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REDWOOD MORTGAGE INVESTORS VII
(a California Limited Partnership)
Index to Form 10-K
December 31, 2002
Part I
Page No.
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Item 1 - Business 3
Item 2 - Properties 6
Item 3 - Legal Proceedings 6
Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 6
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 7
Item 6 - Selected Financial Data 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 15
Item 8 - Financial Statements and Supplementary Data 18
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 39
Part III
Item 10 - Directors and Executive Officers of the Registrant 39
Item 11 - Executive Compensation 39
Item 12 - Security Ownership of Certain Beneficial Owners and Management 40
Item 13 - Certain Relationships and Related Transactions 40
Item 14 - Control and Procedures 40
Part IV
Item 15 - Exhibits, Financial Statements and Schedules, and Reports on Form 8-K 41
Signatures 42
Certifications 43
1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the year ended December 31, 2002 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)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
- --------------------------------------------------------------------------------
(address of principal executive offices) (zip code)
Registrant's telephone number including area code (650) 365-5341
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- --------------------------------------------------------------------------------
None None
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Units
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES XXXX NO
- -------------------------- -------------------------
Through December 31, 2002, the limited partnership Units purchased by
non-affiliates was 119,983.59 Units computed at $100.00 a Unit for $11,998,359.
The offering was closed on September 30, 1992.
Documents incorporated by reference:
Portions of the Prospectus dated October 20, 1989, and Supplement #5 dated
February 14, 1992, filed on form S-11, are incorporated in Parts II, III, and
IV. Exhibits filed as part of Form S-11 Registration Statement #33-30427 are
incorporated in part IV.
2
Part I
Item 1 - Business
Redwood Mortgage Investors VII, a California limited partnership (the
"Partnership"), was organized in 1989 of which Michael R. Burwell and Gymno
Corporation, a California corporation, are the general partners. The address of
the Partnership and the general partners is 900 Veterans Blvd., Suite 500,
Redwood City, California 94063. The Partnership is organized to engage in
business as a mortgage lender, for the primary purpose of making loans secured
by deeds of trust on California real estate. Loans are arranged and serviced by
Redwood Mortgage Corp., an affiliate of the general partners. The Partnership's
objectives are to make investments, as referred to above, which will: (i)
provide the maximum possible cash returns which limited partners may elect to
(a) receive as monthly, quarterly or annual cash distributions or (b) have
credited to their capital accounts and applied to Partnership activities; and
(ii) preserve and protect the Partnership's capital. The Partnership's general
business is more fully described under the section entitled "Investment
Objectives and Criteria" pages 26-31 of the Prospectus, which is incorporated by
reference.
Originally, 60,000 Units were offered on a "best efforts" basis through
broker/dealer member firms of the National Association of Security Dealers, Inc.
In accordance with the terms of the Prospectus, the general partners increased
the number of Units for sale from 60,000 to 120,000 and elected to continue the
offering until September 30, 1992. The offering closed on September 30, 1992,
and the limited partners contributed capital totaled $11,998,359 of an approved
$12,000,000 issue, in Units of $100 each. At that date all the applicants had
been admitted into the Partnership with none left in the applicant status. The
final SR report (Report of Sales of Securities and use of proceeds therefrom)
was filed on September 21, 1992.
The Partnership began selling Units in October 1989 and began investing in
mortgages in December 1989. At December 31, 2002, the Partnership had a balance
in its secured loans portfolio totaling $6,423,984 with interest rates thereon
ranging from 6.125% to 13.00%.
Currently, loans secured by First Trust Deeds comprise 50.90% of the amount
of funds in the secured loan portfolio followed by Second Trust Deeds of 45.76%
and Third Trust Deeds of 3.34%. Owner-occupied homes combined with non-owner
occupied homes total 25.10% of the secured loans. Commercial loans origination
decreased from last year, now comprising 63.87% of the secured portfolio, a
decrease of 1.31%. Loans to apartments totaled 11.03%. Of the total secured
loans, 52.18% are in six counties of the Bay Area. The County of Stanislaus
makes up 41.38% of the loans. Stanislaus County is an adjacent county to the San
Francisco Bay Area, located approximately 65 miles from San Francisco. The
balance of loans are primarily in Northern California. Loan size decreased the
past year, and is now averaging $256,959 per loan, a decrease of $23,352. Some
of the larger loans invested in by the Partnership are fractionalized between
other affiliated partnerships with objectives similar to those of the
Partnership to further reduce risk. Average equity per loan transaction, which
is our loan plus any senior loans, divided by the property's appraised value,
subtracted from 100%, stood at 34.14%. A 40% equity average on loan origination
is generally considered very conservative. Generally, the more equity, the more
protection for the lender. The Partnership's loan portfolio is in good condition
with two properties in foreclosure as of December 2002.
