,296, $452,827, and $375,105, respectively. As of December 31
2001, 2002 and 2003, limited partners electing to withdraw earnings represented
42%, 36% and 34% 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 years ended December 31, 2001, 2002 and 2003,
$98,857, $186,716, and $22,690 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 December 31, 2001, 2002, and 2003, respectively.
Additionally, for the years ended December 31, 2001, 2002, and 2003,
$1,089,113, $646,089, and $376,511, 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
13
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.
Earnings and capital liquidations, including early withdrawals, during the
three years ended December 31, 2003 were:
Years ended December 31,
Earnings Capital
Liquidation Liquidation Total
-------------- ------------- ------------
2001 $ 374,689 *$ 1,187,970 $ 1,562,659
2002 $ 303,020 *$ 832,805 $ 1,135,825
2003 $ 211,610 *$ 399,201 $ 610,811
* These amounts represent gross of early withdrawal penalties.
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
December 31, 2003, approximately 72.24% ($5,982,029) of the loans held by the
Partnership were in five of the 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 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 economy, which includes lower earnings, job
losses and layoffs.
Recently the national Northern California economies seem to be improving.
Job creation remains a concern, as little job creation seems to be evident. The
partnership makes loans primarily in Northern California and real estate values
of residential, commercial, multi-family properties and land are of particular
interest to the partnership. Real estate is the primary security for the
partnership's loans.
14
The residential real estate market in California continues to appreciate.
The Office of Federal Housing Enterprise Oversight reported that the state
average home prices rose 13.8% in 2003. Southern California home price
appreciation outpaced Northern California home price appreciation. Yet even
Santa Clara County had positive price appreciation in 2003. The residential
market is not all positive. The luxury home market in the San Francisco Bay Area
is still well below values posted in 1999 and 2000. The strong residential real
estate outlook implies that collateral values behind the Partnership's loans
should remain firm and assist in reducing losses if the take back of collateral
through the foreclosure process should eventuate.
While the residential market outlook remains strong overall the commercial
real estate market is not as strong.
Commercial property values are chiefly tied to the income a property can
produce. Vacancies in office properties since 2000 have risen sharply in the San
Francisco Bay Area. In the fourth quarter of 2003 both BT Commercial Real Estate
and Cornish and Carey Commercial/Oncor International reported declines in San
Francisco peninsula office vacancies. Each reported about 1% declines to about
27.3%. Colliers International reported a decline in San Francisco office vacancy
in the fourth quarter of 2003 from 17.3% to 16.9%. Rents have also continued to
fall and in San Francisco the average is $29.31, which is down from $30.04 at
the start of 2003. These statistics seem to indicate that the commercial rental
market is stabilizing but that existing vacancies will take a long time to fill.
Commercial real estate values have decreased but lowered capitalization rates
have helped keep commercial property from large value reductions. The decrease
in vacancies could mean improved cash flows for owners, which translates into
improved debt service abilities.
As of December 31, 2003, the Partnership had an average loan to value ratio
based on appraisals and prior liens as of the date the loan was made of 60.79%.
This did not account for any increases or decreases in property values since the
date the loan was made, nor does it include any reductions in prior lien
principal through amortization of payments after the loan was made. This low
loan to value ratio will assist the Partnership in weathering loan delinquencies
and foreclosures should they eventuate.
The foregoing analysis of year 2003 issues includes forward-looking
statements and predictions about possible or future events, results of
operations, and financial condition. As such, this analysis may prove to be
inaccurate because of assumptions made by the general partners or the actual
development of future events. No assurance can be given that any of these
statements or predictions will ultimately prove to be correct or substantially
correct.
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, secured loans held in the Partnership's portfolio and on our
line of credit as of December 31, 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 2004 through 2008 and separately
aggregates the information for all maturities arising after 2008. The carrying
values of these assets and liabilities approximate their fair market values as
of December 31, 2003:
2004 2005 2006 2007 2008 Thereafter Total
--------------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 287,315 $ 287,315
Average interest rate 0.68% 0.68%
Loans secured by deeds
of trust $2,334,650 2,622,109 809,894 1,521,152 199,415 793,606 $8,280,826
Average interest rate 10.78% 9.59% 8.70% 8.13% 10.50% 8.11% 9.45%
Interest bearing
Liabilities:
Line of credit $ 200,000 $ 200,000
Average interest rate 4.25% 4.25%
15
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
December 31, 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.
PORTFOLIO REVIEW - For the years ended December 31, 2001, 2002 and 2003.
Loan Portfolio
The Partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of December 31, 2001,
2002 and 2003 the Partnership's loans secured by real property collateral in
five of the San Francisco Bay Area counties (San Francisco, San Mateo, Santa
Clara, Alameda and Contra Costa) represented $6,784,000 (67.20%), $3,353,000
(52.20%), and $5,982,000 (72.24%), respectively, of the outstanding secured loan
portfolio. The remainder of the portfolio represented loans secured by real
estate located primarily in Northern California.
The following table sets forth the distribution of loans held by the
Partnership by property type for the years ended December 31, 2001, 2002 and
2003:
December 31,
---------------------------------------------------------------------------------------
2001 2002 2003
-------------------------- -------------------------- -------------------------
Single-family homes (1-4 units)
- owner occupied $ 622,435 6.17% $ 1,037,474 16.15% $ 853,869 10.31%
Single-family homes (1-4 units)
- non-owner occupied 1,435,444 14.23% 575,051 8.95% 1,589,092 19.19%
Apartments (over 4 units) 1,563,213 15.50% 708,648 11.03% 1,367,327 16.51%
Commercial 3,280,000 32.50% 2,045,811 31.85% 2,410,861 29.11%
Land 3,190,103 31.60% 2,057,000 32.02% 2,059,677 24.88%
------------ ---------- ------------ ---------- ----------- ----------
Total $10,091,195 100.00% $ 6,423,984 100.00% $8,280,826 100.00%
============ ========== ============ ========== =========== ==========
16
As of December 31, 2003, the Partnership held 23 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the secured loans held by the Partnership as of December 31, 2003.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF SECURED LOANS
As of December 31, 2003
# of Loans Amount Percent
------------- ------------ ----------
1st Mortgages 12 $3,733,346 45.09%
2nd Mortgages 10 3,872,480 46.76%
3rd Mortgages 1 675,000 8.15%
============= ============ ==========
Total 23 $8,280,826 100.00%
Maturing in 2004 8 $2,334,650 28.19%
Maturing in 2005 5 2,622,109 31.67%
Maturing in 2006 2 809,894 9.78%
Maturing after 12/31/06 8 2,514,171 30.36%
============= ============ ==========
Total 23 $8,280,826 100.00%
Average Secured Loan $ 360,036 4.35%
Largest Secured Loan 1,000,000 12.08%
Smallest Secured Loan 11,703 0.14%
Average Loan-to-Value based upon appraisals
and prior liens at time of loan 60.79%
The Partnership's largest loan in the principal amount of $1,000,000
represents 12.08% of outstanding secured loans and 10.77% of Partnership assets.
