UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 2004
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Commission file number 33-30427
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REDWOOD MORTGAGE INVESTORS VII, a California Limited Partnership
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(exact name of registrant as specified in its charter)
California 94-3094928
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(State or other jurisdiction of I.R.S. Employer
incorporation of organization) Identification No.
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
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(address of principal executive office)
(650) 365-5341
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO NOT APPLICABLE X
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest date.
NOT APPLICABLE
1
Part I - Item 1. Financial Statements
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
BALANCE SHEETS
MARCH 31, 2004 and DECEMBER 31, 2003 (unaudited)
ASSETS
March 31 December 31
2004 2003
-------------- --------------
Cash $ 930,684 $ 321,114
-------------- --------------
Loans
Loans, secured by deeds of trust 7,463,825 8,280,826
Loans, unsecured 233,465 232,551
-------------- --------------
7,697,290 8,513,377
Less allowance for loan losses (691,824) (680,469)
-------------- --------------
Net loans 7,005,466 7,832,908
-------------- --------------
Interest and other receivables
Accrued interest 538,150 489,995
Advances on loans 6,567 6,484
-------------- --------------
Total interest and other receivables 544,717 496,479
-------------- --------------
Real estate owned, held for sale 633,053 633,053
Prepaid expenses 3,586 -
-------------- --------------
Total assets $ 9,117,506 $ 9,283,554
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ 0 $ 200,000
Accounts payable 10,360 4,102
Payable to affiliate 56,092 51,288
-------------- --------------
Total liabilities 66,452 255,390
-------------- --------------
Partners' capital
Limited partners' capital,
subject to redemption 9,039,081 9,016,191
General partners' capital 11,973 11,973
-------------- --------------
Total partners' capital 9,051,054 9,028,164
-------------- --------------
Total liabilities and partners' capital $ 9,117,506 9,283,554
============== ==============
The accompanying notes are an integral part of these financial statements.
2
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004 and 2003 (unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2004 2003
----------------- ----------------
Revenues
Interest - on loans $ 203,219 $ 164,099
Interest - interest bearing accounts 1,343 1,570
Late charges 4,598 6,627
Other income 8,494 1,010
----------------- ---------------
217,654 173,306
----------------- ---------------
Expenses
Mortgage servicing fees 20,131 16,154
Interest expense 732 169
Clerical costs through Redwood Mortgage Corp. 4,818 6,485
Asset management fees 8,489 8,517
Provisions for (recovery of) losses on loans
and real estate 11,355 (22,372)
Professional services 20,963 17,318
Printing, supplies and postage 2,290 1,586
Other 8,780 1,204
----------------- ---------------
77,558 29,061
----------------- ---------------
Net income $ 140,096 $ 144,245
================= ===============
Net income: To general partners (1%) 1,401 1,442
To limited partners (99%) 138,695 142,803
----------------- ---------------
$ 140,096 $ 144,245
================= ===============
Net income per $1,000 invested by limited partners
for entire period
-where income is reinvested and compounded $ 15 $ 16
================= ===============
-where partner receives income in monthly
distributions $ 15 $ 16
================= ===============
The accompanying notes are an integral part of these financial statements.
3
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 and 2003 (unaudited)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2004 2003
--------------- ------------
Cash flows from operating activities
Net income $ 140,096 $ 144,245
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for (recovery of) losses on
loans and real estate 11,355 (22,372)
Early withdrawal penalty credited to income (380) (755)
Amortization of discount on unsecured loans (5,371) -
Change in operating assets and liabilities
Accrued interest and advances on loans (48,238) (63,364)
Accounts payable and other liabilities 11,062 (25,178)
Prepaid expenses (3,586) (2,663)
--------------- -----------
Net cash provided by operating activities 104,938 29,913
--------------- -----------
Cash flows from investing activities
Principal collected on loans 1,465,742 446,574
Loans originated (648,741) (1,295,000)
Payments for real estate held for sale - (1,255)
Proceeds from sale of real estate held for sale - -
Investments in limited liability company - (60,821)
Proceeds from unsecured loans 4,457 3,596
--------------- -----------
Net cash provided by (used in) investing activities 821,458 (906,906)
--------------- -----------
Cash flows from financing activities
Net increase (decrease) in line of credit (200,000) 250,000
Partners withdrawals (116,826) (171,171)
--------------- -----------
Net cash provided by (used in) financing activities (316,826) 78,829
--------------- -----------
Net increase (decrease) in cash 609,570 (798,164)
Cash - beginning of year 321,114 1,057,845
--------------- -----------
Cash - end of period 930,684 259,681
=============== ===========
Cash payments for interest $ 732 $ 169
=============== ===========
The accompanying notes are an integral part of these financial statements.
