UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 33-30427
REDWOOD MORTGAGE INVESTORS VII,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California 94-3094928
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063-1743
(Address of principal executive offices) (Zip Code)
(650) 365-5341
(Registrant's telephone number, including area code)
NOT APPLICABLE
(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 such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes XX No
-------------- --------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No XX
-------------- -------------
1
Part I - Item 1. FINANCIAL STATEMENTS
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
BALANCE SHEETS
SEPTEMBER 30, 2004 and DECEMBER 31, 2003 (unaudited)
ASSETS
September 30 December 31,
2004 2003
--------------- ---------------
Cash $ 451,181 $ 321,114
--------------- ---------------
Loans
Loans, secured by deeds of trust 8,620,888 8,280,826
Loans, unsecured, net discount of $112,805 and $128,920 respectively 236,862 232,551
--------------- ---------------
8,857,750 8,513,377
Less allowance for loan losses (722,907) (680,469)
--------------- ---------------
Net loans 8,134,843 7,832,908
Interest and other receivables
Accrued interest 670,812 489,995
Advances on loans 8,831 6,484
Prepaid expenses 1,741
--------------- ---------------
Total interest and other receivables 681,384 496,479
--------------- ---------------
Real estate owned, held for sale, net 616,043 633,053
--------------- ---------------
Total assets $ 9,883,451 $9,283,554
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ 700,000 $ 200,000
Accounts payable 7,538 4,102
Payable to affiliate 68,067 51,288
---------------- -------------
Total liabilities 775,605 255,390
---------------- -------------
Partners' capital
Limited partners' capital, subject to redemption 9,095,873 9,016,191
General partners' capital 11,973 11,973
---------------- -------------
Total partners' capital 9,107,846 9,028,164
---------------- -------------
Total liabilities and partners' capital $ 9,883,451 $ 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 AND NINE MONTHS ENDED SEPTEMBER 30, 2004 and
SEPTEMBER 30, 2003 (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------------------
2004 2003 2004 2003
-------------- -------------- ------------- -------------
Revenues
Interest - on loans $ 198,818 $ 188,377 $ 594,290 $ 539,288
Interest - interest bearing accounts 629 39 2,435 2,181
Late charges 7,115 5,194 17,703 17,822
Other income 8,747 933 25,939 6,487
-------------- -------------- ------------- -------------
215,309 194,543 640,367 565,778
-------------- -------------- ------------- -------------
Expenses
Mortgage servicing fees 20,457 18,368 60,219 51,669
Interest expense 1,444 5,737 2,512 7,062
Clerical costs through Redwood Mortgage Corp. 4,337 5,442 13,753 17,935
Asset management fees 8,520 8,490 25,507 25,512
Provisions (recoveries) for losses on loans and real estate 16,185 8,744 42,438 (37,450)
Professional services 7,293 5,290 37,066 38,881
Printing, supplies and postage 1,378 1,268 5,664 5,537
Other 6,362 (8) 25,334 5,319
-------------- -------------- ------------- -------------
65,976 53,331 212,493 114,465
-------------- -------------- ------------- -------------
Net income 149,333 141,212 427,874 451,313
============== ============== ============= =============
Net income: To general partners (1%) 1,493 1,412 4,279 4,513
To limited partners (99%) 147,840 139,800 423.595 446,800
-------------- -------------- ------------- -------------
$ 149,333 $ 141,212 $ 427,874 $ 451,313
============== ============== ============= =============
Net income per $1,000 invested by limited
partners for entire period
-where income is reinvested and compounded $ 16.35 $ 15.52 $ 47.68 $ 50.35
============== ============== ============= =============
-where partner receives income in monthly
distributions $ 16.26 $ 15.44 $ 46.70 $ 49.26
============== ============== ============= =============
The accompanying notes are an integral part of these financial statements.