Larger loans sometimes increase above 10% of the secured loan portfolio or
Partnership assets as these amounts decrease due to limited partner withdrawals
and loan payoffs.
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 December 31, 2003 the general partners have determined that
the allowance for loan losses of $680,469 (7.53% of net assets) and the
allowance for real estate held for sale of $630,169 (6.98% of net assets) is
adequate in amount. Because of the number of variables involved, the magnitude
of the swings possible and the general partners' inability to control many of
these factors, actual results may and do sometimes differ significantly from
estimates made by the general partners. As of December 31, 2003, five loans were
delinquent over 90 days amounting to $2,259,756.
17
The Partnership also makes loans requiring periodic disbursements of funds.
As of December 31, 2003 there were two such loans. These loans include ground up
construction of buildings and loans for rehabilitation of existing structures.
Interest on these loans is computed at simple interest method and only on the
amounts disbursed on a daily basis.
A summary of the status of the Partnership's construction loans as of
December 31, 2003 is set forth below:
Complete Construction Rehabilitation
--------------------- ----------------
Disbursed funds $ 0 $1,202,431
Undisbursed funds $ 0 $ 75,255
Item 8 - Financial Statements and Supplementary Data
A - Financial Statements
The following financial statements of Redwood Mortgage Investors VII are
included in Item 8:
o Independent Auditors' Report
o Balance Sheets - December 31, 2003, and December 31, 2002
o Statements of Income for the years ended December 31, 2003, 2002
and 2001
o Statements of Changes in Partners' Capital for the years ended
December 31, 2003, 2002 and 2001
o Statements of Cash Flows for the years ended December 31, 2003, 2002
and 2001
o Notes to Financial Statements
B - Financial Statement Schedules
The following financial statement schedules of Redwood Mortgage Inventors
VII are included in Item 8.
o Schedule II - Valuation and Qualifying Accounts
o Schedule IV - Mortgage Loans on Real Estate
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
18
REDWOOD MORTGAGE INVESTORS VII
(A CALIFORNIA LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2003
19
TABLE OF CONTENTS
Page No.
Independent Auditors' Report 21
Balance Sheets 22
Statements of Income 23
Statements of Changes in Partners' Capital 24
Statements of Cash Flows 25
Notes to Financial Statements 26
Supplemental Schedules
Schedule II - Valuation and Qualifying Accounts 37
Schedule IV - Mortgage Loans on Real Estate 38
20
ARMANINO McKENNA
CERTIFIED PUBLIC ACCOUNTANTS
12667 Alcosta Blvd., Suite 500
San Ramon, CA 94583
(925) 790-2600
INDEPENDENT AUDITORS' REPORT
To the Partners
Redwood Mortgage Investors VII
Redwood City, California
We have audited the accompanying balance sheets of Redwood Mortgage
Investors VII (a California limited partnership) as of December 31, 2003 and
2002 and the related statements of income, changes in partners' capital and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Redwood Mortgage Investors
VII as of December 31, 2003 and 2002 and the results of its operations and cash
flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedules II and IV are presented
for purposes of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARMANINO McKENNA LLP
San Ramon, California
February 13, 2004
21
REDWOOD MORTGAGE INVETORS VII
(A California Limited Partnership)
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
------------ ------------
Cash and cash equivalents $ 321,114 $ 1,057,845
------------ ------------
Loans
Loans secured by deeds of trust 8,280,826 6,423,984
Loans, unsecured, net of discount of $128,920
and $150,407 in 2003 and 2002, respectively 232,551 216,770
Allowance for loan losses (680,469) (791,882)
------------ ------------
Net loans 7,832,908 5,848,872
------------ ------------
Interest and other receivables
Accrued interest and late fees 489,995 304,936
Advances on loans 6,484 17,230
------------ ------------
Total interest and other receivables 496,479 322,166
------------ ------------
Investment in limited liability company - 1,212,722
------------ ------------
Real estate held for sale, net 633,053 683,136
------------ ------------
Total assets $ 9,283,554 $ 9,124,741
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ 200,000 $ -
Accounts payable 4,102 2,593
Payable to affiliate 51,288 32,176
Deferred interest - 37,704
------------ ------------
Total liabilities 255,390 72,473
------------ ------------
Partners' capital
Limited partners' capital, subject to redemption 9,016,191 9,040,290
General partners' capital 11,973 11,978
------------ ------------
Total partners' capital 9,028,164 9,052,268
------------ ------------
Total liabilities and partners' capital $ 9,283,554 $ 9,124,741
============ ============
The accompanying notes are an integral part of these financial statements
22
REDWOOD MORTGAGE INVETORS VII
(A California Limited Partnership)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------- -------------
Revenues
Interest on loans $ 748,625 $ 1,037,717 $ 1,172,474
Late fees 24,053 24,920 8,495
Other 9,602 15,549 11,412
------------ ------------- -------------
782,280 1,078,186 1,192,381
------------ ------------- -------------
Expenses
Mortgage servicing fees 73,062 163,531 94,396
Interest expense 8,972 54,724 128,224
Clerical costs from Redwood Mortgage Corp. 23,014 30,572 38,313
Asset management fees 34,011 34,869 37,233
Provisions for (recovery of) losses on loans and real estate (18,299) (20,039) 37,371
Professional services 43,752 40,158 23,868
Other 25,127 10,889 11,779
------------ ------------- -------------
189,639 314,704 371,184
------------ ------------- -------------
Net income $ 592,641 $ 763,482 $ 821,197
============ ============= =============
Net income
General partners (1%) $ 5,926 $ 7,635 $ 8,212
Limited partners (99%) 586,715 755,847 812,985
------------ ------------- -------------
$ 592,641 $ 763,482 $ 821,197
============ ============= =============
Net income per $1,000 invested by limited partners for entire period