4
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 (unaudited)
NOTE 1 - GENERAL
In the opinion of the management of the Partnership, the accompanying
unaudited financial statements contain all adjustments, consisting of normal,
recurring adjustments, necessary to present fairly the financial information
included therein. These financial statements should be read in conjunction with
the audited financial statements included in the Partnership's Form 10-K for the
fiscal year ended December 31, 2003 filed with the Securities and Exchange
Commission. The results of operations for the three month period ended March 31,
2004 are not necessarily indicative of the operating results to be expected for
the full year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Loans, secured by deeds of trust
At March 31, 2004 and December 31, 2003 there were loans categorized as
impaired by the Partnership of $96,710. In addition, the impaired loans had
accrued interest and advances totaling $7,841. The reduction in carrying value
of the impaired loans of $14,596 at March 31, 2004 and December 31, 2003, is
included in the allowance for loan losses. The average recorded investment in
the impaired loans was $96,710 for both quarters ending March 31, 2004 and
December 31, 2003.
At March 31, 2004 and December 31, 2003, the Partnership had three and five
loans past due 90 days or more totaling $1,932,230 and $2,259,756 (25.89% and
27.29% of the secured loan portfolio), respectively. The Partnership does not
consider these loans to be impaired because there is sufficient collateral to
cover the amount outstanding to the Partnership and is still accruing interest
on these loans.
Allowance for loan losses
The composition of the allowance for loan losses as of March 31, 2004 and
December 31, 2003 was as follows:
March 31, December 31,
2004 2003
--------------- -----------------
Impaired loans $ 14,596 $ 14,596
Specified loans 321,263 321,263
General 248,339 236,984
Unsecured loans 107,626 107,626
--------------- -----------------
$ 691,824 $ 680,469
=============== =================
Activity in the allowance for loan losses is as follows for the three
months ended March 31, 2004 and year ended December 31, 2003:
March 31, December 31,
2004 2003
--------------- -----------------
Beginning balance $ 680,469 $ 791,882
Provision for loan losses 11,355 -
Recoveries - (18,299)
Restructures - (50,083)
Write-offs - (43,031)
--------------- -----------------
$ 691,824 $ 680,469
=============== =================
5
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the financial statements since income taxes are the
obligation of the partners if and when income taxes apply.
Reclassifications
Certain reclassifications, not affecting previously reported net income or
total partners' capital, have been made to the previously issued financial
statements to conform to the current period classification.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
Management Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities, at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Such estimates relate principally to the
determination of the allowance for loan losses, including the valuation of
impaired loans and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.
NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES
The following are commissions and fees, which will be paid to the general
partners.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, the Partnership may collect an amount equivalent to 12%
of the loaned amount until 6 months after the termination date of the offering.
Thereafter, loan brokerage commissions (points) will be limited to an amount not
to exceed 4% of the total Partnership assets per year. The loan brokerage
commissions are paid by the borrowers and thus, are not an expense of the
Partnership.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued. Additional service fees are recorded upon the receipt of any
subsequent payments on impaired loans.
Asset management fees
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually).
6
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 (unaudited)
NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES (continued)
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to parties related to the general partners.
Operating expenses
Redwood Mortgage Corp., an affiliate of the general partners, is reimbursed
by the Partnership for all operating expenses actually incurred by it on behalf
of the Partnership, including without limitation, out-of-pocket general and
administration expenses of the Partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
note 4 - Real Estate Held for Sale
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell as of March 31, 2004 and December 31, 2003:
March 31, December 31,
2004 2003
--------------- --------------
Costs of properties $ 1,263,222 $ 1,263,222
Reduction in value (630,169) (630,169)
--------------- --------------
Real estate held for sale $ 633,053 $ 633,053
=============== ==============
NOTE 5 - 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 March 31,
2004 and December 31, 2003 were $ $0 and $200,000, respectively; the interest
rate was 4.25% (4.00% prime + .25%) at March 31, 2004. This line of credit
expires December 2004 and requires the Partnership to meet certain financial
covenants. As of March 31, 2004 and December 31, 2003, the Partnership was in
compliance with all loan covenants.
Should the general partners choose not to renew the line of credit, the
balance then outstanding would be converted to a three-year term loan.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Secured loans had a carrying value of $7,463,825 and $8,280,826, at March
31, 2004 and December 31, 2003, respectively. The fair value of these loans of
$7,511,663 and $8,159,401, 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.