Delinquencies are discussed under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
During the year the Partnership acquired one piece of real estate property
through foreclosure. To protect its own assets and reduce liability, it
subsequently transferred the title to a newly formed LLC, Stockton Street
Property Company, LLC. The Partnership owns a minority interest of 34% together
with another partnership, an affiliate of the general partners, the other
investor in the foreclosed loan, who owns the majority interest of 66% and
participated in the original loan. The LLC is further discussed under Notes to
Financial Statements (Note 6).
3
Competition and General Economic Conditions
The Partnership's major competitors in providing mortgage loans are banks,
savings and loan associates, thrifts, conduit lenders, mortgage brokers, and
other entities both larger and smaller than the Partnership. The Partnership is
competitive in large part because the general partners generate all of their
loans. The general partners have been in the business of making or investing in
mortgage loans in Northern California since 1978 and have developed a quality
reputation and recognition within the field.
Mortgage interest rates have fallen during the last 18 to 24 months. This
has been partially due to actions by the Federal Reserve Bank to reduce the
discount rate on borrowings charged to member banks, a slowing economy and low
rates of inflation. Although the general trend for interest rates has been down,
many lenders have tightened their credit and reduced their lending exposure in
various markets and property types. This credit tightening from competing
lenders would generally provide the Partnership with additional lending
opportunities at attractive interest rates. However, as a result of the slowing
economy, there are now fewer transactions in the marketplace, which could
potentially reduce the number of lending opportunities to the Partnership.
Continued rate reductions by the Federal Reserve Bank, a continued slowing
economy, and a continued low threat of inflation could have the effect of
reducing mortgage yields in the future. Current loans with relatively high
yields could be replaced with loans with lower yields, which in turn could
reduce the net yield paid to the limited partners. In addition, if there is less
demand by borrowers for loans and, thus, fewer loans for the Partnership to
invest in, it will invest its excess cash in shorter-term alternative
investments yielding considerably less than the current investment portfolio.
Loan Portfolio
A summary of the Partnership's secured loan portfolio as of December 31,
2002 is set forth below.
Secured Loans as a Percentage of Appraised Values
First Trust Deeds $3,269,897
Appraised Value of Properties 4,618,205
----------------
Total Investment as a % of Appraisal 70.80%
================
First Trust Deeds $3,269,897
Second Trust Deed Loans 2,939,753
Third Trust Deed Loans 214,334
----------------
6,423,984
Priority positions due other Lenders
First Trust Deeds due other Lenders 4,097,086
Second Trust Deeds due other Lenders 1,378,639
----------------
Total Debt $11,899,709
================
Appraised Property Value $18,069,602
Total Investments as a % of Appraisal 65.86%
================
Number of Secured Loans Outstanding 25
Average Investment 256,959
Average Investment as a % of Loans Outstanding 4.00%
Largest Investment Outstanding 1,000,000
Largest Investment as a % of Loans Outstanding 15.57%
Secured Loans as a Percentage of Total Loans Percent
---------------------------------------------------- -------------
First Trust Deeds 50.90%
Second Trust Deeds 45.76%
Third Trust Deeds 3.34%
-------------
Total 100.00%
4
Secured Loans as a Percentage of Appraised Values (continued)
Secured Loans by Type of Property Amount Percent
----------------------------------------- --------------- -------------
Owner Occupied Homes $1,037,474 16.15%
Non-Owner Occupied Homes 575,051 8.95%
Apartments 608,648 11.03%
Commercial 4,202,811 63.87%
--------------- -------------
Total $6,423,984 100.00 %
=============== =============
The following is a distribution of secured loans outstanding as of December
31, 2002 by Counties.