Where income is reinvested and compounded $ 67 $ 85 $ 85
Where partner receives income in monthly distributions $ 65 $ 82 $ 82
The accompanying notes are an integral part of these financial statements
23
REDWOOD MORTGAGE INVETORS VII
(A California Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Limited Partners' Capital
-------------------------------------------
Limited Total General
Partners' Formation Limited Partners' Total
Capital Loan Partners' Capital Partners'
Accounts Receivable Capital Accounts Capital
------------ ------------ ------------- ------------ -------------
Balances at December 31, 2000 $10,169,942 $ (75,612) $10,094,330 $ 11,978 $10,106,308
Collections on Formation Loan - 71,460 71,460 - 71,460
Net income 812,985 - 812,985 8,212 821,197
Early withdrawal penalties (7,908) 4,152 (3,756) - (3,756)
Partners' withdrawals (1,554,751) - (1,554,751) (8,212) (1,562,963)
------------ ------------ ------------- ------------ -------------
Balances at December 31, 2001 9,420,268 - 9,420,268 11,978 9,432,246
Net income 755,847 - 755,847 7,635 763,482
Early withdrawal penalties (11,619) - (11,619) - (11,619)
Partners' withdrawals (1,124,206) - (1,124,206) (7,635) (1,131,841)
------------ ------------ ------------- ------------ -------------
Balances at December 31, 2002 9,040,290 - 9,040,290 11,978 9,052,268
Net income 586,715 - 586,715 5,926 592,641
Early withdrawal penalties (1,815) - (1,815) - (1,815)
Partners' withdrawals (608,999) - (608,999) (5,931) (614,930)
------------ ------------ ------------- ------------ -------------
Balances at December 31, 2003 $ 9,016,191 $ - $ 9,016,191 $ 11,973 $ 9,028,164
============ ============ ============= ============ =============
The accompanying notes are an integral part of these financial statements
24
REDWOOD MORTGAGE INVETORS VII
(A California Limited Partnership)
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities
Net income $ 592,641 $ 763,482 $ 821,197
Adjustments to reconcile net income to
net cash provided by operating activities
Provisions for (recovery of) losses on loans and real estate (18,299) (20,039) 37,371
Early withdrawal penalty credited to income (1,815) (11,619) (3,756)
Amortization of discount on unsecured loans (21,487) - -
Change in operating assets and liabilities
Loans, unsecured 5,706 45,292 14,690
Accrued interest and late fees (273,744) (73,456) (302,868)
Advances on loans (7,767) (47,216) (20,840)
Accounts payable 1,509 (8,702) 7,193
Payable to affiliate 19,112 28,860 3,316
Deferred interest (37,704) 35,382 2,322
------------ ------------ ------------
Net cash provided by operating activities 258,152 711,984 558,625
------------ ------------ ------------
Cash flows from investing activities
Principal collected on loans 2,556,852 4,569,574 6,123,575
Loans originated (4,349,527) (1,447,329) (3,066,276)
Payments for real estate - (11,033) (449,197)
Proceeds from disposition of real estate - - 38,620
Payments on investment in limited liability company (149,693) (116,354) -
Proceeds from investment in limited liability company 1,362,415 - -
------------ ------------ ------------
Net cash provided by (used in) investing activities (579,953) 2,994,858 2,646,722
------------ ------------ ------------
Cash flows from financing activities
Borrowings (repayments) on line of credit, net 200,000 (1,907,000) (1,593,000)
Formation loan collections - - 71,460
Partners' withdrawals (614,930) (1,131,841) (1,562,963)
------------ ------------ ------------
Net cash used in financing activities (414,930) (3,038,841) (3,084,503)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (736,731) 668,001 120,844
Cash and cash equivalents at beginning of year 1,057,845 389,844 269,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 321,114 $ 1,057,845 $ 389,844
============ ============ ============
Supplemental disclosures of cash flow information
Cash payments for interest $ 8,972 $ 54,724 $ 128,224
The accompanying notes are an integral part of these financial statements
25
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. Organization and General
Redwood Mortgage Investors VII, (the "Partnership") is a California limited
partnership organized on June 30, 1989. The general partners are Michael R.
Burwell, an individual, and GYMNO Corporation, a California corporation. The
Partnership was organized to engage in business as a mortgage lender for the
primary purpose of making loans secured by deeds of trust on California real
estate. Loans are being arranged and serviced by Redwood Mortgage Corp., an
affiliate of the general partners.
Term of the Partnership
The Partnership is scheduled to terminate on December 31, 2029, unless
sooner terminated as provided in the partnership agreement.
2. Summary of Significant Accounting Policies
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 dates 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.
Loans, secured by deeds of trust
Loans generally are stated at their outstanding unpaid principal balance
with interest thereon being accrued by the effective interest method.
If the probable ultimate recovery of the carrying amount of a loan, with
due consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement, and the shortfall in
the amounts due are not insignificant, the carrying amount of the loan is
reduced to the present value of future cash flows discounted at the loan's
effective interest rate. If a loan is collateral dependent, it is valued at the
estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the 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. At December 31, 2003 and 2002, there
were loans categorized as impaired by the Partnership of $96,710 and $96,710,
respectively. In addition, the impaired loans had accrued interest and advances
totaling $7,977 and $7,841 at December 31, 2003 and 2002, respectively. The
reduction in carrying value of the impaired loans of $14,596 and $6,620 at
December 31, 2003 and 2002, respectively, is included in the allowance for loan
losses. The average recorded investment in the impaired loans was $96,710,
$493,074 and $890,018 for December 31, 2003, 2002 and 2001, respectively.