3
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 and 2003 (unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
2004 2003
---------------- ----------------
Cash flows from operating activities
Net income $ 427,874 $ 451,313
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for (recovery of) losses on loans and real estate 42,438 (53,565)
Early withdrawal penalty credited to income (1,777) (1,437)
Amortization of discount on unsecured loans (16,115) (16,115)
Change in operating assets and liabilities
Accrued interest and advances on loans (183,164) (143,677)
Accounts payable and other liabilities 20,215 (19,374)
Prepaid expenses (1,741) -
---------------- ----------------
Net cash provided by operating activities 287,730 217,145
---------------- ----------------
Cash flows from investing activities
Principal collected on loans 3,020,006 1,616,607
Loans originated (3,360,068) (2,863,046)
Recoveries of (payments for) real estate held for sale 17,010 (5,926)
Distributions from limited liability company - 433,195
Proceeds from (payments for) unsecured loans 11,804 -
---------------- ----------------
Net cash used in investing activities (311,248) (819,170)
---------------- ----------------
Cash flows from financing activities
Net increase in line of credit 500,000 1,000,000
Partners withdrawals (346,415) (463,047)
---------------- ----------------
Net cash provided by financing activities 153,585 536,953
---------------- ----------------
Net increase (decrease) in cash 130,067 (65,072)
Cash - beginning of year 321,114 1,057,845
---------------- ----------------
Cash - end of period 451,181 992,773
================ ================
Cash payments for interest $ 2,512 $ 7,062
================ ================
The accompanying notes are an integral part of these financial statements.
4
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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 nine and three month periods ended
September 30, 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 September 30, 2004 and December 31, 2003 there was one loan categorized
as impaired by the Partnership in the total aggregate amount of $96,716. In
addition, the impaired loan had accrued interest and advances totaling $7,841 at
September 30, 2004 and December 31, 2003. The reduction in carrying value of the
impaired loan of $14,596 at September 30, 2004 and December 31, 2003, is
included in the allowance for loan losses. The average recorded investment in
the impaired loan was $96,716 for the nine month period ended September 30, 2004
and the year ended December 31, 2003.
At both September 30, 2004 and December 31, 2003, the Partnership had five
loans past due 90 days or more on interest payments totaling $2,025,966 and
$2,259,756 (23.50% and 27.29% of the secured loan portfolio), respectively. As
of September 30, 2004 and December 31, 2003, four and five of these loans were
past maturity. The Partnership does not consider these loans to be impaired
because, in the opinion of management, 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 September 30, 2004
and December 31, 2003 was as follows:
September 30, December 31,
2004 2003
----------------- ---------------
Impaired loans $ 14,596 $ 14,596
Specified loans 302,500 321,263
General 287,442 236,984
Unsecured loans 118,369 107,626
----------------- ---------------
$ 722,907 $ 680,469
================= ===============
Activity in the allowance for loan losses is as follows for the nine month
period ended September 30, 2004 and the year ended December 31, 2003:
September 30, December 31,
2004 2003
----------------- ---------------
Beginning balance $ 680,469 $ 791,882
Provision for loan losses 42,438 -
Recoveries - (18,299)
Restructures - (50,083)
Write-offs - (43,031)
----------------- ---------------
$ 722,907 $ 680,469
================= ===============
5
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
September 30, 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 year classification.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities, and disclosures of contingent assets and liabilities, at
the 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.
note 3 - General Partners and Related Parties
The following are commissions and fees, which will be paid to the general
partners.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, Redwood Mortgage Corp., an affiliate of the general
partners, may collect an amount equivalent to 12% of the loaned amount until 6
months after the termination date of the offering. Thereafter, loan brokerage
commissions (points) will be limited to an amount not to exceed 4% of the total
Partnership assets per year. The loan brokerage commissions are paid by the
borrowers and thus, are not an expense of the Partnership.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued. Additional service fees are recorded upon the receipt of any
subsequent payments on impaired loans.
6
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 (unaudited)
note 3 - General Partners and Related Parties (continued)
Asset management fees
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually).
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to parties related to the general partners.
Operating expenses
Redwood Mortgage Corp., an affiliate of the general partners, is reimbursed
by the Partnership for all operating expenses actually incurred by it on behalf
of the Partnership, including without limitation, out-of-pocket general and
administration expenses of the Partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
note 4 - Real Estate Held for Sale
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell as of September 30, 2004 and December 31, 2003:
September 30, December 31,
2004 2003
----------------- ----------------
Costs of properties $ 1,263,222 $ 1,263,222
Reduction in value (647,179) (630,169)
----------------- ----------------
Real estate held for sale $ 616,043 $ 633,053
================= ================
During October, 2004, one of the real estate properties held for sale was
sold, resulting in a loss of approximately $613,800, which was fully provided
for.