7
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 (unaudited)
NOTE 7 - ASSET CONCENTRATIONS AND CHARACTERISTICS
Most loans are secured by recorded deeds of trust. At March 31, 2004 and
December 31, 2003 there were 24 and 23 secured loans outstanding, respectively,
with the following characteristics:
March 31, December 31,
2004 2003
-------------- --------------
Number of secured loans outstanding 24 23
Total secured loans outstanding $7,463,825 $8,280,826
Average secured loan outstanding $ 310,993 $ 360,036
Average secured loan as percent of total 4.17% 4.35%
Average secured loan as percent of Partners' capital 3.44% 3.99%
Largest secured loan outstanding $1,000,000 $1,000,000
Largest secured loan as percent of total 13.40% 12.08%
Largest secured loan as percent of partnership assets 10.96% * 10.77% *
Number of counties where security is located
(all California) 9 8
Largest percentage of loans in one county 36.96% 44.11%
Average secured loan to appraised value of security
at time based on appraised values and prior liens
at time loan was consummated 64.38% 60.79%
Number of secured loans in foreclosure none none
Amount of secured loans in foreclosure none none
* 6.76% and 8.71% of outstanding loans and Partners' capital at loan inception.
Over time, loans may increase above 10% of the secured loan portfolio or
Partnership assets as the loan portfolio and assets of the Partnership decrease
due to limited partner withdrawals and/or loan payoffs.
8
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 (unaudited)
NOTE 7 - ASSET CONCENTRATIONS AND CHARACTERISTICS (continued)
The following categories of secured loans were held at March 31, 2004 and
December 31, 2003:
March 31, December 31,
2004 2003
------------- -----------
First trust deeds $3,608,522 $3,733,346
Second trust deeds 3,180,303 3,872,480
Third trust deeds 675,000 675,000
------------- -----------
Total loans 7,463,825 8,280,826
Prior liens due other lenders at time of loan 3,293,340 4,319,281
------------- -----------
Total debt $ 10,757,165 $ 12,600,107
============= ===========
Appraised property value at time of loan $ 16,708,092 $ 20,728,514
Total investments as percent of appraisals based
on appraisals and prior liens at date of loan 64.38% 60.79%
Investments by type of property
Owner occupied homes $ 896,421 $ 853,869
Non-owner occupied homes 1,113,019 1,589,092
Apartments 985,275 1,367,327
Commercial 2,409,433 2,410,861
Land 2,059,677 2,059,677
============= ===========
$7,463,825 $8,280,826
============= ===========
Scheduled maturity dates of secured loans as of March 31, 2004 are as
follows:
Year Ending December 31,
-----------------------------------
2004 $ 2,333,855
2005 1,728,347
2006 845,607
2007 1,246,756
2008 199,341
Thereafter 1,109,919
----------------
Total $ 7,463,825
================
The scheduled maturities for 2004 above include approximately $2,206,409 in
7 loans, which are past maturity at December 31, 2003. Interest payments on
three of these loans with an aggregate principal balance of $1,932,230 were
categorized as delinquent over 90 days and are included in total loans 90 days
or more delinquent presented in Note 2.
Cash deposits at March 31, 2004 of $965,747 were in one bank. The balances
exceeded FDIC insurance limits (up to $100,000 per bank) by $865,747. This bank
is the same financial institution that has provided the Partnership with the
$3,500,000 limit line of credit (LOC). As and when deposits in the Partnership's
bank accounts increase significantly beyond the insured limit, the funds are
typically either placed on new loans when available, or used to pay-down the
line of credit balance to the extent of borrowings or held as cash.
The Partnership has a substantial amount of its loan receivable balance due
on two loans from one borrower. This borrower accounted for approximately 16% of
the loan balance and approximately 10% of interest revenue for the quarter ended
March 31, 2004. The collateral securing these loans was less than the principal
9
balance due under the loans. Redwood Mortgage Corp. has provided an indemnity to
the Partnership whereby it has agreed to indemnify and hold harmless, the
Partnership from any expenses or losses incurred by the Partnership by reason of
the Partnership's inability to collect all principal due under the loans after
the Partnership has exhausted all reserves set aside for these loans and all
remedies available to it including foreclosure of the underlying collateral.
Therefore, these loans are not considered impaired solely because the value of
the collateral securing the loans is less than the principal balance due to the
Partnership.
The Partnership also has a substantial amount of its loan receivable
balance due on three loans from another borrower. This borrower accounted for
approximately 25% of the loan balance and approximately 23% of interest revenue
for the quarter ended March 31, 2004.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Workout agreements
The Partnership has negotiated various contractual workout agreements with
borrowers whose loans are past maturity or who are delinquent in making
payments. Under the terms of these workout agreements, the Partnership is not
obligated to make any additional monetary advances for the maintenance or repair
of the collateral securing these loans as of March 31, 2004 and December 31,
2003. As of March 31, 2004 the Partnership had two loans under workout
agreements totaling $64,917.