26
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
2. Summary of Significant Accounting Policies (continued)
Loans, secured by deeds of trust (continued)
At December 31, 2003 and 2002, the Partnership had 5 and 9 loans past due
90 days or more totaling $2,259,756 and $2,913,212, 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 December 31, 2003 and 2002, as
presented in Note 11, the average loan to appraised value of security based on
appraisals and prior liens at the time the loans were consummated was 60.79% and
65.86%, respectively. When loans are considered impaired, the allowance is
updated to reflect the change in the valuation of collateral security. However,
a low loan to value ratio has the tendency to minimize reductions for
impairment.
During 2003, the Partnership restructured two loans into one existing loan
with a lower interest rate. The amount restructured was $579,005.
During 2002, the Partnership restructured four previously impaired loans
into two new loans with a lower interest rate. The amount restructured was
$1,246,754.
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral 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.
The composition of the allowance for loan losses as of December 31, 2003
and 2002 was as follows:
2003 2002
----------- -----------
Impaired loans $ 14,596 $ 6,620
Specified loans 321,263 163,731
General 236,984 533,200
Unsecured loans 107,626 88,331
----------- -----------
$680,469 $791,882
=========== ===========
Activity in the allowance for loan losses is as follows for the years ended
December 31:
2003 2002 2001
---------- ----------- -----------
Beginning balance $791,882 $887,578 $850,548
Provision for loan losses - 20,394 37,371
Recoveries (18,299) (40,433) -
Restructures / transfers (50,083) (64,210) -
Write-offs (43,031) (11,447) (341)
---------- ----------- -----------
$680,469 $791,882 $887,578
========== =========== ===========
27
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
2. Summary of Significant Accounting Policies (continued)
Cash and cash equivalents
The Partnership considers all highly liquid financial instruments with
maturities of three months or less at the time of purchase to be cash
equivalents.
Real estate held for sale
Real estate held for sale includes real estate acquired through foreclosure
and is stated at the lower of the recorded investment in the loan, plus any
senior indebtedness, or at the property's estimated fair value, less estimated
costs to sell.
The Partnership periodically compares the carrying value of real estate to
expected future undiscounted cash flows for the purpose of assessing the
recoverability of the recorded amounts. If the carrying value exceeds future
undiscounted cash flows, the assets are reduced to fair value. During 2003 and
2002, the Partnership transferred $50,083 and $200,030, respectively, from the
allowance for loan losses to the allowance for losses on real estate held for
sale.
Investment in limited liability company
Investment in limited liability company is accounted for using the equity
method. In 2003 and 2002, the Company had a 34% interest in the Stockton Street
Property Company, LLC (see Note 6).
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.
Net income per $1,000 invested
Amounts reflected in the statements of income as net income per $1,000
invested by limited partners for the entire period are amounts allocated to
limited partners who had their investment throughout the period and have elected
to either leave their earnings to compound or have elected to receive monthly
distributions of their net income. Individual income is allocated each month
based on the limited partners' pro rata share of partners' capital. Because the
net income percentage varies from month to month, amounts per $1,000 will vary
for those individuals who made or withdrew investments during the period, or
select other options.
Late fee revenue
Late fees are generally charged at 6% of the monthly installment payment
past due. During 2003, 2002 and 2001, late fee revenue of $24,053, $24,920 and
$8,495, respectively, was recorded. The Partnership has a late fee receivable at
December 31, 2003 and 2002 of $24,118 and $13,320.
28
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
2. Summary of Significant Accounting Policies (continued)
Reclassification
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 presentation.
Recently issued accounting pronouncements
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45).
FIN 45 requires the recognition of liabilities for guarantees that are issued or
modified subsequent to December 31, 2002. The liabilities should reflect the
fair value, at inception, of the guarantor's obligations to stand ready to
perform, in the event that the specified triggering events or conditions occur.
The implementation of FIN 45 did not have any significant effect on the
Partnership.
In January 2003, FASB issued FASB Interpretation 46 "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46 is
effective immediately for any variable interest entities created after January
31, 2003 and is effective beginning in the third quarter of 2003 to any variable
interest entities created prior to the issuance of the interpretation. FIN 46
provides a new framework to identify variable interest entities and to determine
when an entity should include the assets, liabilities, non-controlling interests
and the results of activities of a variable interest entity in its financial
statements. The implementation of FIN 46 did not have any significant effect on
the Partnership.
In December 2003, the American Institute of Certified Public Accountants
(AICPA) Accounting Standards Executive Committee (AcSEC) issued Statement of
Position 03-03, "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer"(SOP 03-3). SOP 03-03 is effective for loans acquired in fiscal years
beginning after December 15, 2004, with early adoption encouraged. SOP 03-03
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt securities acquired in a transfer if those differences are attributable, at
least in part, to credit quality. It includes loans acquired in business
combinations and applies to all nongovernmental entities, including
not-for-profit organizations. The SOP does not apply to loans originated by the
entity. The implementation of SOP 03-03 is not anticipated to have any
significant effect on the Partnership.
3. Other Partnership Provisions
The Partnership is a California limited partnership. The rights, duties and
powers of the general and limited partners of the partnership are governed by
the limited partnership agreement and Sections 15611 et seq. of the California
Corporations Code.
The general partners are in complete control of the Partnership business,
subject to the voting rights of the limited partners on specified matters. Any
one of the general partners acting alone has the power and authority to act for
and bind the Partnership.
29
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
3. Other Partnership Provisions (continued)
A majority of the outstanding limited partnership interests may, without
the permission of the general partners, vote to: (i) terminate the partnership,
(ii) amend the limited partnership agreement, (iii) approve or disapprove the
sale of all or substantially all of the assets of the Partnership and (iv)
remove or replace one or all of the general partners.