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 September
30, 2004 and December 31, 2003 were $700,000 and $200,000; and the interest rate
was 4.75% (4.50% prime + .25%) at September 30, 2004. This line of credit
expires December 2004 and requires the Partnership to meet certain financial
covenants. To the best of its knowledge, the Partnership was in compliance with
all loan covenants for the nine month period ended September 30, 2004 and for
the year ended December 31, 2003. The Partnership anticipates that the line of
credit will be renewed at its maturity. In the event that a renewal is not
forthcoming, the Partnership has the option to convert the line of credit to a
three year term loan beginning December of 2004.
Should the general partners choose not to renew the line of credit, any
balance then outstanding would be converted to a three-year term loan.
7
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 (unaudited)
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 $8,620,888 and $8,280,826, at
September 30, 2004 and December 31, 2003, respectively. The fair value of these
loans of $8,668,931 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.
note 7 - Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At September 30, 2004
and December 31, 2003 there were 29 and 23 secured loans outstanding,
respectively, with the following characteristics:
September 30, December 31,
2004 2003
----------------- ---------------
Number of secured loans outstanding 29 23
Total secured loans outstanding $ 8,620,888 $ 8,280,826
Average secured loan outstanding $ 297,272 $ 360,036
Average secured loan as percent of total 3.45% 4.35%
Average secured loan as percent of Partnership assets 3.01% 3.64%
Largest secured loan outstanding $ 1,000,000 $ 1,000,000
Largest secured loan as percent of total loans 11.60% 12.08%
Largest secured loan as percent of Partnership assets 10.12% * 10.77%
Number of counties where security is located (all California) 13 8
Largest percentage of loans in one county 31.83% 44.11%
Average secured loan to appraised value of security based on appraisals and
senior liens at time of loan inception 64.95% 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 exceed 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
September 30, 2004 (unaudited)
note 7 - Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at September 30, 2004
and December 31, 2003:
September 30, December 31,
2004 2003
----------------- ---------------
First trust deeds $ 5,160,098 $ 3,733,346
Second trust deeds 2,785,790 3,872,480
Third trust deeds 675,000 675,000
----------------- ---------------
Total loans 8,620,888 8,280,826
Senior liens due other lenders 3,783,284 4,319,281
----------------- ---------------
Total debt $ 12,404,172 $12,600,107
================= ===============
Appraised property value at time of loan $ 19,097,123 $20,728,514
----------------- ---------------
Total secured loans as percent of appraisals based on appraisals
and senior liens at date of loan 64.95% 60.79%
----------------- ---------------
Secured loans by type of property
Owner occupied homes $ 1,507,105 $ 853,869
Non-owner occupied homes 2,209,343 1,589,092
Apartments 1,012,221 1,367,327
Commercial 2,598,804 2,410,861
Land 1,293,415 2,059,677
----------------- ---------------
$ 8,620,888 $ 8,280,826
================= ===============
Scheduled maturity dates of secured loans as of September 30, 2004 are as
follows:
Year Ending December 31,
--------------------------------
2004 $ 1,358,288
2005 1,715,125
2006 1,872,945
2007 1,246,754
2008 198,609
Thereafter 2,229,167
-----------------
Total $ 8,620,888
=================
The scheduled maturities for 2004 above include approximately $1,211,382 in
five loans, which are past maturity at September 30, 2004. Interest payments on
four of these loans with an aggregate principal balance of $1,199,738 were
categorized as delinquent over 90 days. The remaining one loan is making regular
monthly interest payments.
9
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 (unaudited)
note 7 - Asset Concentrations and Characteristics (continued)
At times, the Partnership's cash deposits exceed federally insured limits.
Management believes deposits are maintained in financially secure financial
institutions.
The Partnership has a substantial amount of its loan receivable balance due
on two loans from one borrower. This borrower accounted for approximately 14.46%
of the loan balance and approximately 12.59% of interest revenue for the nine
months ended September 30, 2004. The value of collateral securing these loans
was less than the principal 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. Neither of these loans is past 90 days
or more on interest payments nor are they past maturity.
The Partnership also has a substantial amount of its loan receivable
balance due on three loans from another borrower. This borrower accounted for
approximately 13.88% of the loan balance and approximately 23.69% of interest
revenue for the nine months ended September 30, 2004. These loans are past
maturity and therefore past due 90 days or more on interest payments.
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 the loans as of September 30, 2004. As of September
30, 2004 the Partnership had two loans under workout agreements totaling
$64,873.
Construction loans
The Partnership has construction loans, which are at various stages of
completion of the construction process and loans, which are not fully disbursed
at September 30, 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 September 30, 2004, there was one construction loan which was
fully funded
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.
