REDWOOD MORTGAGE INVESTORS VII (a California Limited Partnership) Index to Form 10-K December 31, 1996 Part I Page No. Item 1 - Business 3 Item 2 - Properties 3-5 Item 3 - Legal Proceedings 5 Item 4 - Submission of Matters to a vote of Security Holders (partners) 6 Part II Item 5 - Market for the Registrants Partners Capital and related matters 6 Item 6 - Selected Financial Data 6-7 Item 7 - Managements Discussion and Analysis of Financial condition and Results of Operations 8 Item 8 - Financial Statements and Supplementary Data 9-26 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27 Part III Item 10 - Directors and Executive Officers of the Registrant 27 Item 11 - Executive Compensation 28 Item 12 - Security Ownership of Certain Beneficial Owners and management 29 Item 13 - Certain Relationships and Related Transactions 29 Part IV Item 14 - Exhibits,Financial Statement Schedules, and Reports on Form 8-K. 9-30 Signatures 31 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the year ended December 31, 1996 Commission file number 33-30427 - ------------------------------------------------------------------------------- REDWOOD MORTGAGE INVESTORS VII (Exact name of registrant as specified in its charter) California 94-3094928 - ------------------------- ----------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification) incorporation or organization) 650 El Camino Real Suite G, Redwood City, CA 94063 - ------------------------------------------------------------------------------- (address of principal executive offices) (zip code) Registrants telephone No. including area code (415) 365-5341 - ------------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------------------------------------------------------------------- Limited Partnership Units None - ------------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Interests Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES XXXX NO - -------------------------------- ----------------------------- Through December 31, 1992, the limited partnership units purchased by non affiliates was 119,983.59 units computed at $100.00 a unit for $11,998,359. The offering was closed on September 30, 1992. Documents incorporated by reference: Portions of the Prospectus dated October 20, 1989, and Supplement #5 dated February 14, 1992, filed on form S-11, are incorporated in Parts II, III, and IV. Exhibits filed as part of Form S-11 Registration Statement #33-30427 are referenced in part IV. Part I Item 1 - Business Redwood Mortgage Investors VII, a California limited partnership (the Partnership), was organized in 1989 of which D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation, are the General Partners. The address of the General Partners is 650 El Camino Real, Suite G, Redwood City, California 94063. The Partnership is organized to engage in business as a mortgage lender, for the primary purpose of making Mortgage Investments secured by deeds of trust on California real estate. Mortgage Investments are arranged and serviced by Redwood Home Loan Co., dba Redwood Mortgage, an affiliate of the General Partners. The Partnerships objectives are to make investments, as referred to above, which will: (i) provide the maximum possible cash returns which Limited Partners may elect to (a) receive as monthly, quarterly or annual cash distributions or (b) have credited to their capital accounts and applied to Partnership activities; and (ii) preserve and protect the Partnerships capital. The Partnerships general business is more fully described under the section entitled Investment Objectives and Criteria pages 26-31 of the Prospectus which is incorporated by reference. Originally, 60,000 Units were offered on a best efforts basis through broker/dealer member firms of the National Association of Security Dealers, Inc. In accordance with the terms of the Prospectus, the General Partners increased the number of units for sale from 60,000 to 120,000 and elected to continue the offering until October 19, 1992. The offering closed on September 30, 1992, and the Limited Partners contributed capital totalled $11,998,359 of an approved $12,000,000 issue, in units of $100 each. At that date all the applicants had been admitted into the Partnership with none left in the applicant status. The final SR report (Report of Sales of Securities and use of proceeds therefrom), was filed on September 21, 1992. The Partnership began selling units in October, 1989 and began investing in mortgages in December, 1989. At December 31, 1996, the Partnership had a balance in its Mortgage Investments portfolio totalling $12,036,293 with interest rates thereon ranging from 4% to 15.50%. Currently, Mortgage Investments secured by First Trust Deeds comprise 34.89% of the Mortgage Investment portfolio followed by Second Trust Deeds of 57.44%, and Third Trust Deeds of 6.01%. A Fourth Trust Deed makes up the balance. Owner-occupied homes, combined with non-owner occupied homes total 23.72 % of the Mortgage Investments. Commercial Mortgage Investments origination increased from last year, now comprising 65.26% of the portfolio, an increase of 10.99%. The past year brought us many outstanding low loan to value lending opportunities in this segment of the market. Mortgage Investment size increased this past year, and is now averaging $169,525 per Mortgage Investment, an increase of $2,192. Some of the larger Mortgage Investments invested in by the Partnership are fractionalized between other affiliated partnerships with objectives similar to those of the Partnership to further reduce risk. Average equity per loan transaction stood at 34.24%. A 40% equity average on loan origination is generally considered very conservative. Generally, the more equity, the more protection for the lender. The Partnerships Mortgage Investment portfolio is in good condition with five properties in foreclosure. Item 2 - Properties A summary of the Partnerships Mortgage Investment Portfolio as of December 31, 1996, is set forth below. Mortgage Investments as a Percentage of Total Mortgage Investments First Trust Deeds $4,199,551.40 Appraised Value of Properties 8,799,746.00 Total Investment as a % of Appraisal 47.72% Second Trust Deed Mortgage Investments 6,913,852.90 Third Trust Deed Mortgage Investments 722,887.23 Fourth Trust Deed Mortgage Investments * 200,001.20 First Trust Deeds due other Lenders 20,947,294.00 Second Trust Deeds due other Lenders 979,402.00 Third Trust Deeds due other Lenders 142,858.00 Total Debt $34,105,846.73 Appraised Property Value 51,863,991.00 Total Investments as a % of Appraisal 65.76% Number of Mortgage Investments Outstanding 71 Average Investment 169,525.25 Average Investment as a % of Net Assets 1.21% Largest Investment Outstanding 979,272.93 Largest Investment as a % of Net Assets 6.99% Mortgage Investments as a Percentage of Total Mortgage Investments First Trust Deeds 34.89% Second Trust Deeds 57.44% Third Trust Deeds 6.01% Fourth Trust Deeds 1.66% ----------- Total 100.00% Mortgage Investments by Amount Percent Type of Property Owner Occupied Homes $1,742,767.10 14.48% Non-Owner Occupied Homes 1,112,274.08 9.24% Apartments 1,325,871.63 11.02% Commercial 7,855,379.92 65.26% ------------------ ----------- Total $12,036,292.73 100.00% * Footnotes on following page The following is a distribution of Mortgage Investments outstanding as of December 31, 1996 by Counties. County Total Mortgage Percent Investments Santa Clara $2,888,907.85 24.00% San Francisco 1,950,728.50 16.21% Stanislaus 1,665,745.47 13.84% San Mateo 1,536,899.28 