The approval of all the limited partners is required to elect a new general
partner to continue the Partnership business where there is no remaining general
partner after a general partner ceases to be a general partner other than by
removal.
Election to receive monthly, quarterly or annual distributions
At subscription, investors elected either to receive monthly, quarterly or
annual distributions of earnings allocations, or to allow earnings to compound.
Subject to certain limitations, a compounding investor may subsequently change
his election, but an investor's election to have cash distributions is
irrevocable.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of Partnership units
and accordingly an investment in the Partnership is not liquid. Limited partners
have no right to withdraw from the Partnership or to obtain the return of their
capital account for at least one year from the date of purchase of units.
In order to provide a certain degree of liquidity to the limited partners
after the one-year period, limited partners may withdraw all or part of their
capital accounts from the Partnership in four quarterly installments beginning
on the last day of the calendar quarter following the quarter in which the
notice of withdrawal is given, subject to a 10% early withdrawal penalty. The
10% penalty is applicable to the amount withdrawn early and will be deducted
from the capital account.
After five years from the date of purchase of the units, limited partners
have the right to withdraw from the Partnership, on an installment basis.
Generally this is done over a five-year period in twenty quarterly installments.
Once a limited partner has been in the Partnership for the minimum five-year
period, no penalty will be imposed if withdrawal is made in twenty quarterly
installments or longer. Notwithstanding the five-year (or longer) withdrawal
period, the general partners may liquidate all or part of a limited partner's
capital account in four quarterly installments beginning on the last day of the
calendar quarter following the quarter in which the notice of withdrawal is
given. This withdrawal is subject to a 10% early withdrawal penalty applicable
to any sums withdrawn prior to the time when such sums could have been withdrawn
without penalty.
The Partnership will not establish a reserve from which to fund withdrawals
and, accordingly, the Partnership's capacity to return a limited partner's
capital account is restricted to the availability of Partnership cash flow.
Furthermore, no more than 20% of the total limited partners' capital accounts
outstanding at the beginning of any year, shall be liquidated during any
calendar year.
30
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
4. General Partners and Related Parties
The following are commissions and fees which will be paid to the general
partners and affiliates:
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. During 2003, 2002 and 2001, loan brokerage commissions paid by the
borrowers were $111,927, $24,661 and $84,137, respectively.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued. Additional service fees are recorded upon the receipt of any
subsequent payments on impaired loans. Mortgage servicing fees of $73,062,
$163,531 and $94,396 were incurred for 2003, 2002 and 2001, respectively. The
Partnership has a payable to Redwood Mortgage Corp. for servicing fees of
$51,288 and $32,176 at December 31, 2003 and 2002, respectively.
Asset management fee
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). Asset management fees of $34,011, $34,869 and $37,233 were
incurred for 2003, 2002 and 2001, respectively.
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to 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.
During 2003, 2002 and 2001, operating expenses totaling $23,014, $30,572 and
$38,313, respectively, were reimbursed to Redwood Mortgage Corp.
31
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
5. 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 December 31, 2003 and 2002:
2003 2002
------------ ------------
Costs of properties $ 1,263,222 $ 1,263,222
Reduction in value (630,169) (580,086)
------------ ------------
Real estate held for sale, net $ 633,053 $ 683,136
============ ============
6. 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 were capitalized during
construction; thus, there was no income or expense recognized by Stockton during
2002 and a portion of 2003. During 2003, the LLC completed construction and the
property was sold. The Partnership recognized a loss of $42,518 during 2003
related to this property.
7. 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 December 31,
2003 and 2002 were $200,000 and $0, respectively, and the interest rate was
4.25% (4.00% prime + .25%) at December 31, 2003. This line of credit expires
December 2, 2004 and requires the Partnership to meet certain financial
covenants. As of December 31, 2003 and 2002, the Partnership was in compliance
with all loan covenants.
8. Income Taxes
The following reflects a reconciliation of partners' capital reflected in
the financial statements to the tax basis of the Partnership capital:
2003 2002
------------ ------------
Partners' capital per financial statements $ 9,028,164 $ 9,052,268
Allowance for loan losses 680,469 791,882
Allowance for real estate losses 630,169 580,086
------------ ------------
Partners' capital tax basis $10,338,802 $10,424,236
============ ============
In 2003 and 2002, approximately 69% of taxable income was allocated to
tax-exempt organizations (i.e., retirement plans).
32
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
9. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
(a) Cash and Cash Equivalents - The carrying amount equals fair value. All
amounts, including interest bearing, are subject to immediate withdrawal.
(b) Secured loans had a carrying value of $8,280,826 and $6,423,984 at
December 31, 2003 and 2002, respectively. The fair value of these loans of
$8,159,401 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.
10. Non-cash Transactions
During 2003, the Partnership restructured two loans that resulted in an
increase to loans receivable of $107,198 and a decrease to accrued interest and
late fees and advances of $88,685 and $18,513, respectively.
During 2002, the Partnership foreclosed on one property and transferred its
interest into a LLC (see Note 6), which resulted in an increase in investments
of $1,096,368 and a decrease in loans receivable, accrued interest and advances
of $954,488, $88,913 and $52,967, respectively.
During 2002, the Partnership restructured four loans that resulted in an
increase to loans receivable and the allowance for loan losses of $420,969 and
$47,489, respectively, and a decrease to accrued interest and advances of
$345,796 and $27,684, respectively.
During 2002, the Partnership originated two unsecured non-interest bearing
loans, which resulted in an increase to unsecured loans of $238,738 and the
allowance for loan losses of $88,331. The Partnership imputed interest on these
loans at 10.5% per annum, which resulted in a decrease to unsecured loans and an
increase to discount on loans of $150,407.