10
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 dates and revenue and expenses
for the reporting periods. Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
held for sale.
Loans and the related accrued interest, late fees and advances are analyzed
on a regular 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-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. Michael R.
Burwell is President and Chief Financial Officer of Gymno Corporation and
Redwood Mortgage Corp. 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.
11
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, Redwood Mortgage
Corp. may collect an amount equivalent to 12% of the loaned amount until 6
months after the termination date of the offering. Thereafter, the loan
brokerage commissions (points) will be limited to an amount not to exceed 4% of
the total Partnership assets per year. The loan brokerage commissions are paid
by the borrowers, and thus, are not an expense of the Partnership. Loan
brokerage commissions paid by the borrowers were $59,128 and $64,877 for the
nine month periods ended September 30, 2004 and 2003, and $9,600 and $16,102 for
the three month periods ended September 30, 2004 and 2003, 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 $60,219 and $51,669 were incurred for the
nine month periods ended September 30, 2004 and 2003, and $20,457 and $18,368
were incurred for the three month periods ended September 30, 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 $25,507 and $25,512 were incurred by the Partnership for the nine
month periods ended September 30, 2004 and 2003, and $8,520 and $8,490 were
incurred for the three month periods ended September 30, 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.
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 nine and three months through September 30, 2004 and 2003,
operating expenses totaling $13,753 and $17,935 for the nine month periods and
$4,337 and $5,442 for the three month periods, 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 September 30, 2004 and 2003, a general
partner, Gymno Corporation, had contributed $11,973 as capital in accordance
with Section 4.02(a) of the Partnership Agreement.
12
Results of Operations - For the nine and three months ended September 30,
2004 and 2003
The following increases/(decreases) took place in the Partnership's
operating results for the nine and three month periods ended September 30, 2004
versus 2003 and are summarized here under :
Changes during the Changes during the
nine months ended three months ended
September 30, 2004 September 30, 2004
versus 2003 versus 2003
----------------------------- ----------------------------
Net income increase (decrease) $ (23,439) $ 8,121
=================== ================
Revenue
Interest on loans $ 55,022 $ 10,441
Interest - interest bearing accounts 254 590
Late charges (119) 1,921
Other income 19,452 7,814
------------------- ----------------
$ 74,589 $ 20,766
------------------- ----------------
Expenses
Mortgage servicing fees $ 8,550 $ 2,089
Interest expense (4,550) (4,293)
Clerical costs (4,182) (1,105)
Asset management fees (5) 30
Provisions for losses on loans and real estate 79,888 7,441
Professional services (1,815) 2,003
Printing, supplies and postage 127 110
Other 20,015 6,370
------------------- ----------------
$ 98,028 $ 12,645
------------------- ----------------
Net income (decrease) $ (23,439) $ 8,121
=================== ================
The increase in interest on loans of $55,002 (10.20%) for the nine month
period, and $10,441 (5.54%) for the three month period ended September 30, 2004
versus the periods ended September 30, 2003 was due primarily to an increase in
the average loan portfolio outstanding during these periods to $7,993,288 as of
September 30, 2004 from $7,126,745 as of September 30, 2003. The increase in
interest is also attributed to an increase of the average interest rate, which
stood at 9.62% as of September 30, 2004 versus 9.55% as of September30, 2003.
The interest revenue increase also includes $16,115 and $5,372 in imputed
interest on discount notes for the nine and three month periods ended September
30, 2004 and 2003, respectively.
The increase in mortgage servicing fees of $8,550 (16.55%) for the nine
month period and $2,089 (11.37%) for the three month period ended September 30,
2004, versus the corresponding periods ended September 30, 2003, was due to
larger average loan portfolio balances of $7,993,288 as of September 30, 2004,
compared to $7,126,745 as of September 30, 2003.
Loan loss provisions were $42,438 for the nine month period, and $16,185
for the three month period ended September 30, 2004, as compared to loan loss
recoveries of $(37,450) for the nine month period, and a provision of $8,744 for
the three month period ended September 30, 2003. The general partners believe
that the allowance for loan losses of $722,907 as of September 30, 2004 was
adequate to offset potential losses on loans.
The decrease in professional fees of $1,815 (4.67%) for the nine month
period, and an increase of $2,003 (37.86%)for the three month period ended
September 30, 2004 versus September 30, 2003 is due to timing of services
provided in 2004 compared to 2003.