12.77% Alameda 1,233,138.15 10.25% Contra Costa 1,147,497.77 9.53% Sonoma 370,953.22 3.08% El Dorado 274,178.59 2.28% Sacramento 206,893.59 1.72% Ventura 195,000.00 1.62% Santa Barbara 122,596.76 1.02% Solano 104,713.29 0.87% Shasta 82,407.46 0.68% Monterey 79,619.05 0.66% Tuoloume 65,213.37 0.54% Marin 62,836.42 0.52% Santa Cruz 48,963.96 0.41% ------------------ ----------- Total $12,036,292.73 100.00% * Redwood Mortgage Investors VII, together with other Redwood Partnerships, hold a second and a fourth trust deed against the secured property. In addition, the principals behind the borrower corporation have given personal guarantees as collateral. The overall loan to value ratio on this loan is 76.52%. In addition to the borrower paying an interest rate of 12.25%, the Partnership and other lenders will also participate in profits. The General Partners have had previous loan activity with this borrower which had been concluded successfully, with extra earnings earned for the other partnerships involved. Statement of Condition of Mortgage Investments Number of Mortgage Investments in Foreclosure 5 Item 3 - Legal Proceedings In the normal course of business the Partnership may become involved in various types of legal proceedings such as assignments of rents, bankruptcy proceedings, appointments of receivers, unlawful detainers, judicial foreclosures, etc., to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes or to protect/recoup its investment from the real property secured by the deeds. As of the date hereof, the Partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business. Management anticipates that the ultimate result of these cases will not have a material adverse effect on the net assets of the Partnership, with due consideration having been given in arriving at the allowance for doubtful accounts. Item 4 - Submission of matters to vote of Security Holders (Partners). No matters have been submitted to a vote of the Partnership. Part II Item 5 - Market for the Registrants Units and Related Partnership Matters. 120,000 units at $100 each (minimum 20 units) were offered through broker-dealer member firms of the National Association of Securities Dealers on a best efforts basis (as indicated in Part I item 1). Investors have the option of withdrawing earnings on a monthly, quarterly, or annual basis or reinvesting and compounding the earnings. Limited Partners may withdraw from the Partnership in accordance with the terms of the Partnership Agreement subject to possible early withdrawal penalties. There is no established public trading market. A description of the Partnership units, transfer restrictions and withdrawal provisions is more fully described under the section entitled Description of Units and summary of Limited Partnership Agreement, pages 47 to 50 of the Prospectus, a part of the referenced Registration Statement, which is incorporated by reference. Item 6 - Selected Financial Data Redwood Mortgage Investors VII began operations in December 1989. Financial results for years 1984 to 1989 for prior partnerships are incorporated by reference to the Prospectus (S-11) dated October 20, 1989, Table III pages 7 through 11 and Supplement No. 3 dated October 2, 1990 to Prospectus dated October 20, 1989, Table III pages 27 through 33. Financial condition and results of operation for the Partnership for three years to December 31, 1996 were: Balance Sheet Assets December 31, ------------------------------------------------------ 1996 1995 1994 -------------- -------------- ------------- Cash ............................................................. $ 755,089 $ 514,840 $ 462,681 Accounts Receivable: Mortgage Investments secured by Deeds of Trust ................ 12,036,293 12,382,641 11,345,566 Accrued interest and other fees ............................... 264,495 940,541 738,142 Advances on Mortgage Investments .............................. 41,203 110,874 28,767 Other receivables - Unsecured ................................. 337,242 378,200 359,072 Less allowance for losses ..................................... (228,647) (200,000) (201,608) Real Estate Owned acquired through foreclosure at estimated net realizable value ............................... 1,468,345 1,347,997 2,352,221 Formation loan due from Redwood Mortgage ......................... 429,163 517,051 604,939 Partnership Interest ............................................. 242,394 223,245 0 Organization cost net of amortization ............................ 0 368 2,384 ------------ ------------ ------------ $ 15,345,577 $ 16,215,757 $ 15,692,164 ------------ ------------ ------------ Liabilities and Partners Capital December 31, ------------------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Liabilities: Note payable - Bank ................................................................ $ 1,175,000 $ 2,000,000 $ 1,929,630 Accounts payable and accrued expenses .............................................. 1,472 1,472 2,973 Discount of Mortgage Investments ................................................... 154,598 0 0 Due to Related Companies ........................................................... 0 0 5,663 ----------- ----------- ----------- $ 1,331,070 $ 2,001,472 $ 1,938,266 Partners Capital ................................................................... 14,014,507 14,214,285 13,753,898 ----------- ----------- ----------- $15,345,577 $16,215,757 $15,692,164 ----------- ----------- ----------- Statement of Income Gross revenue ...................................................................... $ 1,483,233 $ 1,450,487 $ 1,489,882 Expenses ........................................................................... 624,134 538,527 562,591 ----------- ----------- ----------- Net Income ......................................................................... $ 859,099 $ 911,960 $ 927,291 ----------- ----------- ----------- Net income to General Partners (1%) ................................................ $ 8,591 $ 9,120 $ 9,273 =========== =========== =========== Net Income to Limited Partners (99%) ............................................... $ 850,508 $ 902,840 $ 918,018 =========== =========== =========== Net Income per $1,000 invested by Limited Partners for entire period: - where income is reinvested and compounded ..................................... $ 60 $ 60 $ 63 =========== =========== =========== - where partner receives income in monthly distributions ............................................................... $ 59 $ 58 $ 61 =========== =========== =========== <FN> Net income in 1994 averaged at an annualized yield of 6.28%. In 1995, the annualized yield was 6.00% and in 1996 the annualized yield was 6.02%. </FN> MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On September 30, 1992, the Partnership had sold 119,983.59 units and its contributed capital totaled $11,998,359 of the approved $12,000,000 issue, in units of $100 each. As of that date, the offering was formally closed. At December 31, 1996, Partners Capital totaled $14,014,507. The Partnership began funding Mortgage Investments on December 27, 1989 and as of December 31, 1996 had credited the Partners accounts with income at an average annualized (compounded) yield of 8.14%. Currently, mortgage interest rates are lower than those prevalent at the inception of the Partnership. New Mortgage Investments are being originated at these lower interest rates. The result is a reduction of the average return across the entire portfolio held by the Partnership. In the future, 