33
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
11. Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At December 31, 2003 and
2002, there were 23 and 25 secured loans outstanding, respectively, with the
following characteristics:
2003 2002
------------- -------------
Number of secured loans outstanding 23 25
Total secured loans outstanding $ 8,280,826 $ 6,423,984
Average secured loan outstanding $ 360,036 $ 256,959
Average secured loan as percent of total 4.35% 4.00%
Average secured loan as percent of Partners' capital 3.99% 2.84%
Largest secured loan outstanding $ 1,000,000 $ 1,000,000
Largest secured loan as percent of total 12.08% 15.57%
Largest secured loan as percent of Partners' capital 11.08% 11.05%
Number of counties where security is located (all California) 8 11
Largest percentage of loans in one county 44.11% 41.38%
Average secured loan to appraised value of security based on
appraisals and prior liens at date of loan 60.79% 65.86%
Number of secured loans in foreclosure 0 2
Amount of secured loans in foreclosure $ 0 $ 236,807
The following categories of secured loans were held at December 31, 2003
and 2002:
2003 2002
------------- -------------
First trust deeds $ 3,733,346 $ 3,269,897
Second trust deeds 3,872,480 2,939,753
Third trust deeds 675,000 214,334
------------- -------------
Total loans 8,280,826 6,423,984
Prior liens due other lenders at time of loan 4,319,281 5,475,725
------------- -------------
Total debt $12,600,107 $11,899,709
============= =============
Appraised property value at time of loan $20,728,514 $18,069,602
Total loans as percent of appraisals based on appraisals
and prior liens at date of loan 60.79% 65.86%
Loans by type of property
Owner occupied homes $ 853,869 $ 1,037,474
Non-owner occupied homes 1,589,092 575,051
Apartments 1,367,327 708,648
Commercial 2,410,861 2,045,811
Land 2,059,677 2,057,000
------------- -------------
$ 8,280,826 $ 6,423,984
============= =============
34
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
11. Asset Concentrations and Characteristics (continued)
Scheduled maturity dates of secured loans as of December 31, 2003 are as
follows:
Year Ending December 31,
2004 $ 2,334,650
2005 2,622,109
2006 809,894
2007 1,521,152
2008 199,415
Thereafter 793,606
------------
Total $ 8,280,826
============
The scheduled maturities for 2004 above include approximately $2,207,200 in
7 loans, which are past maturity at December 31, 2003. Interest payments on four
of these loans with an aggregate principal balance of $1,985,357 were
categorized as delinquent over 90 days and are included in total loans 90 days
or more delinquent presented in Note 2.
Cash deposits per bank at December 31, 2003 of $457,204 were in one bank.
The balance exceeded federal insurance limits (up to $100,000 per bank) by
$357,204. 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 had a substantial amount of its loan receivable balance due
from one borrower in 2003 and 2002. This borrower accounted for approximately
15% and 22% of the loan balance at December 31, 2003 and 2002, respectively.
This borrower accounted for approximately 12%, 7% and 0% of interest revenue for
the years ended December 31, 2003, 2002 and 2001.
12. 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. The Partnership is not obligated to fund additional money as of
December 31, 2003. As of December 31, 2003 the Partnership had two loans under
workout agreements totaling $64,936.
Construction loans
The Partnership has construction loans on projects, which are at various
stages of completion of the construction process at December 31, 2003. The
Partnership has approved the borrowers up to a maximum loan balance; however,
disbursements are made during completion phases throughout the construction
process. At December 31, 2003, there were $75,255 of undistributed construction
loans which will be funded by a combination of retained investors' earnings,
line of credit draw-downs and retirement of principal on current loans.
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.
35
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
13. Selected Financial Information (Unaudited)
Calendar Quarter
----------------------------------------------------------
First Second Third Fourth Annual
----------- ----------- ----------- ----------- -------------
Revenues
2003 $ 173,306 $ 187,186 $ 192,171 $ 229,617 $ 782,280
2002 $ 312,044 $ 278,648 $ 260,548 $ 226,946 $1,078,186
2001 $ 349,061 $ 291,342 $ 261,312 $ 290,666 $1,192,381
Expenses
2003 $ 29,061 $ 21,330 $ 50,959 $ 88,289 $ 189,639
2002 $ 115,413 $ 81,173 $ 69,770 $ 48,348 $ 314,704
2001 $ 137,576 $ 84,453 $ 58,231 $ 90,924 $ 371,184
Net income allocated to general partners
2003 $ 1,442 $ 1,659 $ 1,412 $ 1,413 $ 5,926
2002 $ 1,966 $ 1,975 $ 1,908 $ 1,786 $ 7,635
2001 $ 2,115 $ 2,069 $ 2,031 $ 1,997 $ 8,212
Net income allocated to limited partners
2003 $ 142,803 $ 164,197 $ 139,800 $ 139,915 $ 586,715
2002 $ 194,665 $ 195,500 $ 188,870 $ 176,812 $ 755,847
2001 $ 209,370 $ 204,820 $ 201,050 $ 197,745 $ 812,985
Net income per $1,000 invested
where income is reinvested
2003 $ 16 $ 16 $ 16 $ 19 $ 67
2002 $ 21 $ 21 $ 21 $ 22 $ 85
2001 $ 21 $ 21 $ 21 $ 22 $ 85
where income is withdrawn
2003 $ 16 $ 16 $ 16 $ 17 $ 65
2002 $ 21 $ 21 $ 21 $ 19 $ 82
2001 $ 20 $ 21 $ 21 $ 20 $ 82
36
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
December 31, 2003
Col. C - Additions
Col B. -------------------------------------
Balance at (1) (2) Col E.
Col A. Beginning Charged to Costs Charged to Col. D Balance at
Description of Period And Expenses Other Accounts Deductions End of Period
- --------------------------------------- ------------ ------------------ ---------------- ------------- ---------------
(a)
Year Ended December 31, 2003
Deducted from asset accounts
Allowance for doubtful accounts $ 791,882 $ (68,382) $ - $ (43,031) $ 680,469
Cumulative write-down of
real estate held for sale (REO) 580,086 50,083 - - 630,169
------------ ------------------ ---------------- ------------- ---------------
$ 1,371,968 $ (18,299) $ - $ (43,031) $ 1,310,638
============ ================== ================ ============= ===============
(a) Represents write-offs on loans.