13
Partnership capital increased during the first nine months of 2004 as both
earnings distributions and capital liquidations declined. For the nine and three
month periods ended September 30, 2004 earnings and capital liquidated was
$145,076 and $198,838 for the nine month period, and $49,828 and $51,018 for the
three month period, respectively, versus $159,354 and $300,615 for the nine
month period, and $49,239 and $81,951 for the three month period, respectively
for the corresponding periods in 2003. Earnings and capital liquidations are a
factor of limited partner elections and currently limited partners seeking
liquidations of earnings or their capital account has declined.
For the nine and three month periods ended September 30, 2004, other income
was mainly comprised of $23,143 and $7,714, respectively, of non-refundable
option payments against the purchase price of real estate held for sale. Other
expenses consisted of $21,772 for the nine month period and $6,286 for the three
month period ended September 30, 2004, spent on the upkeep of Partnership
properties. One of the real estate owned properties was sold in October, 2004,
therefore no further non-refundable option payments will be forthcoming and the
upkeep expenses should reduce substantially.
A decrease in clerical costs of $4,182 for the nine month period and $1,105
for the three month period ended September 30, 2004 versus September 30, 2003,
is due to the basis of computation of this expense. All of the partnerships
reimburse Redwood Mortgage Corp for their share of cost based on the capital
balances at the end of the preceding month. One partnership, whose capital base
is substantially larger with significant increases every month due to new
subscriptions, continues to absorb a larger percentage of this cost, reducing
the other partnerships' portion on a pro rata basis.
A decrease in interest expense of $4,550 for the nine month period and
$4,293 for the three month period ended September 30, 2004 versus September 30,
2003, is due to a lower average use of the line of credit in the former period
than in the latter. Average line of credit used during the nine months preceding
September 30, 2004, was $70,500 as compared to an average use of $221,500 during
the nine months through September 30, 2003
At September 30, 2004, there were no outstanding loans with filed notices
of default. During the 4th quarter of 2004, the partnership anticipates filing a
foreclosure on one of its 90 day past due loans in the principal amount of
$776,228.
Redwood Mortgage Corp., an affiliate of the general partners, received
Mortgage Brokerage Commissions from the loan borrowers of $59,128 and $9,600 for
the nine and three month periods ended September 30, 2004 as compared to $64,877
and $16,102 for the nine and three month periods ended September 30, 2003. The
decrease is due to loans with reduced commissions written in the nine and three
month periods ended September 30, 2004.
14
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
stabilized. During 2004 the economy and the Northern California Real Estate
Market has strengthened. At September 30, 2004 the Partnership had 5 loans past
due 90 days or more totaling $2,025,966 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 loans in workout agreements with borrowers is two, consisting of two
matured loans totaling $64,873. 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 balloon 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 generally rise
during difficult economic times and conversely fall during good economic times.
The number and amount of workout agreements existing at September 30, 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 an appropriate allowance for loan losses and based on our experience,
are reflective of our loan marketplace segment. In the remainder of 2004, we may
initiate foreclosure by filing notices of default on delinquent borrowers or
borrowers who become delinquent during the year. We anticipate that one notice
of default in the principal amount of $776,228 will be filed during the fourth
quarter of 2004. Management has considered this expected foreclosure in
determining the adequacy of the loan loss reserve. 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 $1,370,086 at September 30, 2004.
These provisions for losses were made to guard against collection losses. The
total cumulative provision for losses as of September 30, 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. Total
provisions for losses on loans of $722,907 and real estate held for sale of
$647,179 as of September 30, 2004, is considered to be reasonable. In October,
2004, one of the real estate properties owned was sold at a loss of
approximately $613,800 which was fully provided for.
As of September 30, 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 64.95%. This percentage does not account for any increases or
decreases in property values since the date the loan was made, nor does it
include any reductions in principal through amortization of payments after the
loan was made. This low loan to value ratio will assist the Partnership in
weathering loan delinquencies and foreclosures should they eventuate.
PORTFOLIO REVIEW - For the nine month period ended September 30, 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 September 30, 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 $5,417,331 (62.84%) and $5,295,139 (68.85%)
of the outstanding secured loan portfolio. The remainder of the portfolio
represented loans secured by real estate located primarily in Northern
California.