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 believe the rates charged by the Partnership to its borrowers will not change significantly in the immediate future. Based upon the rates payable in connection with the existing Mortgage Investments, the current and anticipated interest rates to be charged by the Partnership, and current reserve requirements, the General Partners anticipate that the annualized yield next year will range only slightly higher from its current rate of 6.02%. The Partnership has a line of credit with a commercial bank secured by its Mortgage Investments to a limit of $3,000,000, at a variable interest rate set at one half percent above the prime rate. Currently, it has borrowed $1,175,000. This facility could increase as the Partnership capital increases. This added source of funds helped in maximizing the Partnership yield by allowing the Partnership to minimize the amount of funds in lower yield investment accounts when appropriate Mortgage Investments are not currently available and since most of the Mortgage Investments made by the Partnership bear interest at a rate in excess of the rate payable to the bank which extended the line of credit. Once the required principal and interest payments on the line of credit are paid to the bank, the Mortgage Investments funded using the line of credit generate revenue for the Partnership. As of December 31, 1996, the Partnership is current with its interest payments on the line of credit. The Partnerships income and expenses, accruals and delinquencies are within the normal range of the General Partners expectations, based upon their experience in managing similar Partnerships over the last nineteen years. Borrower foreclosures, as set forth under Results of Operations, are a normal aspect of partnership operations and the General Partners anticipate that they will not have a material effect on liquidity. Cash is constantly being generated from interest earnings, late charges, pre-payment penalties, amortization of Mortgage Investments and pay-off on notes. Currently, cash flow exceeds Partnership expenses and earnings payout requirements. As Mortgage Investment opportunities become available, excess cash and available funds are invested in new Mortgage Investments. The General Partners regularly review the Mortgage Investment portfolio, examining the status of delinquencies, the underlying collateral securing these properties, the REO expenses and sales activities, borrowers payment records, etc. Data on the local real estate market and on the national and local economy are studied. Based upon this information and other data, loss reserves are increased or decreased. Because of the number of variables involved, the magnitude of the possible swings and the General Partners inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the General Partners. The Northern California recession reached bottom in 1993. Since then, the California economy has been improving, slowly at first, but now, more vigorously. A wide variety of indicators suggest that the economy in California was strong in 1996, and the State is well - positioned for fast growth. This improvement is reflective in increasing property values, in job growth, personal income growth, etc., which all translates into more loan activity, which of course, is healthy for the Partnerships lending activity. Item 8 - Financial Statements and Supplementary Data Redwood Mortgage Investors VII, a California Limited Partnership's list of Financial Statements and Financial Statement schedules: A-Financial Statements The following financial statements of Redwood Mortgage Investors VII are included in Item 8: Independent Auditors Report, Balance Sheets - December 31, 1996, and December 31, 1995, Statements of Income for the three years ended December 31, 1996, Statements of Changes in Partner Capital for the three years ended December 31, 1996, Statements of Cash Flows for the three years ended December 31, 1996, Notes to Financial Statements - December 31, 1996. B-Financial Statement Schedules The following financial statement schedules of Redwood Mortgage Inventors VII are included in Item 8. Schedule II Amounts receivable from related parties and underwriters, promoters, and employees other than related parties Schedule VIII Valuation of Qualifying Accounts Schedule IX Short Term Borrowings Schedule XII Mortgage loans on real estate All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) FINANCIAL STATEMENTS DECEMBER 31, 1996 (With Auditors Report Thereon) PARODI & CROPPER CERTIFIED PUBLIC ACCOUNTANTS 3658 Mount Diablo Blvd., Suite #205 Lafayette CA 94549 (510) 284-3590 INDEPENDENT AUDITORS REPORT THE PARTNERS REDWOOD MORTGAGE INVESTORS VII We have audited the financial statements and related schedules of REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) listed in Item 8 on form 10-K including balance sheets as of December 31, 1996 and 1995 and the statements of income, changes in partners capital and cash flows for the three years ended December 31, 1996. These financial statements are the responsibility of the Partnerships management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of REDWOOD MORTGAGE INVESTORS VII as of December 31, 1996 and 1995, and the results of its operations and cash flows for the three years ended December 31, 1996 in conformity with generally accepted accounting principles. Further, it is our opinion that the schedules referred to above present fairly the information set forth therein in compliance with the applicable accounting regulations of the Securities and Exchange Commission. /S/ A. Bruce Cropper PARODI & CROPPER Lafayette, California February 28, 1997 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) BALANCE SHEETS DECEMBER 31, 1996 AND 1995 ASSETS 1996 1995 -------------- -------------- Cash $755,089 $514,840 ------------- -------------- Accounts receivable: Mortgage Investments, secured by deeds of trust .......................................... 12,036,293 12,382,641 Accrued Interest on Mortgage Investments ................................................. 264,495 940,541 Advances on Mortgage Investments ......................................................... 41,203 110,874 Accounts receivables, unsecured .......................................................... 337,242 378,200 ----------- ----------- 12,679,233 13,812,256 Less allowance for doubtful accounts ..................................................... 228,647 200,000 ----------- ----------- 12,450,586 13,612,256 ----------- ----------- Real estate owned, acquired through foreclosure, at net realizable value ................... 1,468,345 1,347,997 Investment in partnership .................................................................. 242,394 223,245 Formation loan due from Redwood Mortgage ................................................... 429,163 517,051 Organization costs, less accumulated amortization of $10,102 and $9,734, respectively .................................................................... 0 368 ----------- ----------- $15,345,577 $16,215,757 =========== =========== LIABILITIES AND PARTNERS CAPITAL Liabilities: Notes payable - bank line of credit ...................................................... $ 1,175,000 $ 2,000,000 Accounts payable and accrued expenses .................................................... 1,472 1,472 Deferred Interest ........................................................................ 154,598 0 ----------- ----------- 1,331,070 2,001,472 Partners Capital ........................................................................... 