Total Mortgage
County Investments Percent
--------------------------------- ----------------- ----------------
Stanislaus $2,658,350 41.38%
Alameda 891,400 13.88%
San Mateo 842,474 13.11%
Santa Clara 776,883 12.09%
San Francisco 511,932 7.97%
Sacramento 224,166 3.49%
Marin 195,000 3.03%
Contra Costa 134,879 2.10%
San Joaquin 100,000 1.56%
Shasta 77,485 1.21%
Sonoma 11,415 0.18%
----------------- ----------------
Total $6,423,984 100.00%
================= ================
Statement of Condition of Loans:
Number of Loans in Foreclosure 2
Scheduled maturity dates of secured loans as of December 31, 2002 are as
follows:
Year Ending
December 31, Amount
------------------- -----------------
2003 $3,095,300
2004 1,014,056
2005 40,125
2006 96,716
2007 1,662,819
Thereafter 514,968
-----------------
Total $6,423,984
=================
5
The scheduled maturities for 2003 include seven loans totaling
approximately $2,401,294 past maturity at December 31, 2002. This represents
37.38% of the secured loan portfolio. Interest payments on 6 of these loans
totaling $2,266,414 were categorized as delinquent over 90 days, which
represents 35.28% of the Partnership's secured loan portfolio. Four of these
loans were made to a developer who is in the process of selling part of his
property. By the middle of 2003 the Partnership expects to receive the sale
proceeds and at that time, depending on the magnitude of the proceeds, all loans
will either be brought current or paid off. Several other borrowers were in
process of refinancing their loans through other institutions, as this was an
opportune time for them to do so and take advantage of the lower interest rate.
Additionally, the Partnership allows borrowers to occasionally continue to make
the payments on debt past maturity for periods of time. The Partnership, in most
instances, receives the benefit of a higher interest rate than would otherwise
be available in the currently existing loan marketplace.
Overall, the loan portfolio had ten loans with principal outstanding of
$3,009,927 where interest payments were overdue in excess of 90 days. The
principal outstanding represents 46.85% of the Partnership's portfolio as of
December 31, 2002.
In addition, one loan with principal outstanding of $96,716 was considered
impaired at December 31, 2002. That is, interest accruals are no longer recorded
thereon. This represents 1.51% of the total loan portfolio.
Item 2 - Properties
During 2002, the Partnership acquired the real estate security on one of
its loans through foreclosure with another partnership, an affiliate of the
general partners. It subsequently transferred its interest in the property to a
newly formed LLC. The real estate security was seven condominium units. In order
to sell these units, the Partnership was required to obtain a "White Report"
from the Department of Real Estate. That report was obtained in February, 2003.
Two of the condominiums were listed for sale in March, 2003. One of the seven
units will require renovations estimated to cost approximately $230,000 and that
work has currently commenced. The general partners have visited the property
with real estate professionals, reviewed the appraisal and concluded that the
collateral appears adequate to cover the collection of sums due. The
Partnership's net investment at December 31, 2002 was $1,212,722.
The Partnership also owns (through foreclosure) two other properties; a
commercial property and the other land. The land is located in East Palo Alto.
The land is owned with two other affiliated partnerships. The Partnership's net
investment at December 31, 2002 is $62,733. Currently there is not an active
market for land sale. The Partnership's net investment of $62,733 is less than
1% of Partnership assets. The general partners are offering the property for
sale but there has been little activity, although some negotiations have ensued.
The general partners believe that the property is worth considerably more than
its net investment.
Our final property is a commercial property located in Walnut Creek,
California. The property is currently for sale. Management has set aside loss
reserves, which they believe are adequate in amount to cover anticipated losses.
Item 3 - Legal Proceedings
In the normal course of business the Partnership may become involved in
various types of legal proceedings such as assignments of rents, bankruptcy
proceedings, appointments of receivers, unlawful detainers, judicial
foreclosures, etc., to enforce the provisions of the deeds of trust, collect the
debt owed under the promissory notes or to protect or recoup its investment from
the real property secured by the deeds. As of the date hereof, the Partnership
is not involved in any legal proceedings other than those that would be
considered part of the normal course of business.
Item 4 - Submission of Matters to a Vote of Security Holders (Partners)
No matters have been submitted to a vote of the Partnership.
6
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and
Related Unitholder Matters
120,000 Units at $100 each (minimum 20 Units) were offered through
broker-dealer member firms of the National Association of Securities Dealers on
a "best efforts" basis (as indicated in Part I item 1). Investors have the
option of withdrawing earnings on a monthly, quarterly, or annual basis or
reinvesting and compounding the earnings. Limited partners may withdraw from the
Partnership in accordance with the terms of the Partnership Agreement subject to
possible early withdrawal penalties. There is no established public trading
market.