15
As of September 30, 2004 and September 30, 2003, the Partnership held 29
and 24 loans respectively in the following categories:
September 30, September 30,
2004 2003
--------------------------------- ---------------------------------
Single Family Residences (1-4 units) $ 3,716,448 43% $ 1,793,249 23%
Multiple family dwellings (5+ units) 1,012,221 12% 1,798,982 23%
Commercial 2,598,804 30% 2,715,484 36%
Land 1,293,415 15% 1,383,624 18%
-------------- --------------- --------------- --------------
Total $ 8,620,888 100% $ 7,691,339 100%
============== =============== =============== ==============
As of September 30, 2004, the Partnership held 29 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the Partnership as of September 30, 2004:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of September 30, 2004
# of Loans Amount Percent
----------- ------------- -------------
1st Mortgages 18 $ 5,160,098 60%
2nd Mortgages 10 2,785,790 32%
3rd Mortgages 1 675,000 8%
=========== ============= =============
Total 29 $ 8,620,888 100%
Maturing 12/31/04 and prior 6 $ 1,358,288 16%
Maturing prior to 12/31/05 3 1,715,125 20%
Maturing prior to 12/31/06 4 1,872,945 22%
Maturing after 12/31/06 16 3,674,530 42%
=========== ============= =============
Total 29 $ 8,620,888 100%
Average Loan $ 297,272 3%
Largest Loan 1,000,000 12%
Smallest Loan 11,644 0.14%
Average Loan-to-Value based upon appraisal and senior
liens at date of loan 64.95%
The Partnership's largest loan in the principal amount of $1,000,000
represents 11.60% of outstanding secured loans and 10.12% 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 a
decision to either take distributions of earnings monthly, quarterly or annually
or to compound earnings in their capital account. For the nine and three month
periods ended September 30, 2004 and 2003, the Partnership made distributions of
earnings to limited partners of $145,076 and $159,354 for the nine month
periods, and $49,828 and $49,239 for the three month periods, respectively.
Distribution of earnings to limited partners, which were not withdrawn for the
nine and three month periods ended September 30, 2004 and 2003 were $278,519 and
$287,444 for the nine month periods, and $98,012 and $90,561 for the three month
periods, respectively. As of September 30, 2004 and 2003, limited partners
electing to withdraw earnings represented 34% and 35% of the limited partners'
capital.
16
The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations (see liquidation provisions of
Partnership agreement). For the nine and three month periods ended September 30,
2004 and 2003, $22,213 and $17,940 for the nine month periods, and $8,950 and
$4,750 for the three month periods, respectively, were liquidated subject to the
10% penalty for early withdrawal. These withdrawals are within the normally
anticipated range that the general partners would expect in their experience in
this and other Partnerships. The general partners expect that a small percentage
of limited partners will elect to liquidate their capital accounts over one year
with a 10% early withdrawal penalty. In originally conceiving the Partnership,
the general partners wanted to provide limited partners needing their capital
returned a degree of liquidity. Generally, limited partners electing to withdraw
over one year need to liquidate their investment to raise cash. The trend the
Partnership is experiencing in withdrawals by limited partners electing a one
year liquidation program represents a small percentage of limited partner
capital as of September 30, 2004 and 2003.
Additionally, for the nine and three month periods ended September 30, 2004
and 2003, $176,625 and $282,675 for the nine month periods, and $42,068 and
$77,201 for the three month periods, respectively, were liquidated by limited
partners who have elected a liquidation program over a period of five years or
longer. This ability to withdraw after five years by limited partners has the
effect of providing limited partner liquidity. The general partners expect a
portion of the limited partners to take advantage of this provision. This has
the anticipated effect of the Partnership growing, primarily through
reinvestment of earnings in years one through five. The general partners expect
to see increasing numbers of limited partner withdrawals in years five through
eleven, after which time the bulk of those limited partners who have sought
withdrawal have been liquidated. After year eleven, liquidation generally
subsides.
In some cases in order to satisfy Broker Dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the Partnership on a basis which utilizes a per Unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the Partnership to integrate with
certain software used by the Broker Dealers and other reporting entities. In
those cases, the Partnership will report to Broker Dealers, Trust Companies and
others a "reporting" number of Units based upon a $1.00 per Unit calculation.
The number of reporting Units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the Partnership account statement
provided to investors. The reporting Units are solely for Broker Dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the Partnership. Each investor's
capital account balance is set forth periodically on the Partnership account
statement provided to investors. The amount of Partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per Unit estimated value
of the client's investment in the Partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the Partnership
Units, such determination may not be representative of the ultimate price
realized by an investor for such Units upon sale. No public trading market
exists for the Partnership's Units and none is likely to develop. Thus, there is
no certainty that the Units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
Partnership, which may include early withdrawal penalties (See the section of
the Prospectus entitled "Risk Factors - Purchase of Units is a long term
investment").