14,014,507 14,214,285 ----------- ----------- $15,345,577 $16,215,757 =========== =========== <FN> See accompanying notes to financial statements. </FN> REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF INCOME FOR THE THREE YEARS ENDED DECEMBER 31, 1996 YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1996 1995 1994 ------------- ------------- -------------- Revenues: Interest on Mortgage Investments ........................................ $1,430,183 $1,430,742 $1,453,969 Interest on bank deposits ............................................... 10,228 8,407 13,843 Late charges ............................................................ 17,266 9,038 20,232 Other ................................................................... 25,556 2,300 1,838 ---------- ---------- ---------- 1,483,233 1,450,487 1,489,882 ---------- ---------- ---------- Expenses: Interest on note payable - bank ......................................... 127,454 163,361 135,790 Clerical costs through Redwood Mortgage ................................. 40,874 27,762 0 Amortization of organization costs ...................................... 368 2,016 2,016 General partners asset management fee ................................... 0 0 10,008 Provision for doubtful accounts and losses on real estate acquired through foreclosure ............................ 419,437 306,779 335,955 Professional services ................................................... 18,802 19,557 53,250 Printing, supplies and postage .......................................... 12,466 14,703 17,282 Other ................................................................... 4,733 4,349 8,290 ---------- ---------- ---------- 624,134 538,527 562,591 ---------- ---------- ---------- Net Income ................................................................ $ 859,099 $ 911,960 $ 927,291 ========== ========== ========== Net income: To General Partners(1%) ...................................... $ 8,591 $ 9,120 $ 9,273 To Limited Partners (99%) ............................ 850,508 902,840 918,018 ---------- ---------- ---------- $ 859,099 $ 911,960 $ 927,291 ========== ========== ========== Net income per $1,000 invested by Limited Partners for entire period: -where income is reinvested and compounded .......................... $ 60 $ 60 $ 63 ========== ========== ========== -where partner receives income in monthly distributions .............. $ 59 $ 58 $ 61 ========== ========== ========== <FN> See accompanying notes to financial statements. </FN> REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS CAPITAL FOR THE THREE YEARS ENDED DECEMBER 31, 1996 PARTNERS CAPITAL UNALLOCATED GENERAL LIMITED SYNDICATION PARTNERS PARTNERS COSTS TOTAL --------- ----------- ------------ ----------- Balances at December 31, 1993 .................. 11,978 13,596,915 (189,704) 13,419,189 Net income ..................................... 9,273 918,018 0 927,291 Allocation of syndication costs ................ (810) (80,190) 81,000 0 Early withdrawal penalties ..................... 0 (34,001) 10,635 (23,366) Partners withdrawals ........................... (8,463) (560,753) 0 (569,216) ----------- ----------- ----------- ----------- Balances at December 31, 1994 .................. 11,978 13,839,989 (98,069) 13,753,898 Net income ..................................... 9,120 902,840 0 911,960 Allocation of syndication costs ................ (810) (80,190) 81,000 0 Early withdrawal penalties ..................... 0 (10,690) 3,344 (7,346) Partners withdrawals ........................... (8,310) (435,917) 0 (444,227) ----------- ----------- ----------- ----------- Balances at December 31, 1995 .................. $ 11,978 14,216,032 (13,725) 14,214,285 Net income ..................................... 8,591 850,508 0 859,099 Allocation of syndication costs ................ (137) (13,588) 13,725 0 Early withdrawal penalties ..................... 0 (37,345) 0 (37,345) Partners withdrawals ........................... (8,454) (1,013,078) 0 (1,021,532) ----------- ----------- ----------- ----------- Balances at December 31, 1996 .................. $ 11,978 14,002,529 0 14,014,507 =========== =========== =========== =========== <FN> See accompanying notes to financial statements </FN> REDWOOD MORTGAGE INVESTORS VII (A Califonira Limited Partnership) STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 1996 YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- Cash flows from operating activities: Net income ................................................................. $ 859,099 $ 911,960 $ 927,291 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of organization costs ....................................... 368 2,016 2,016 Increase in allowance for doubtful accounts .............................. 28,647 (1,608) 106,750 (Increase) decrease in accrued interest & advances ....................... 745,717 (284,506) (140,657) Increase (decrease) in accounts payable and accrued expenses ............. 0 (1,501) (37,549) (Increase) decrease in amount due from or to Redwood Mortgage ............ 0 (5,663) 3,806 Increase (decrease) in deferred interest on Mortgage Investments ......... 154,598 0 (8,548) ----------- ----------- ----------- Net cash provided by operating activities .............................. 1,788,429 620,698 853,109 ----------- ----------- ----------- Cash flows from investing activities: Net (increase) decrease in: Mortgage Investments .................................................. 346,348 (1,037,075) 420,623 Formation loan ........................................................ 87,888 87,888 88,532 Real Estate owned ..................................................... (120,348) 1,004,224 (1,705,159) Other receivables - unsecured ......................................... 40,958 (19,128) (88,289) Investment in partnership ............................................. (19,149) (223,245) 0 ----------- ----------- ----------- Net cash provided by (used in) investing activities .................... 335,697 (187,336) (1,284,293) ----------- ----------- ----------- Cash flows from financing activities: Net increase (decrease) in note payable-bank ................................ (825,000) 70,370 999,137 Early withdrawal penalties, net of credit to syndication costs ............... (37,345) (444,227) (569,216) Partners withdrawals ......................................................... (1,021,532) (7,346) (23,366) ----------- ----------- ----------- Net cash provided by (used in) financing activities .................... (1,883,877) (381,203) 406,555 ----------- ----------- ----------- Net increase (decrease) in cash .............................................. 240,249 52,159 (24,629) Cash - beginning of period ................................................... 