A description of the Partnership Units, transfer restrictions and
withdrawal provisions is more fully described under the section entitled
"Description of Units" and "Summary of Limited Partnership Agreement", pages 47
to 50 of the Prospectus, a part of the referenced Registration Statement, which
is incorporated by reference.
Item 6 - Selected Financial Data
Redwood Mortgage Investors VII began operations in December 1989.
Financial condition and results of operation for the Partnership for five
years to December 31, 2002 were:
Balance Sheets
Assets
December 31,
----------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- --------------- -------------- -------------- ---------------
Cash $1,057,845 $ 389,844 $ 269,000 $ 388,770 $ 461,544
Loans
Loans, secured by deeds of trust 6,423,984 10,091,195 12,794,297 11,011,660 13,209,186
Loans, unsecured 216,770 173,731 188,421 163,085 242,493
Less allowance for losses (791,882) (887,578) (850,548) (828,563) (787,042)
Interest and other receivables
Accrued interest and other fees 304,936 666,189 363,321 357,177 442,350
Advances on loans 17,230 50,665 29,825 31,669 39,733
Real estate owned ("REO"), net 683,136 872,133 816,094 307,931 397,396
Real estate owned in process - - - 525,510 -
Investment in LLC 1,212,722 - - - -
------------- --------------- -------------- -------------- ---------------
$9,124,741 $11,356,179 $13,610,410 $11,957,239 $14,005,660
============= =============== ============== ============== ===============
7
Liabilities and Partners' Capital
December 31
----------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- -------------- -------------- -------------- --------------
Liabilities
Note payable - bank - $ 1,907,000 $ 3,500,000 $ 800,000 $1,912,663
Accounts payable and
accrued expenses 2,593 11,295 4,102 32,234 12,547
Deferred interest 37,704 2,322 - 115,709 131,743
Payable to affiliate 32,176 3,316 - - -
------------- -------------- --------------- -------------- --------------
72,473 1,923,933 3,504,102 947,943 2,056,953
Partners' capital
General partners 11,978 11,978 11,978 11,978 11,978
Limited partners subject to
redemption 9,040,290 9,420,268 10,094,330 10,997,318 11,936,729
------------- -------------- --------------- -------------- --------------
Total partners capital 9,052,268 9,432,246 10,106,308 11,009,296 11,948,707
------------- -------------- --------------- -------------- --------------
$9,124,741 $11,356,179 $13,610,410 $11,957,239 $14,005,660
============= ============== =============== ============== ==============
Statements of Income
December 31,
------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- --------------
Gross revenue $1,078,186 $1,192,381 $1,437,964 $1,663,245 $1,657,728
Expenses 314,704 371,184 537,818 753,664 811,157
------------- ------------- ------------- ------------- --------------
Net income $ 763,482 $ 821,197 $ 900,146 $ 909,581 $ 846,571
============= ============= ============= ============= ==============
Net income to general partners (1%) 7,635 8,212 9,001 9,096 8,466
Net income to limited partners (99%) 755,847 812,985 891,145 900,485 838,105
------------- ------------- ------------- ------------- --------------
$ 763,482 $ 821,197 $ 900,146 $ 909,581 $ 846,571
============= ============= ============= ============= ==============
Net income per $1,000 invested by limited partners for entire period:
- where income is compounded
and reinvested $85 $85 $85 $79 $67
============= ============= ============= ============= ==============
- where partner receives
income in monthly distributions $82 $82 $82 $76 $65
============= ============= ============= ============= ==============
The annualized yield for 1999 was 7.86%, for 2000 the annualized yield was
8.52%, and for 2001 the annualized yield was 8.50%, and the annualized yield for
2002 was 8.44%. Average annualized yield from inception through December 31,
2002, was 7.89%.
8
Item 7 - Management Discussion and Analysis of Financial Condition and
Results of Operations
Management Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet date. Such estimates relate
principally to the determination of (1) the allowance for loan losses (i.e. the
amount of allowance established against loans receivable as an estimate of
potential loan losses) including the accrued interest and advances that are
estimated to be unrecoverable based on estimates of amounts to be collected plus
estimates of the value of the property as collateral and (2) the valuation of
real estate acquired through foreclosure.
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. A provision is made for loan losses to
adjust the allowance for loan losses to an amount considered by management to be
adequate, with due consideration to collateral value, to provide for
unrecoverable loans and receivables, including impaired loans, other loans,
accrued interest, late fees and advances on loans and other accounts receivable
(unsecured). The Partnership charges off uncollectible loans and related
receivables directly to the allowance account once it is determined that the
full amount is not collectible.