Construction loans The Partnership has construction loans, which are at
various stages of completion of the construction process and loans, which are
not fully disbursed at March 31, 2004. The partnership has approved the
borrowers up to a maximum loan balance; however, disbursements are made during
completion phases throughout the construction process or incrementally upon
certain conditions being met. At March 31, 2004, there were $38,115 of
undistributed loans which will be funded by a combination of borrower monthly
mortgage payments, line of credit draw-downs, retirement of principal on current
loans, cash and reinvestment of investors' earnings.
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.
Part I - Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet date and revenues and expenses
during the reporting period. Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
acquired through foreclosure.
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. A provision is made for loan losses to
adjust the allowance for loan losses to an amount considered by management to be
adequate, with due consideration to collateral value, to provide for
unrecoverable loans and receivables, including impaired loans, other loans,
accrued interest, late fees and advances on loans and other accounts receivable
(unsecured). The Partnership charges off uncollectible loans and related
receivables directly to the allowance account once it is determined that the
full amount is not collectible.
10
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 (unaudited)
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.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Forward Looking Statements.
Some of the information in the Form 10-Q may contain forward looking
statements. Uses of words such as "will", "may", "anticipate", "estimate",
"continue" or other forward looking words, discuss future expectations or
predictions. The foregoing analysis of 2004 includes forward looking statements
and predictions about the possibility of future events, results of operations
and financial condition. As such, this analysis may prove to be inaccurate
because of assumptions made by the general partners or the actual development of
the future events. No assurance can be given that any of these statements or
predictions will ultimately prove to be correct or substantially correct.
Related Parties.
The general partners of the Partnership are Gymno Corporation and Michael
R. Burwell. Most Partnership business is conducted through Redwood Mortgage
Corp., an affiliate of the general partner, which arranges, services and
maintains the loan portfolio for the benefit of the Partnership. The fees
received by the affiliate to the general partners are paid pursuant to the
partnership agreement and are determined at the sole discretion of the affiliate
to the general partner. In the past, the affiliate to the general partners has
elected not to take the maximum compensation. The following is a list of various
Partnership activities for which related parties are compensated.
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, the Partnership may
collect an amount equivalent to 12% of the loaned amount until 6 months after
the termination date of the offering. Thereafter, the loan brokerage commissions
(points) will be limited to an amount not to exceed 4% of the total Partnership
assets per year. The loan brokerage commissions are paid by the borrowers, and
thus, are not an expense of the partnership. For the three months ended March 31
2004 and 2003, loan brokerage commissions paid by borrowers were $17,634 and
$42,775, 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 $20,131 and $16,154 were incurred for the
three months ended March 31, 2004 and 2003, respectively.
o Asset Management Fees The general partners receive monthly fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $8,489 and $8,517 were incurred by the Partnership for the three
months ended March 31, 2004 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.
11
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective Partnership interests. The allocation
to the general partners (combined) shall be a total of 1%.
o Operating Expenses An affiliate of the Partnership, Redwood Mortgage
Corp., is reimbursed by the Partnership for all operating expenses actually
incurred by it on behalf of the Partnership, including without limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees, legal fees and expenses, postage and preparation of reports to
limited partners. Such reimbursements are reflected as expenses in the statement
of income. During the three months through March 31, 2004 and 2003, operating
expenses totaling $4,818 and $6,485, respectively, were reimbursed to Redwood
Mortgage Corp.
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 March 31, 2004 and 2003, a general
partner, Gymno Corporation, had contributed $11,978 as capital in accordance
with Section 4.02(a) of the partnership agreement.
Results of Operations - For the three months ended March 31, 2004 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 March
31, 2004, Partners' Capital totaled $9,051,054.
The net income decrease of $4,149 (2.88%) for the three months ended March
31, 2004 versus the three month period ended March 31, 2003 was due primarily to
an increase in interest earned on loans of $39,120 (23.84%), and an increase in
other income of $7,484 (740.99%) offset by expense increases. Significant
expense increases for the three month period ended March 31, 2004 versus March
31, 2003 included higher mortgage servicing fees of $3,977, and increases in the
provision for losses on loans and real estate of $33,727, interest expense of
$563, professional fees of $3,645, and other expenses of $7,576.
The increase in interest on loans of $39,120 (23.84%) for the three months
ended March 31, 2004 versus March 31, 2003 was due primarily to an increase to
the loan portfolio to $7,463,825 from $7,272,410 at March 31, 2004 and March 31,
2003 respectively. At December 31, 2002, the loan portfolio totaled $6,423,984
versus $8,280,826 at December 31, 2003 which allowed a larger average
outstanding loan balance during the first quarter of 2004 versus the first
quarter of 2003.
The increase in interest on the line of credit of $563 (333.14%) for the
three months ended March 31, 2004 versus March 31, 2003 is due to higher overall
usage of the line of credit during the first quarter of 2004. The Partnership,
on average, utilized its bank line of credit more during the first quarter of
2004 compared to the first quarter of 2003. Cash generated from interest
earnings, late charges, amortization of principal and loan payoffs was utilized
to pay down the credit line in full as of March 31, 2004.