514,840 462,681 487,310 ----------- ----------- ----------- Cash - end of period ......................................................... $ 755,089 $ 514,840 $ 462,681 =========== =========== =========== <FN> See accompanying notes to financial statements. </FN> REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE 1 - ORGANIZATION AND GENERAL Redwood Mortgage Investors VII, (the Partnership) is a California Limited Partnership, of which the General Partners are D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation owned and operated by the individual General Partners. The Partnership was organized to engage in business as a mortgage lender for the primary purpose of making Mortgage Investments secured by Deeds of Trust on California real estate. Mortgage Investments are being arranged and serviced by Redwood Home Loan Co., dba Redwood Mortgage, an affiliate of the General Partners. At September 30, 1992, the offering had been closed with contributed capital totaling $11,998,359 for limited partners. A minimum of 2,500 units ($250,000) and a maximum of 120,000 units ($12,000,000) were offered through qualified broker-dealers. As Mortgage Investments were identified, partners were transferred from applicant status to admitted partners participating in Mortgage Investment operations. Each months income is allocated to partners based upon their proportionate share of partners capital. Some partners have elected to withdraw income on a monthly, quarterly or annual basis. A. Sales Commissions - Formation Loan Sales commissions ranging from 0% (Units sold by General Partners) to 10% of the gross proceeds were paid by Redwood Mortgage, an affiliate of the General Partners that arranges and services the Mortgage Investments. To finance the sales commissions, the Partnership was authorized to loan to Redwood Mortgage an amount not to exceed 8.3% of the gross proceeds provided that the Formation Loan for the minimum offering period could be 10% of the gross proceeds for that period. The Formation Loan is unsecured and is being repaid, without interest, in ten installments of principal, over a ten year period commencing January 1, 1992. At December 31, 1992, Redwood Mortgage has borrowed $914,369 from the Partnership to cover sales commissions relating to $11,998,359 limited partner contributions (7.62%). Through December 31, 1996, $485,206 including $75,478 in early withdrawal penalties, had been repaid leaving a balance of $429,163. B. Other Organizational and Offering Expenses Organizational and offering expenses, other than sales commissions, (including printing costs, attorney and accountant fees, and other costs), were paid by the Partnership. Such costs were limited to 10% of the gross proceeds of the offering or $500,000 whichever was less. The General Partners were to pay any amount of such expenses in excess of 10% of the gross proceeds or $500,000. Organization costs of $10,102 and syndication costs of $415,692 were incurred by the Partnership. The sum of organization and syndication costs, $425,794, approximated 3.55% of the gross proceeds contributed by the Partners. Both the Organization and Syndication Costs have been fully amortized and allocated to the Partners. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenues and expenses are accounted for on the accrual basis of accounting. The Partnership bears its own organization and syndication costs (other than certain sales commissions and fees described above) including legal and accounting expenses, printing costs, selling expenses, a 1% wholesale brokerage fee and filing fees. Organizational costs were capitalized and were amortized over a five year period. Syndication costs were charged against partners capital and were allocated to individual partners consistent with the Partnership Agreement. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 Property acquired through foreclosure will be held for prompt sale to return the funds to the Mortgage Investment portfolio. Such property is recorded at cost which includes the principal balance of the former Mortgage Investment made by the Partnership plus accrued interest, payments made to keep the senior loans current, costs of obtaining title and possession, less rental income or at estimated net realizable value, if less. The difference between such costs and estimated net realizable value is deducted from cost in the Balance Sheet to arrive at the carrying value of such property. Mortgage Investments and the related accrued interest, fees and advances are analyzed on a continuous basis for recoverability. Delinquencies are identified and followed as part of the Mortgage Investment system. A provision is made for doubtful account to adjust the allowance for doubtful accounts to an amount considered by management to be adequate to provide for unrecoverable accounts receivable. 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 for the related periods. Such estimates relate principally to the determination of the allowance for doubtful accounts and the valuation of real estate acquired through foreclosure. Actual results could differ significantly from these estimates. No provision for Federal and State income taxes is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply. Amounts reflected in the statements of income as net income per $1,000 invested by Limited Partners for the entire period are actual amounts allocated to Limited Partners who have their investment throughout the period and have elected to either leave their earnings to compound or have elected to receive monthly distributions of their net income. Individual income is allocated each month based on the Limited partners pro rata share of Partners Capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or select other options. However, the net income per $1,000 average invested has approximated those reflected for those whose investments and options have remained constant. NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES The following are commissions and/or fees which will be paid to the General Partners and/or related parties. A. Mortgage Brokerage Commissions For services in connection with the review, selection, evaluation, negotiation and extension of Mortgage Investments in an amount up to 12% of the principal through the period ending 6 months after the termination date of the offering. Thereafter, loan brokerage commissions are 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, not an expense of the Partnership. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 B. Mortgage Servicing Fees Monthly loan servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal, or such lesser amount as is reasonable and customary in the geographic area where the property securing the Mortgage Investment is located. Amounts remitted to Redwood Mortgage and recorded as interest on Mortgage Investments is net of such fees. In 1994, all $124,049 in loan servicing fees were waived by Redwood Mortgage. In 1995, $66,888 of the total loan servicing fees of $100,282 were waived. In 1996, $92,249 of the total loan servicing fees of $189,516 were waived by Redwood Mortgage. C. Asset Management Fee The General Partners receive a monthly fee for managing the Partnerships Mortgage Investment portfolio and operations equal to 1/32 of 1% of the net asset value(3/8 of 1% annual). In 1996, 1995 and 1994, the asset management fees charged were $10,008, $16,735, and $0.00 respectively. The computed management fees were $51,519, $50,360, and $53,537 respectively, with the difference being waived by the General Partners. D. 