37
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
RULE 12-29 LOANS ON REAL ESTATE
DECEMBER 31, 2003
Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J
Col. A Interest Final Period Prior Face Amount Carry Amount Principal Amt Type Geographic
Descript Rate Maturity Payment Liens Mortgage Mortgage Delinquent Lien Location
- ----------------------------------------------------------------------------------------------------------------------
Apts. 6.50% 05/01/06 $ 541 $ 89,904 $ 75,000 $ 96,716 $ 96,716 2nd Sacramento
Apts. 7.00% 02/10/05 234 80,250 40,125 40,125 - 2nd San Francisco
Comm. 9.00% 05/10/02 671 - 83,333 77,472 77,472 1st Shasta
Comm. 7.00% 07/01/02 1,131 - 146,667 132,568 132,568 1st Contra Costa
Land 11.00% 01/01/01 9,167 201,686 1,000,000 773,510 773,510 2nd Stanislaus
Land 11.00% 07/01/01 9,167 137,737 1,000,000 975,793 975,793 2nd Stanislaus
Land 11.00% 11/01/00 - - 85,366 - - 3rd Stanislaus
Land 11.50% 07/01/01 1,753 1,000,000 182,927 182,927 182,927 2nd Stanislaus
Apts. 12.00% 07/01/06 5,755 - 720,000 713,178 - 1st San Francisco
Comm. 10.00% 12/01/03 471 - 53,636 53,229 53,229 1st Stanislaus
Comm. 10.00% 12/01/01 105 82,723 11,919 11,702 11,702 2nd Stanislaus
Comm. 10.00% 07/01/11 1,995 - 219,538 214,135 - 1st Santa Clara
Land 8.00% 12/01/04 900 - 135,000 127,448 - 1st Sacramento
Comm. 7.50% 02/28/07 3,206 - 513,000 560,354 - 1st Santa Clara
Comm. 7.50% 02/28/07 4,290 - 686,400 686,400 - 1st Alameda
Res. 6.13% 08/01/32 1,823 - 300,000 294,469 - 1st San Mateo
Res. 11.00% 09/01/07 2,619 415,386 275,000 274,398 274,398 2nd San Mateo
Apts. 10.00% 10/14/05 7,121 610,555 900,000 417,733 - 2nd Alameda
Apts. 10.50% 06/01/08 944 389,330 100,000 99,576 - 2nd Alameda
Res. 10.50% 07/01/08 915 - 100,000 99,839 - 1st San Francisco
Res. 8.75% 09/01/05 4,396 - 900,000 489,254 - 1st Alameda
Res. 8.75% 01/01/09 2,242 - 285,000 285,000 - 1st Alameda
Comm. 9.50% 01/01/05 5,344 463,805 675,000 675,000 - 3rd Alameda
Res. 10.00% 12/25/05 8,333 847,905 1,000,000 1,000,000 - 2nd Alameda
--------------------------------------------------------------
Total $ 73,123 $4,319,281 $9,487,911 $8,280,826 $2,578,315
==============================================================
38
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
SCHEDULE IV (continued)
MORTGAGGE LOANS ON REAL ESTATE
RULE 12-29 LOANS ON REAL ESTATE
DECEMBER 31, 2003
Reconciliation of carrying amount (cost) of secured loans at close of
periods
Year ended December 31,
------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Balance at beginning of year $ 6,423,984 $ 10,091,195 $ 12,794,297
-------------- -------------- --------------
Additions during period
New loans 4,349,527 1,447,329 3,066,276
Other 107,198 420,969 354,197
-------------- -------------- --------------
Total additions 4,456,725 1,868,298 3,420,473
-------------- -------------- --------------
Deductions during period
Collections of principal 2,556,852 4,569,574 6,123,575
Foreclosures - 954,488 -
Cost of loans sold - - -
Amortization of premium - - -
Other 43,031 11,447 -
-------------- -------------- --------------
Total deductions 2,599,883 5,535,509 6,123,575
-------------- -------------- --------------
Balance at close of year $ 8,280,826 $ 6,423,984 $ 10,091,195
============== ============== ==============
39
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with the Partnership's independent public
accountants during the years ended December 31, 2003 and 2002.
Item 9a. - Controls and Procedures
The Partnership carried out an evaluation, under the supervision and with
the participation of the general partners of the effectiveness of the design and
operation of the Partnership's disclosure controls and procedures as of the end
of the period covered by this report pursuant to the Securities and Exchange Act
of 1934. Based upon that evaluation, the general partners concluded that the
Partnership's disclosure controls and procedures were effective.
There were no significant changes in the Partnership's internal control
over financial reporting during the Partnership's fourth fiscal quarter and
through the date of this report that have materially affected, or are likely to
materially affect, the Partnership's internal control over financial reporting.
Part III
Item 10 - Directors and Executive Officers of the Registrant
The Partnership has no Officers or Directors. Rather, the activities of the
Partnership are managed by the two general partners, one of whom is an
individual, Michael R. Burwell. The second general partner is Gymno Corporation,
a California corporation, formed in 1986. Mr. Burwell is one of the two
shareholders of Gymno Corporation, a California corporation, and has a 50%
interest in the corporation.
The General Partners.
Michael R. Burwell. Michael R. Burwell, age 46, General Partner, past
member of Board of Trustees and Treasurer, Mortgage Brokers Institute
(1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage
Corp. (1979-present); Director, Secretary and Treasurer A & B Financial
Services, Inc. (1980-present); President, Director, Chief Financial Officer and
Secretary (since 1986) of Gymno Corporation; President, Director, Secretary and
Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as
a real estate sales person.
Gymno Corporation. Gymno Corporation, General Partner, is a California
corporation formed in 1986 for the purpose of acting as a general partner of
this partnership and of other limited partnerships formed by the individual
general partners. The shares in Gymno Corporation are held equally by Michael R.
Burwell and the estate of D. Russell Burwell. Upon the completion of the
administration of D. Russell Burwell's estate, Michael R. Burwell will have a
controlling interest in Gymno Corporation. Michael R. Burwell is a director of
Gymno and the director position held by D. Russell Burwell is currently vacant.
Michael R. Burwell is its President, Chief Financial Officer and Secretary.