The increase in mortgage servicing fees of $3,977 (24.62%) for the three
months ended March 31, 2004 versus March 31, 2003 is attributable to an increase
in the average outstanding loan portfolio during the first quarter of 2004.
The provision for losses on loans and real estate was $11,355 during the
first quarter of 2004 versus a recovery of loan losses of $22,372 in 2003. The
general partners believe that the allowance for loan losses of $691,824 as of
March 31, 2004 was adequate to offset potential loss in loans or real estate.
The increase in professional fees of $3,645 (21.05%) for the three months
ended March 31, 2004 versus March 31, 2003 is due to timing and increased cost
of services provided in 2004 compared to 2003 in relation to its audit and tax
return services.
For the three months ended March 31, 2004, other income was mainly
comprised of $7,714 as a non-refundable payment which was not deductible against
the purchase price of real estate held for sale. Other expense consisted of
$7,345 spent on the upkeep of Partnership properties.
12
Partnership capital increased this quarter as both earnings distribution
and capital liquidations declined. For the three months ended March 31, 2004
earnings and capital liquidated was $48,198 and $67,608, respectively versus
$57,158 and $113,151, respectively for the corresponding period in 2003.
At March 31, 2004, outstanding foreclosures were reduced to none ($0) from
the two ($236,807) that existed at March 31, 2003. These foreclosures reflected
more difficult economic times at March 31, 2003, yet were not unusual in the
general partners' experience.
The general partners received Mortgage Brokerage Commissions from the loan
borrowers of $17,634 for the three months ended March 31, 2004 as compared to
$42,775 for the three months ended March 31, 2003. The decrease is due to fewer
loans written with reduced average commission rates for the three months ended
March 31, 2004.
Since January, 2001, and through March 31, 2004, 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. New loans will be
originated at then existing interest rates. In the future the general partners
anticipate that interest rates likely will change from their current levels. The
general partners cannot, at this time, predict at what levels interest rates
will be in the future. The general partners anticipate that new loans will be
placed during 2004 at rates similar to those that prevailed in 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. However, demand
for loans from qualified borrowers continues to be strong and as prepayments
occur, the general partners expect to replace paid off loans with loans at
somewhat lower interest rates. At this time, the general partners believe that
the average loan portfolio interest rate will decline approximately .50% 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 loans,
borrowers' payment records, etc. Based upon this information and other data, the
allowance for loan losses is increased or decreased. Borrower foreclosures are a
normal aspect of partnership operations. The partnership is not a credit based
lender and hence while it reviews the credit history and income of borrowers,
and if applicable, the income from income producing properties, the general
partners expect that we will on occasion take back real estate security. During
2001, the Northern California real estate market slowed and the national and
local economies slipped into recession. During 2002 and 2003, the economy has
stabilized, but is still stagnant. At March 31, 2004 the partnership had 3 loans
past due 90 days or more totaling $1,932,230 with no loans in foreclosure.
The partnership has entered into workout agreements with borrowers who are
past maturity or delinquent in their regular payments. The total number of
partnership workout agreements with borrowers is two matured loans totaling
$64,917. Typically, a workout agreement allows the borrower to extend the
maturity date of the balloon payment and/or allows the borrower to make current
monthly payments while deferring for periods of time, past due payments, and
allows time to pay the loan in full. These workout agreements and foreclosures
generally exist within our loan portfolio to greater or lesser degrees,
depending primarily on the health of the economy. The number of foreclosures and
workout agreements will rise during difficult economic times and conversely fall
during good economic times. The number and amount of workout agreements existing
at March 31, 2004, 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. In 2004, we may
initiate foreclosure on delinquent borrowers or borrowers who become delinquent
during the year. We may take back additional real estate through the foreclosure
process in 2004. Borrower foreclosures are a normal aspect of partnership
operations and the general partners anticipate that they will not have a
material effect on liquidity. As a prudent guard against potential losses, the
general partners have made provisions for losses on loans and real estate owned
through foreclosure of $1,321,993 through March 31, 2004. These provisions for
losses were made to guard against collection losses. The total cumulative
provision for losses as of March 31, 2004 is considered by the general partners
to be adequate. Because of the number of variables involved, the magnitude of
the swings possible and the general partners inability to control many of these
factors, actual results may and do sometimes differ significantly from estimates
made by the general partners.