Statement of Financial Accounting Standards Nos. 114 and 118 provide that
if the probable ultimate recovery of the carrying amount of a loan, with due
consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the investment
shall be reduced to the present value of future cash flows discounted at the
loan's effective interest rate. If a loan is collateral dependent, it is valued
at the estimated fair value of the related collateral. If events and or changes
in circumstances cause management to have serious doubts about the further
collectibility of the contractual payments, a loan may be categorized as
impaired and interest is no longer accrued. Any subsequent payments on impaired
loans are applied to reduce the outstanding loan balances including accrued
interest and advances.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Forward Looking Statements.
Some of the information in the Form 10-K may contain forward looking
statements. Uses of words such as "will", "may", "anticipate", "estimate",
"continue" or other forward looking words, discuss future expectations or
predictions. The foregoing analysis of 2002 includes forward looking statements
and predictions about the possibility of future events, results of operations
and financial condition. As such, this analysis may prove to be inaccurate
because of assumptions made by the general partners or the actual development of
the future events. No assurance can be given that any of these statements or
predictions will ultimately prove to be correct or substantially correct.
Related Parties.
The general partners of the Partnership are Gymno Corporation and Michael
R. Burwell. Most Partnership business is conducted through Redwood Mortgage
Corp., an affiliate of the general partner, which arranges, services and
maintains the loan portfolio for the benefit of the Partnership. The fees
received by the affiliate to the general partners are paid pursuant to the
partnership agreement and are determined at the sole discretion of the affiliate
to the general partner. In the past, the affiliate to the general partners has
elected not to take the maximum compensation. The following is a list of various
Partnership activities for which related parties are compensated. o
9
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, the Partnership may
collect an amount equivalent to 12% of the loaned amount until 6 months after
the termination date of the offering. Thereafter, the loan brokerage commissions
(points) will be limited to an amount not to exceed 4% of the total Partnership
assets per year. The loan brokerage commissions are paid by the borrowers, and
thus, are not an expense of the Partnership. For the years ended December 31,
2000, 2001 and 2002 loan brokerage commissions paid by borrowers were $130,487,
$84,137 and $24,661, 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 $110,713, $94,396 and $163,531 were incurred
for the years ended December 31, 2000, 2001 and 2002, respectively.
o Asset Management Fees The general partners receive monthly fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $38,400, $37,233 and $34,869 were incurred by the Partnership for
the years ended December 31, 2000, 2001 and 2002, respectively.
o Other Fees The partnership agreement provides that the general partners
may receive other fees such as reconveyance, mortgage assumption and mortgage
extension fees. Such fees are incurred by the borrowers and are paid to the
general partners.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective Partnership interests. The allocation
to the general partners (combined) shall be a total of 1%.
o Operating Expenses An affiliate of the Partnership, Redwood Mortgage
Corp., is reimbursed by the Partnership for all operating expenses actually
incurred by it on behalf of the Partnership, including without limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees, legal fees and expenses, postage and preparation of reports to
limited partners.
o Contributed Capital The general partners jointly and severally
contributed 1/10 of 1% in cash contributions as proceeds from the offerings were
received from the limited partners. As of December 31, 2002 and 2001, a general
partner, Gymno Corporation, had contributed $11,978 as capital in accordance
with Section 4.02(a) of the partnership agreement.
Results of Operations - For the three years ended December 31, 2000, 2001
and 2002.
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, 2002, Partners' Capital totaled $9,052,268.
The decline in interest revenues from $1,406,098 in 2000 to $1,172,474 in
2001 and to $1,037,717 in 2002 is primarily attributable to the reducing secured
loan portfolio balance from $12,794,297 to $10,091,195 to $6,423,984 for the
years 2000, 2001 and 2002, respectively. Significant reduction of the portfolio
in 2002 represents principal pay-offs and pay-down on loans totaling $4,581,021,
and one loan with a principal balance of $954,488 became REO versus funding of
new loans of only $1,868,298.
Late fee income was $11,219 in 2000, $8,495 in 2001 and $24,920 in 2002.
The increase in 2002 mainly involves collection of additional late charges in
excess of amounts recorded when some larger loans paid-off.
Reduction in other income from $20,647 in 2000 to $11,412 in 2001 and to
$15,549 in 2002 was mainly because of reduction in transfer fees received and
reduction in interest on money market deposits.