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. E. Income and Losses All income is credited or charged to partners in relation to their respective partnership interests. The partnership interest of the General Partners (combined) is a total of 1%. F. Operating Expenses The General Partners or their affiliate (Redwood Mortgage) are reimbursed by the Partnership for all operating expenses actually incurred by them 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. In 1994, all such expenses were absorbed by Redwood Mortgage. In 1996 and 1995, reimbursed expenses totalled $40,874 and $27,762, respectively. The General Partners collectively or severally were to contribute 1/10 of 1% in cash contributions as proceeds from the offering were admitted to limited Partner capital. As of December 31, 1992 a General Partner, GYMNO Corporation, had contributed $11,998, 1/10 of 1% of limited partner contributions in accordance with Section 4.02(a) of the Partnership Agreement. NOTE 4 - OTHER PARTNERSHIP PROVISIONS A. Applicant Status Subscription funds received from purchasers of units were not admitted to the Partnership until appropriate lending opportunities were available. During the period prior to the time of admission, which ranged between 1-120 days, purchasers subscriptions remained irrevocable and earned interest at money market rates, which were lower than the return on the Partnerships loan portfolio. Interest earned prior to admission was credited to partners in applicant status. As Mortgage Investments were made and partners were transferred to regular status to begin sharing in income from Mortgage Investments secured by deeds of trust, the interest credited was either paid to the investors or transferred to Partners Capital along with the original investment. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 B. Term of the Partnership The term of the Partnership is approximately 40 years, unless sooner terminated as provided. The provisions provide for no capital withdrawal for the first five years, subject to the penalty provision set forth in (E) below. Thereafter, investors have the right to withdraw over a five-year period, or longer. C. Election to Receive Monthly, Quarterly or Annual Distributions Upon subscriptions, investors elected either to receive monthly, quarterly or annual distributions of earnings allocations, or to allow earnings to compound for at least a period of 5 years. D. Profits and Losses Profits and losses are allocated among the Limited Partners according to their respective capital accounts after 1% is allocated to the General Partners. E. Liquidity, Capital Withdrawals and Early Withdrawals There are substantial restrictions on transferability of Units and accordingly an investment in the Partnership is illiquid. Limited Partners have no right to withdraw from the partnership or to obtain the return of their capital account for at least one year from the date of purchase of Units. In order to provide a certain degree of liquidity to the Limited Partners after the one-year period, Limited Partners may withdraw all or part of their Capital Accounts from the Partnership in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty. The 10% penalty is applicable to the amount withdrawn as stated in the Notice of Withdrawal and will be deducted from the Capital Account and the balance distributed in four quarterly installments. Withdrawal after the one-year holding period and before the five-year holding period will be permitted only upon the terms set forth above. Limited Partners also have the right after five years from the date of purchase of the Units to withdraw from the partnership on an installment basis, generally over a five year period in twenty (20) quarterly installments or longer. Once this five year period expires, no penalty will be imposed if withdrawal is made in twenty (20) quarterly installments or longer. Notwithstanding the five-year (or longer) withdrawal period, the General Partners will liquidate all or part of a Limited Partners capital account in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn pursuant to the five-year (or longer) withdrawal period. The Partnership will not establish a reserve from which to fund withdrawals and, accordingly, the Partnerships capacity to return a Limited Partners capital account is restricted to the availability of Partnership cash flow. F. Guaranteed Interest Rate For Offering Period During the period commencing with the day a Limited Partner was admitted to the Partnership and ending 3 months after the offering termination date, the General partners guaranteed an interest rate equal to the greater of actual earnings from mortgage operations or 2% above The Weighted Average cost of Funds Index for the Eleventh District Savings Institutions (Savings & Loan & Thrift Institutions) as computed by the Federal Home Loan Bank of San Francisco monthly, up to a maximum interest rate of 12%. The guarantee amounted to $12,855 and $5,195 in 1990 and 1991, respectively. In 1992 and 1993, actual realization exceeded the guaranteed amount each month. None of 1994, 1995, or 1996, was subject to the guarantee. This guarantee is now no longer applicable. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE 5 - INVESTMENT IN PARTNERSHIP The Partnerships interest in land, acquired through foreclosure, located in East Palo Alto with costs totalling $242,394 has been invested with that of two other Partnerships (total cost to date, primarily land, of $1,021,798) in a partnership which is in the process of obtaining approval for constructing approximately 72 single family homes for sale. Redwood Mortgage Investors V, VI and VII have first priority on return of investment plus interest thereon, in addition to a share of profits realized. NOTE 6 - LEGAL PROCEEDINGS The Partnership is not a defendant in any legal actions. However, legal actions against borrowers and other involved parties have been initiated by the Partnership to help assure payments against unsecured accounts receivable totalling $337,242 at December 31, 1996. Management anticipates that the ultimate results of these cases will not have a material adverse effect on the net assets of the Partnership, with due consideration having been given in arriving at the allowance for doubtful accounts. NOTE 7 - NOTE PAYABLE BANK - LINE OF CREDIT The Partnership has a bank line of credit secured by its Mortgage Investment portfolio of up to $3,000,000 at .50% over prime. The balances outstanding as of December 31, 1995 and 1996 were $2,000,000, and $1,175,000 respectively, and the interest rate at December 31, 1996 was 8.75% (8.25% prime + .50%). NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS The Mortgage Investments are secured by recorded deeds of trust. At December 31, 1996, there were 71 Mortgage Investments outstanding with the following characteristics: Number of Mortgage Investments outstanding 71 Total Mortgage Investments outstanding $12,036,293 Average Mortgage Investment outstanding $169,525 Average Mortgage Investment as percent of total 1.41% Average Mortgage Investment as percent of Partners Capital 1.21% Largest Mortgage Investment outstanding $979,273 Largest Mortgage Investment as percent of total 8.14% Largest Mortgage Investment as percent of Partners Capital 6.99% Number of counties where security is located(all California) 17 Largest percentage of Mortgage Investments in one county 24.00% Average Mortgage Investment to appraised value of security at time loan was consummated 65.76% Number of Mortgage Investments in foreclosure 5 The cash balance at December 31, 1996 of $755,089 was in one bank with interest bearing balance totalling $179,572. The balances exceeded FDIC insurance limits (up to $100,000 per bank) by $655,089. SCHEDULE II AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES. Rule 12-03 Column A Column B Column C Column D Column E Name of Debtor Balance Beginning Additions Deductions Balance at end of period of period 12/31/95 (1) (2) (1) (2) Amounts Amounts Current Not Current collected written off 12/31/96 Redwood Mortgage .................. $517,051 $ 0.00 $ 62,225 $ 25,663* $ 0.00 $429,163 <FN> The above schedule represents the