13
As of March 31, 2004, the Partnership had an average loan to value ratio
computed based on appraised values and prior liens as of the date the loan was
made of 64.38%. This percentage does not account for any increases or decreases
in property values since the date the loan was made, nor does it include any
reductions in principal through amortization of payments after the loan was
made. This low loan to value ratio will assist the Partnership in weathering
loan delinquencies and foreclosures should they eventuate. PORTFOLIO REVIEW -
For the three months ended March 31, 2004 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 March 31, 2004 and
2003 the Partnership's loans secured by real property collateral in the six San
Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, and Marin) represented $4,684,545 (62.76%) and $4,201,144 (57.77%)
of the outstanding loan portfolio. The remainder of the portfolio represented
loans secured by real estate located primarily in Northern California.
As of March 31, 2004 and March 31, 2003, the Partnership held 24 and 26
loans respectively in the following categories:
March 31 March 31
2004 2003
---------------- ----------------
Single Family Residences
(1-4 units) $2,009,440 26.92% $1,562,396 21.48%
Multiple family dwellings
(5+ units) 985,275 13.20% 1,508,648 20.75%
Commercial 2,409,433 32.28% 2,044,309 28.11%
Land 2,059,677 27.60% 2,157,057 29.66%
------------ --------- ---------- ----------
Total $7,463,825 100.00% $7,272,410 100.00%
============ ========= ========== ==========
As of March 31, 2004, the Partnership held 24 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the Partnership as of March 31, 2004:
14
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of March 31, 2004
# of Loans Amount Percent
-------------- ---------- -------
1st Mortgages 15 $3,608,522 48.35%
2nd Mortgages 8 3,180,303 42.61%
3rd Mortgages 1 675,000 9.04%
========= ========== =======
Total 24 $7,463,825 100%
Maturing 12/31/04 and prior 8 $2,333,856 31.27%
Maturing prior to 12/31/05 4 1,728,347 23.16%
Maturing prior to 12/31/06 2 845,607 11.33%
Maturing after 12/31/06 10 2,556,015 34.24%
========== ========== =======
Total 24 $7,463,825 100%
Average Loan $ 310,993 4%
Largest Loan $1,000,000 13%
Smallest Loan $ 11,688 0.16%
Average Loan-to-Value
based upon appraisal and
prior liens at date of loan 64%
The Partnership's largest loan in the principal amount of $1,000,000
represents 13% of outstanding secured loans and 10.96% of Partnership assets.
Over time, loans may increase above 10% of the secured loan portfolio or
Partnership assets as the loan portfolio and assets of the Partnership decrease
due to limited partner withdrawals and/or loan payoffs.
Borrower Liquidity and Capital Resources.
At the time of subscription to the Partnership, limited partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound earnings in their capital account. For the three
months ended March 31, 2004 and 2003, the Partnership made distributions of
earnings to limited partners of $48,198 and $57,158, respectively. Distribution
of Earnings to limited partners, which were not withdrawn for the three months
ended March 31, 2004 and 2003 were $90,497 and $85,645, respectively. As of
March 31, 2004 and 2003, limited partners electing to withdraw earnings
represented 35%and 37% 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 three months ended March 31, 2004 and 2003,
$4,750 and $9,440 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 March 31, 2004 and 2003, respectively.
Additionally, for the three months ended March 31, 2004 and 2003, $67,608
and $103,711, respectively, were liquidated by limited partners who have elected
a liquidation program over a period of five years or longer. This ability to
withdraw after five years by limited partners has the effect of providing
limited partner liquidity. The general partners expect a portion of the limited
partners to take advantage of this provision. This has the anticipated effect of
the Partnership growing, primarily through reinvestment of earnings in years one
through five. The general partners expect to see increasing numbers of limited
partner withdrawals in years five through eleven, after which time the bulk of
those limited partners who have sought withdrawal have been liquidated. After
year eleven, liquidation generally subsides.
15
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 March
31, 2004, approximately 62.76%, ($4,684,545) of the loans held by the
Partnership were in six San Francisco Bay Area Counties. The remainder of the
loans held were secured primarily by Northern California real estate outside the
San Francisco Bay Area. Like the rest of the nation, the San Francisco Bay Area
has felt the recession and accompanying slow down in economic growth and
increasing unemployment. The technology companies of Silicon Valley, the airline
industry, the tourism industry and other industries are feeling the effects of
the overall United States recession, which includes lower earnings, losses and
layoffs.
Recently the national and the 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.
The residential real estate market in California continues to appreciate.