Financial Oversight by General Partners.
The Partnership does not have a board of directors or an audit committee.
Accordingly, the general partners serve the equivalent function of an audit
committee for, among other things, the following purposes: appointment,
compensation, review and oversight of the work of our independent public
accountants, and establishing the enforcing of the Code of Ethics. However,
since the Partnership does not have an audit committee and the general partners
are not independent of the Partnership, the Partnership does not have an "audit
committee financial expert."
40
Code of Ethics.
The general partners have adopted a Code of Ethics applicable to the
general partners and to any agents, employees or independent contractors engaged
by the general partners to perform the functions of a principal financial
officer, principal accounting officer or controller of the Partnership, if any.
You may obtain a copy of this Code of Ethics, without charge, upon request by
calling our Investor Services Department at (650) 365-5341.
Item 11 - Executive Compensation
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
As indicated above in Item 10, the Partnership has no Officers or
Directors. The Partnership is managed by the general partners. There are certain
fees and other items paid to management and related parties.
A more complete description of management compensation is found in the
Prospectus, pages 12-13, under the section "Compensation of the General Partners
and the Affiliates", which is incorporated by reference. Such compensation is
summarized below.
The following compensation has been paid to the general partners and
affiliates for services rendered during the year ended December 31, 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. Mortgage Servicing Fee for servicing loans...................$73,062
General Partners &/or Affiliates Asset Management Fee for managing assets.....................$34,011
General Partners 1% interest in profits........................................$5,926
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY
COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE
PARTNERSHIP)
Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in
connection with the review, selection, evaluation,
negotiation, and extension of the loans paid by
the borrowers and not by the Partnership....................$111,927
Redwood Mortgage Corp. Processing and Escrow Fees for services in
connection with fees notary, document preparation,
credit investigation, and escrow payable by the
borrowers and not by the Partnership..........................$3,296
Gymno Corporation Reconveyance Fee................................................$877
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 . . . . . . . . . . . . . . . . . . . . . . . . . . $23,014
41
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The general partners are to own an aggregate total of 1% of the Partnership
including a 1% portion of income and losses.
Item 13 - Certain Relationships and Related Transactions
Refer to footnotes 3 and 4 of the Notes to Financial Statements in Part II
item 8, which describes related party fees and data.
Also refer to the Prospectus dated October 20, 1989 (incorporated herein by
reference) on page 12 "Compensation of General Partners and Affiliates" and page
14 "Conflicts of Interest".
Item 14 - Principal Accountant Fees and Services
Fees for services performed for the Partnership by the principal accountant
for 2003 and 2002 are as follows:
Audit Fees The aggregate fees billed during the years ended December 31,
2003 and 2002 for professional services rendered for the audit of the
Partnership's annual financial statements included in the Partnership's Annual
Report on Form 10-K and review of financial statements included in the
Partnership's Quarterly Reports on Form 10-Q were $37,513 and $35,427,
respectively.
Audit Related Fees There were no fees billed during the years ended
December 31, 2003 and 2002 for audit-related services.
Tax fees The aggregate fees billed for tax services for the years ended
December 31, 2003 and 2002, were $3,495 and $3,036, respectively. These fees
relate to professional services rendered primarily for tax compliance.
All Other Fees There were no other fees billed during the years ended
December 31, 2003 and 2002.
All audit and non-audit services are approved by the general partner prior
to the accountant being engaged by the Partnership.
42
Part IV
Item 15 - Exhibits, Financial Statements and Schedules, and Reports on Form 8-K
A. Documents filed as part of this report are incorporated:
1. In Part II, Item 8 under A - Financial Statements.
2. The Financial Statement Schedules are listed in Part II - Item 8
under B - Financial Statement Schedules.
3. Exhibits.
Exhibit No. Description of Exhibits
- ---------------- -------------------------------------------------------------
3.1 Limited Partnership Agreement
3.2 Form of Certificate of Limited Partnership Interest
3.3 Certificate of Limited Partnership
10.1 Escrow Agreement
10.2 Servicing Agreement
10.3 (a) Form of Note secured by Deed of Trust which provides for
principal and interest payments.
(b) Form of Note secured by Deed of Trust which provides
principal and interest payments and right of assumption
(c) Form of Note secured by Deed of Trust which provides for
interest only payments (d)Form of Note
10.4 (a) Deed of Trust and Assignment of Rents to accompany Exhibits
10.3 (a), and (c)
(b) Deed of Trust and Assignment of Rents to accompany Exhibit
10.3 (b)
(c) Deed of Trust to accompany Exhibit 10.3 (d)
10.5 Promissory Note for Formation Loan
10.6 Agreement to Seek a Lender
All of these exhibits were previously filed as the exhibits to Registrant's
Statement on Form S-11 (Registration No. 33-30427 and incorporated by reference
herein).
B. Reports of Form 8-K.
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
C. See A (3) above.
D. See A (2) above. Additional reference is made to the prospectus (S-11
filed as part of the Registration statement) dated October 20, 1989 to
pages 65 through 67 and Supplement #5 dated February 14, 1992 for
financial data related to Gymno Corporation, a general partner.
43
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 30th day of March
2004.
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
& 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 30th day of March 2004.
Signature Title Date
/S/ Michael R. Burwell
- ------------------------
Michael R. Burwell General Partner March 30, 2004
/S/ Michael R. Burwell
- ------------------------
Michael R. Burwell President, Secretary & Chief March 30, 2004
Financial Officer of Gymno
Corporation (Principal Financial
and Accounting Officer);
Director of Gymno Corporation
44
Exhibit 99.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner of the Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of December 31, 2003 (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
March 30, 2004
45
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VII (the
"Partnership") on Form 10-K for the period ended December 31, 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
March 30, 2004
46
Exhibit 99.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner of the Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of December 31, 2003(the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- ---------------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 30, 2004
47
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VII (the
"Partnership") on Form 10-K for the period ended December 31, 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 and Chief Financial
Officer of Gymno Corporation, General Partner of the Partnership, certify that
to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- ---------------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 30, 2004
48