Current Economic Conditions.
On July 1, and again on September 1, 2004, the Federal Reserve increased
the Federal Funds Rate by one quarter percentage point in each month(1/4 of one
percent) to 1.50%. These were the first Federal Funds Rate increases in more
than three years and may indicate that the Federal Reserve has changed its
interest rate policy to increased rates for the foreseeable future. A 1/2 of one
percent upward shift in the Federal Funds Rate will have an almost negligible
effect upon the interest rates the Partnership charges borrowers. If, however,
there are future interest rate increases or if they remain at their current
levels, borrowers will no longer be encouraged through continually declining
interest rates to prepay their debts through refinancing of their obligations.
This could mean that the Partnership may begin experiencing less prepayments by
borrowers in its portfolio. This would reduce the need for the Partnership to
replace these prepaid loans with new loans at lower interest rates.
Additionally, the overall real estate marketplace has become much more active in
17
the last nine months, particularly in Northern California. This has translated
into more loan activity for the Partnership, as demand for loans is strong from
qualified borrowers. The general partners believe that the average loan
portfolio interest rate may decline as some remaining borrowers that did not
refinance their loans to lower interest rates take advantage of the current low
rates of interest available. Based upon existing note rates in the portfolio and
the Partnership's expectations of stable interest rates in the near future, the
Partnership anticipates that the average loan portfolio interest rate will
decline approximately 5 to 25 basis points over the remainder of 2004. From the
general partners' experience, we anticipate that the annualized yield for 2004
will range between 6% and 7%.
The Partnership makes loans primarily in Northern California. As of
September 30, 2004, approximately 62.84%, ($5,417,331) of the secured loans held
by the Partnership were in six San Francisco Bay Area Counties. The remainder of
the loans held was 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 slow down in economic growth and increasing unemployment.
In 2004 the Northern California economy has begun to rebound. Unemployment
is still a concern as job creation is an important aspect of continued economic
expansion. The unemployment rate in California was 5.9% as of September, 2004 as
compared to an unemployment rate of 6.7% in September, 2003. This decrease in
unemployment indicates improvement but is still higher than many economists
would like. The Labor Department reported that the consumer price index rose
0.6% in September, 2004 and for the first nine months of this year, consumer
prices went up at an annual rate of 3.5%, compared with a rate of 1.9% for all
of 2003. In July and September, 2004, the Federal Reserve, after more than three
years of lowering its core interest rates, raised its core interest rate .25% in
each of these months to 1.50%. This marks a dramatic change in policy from
lowering interest rates to a probable policy of raising interest rates over the
foreseeable future. Real estate prices are, in part, directly impacted by the
cost of money. The value of real estate is important to the partnership as real
estate collateral is backing each of our loans. At current interest rates,
demand for residential real estate is at all time highs. DataQuick Information
Systems reported all time high numbers in July and August, 2004 for many tracked
California real estate categories. These included a record $520,000 median sales
price for a San Francisco Bay Area home. In July, 2004 there was a total of
12,862 house and condominium sales in the nine county San Francisco Bay Area
marketplace. In August, 2004 there was 12,674 sales recorded. This was due to
strong demand, increased inventory and continued low mortgage interest rates.
Home affordability in San Francisco, as measured by the affordability index
stood at 11% for September, 2004, down from 12% in August, 2004. Many buyers are
expecting interest rates to rise over the next year so they are doing their
buying now rather than later. Interest rates have cooperated, dropping to an
average of 5.75% as of September 16, 2004 from 5.83% as of September 9, 2004.
For the partnership, stable and rising residential real estate values are good
as the partnership is more collateral dependent than credit dependent in its
loan underwriting decisions. A strong and active real estate marketplace also
serves to produce a substantial number of real estate financing opportunities
which the partnership may compete for.
The San Francisco Bay Area commercial real estate marketplace is on the
rebound. Grubb and Ellis reports that downtown San Francisco building sales
through the third quarter of 2004 are tracking to beat $2.4 billion,-the all
time high set in 2000. Additionally, Grubb and Ellis reports that there has been
five consecutive quarters of positive net rental absorption or 1.1 million
square feet over these same 5 quarters and 670,000 square feet in 2004. Vacancy
rates declined to 21.2 percent or 2.9 percentage points from the peak in the
second quarter of 2002. Grubb and Ellis also reports that asking rents increased
albeit minimally by 21 cents per square foot. CB Richard Ellis reports overall
vacancy considerably lower at 17.4 percent and puts absorption at 884,421 square
feet for 2004. In any case, the commercial market is improving. Improved
occupancies in commercial properties will assist owners of those properties in
handling their debt payments Improved occupancies will stabilize commercial real
estate values, which is a benefit to the partnership.