The San Francisco Business Times of March 19, 2004 states "Robust February for
Bay Area home sales." "Bay Area home prices rose at their fastest rate in nearly
three years and sales were at near-record levels last month, the result of
continued demand and an accommodating mortgage finance environment, according to
DataQuick Information Systems of La Jolla, a real estate information service. A
total of 7,412 new and resale houses and condos were sold in the nine-county
region in February. That was up 4.4 percent from 7,102 the month before and 10.6
percent from 6,704 for February last year, according to DataQuick". "Last month
was the second strongest February DataQuick has in its records, which go back to
1988." "The median price paid for a Bay Area home was $457,000 last month, near
December's record $458,000. Last month's median was up 3.2 percent from $443,000
in January and up 13.4 percent from $403,000 for February last year. The
year-over-year increase was the highest since March 2001 when the median was
$386,000, up 17.3 percent from $329,000 a year earlier. Santa Clara County had
the lion's share of home sales --25%-- with 1,865 homes sold in February
compared to 1,450 in February 2003, according to DataQuick, which compiles its
figures from public records of all sales. The Median Price in the county,
according to DataQuick, was $490,000, up 7.5% in a year's time." "Indicators of
market distress are still largely absent, in DataQuick's opinion. It said
foreclosure rates are low, flipping rates are low, down payment sizes are stable
and there have been no significant shifts in market mix." On the commercial
scene, the SF Business Times of March 26-April 1, 2004 stated "City's real
estate market creeps toward recovery." "San Francisco's commercial real estate
industry clawed forward in the first quarter, as office vacancy moved downward,
16
rents remained flat or moved up slightly, and sales surged. Colliers
International reported 221,347 square feet of downtown office absorption, while
preliminary numbers from Grubb & Ellis indicated around 140,000 square feet of
absorption. The firms put the office vacancy rate at 16.9 percent and 22
percent, respectively. "We're trending back toward a favorable market," said
Scott Harper, managing director of Collier's San Francisco office. "It's the
third consecutive quarter, and fourth of the last five quarters, of positive
absorption." The pace of absorption did slow from the fourth quarter, however.
Collier's reported 360,631 square feet of positive absorption during the final
three months of 2003, while Grubb saw 365,000 square feet. "As recovery starts,
the pace usually picks up initially and then starts to moderate," said Colin
Yasukochi, regional manager of research and client services for California at
Grubb & Ellis. "We've always projected that performance will be uneven in the
first year of the recovery." Large deals during the first quarter included
Gymboree's 163,000 square foot deal at 500 Howard St, Design Within Reach's
59,000 square foot lease at 225 Bush St, Kirkland & Ellis' 47,000 square foot
deal at 555 California St., and California Pacific Medical Center's 42,000
square foot deal at 475 Brannan. Also on the plus side, sublease space is
steadily decreasing. After hitting a peak of around 8 million square feet in
2002, total San Francisco sublease space is now around 4 million square feet,
Grubb & Ellis reported."
A strong, appreciating residential market is good for primarily equity
based lenders as it allows borrowers to sell or refinance if they become unable
to make their mortgage payments. Appreciation assists lenders if they must take
back the real estate security on a loan mitigating potential loan losses.
Recovering commercial vacancies and stable to increasing rental rates will
assist landlords in debt service coverage, cash flow, and property values. All
are good for the real estate collateral securing the Partnership's commercial
loans.
For Partnership loans outstanding, as of March 31, 2004, the Partnership
had an average loan to value ratio computed based on appraised values and prior
liens as of the date the loan was made of 64.38%. This percentage does not
account for any increases or decreases in property values since the date the
loan was made, nor does it include any reductions in principal through
amortization of payments after the loan was made. This low loan to value ratio
will assist the Partnership in weathering loan delinquencies and foreclosures
should they eventuate.
Part I - Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, secured loans held in the Partnership's portfolio and our line
of credit as of March 31, 2004. 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 March 31, 2004:
2004 2005 2006 2007 2008 Thereafter Total
------------ ------------ ----------- ------------ ------------- ------------ -------------
Interest earning assets:
Money market accounts $787,622 $ 787,622
Average interest rate 0.70% 0.70%
Loans secured by deeds
of trust 2,333,855 1,728,347 845,607 1,246,756 199,341 1,109,919 $7,463,825
Average interest rate 10.78% 9.73% 8.71% 9.00% 10.50 9.24% 9.77%
Interest bearing
liabilities:
Line of credit $ 0 $0
Average interest rate 4.25% 4.25%
Market Risk.
The Partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the Partnership's primary market risk exposure with
respect to its obligations is to changes in interest rates, which will affect
the interest cost of outstanding amounts on the line of credit. The Partnership
may also suffer market risk tied to general trends affecting real estate values
that may impact the Partnership's security for its loans.