formation loan borrowed by Redwood Mortgage from the Partnership to pay for the selling commissions on units. It is an unsecured loan and will not bear interest. It will be repaid to the Partnership in ten annual installments of principal only commencing January 1, 1992. * The amount written off is comprised of the applications of the applicable portions of early withdrawal penalty as provided for in the prospectus. </FN> SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS REDWOOD MORTGAGE INVESTORS VII Column A Column B Column C Column D Column E Description Balance at Additions Deductions Balance at beginning (1) (2) Describe End of Period of period Charged to Charged to Costs & Expenses Other accounts - Describe Year Ended 12/31/96 Deducted from Asset accounts: Allowance for Doubtful accts .................... $200,000 $419,437 $ 0.00 $390,790 $228,647 <FN> *The provision noted above, includes amounts written off on real estate acquired through foreclosure. </FN> SCHEDULE IX SHORT TERM BORROWINGS REDWOOD MORTGAGE INVESTORS VII RULE 12-10 Column A Column B Column C Column D Column E Column F Category of Aggregate Balance at End Weighted Average Maximum Amount Average Amount Weighted Average Short-Term Borrowings of Period Interest Rate Outstanding Outstanding Interest Rate during During the Period During the Period the period - ----------------------- ---------------- ------------------- --------------------- --------------------------------- Year-Ended 12/31/96 .................. $1,175,000 9.300% $2,000,000 $1,370,413 9.300% SCHEDULE XII MORTGAGE INVESTMENTS ON REAL ESTATE. RULE 12-29 MORTGAGE LOANS ON REAL ESTATE Col. A Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J Descp. Interest Final Periodic Prior Face Amt. Carrying Principal Type of Geographic Rate Maturity Payment Liens of amount of amount of Lien County Date Terms Mortgage Mortgage Mortgage Location Investments Investments Investments (original subject to amount) Delinq. Principal or Interest Res. 14.500% 12/01/95 $1,114.35 $336,591 $91,000.00 $89,074.94 $89,074.94 2nd Mtg San Mateo Res 14.000% 09/01/94 175.00 67,583 15,000.00 14,708.39 0.00 2nd Mtg San Mateo Res 14.500% 06/01/01 782.62 84,303 63,910.49 62,836.42 62,836.42 2nd Mtg Marin Res 13.750% 08/01/96 1,258.32 0.00 108,000.00 105,694.70 0.00 1st Mtg San Francisco Res 15.000% 09/01/96 1,251.80 319,721 99,000.00 90,740.78 90,740.78 2nd Mtg San Mateo Res 12.000% 08/01/04 710.00 70,729 62,000.00 64,393.56 0.00 2nd Mtg Alameda Res 13.750% 10/01/96 916.67 369,163 80,000.00 80,000.00 0.00 2nd Mtg San Mateo Res 13.750% 10/01/96 988.28 0.00 86,250.00 86,250.00 0.00 1st Mtg Santa Clara Res 12.500% 02/01/07 369.76 0.00 30,000.00 25,438.43 0.00 1st Mtg Santa Cruz Res 10.000% 12/24/01 308.28 0.00 37,984.50 34,884.05 0.00 1st Mtg Alameda Res 10.000% 04/17/97 132.08 126,800 15,850.00 15,788.90 0.00 2nd Mtg Sonoma Land 15.000% 06/01/93 1,375.00 210,000 110,000.00 110,000.00 0.00 3rd Mtg Sacramento Res 13.000% 07/01/97 1,603.99 254,505 145,000.00 142,127.61 0.00 2nd Mtg San Mateo Res 12.500% 07/01/97 453.58 129,491 42,500.00 41,717.30 0.00 2nd Mtg San Mateo Res 12.750% 07/01/97 880.22 592,878 81,000.00 79,123.10 0.00 2nd Mtg San Mateo Land 15.500% 07/15/94 1,453.13 0.00 112,500.00 112,500.00 0.00 1st Mtg San Mateo Comm 7.000% 08/06/02 311.38 17,382 46,803.50 44,532.37 0.00 2nd Mtg Alameda Comm 12.000% 10/01/97 4,517.38 796,163 439,172.47 431,064.13 0.00 3rd Mtg Contra Costa Res 10.000% 11/06/07 65.91 48,829 6,133.33 5,242.28 0.00 2nd Mtg San Francisco Comm 12.500% 01/01/98 587.00 0.00 55,000.00 54,128.70 0.00 1st Mtg San Mateo Comm 12.250% 01/01/98 4,083.36 354,077 400,002.42 400,002.42 0.00 2nd Mtg Contra Costa Res 12.000% 02/01/98 150.00 208,000 15,000.00 8,528.06 0.00 2nd Mtg San Mateo Comm 12.500% 04/05/08 921.02 0.00 175,000.00 65,213.37 0.00 1st Mtg Tuoloume Res 12.000% 05/01/98 514.31 0.00 50,000.00 49,257.75 0.00 1st Mtg San Francisco Comm 12.000% 06/01/98 2,038.01 0.00 239,850.00 195,804.52 0.00 1st Mtg Sonoma Apts 4.000% 05/01/06 540.83 89,904 100,000.00 96,893.59 0.00 2nd Mtg Sacramento Res 12.000% 07/01/98 3,085.84 85,930 300,000.00 274,178.59 274,178.59 2nd Mtg El Dorado Res 12.750% 07/01/08 370.90 236,164 29,700.00 26,875.11 0.00 2nd Mtg San Mateo Res 13.500% 09/01/08 1,647.07 106,044 126,861.90 116,430.02 0.00 2nd Mtg Contra Costa Comm 12.000% 09/01/03 848.61 0.00 82,500.00 81,345.94 0.00 1st Mtg Alameda Comm 6.000% 09/01/03 885.00 0.00 133,000.00 125,200.12 0.00 1st Mtg San Mateo Comm 12.000% 11/01/98 2,057.23 5,635 200,000.00 74,423.44 0.00 2nd Mtg San Francisco Res 8.000% 05/01/09 753.50 0.00 81,825.00 71,982.62 0.00 1st Mtg Alameda Comm 10.000% 12/01/98 647.21 0.00 73,750.00 72,887.14 0.00 1st Mtg Stanislaus Comm 12.250% 01/01/98 2,080.84 891,453 200,001.20 200,001.20 0.00 4th Mtg Contra Costa Comm 10.000% 12/01/98 3,619.98 0.00 412,500.00 407,226.68 0.00 1st Mtg Alameda Comm 7.000% 12/01/03 575.74 281,250 49,586.38 41,566.43 0.00 2nd Mtg Alameda Comm 12.000% 02/01/99 3,420.75 0.00 312,000.00 335,638.30 0.00 1st Mtg Santa Clara Comm 12.000% 06/01/04 1,316.53 0.00 125,000.00 122,596.76 0.00 1st Mtg Santa Barbara Land 12.000% 07/01/96 1,352.50 679,258 135,250.00 135,250.00 135,250.00 3rd Mtg Sonoma Res 11.000% 10/01/99 571.39 478,120 60,000.00 59,375.29 0.00 2nd Mtg San Mateo Comm 15.250% 10/01/95 1,270.83 510,979 100,000.00 23,525.53 0.00 2nd Mtg Santa Cruz Land 11.500% 12/20/96 6,160.73 907,480 757,144.25 642,858.33 0.00 2nd Mtg Stanislaus Apts 7.000% 02/10/05 234.06 80,250 40,125.00 40,125.00 0.00 2nd Mtg San Francisco Res 12.000% 03/01/98 1,500.29 0.00 280,000.00 147,206.50 0.00 1st Mtg Alameda Apts 11.500% 04/01/05 2,651.89 0.00 550,000.00 267,792.71 0.00 1st Mtg San Francisco Comm 11.875% 05/01/05 2,088.00 0.00 200,000.00 197,605.96 0.00 1st Mtg San Francisco Col. A Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J Descp. Interest Final Periodic Prior Face Amt. Carrying Principal Type of Geographic Rate Maturity Payment Liens of amount of amount of Lien County Date Terms Mortgage Mortgage Mortgage Location Investments Investments Investments (original subject to amount) Delinq. Principal or Interest Comm 9.000% 05/10/02 670.52 0.00 83,333.33 82,407.46 0.00 1st Mtg Shasta Comm 12.000% 10/31/99 7,000.00 2,684,430 700,000.00 700,000.00 0.00 2nd Mtg Santa Clara Res 8.000% 09/27/00 530.79 106,333 79,619.05 79,619.05 0.00 2nd Mtg Monterey Land 8.000% 12/01/97 400.00 0.00 60,000.00 60,000.00 0.00 1st Mtg Solano Comm. 11.875% 02/01/06 4,437.00 0.00 425,000.00 422,581.57 0.00 1st Mtg San Mateo Comm. 12.000% 12/31/01 9,792.73 5,492,794 955,000.00 979,272.93 0.00 2nd Mtg Santa Clara Comm 12.000% 03/15/98 4,000.00 3,000,000 400,000.00 400,000.00 0.00 2nd Mtg Santa Clara Land 12.000% 02/01/97 3,822.50 0.00 382,250.00 382,250.00 0.00 1st Mtg Santa Clara Apts 12.000% 02/01/98 9,106.84 883,750 1,427,500.00 921,060.33 0.00 2nd Mtg San Francisco Res 12.000% 02/01/98 2,107.47 825,000 320,000.00 246,903.83 0.00 2nd Mtg San Francisco Res 8.000% 09/18/03 87.56 0.00 11,932.83 11,908.65 0.00 1st Mtg Sonoma Res 12.000% 05/01/98 235.43 0.00 238,000.00 42,622.50 0.00 1st Mtg San Francisco Res 8.000% 09/30/03 89.71 0.00 12,225.92 12,201.15 0.00 1st Mtg Sonoma Res 8.000% 04/10/97 199.63 0.00 29,944.39 29,944.39 0.00 1st Mtg San Mateo Comm 12.000% 02/01/99 56.65 312,000 12,000.00 5,496.62 0.00 2nd Mtg Santa Clara Res 13.000% 12/01/99 704.17 0.00 65,000.00 65,000.00 0.00 1st Mtg Ventura Res 13.000% 12/01/99 704.17 0.00 65,000.00 65,000.00 0.00 1st Mtg Ventura Res 13.000% 12/01/99 704.17 0.00 65,000.00 65,000.00 0.00 1st Mtg Ventura Res 12.000% 01/01/98 