For Partnership loans outstanding as of September 30, 2004, the Partnership
had an average loan to value ratio of 64.95%, computed based on appraised values
and senior liens as of the date the loan was made. 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 on senior
indebtedness 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.
18
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 September 30, 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 September 30, 2004:
2004 2005 2006 2007 2008 Thereafter Total
------------- ------------- ------------ ------------ ----------- ------------ -------------
Interest earning assets:
Money market accounts $ 402,507 $ 402,507
Average interest rate 0.70% 0.70%
Unsecured loans $ 236,862 $ 236,862
Loans secured by deeds
of trust $1,358,288 1,715,125 1,872,945 1,246,754 198,609 2,229,167 $8,620,888
Average interest rate 10.81% 9.73% 9.46% 9.00% 10.50% 9.20% 9.62%
Interest bearing
liabilities
Line of credit $ 700,000 $ 700,000
Average interest rate 4.75% 4.75%
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 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.
19
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 September 30, 2004 the general partners have determined that
the allowance for loan losses of $722,907 (7.94% of net assets) is adequate in
amount. Because of the number of variables involved, the magnitude of the swings
possible and the general partners' inability to control many of these factors,
actual results may and do sometimes differ significantly from estimates made by
the general partners. As of September 30, 2004, 5 loans were delinquent over 90
days amounting to $2,025,966. The Partnership does not consider these loans to
be impaired because in the opinion of management there is sufficient collateral
to cover the amount outstanding to the Partnership and is still accruing
interest on the loans. In addition, allowance for loan losses of $722,907 as of
September 30, 2004 is considered reasonable to offset potential loss in loan
collections in the future.
Part I - Item 4. Controls and Procedures
As of September 30, 2004, the general partner of the Partnership carried
out an evaluation, under the supervision and with the participation of the
general partner's management, including the general partner's President and
Chief Financial Officer, of the effectiveness of the design and operation of the
Partnership's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the President and Chief Financial Officer of
the general partner concluded that the Partnership's disclosure controls and
procedures are effective. There were no significant changes in the Partnership's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
20
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
The Partnership has no officers or directors. The Partnership is managed by
the general partners. There are certain fees and other items paid to management
and related parties.
A more complete description of management compensation is found in the
Prospectus part of Form S-11 and subsequent amendments related to the offering
of Partnership interests, pages 12-13, under the section "Compensation of the
General Partners and the Affiliates", which are incorporated by reference. Such
compensation is summarized below.
The following compensation has been paid to the general partners and
affiliates for services rendered during the nine month period ended September
30, 2004. All such compensation is in compliance with the guidelines and
limitations set forth in the Prospectus.
Entity Receiving
Compensation Description of Compensation and Services Rendered Amount
- ---------------------------------------------------------------------------------------------------------
I. Redwood Mortgage Corp. Loan Servicing Fee for servicing loan ..........................$60,219
General Partners
&/or Affiliates Asset Management Fee for managing assets .......................$25,507
General Partners 1% interest in profits ..........................................$4,279
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.................................................$59,128
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.... $5,733
Gymno Corporation, Inc. Reconveyance Fee ................................................ $873
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 . . . . . . . . . . . . . . . . . . . . . . . . . . $13,753
21
PART II - 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
22
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 15th day of
November 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
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 15th day of November 2004.
Signature Title Date
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell General Partner November 15, 2004
/S/ Michael R. Burwell
- ----------------------
Michael R. Burwell President, Secretary/Treasurer November 15, 2004
of Gymno Corporation (Principal
Financial and Accounting
Officer); Director of Gymno
Corporation
23
Exhibit 99.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of September 30, 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
November 15, 2004
24
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VII
(the "Partnership") on Form 10-Q for the period ending September 30, 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
November 15, 2004
25
Exhibit 99.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of September 30, 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, President and
Chief Financial Officer of Gymno
Corporation, General Partner
November 15, 2004
26
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VII
(the "Partnership") on Form 10-Q for the period ending September 30, 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
November 15, 2004
27