17
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
March 31, 2004) earn interest at fixed rates. Changes in interest rates may also
affect the value of the Partnership's investment in mortgage loans and the rates
at which the Partnership reinvests funds obtained from loan repayments and new
capital contributions from limited partners. If interest rates increase, the
interest rates the Partnership obtains from reinvested funds will generally
increase, but the value of the Partnership's existing loans at fixed rates will
generally tend to decrease. The risk is mitigated by the fact that the
Partnership does not intend to sell its loan portfolio, rather such loans are
held until they are paid off. If interest rates decrease, the amounts becoming
available to the Partnership for investment due to repayment of Partnership
loans may be reinvested at lower rates than the Partnership had been able to
obtain in prior investments, or than the rates on the repaid loans. In addition,
interest rate decreases may encourage borrowers to refinance their loans with
the Partnership at a time where the Partnership is unable to reinvest in loans
of comparable value.
The Partnership does not hedge or otherwise seek to manage interest rate
risk. The Partnership does not enter into risk sensitive instruments for trading
purposes.
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the loan portfolio as affected by
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
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 March 31, 2004 the general partners have determined that the
allowance for loan losses of $691,824 (7.64% 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 March 31, 2004, 3 loans were delinquent over 90 days
amounting to $1,932,230.
The Partnership also makes loans requiring periodic disbursements of funds.
As of March 31, 2004, 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 using a simple interest method and only on
the amounts disbursed on a daily basis.
A summary of the status of the Partnership's loans which are periodically
disbursed, as of March 31, 2004, is set forth below (in thousands):
Complete construction Rehabilitation
--------------------------- -------------------
Disbursed funds $ 0 $ 1,640,652
Undisbursed funds $ 0 $ 38,115
Part I - Item 4. CONTROLS AND PROCEDURES
As of March 31, 2004, the general partners of the Partnership carried out
an evaluation, under the supervision and with the participation of the general
partner's management, including the general partner's President and Chief
Financial Officer, of the effectiveness of the design and operation of the
Partnership's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon the evaluation, the President and Chief Financial Officer of
the general partner concluded that the Partnership's disclosure controls and
18
procedures are effective. There were no significant changes in the Partnership's
internal controls on the other factors that could significantly affect these
controls subsequent to the date of their evaluation.
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
The Partnership has no officers or directors. The Partnership is managed by
the general partners. There are certain fees and other items paid to management
and related parties.
A more complete description of management compensation is found in the
Prospectus part of Form S-11 and subsequent amendments related to the offering
of Partnership interests, pages 12-13, under the section "Compensation of the
General Partners and the Affiliates", which are incorporated by reference. Such
compensation is summarized below.
The following compensation has been paid to the general partners and
affiliates for services rendered during the three months ended March 31, 2004.
All such compensation is in compliance with the guidelines and limitations set
forth in the Prospectus.
Entity Receiving Description of Compensation
Compensation and Services Rendered Amount
- -------------------- -------------------------------- -------------
I. Redwood Mortgage
Corp. Loan Servicing Fee for servicing loan .........$.20,131
General Partners
&/or Affiliates Asset Management Fee for managing assets ......$..8,489
General Partners 1% interest in profits ........................$..1,401
II. FEES PAID BY BORROWERS ON LOANS PLACED BY COMPANIES RELATED TO THE
GENERAL PARTNERS WITH THE PARTNERSHIP (EXPENSES OF BORROWERS NOT OF THE
PARTNERSHIP)
Redwood Mortgage
Corp. Mortgage Brokerage Commissions for services in connection with the
review, selection, evaluation, negotiation, and extension of the
loan paid by the borrowers and not by the Partnership......$ 17,634
Redwood Mortgage
Corp. Processing and Escrow Fees for services in connection with notary,
document preparation, credit investigation, and escrow fees paid
by the borrowers and not by the Partnership................$ 1,733
Gymno Corporation,
Inc. Reconveyance Fee.............................................$ 576
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 . . . . . . . . . . . . . . . . . . . . . . . . . . $4,818
19
PART 2
OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership periodically is a defendant
in various legal actions. Please refer to
Note 8 of the Financial Statements.
Item 2. Changes in the Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99.1) Certification of Michael R. Burwell, General Partner
(99.2) Certification of Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno
Corporation, General Partner
(b) Form 8-K
Not Applicable
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 14th day of May
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/Treasurer & Chief Financial Officer
21
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 14th day of May 2004.
Signature Title Date
/S/ Michael R. Burwell
- ---------------------------
Michael R. Burwell General Partner May 14, 2004
/S/ Michael R. Burwell
- ---------------------------
Michael R. Burwell President, Secretary/Treasurer May 14, 2004
of Gymno Corporation (Principal
Financial and Accounting
Officer); Director of Gymno
Corporation
22
Exhibit 99.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of March 31, 2004 (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
May 14, 2004
23
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VII
(the "Partnership") on Form 10-Q for the period ending March 31, 2004 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
May 14, 2004
24
Exhibit 99.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of March 31, 2004 (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
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Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
May 14, 2004
25
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VII
(the "Partnership") on Form 10-Q for the period ending March 31, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General
Partner of the Partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner
May 14, 2004
26