3,400.00 0.00 340,000.00 340,000.00 0.00 1st Mtg Alameda Land 12.000% 01/01/00 9,500.00 89,692 950,000.00 950,000.00 0.00 2nd Mtg Stanislaus Res 13.000% 01/01/03 999.54 15,400 79,000.00 51,719.39 0.00 2nd Mtg San Mateo Res 10.000% 08/01/97 388.67 309,872 45,000.00 46,573.10 0.00 3rd Mtg San Mateo Res 13.500% 04/01/95 732.61 0.00 63,960.00 61,981.43 0.00 1st Mtg San Mateo Res 15.250% 04/01/95 588.29 11,601 45,800.00 44,713.29 0.00 2nd Mtg Solano ----------- ---------- ------------ ------------ ------------ Totals $124,899.62 $22,069,554 $13,811,765.96 $12,036,292.73 $652,080.73 Schedule XII Reconciliation of carrying amount of Mortgage Investments at close of period (12/31/96) Balance at beginning of period 1/01/96 $12,382,641 Additions during period: New Mortgage Investments $9,099,688 Other 0 $9,099,688 - ------------------------------------------------------------------------------- $21,482,329 Deduction during period: Collections of principal $8,923,339 Foreclosures 492,697 Cost of Mortgage Investment sold 0 Amortization of Premium 0 Other 30,000 $9,446,036 - -------------------------------------------------------------------------------- Balance at close of period (12/31/96) $12,036,293 ----------- Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The Partnership has neither changed its accountants nor does it have any disagreement on any matter of accounting principles or practices of financial statement disclosures. Part III Item 10 - Directors and Executive Officers of the Registrant The Partnership has no Officers or Directors. Rather, the activities of the Partnership are managed by the three General Partners of which two individuals are D. Russell Burwell and Michael R. Burwell. The third General Partner is Gymno Corporation, a California corporation, formed in 1986. The Burwells are the two shareholders of Gymno Corporation, a California corporation, on an equal (50-50) basis. Item 11 - Executive Compensation COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP As indicated above in Item 10, the Partnership has no officers or directors. The Partnership is managed by the General Partners. There are certain fees and other items paid to management and related parties. A more complete description of management compensation is found in the Prospectus, pages 12-13, under the section Compensation of the General partners and the Affiliates, which is incorporated by reference. Such compensation is summarized below. The following compensation has been paid to the General Partners and Affiliates for services rendered during the year ended December 31, 1996. All such compensation is in compliance with the guidelines and limitations set forth in the Prospectus. Entity Receiving Description of Compensation and Amount Compensation Services Rendered - ------------------------------------------------------------------------------- I. Redwood Mortgage Mortgage Servicing Fee for servicing $97,267 Mortgage Investments ($92,249 waived by Redwood Mortgage) General Partners &/or Asset Management Fee for managing Affiliate assets........................... $0 ($53,537 waived by the General Partners) General Partners 1% interest in profits.......... $8,591 Less allowance for syndication costs 137 $8,454 II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED BY COMPANIES RELATED TO THE GENERAL PARTNERS WITH THE PARTNERSHIP (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP) Redwood Mortgage. Loan Brokerage Commissions for services in connection with the review, selection, evaluation, negotiation, and extension of the Mortgage Investments paid by the borrowers and not by the Partnership...................... $236,310 Redwood Mortgage Processing and Escrow Fees for services in connection with notary, document preparation, credit investigation, and escrow fees payable by the borrowers and not by the Partnership...... $5,609 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. $40,874 Item 12 - Security Ownership of Certain Beneficial Owners and Management The General Partners are to own a combined total of 1% of the Partnership including a 1% portion of income and losses. Item 13 - Certain Relationships and Related Transactions Refer to footnote 3 of the notes to financial statements in Part II item 8 which describes related party fees and data. Also refer to the Prospectus dated October 20, 1989 (incorporated herein by reference) on page 12 Compensation of General Partners and Affiliates and page 14 Conflicts of Interest. Part IV Item 14 - Exhibits, Financial Statements and Schedules, and Reports on Form 8-K. A. Documents filed as part of this report are incorporated: 1. In Part II, Item 8 under A - Financial Statements. 2. The Financial Statement Schedules are listed in Part II - Item 8 under B- Financial Statement Schedules. 3. Exhibits. Exhibit No. Description of Exhibits - ----------------- -------------------------- 3.1 Limited Partnership Agreement 3.2 Form of Certificate of Limited Partnership Interest 3.3 Certificate of Limited Partnership 10.1 Escrow Agreement 10.2 Servicing Agreement 10.3 (a) Form of Note secured by Deed of Trust which provides for principal and interest payments. (b) Form of Note secured by Deed of Trust which provides principal and interest payments and right of assumption (c) Form of Note secured by Deed of Trust which provides for interest only payments (d) Form of Note 10.4 (a) Deed of Trust and Assignment of Rents to accompany Exhibits 10.3 (a), and (c) (b) Deed of Trust and Assignment of Rents to accompany Exhibit 10.3 (b) (c) Deed of Trust to accompany Exhibit 10.3 (d) 10.5 Promissory Note for Formation Loan 10.6 Agreement to Seek a Lender 24.1 Consent of Parodi & Cropper 24.2 Consent of Stephen C. Ryan & Associates. All of these exhibits were previously filed as the exhibits to Registrants Statement on Form S-11 (Registration No. 33-30427 and incorporated by reference herein). B. Reports of Form 8-K. No reports on Form 8-K have been filed during the last quarter of the period covered by this report. C. See A (3) above. D. See A (2) above. Additional reference is made to the prospectus (S-11 filed as part of the Registration Statement) dated October 20, 1989 to pages 65 through 67 and Supplement #5 dated February 14, 1992 for financial data related to Gymno Corporation, a General Partner. 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 18th day of March, 1997. REDWOOD MORTGAGE INVESTORS VII By: /S/ D. Russell Burwell --------------------------------------------- D. Russell Burwell, General Partner By: /S/ Michael R. Burwell --------------------------------------------- Michael R. Burwell, General Partner By: Gymno Corporation, General Partner By: /S/ D. Russell Burwell --------------------------------------------- D. Russell Burwell, President By: /S/ Michael R. Burwell --------------------------------------------- Michael R. Burwell, Secretary/Treasurer 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 18th day of March, 1997. Signature Title Date /S/ D. Russell Burwell - ---------------------- D. Russell Burwell General Partner March 18, 1997 /S/ Michael R. Burwell - ---------------------- Michael R. Burwell General Partner March 18, 1997 /S/ D. Russell Burwell - ---------------------- D. Russell Burwell President of Gymno Corporation, March 18, 1997 (Principal Executive Officer); Director of Gymno Corporation /S/ Michael R. Burwell - ---------------------- Michael R. Burwell Secretary/Treasurer of Gymno March 18, 1997 Corporation (Principal Financial and Accounting Officer); Director of Gymno Corporation