10
Mortgage Servicing fees were $110,713 in 2000, $94,396 in 2001 and $163,531
in 2002. The increase in 2002 is primarily attributable to additional servicing
fees earned related to impaired loans. The Partnership does not accrue servicing
fees to Redwood Mortgage Corp. on impaired loans. Rather, servicing fees on
impaired loans are incurred as borrower payments are received.
Reduction in interest expense on bank line of credit is because of lesser
utilization of the credit facility in 2002. The Partnership used loan pay-off
proceeds received at year end and paid down the line of credit to 0. The line of
credit balances were $3,500,000, $1,907,000 and $0 at December 31, 2000, 2001
and 2002, respectively.
Decrease in asset management fees from $38,400 in 2000 to $37,233 in 2001
and to $34,869 in 2002 was due to a decrease in limited partners' capital under
management. Limited partners' capital balances were $10,094,330, $9,420,268 and
$9,040,290 at December 31, 2000, 2001 and 2002, respectively.
Increase in professional fees from $22,068 in 2000 to $23,868 in 2001 and
to $40,158 in 2002 was due to increased costs and the timing of services
provided in 2002 versus 2001 in relation to audit and tax return processing.
No provision for losses on loans was required in 2002 as the general
partners felt the allowance for loan losses of $791,882 as of December 31, 2002,
was adequate to offset any potential loss in loans or real estate. A negative
provision of ($20,039) in 2002 was due to loan loss recoveries during 2002. All
other expenses ranged within the level expected by the general partners.
During the year 2002 the Partnership's annualized yield on compounding
accounts was 8.40% and on monthly distributing accounts it was 8.20%.
During 2001, and through December 31, 2002, the Federal Reserve reduced
interest rates by cutting the Federal Funds Rate twelve times to 1.25%. The
effect of the previous cuts has greatly reduced short-term interest rates and to
a lesser extent reduced long-term interest rates. The general partners
anticipate that new loans will be placed at rates approximately 1% to 1.50%
lower than similar loans during 2002. The lowering of interest rates has
encouraged those borrowers that have mortgages with higher interest rates than
those currently available to seek refinancing of their obligations. The
Partnership may face prepayments in the existing portfolio from borrowers taking
advantage of these lower rates. However, demand for loans from qualified
borrowers continues to be strong and as prepayments occur, the general partners
expect to replace paid off loans with loans at somewhat lower interest rates. At
this time, the general partners believe that the average loan portfolio interest
rate will decline approximately .50% to .75% over the year 2003. Nevertheless,
based upon the rates payable in connection with the existing loans, and
anticipated interest rates to be charged by the Partnership and the general
partners' experience, the general partners anticipate that the annualized yield
will range between 7% and 8% in 2003.
Borrower foreclosures, as set forth under Results of Operations, are a
normal aspect of Partnership operations and the general partners anticipate that
they will not have a material effect on liquidity. As of December 31, 2002,
there were two properties in foreclosure. The principal amount of these
foreclosures was $236,807.00. Cash is constantly being generated from interest
earnings, late charges, pre-payment penalties, amortization of principal and
loan pay-offs. Currently, cash flow exceeds Partnership expenses, earnings and
capital payout requirements. Excess cash flow will be invested in new loan
opportunities, when available, and will be used to reduce the Partnership credit
line or in other Partnership business.
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these properties,
the Real Estate Owned ("REO") expenses and sales activities, borrowers payment
records, etc. Data on the local real estate market and on the national and local
economy are studied. Based upon this information and other data, loss reserves
are increased or decreased. Borrower foreclosures are a normal aspect of
Partnership operations. The Partnership is not a credit based lender and hence
while it reviews the credit history and income of borrowers, and if applicable,
the income from income producing properties, the general partners expect that we
will on occasion take back real estate security. During 2001, and continuing in
2002, the Northern California real estate market slowed and the national and
local economies have slipped into recession. As of December 31, 2002, two
notices of default are currently filed beginning the process of foreclosing two
11
additional loans. The principal amounts of the two foreclosed loans total
$236,807 or 3.69% of our loan portfolio. The Partnership also entered into
workout agreements with borrowers who are past maturity or delinquent in their
regular payments. The Partnership had workout agreements on approximately 2
loans totaling $65,108 as of December 31, 2002. Typically, a workout agreement
allows the borrower to extend the maturity date of the balloon payment and
allows the borrower to make current monthly payments while deferring for periods
of time, past due payments, or allows time to pay the loan in full. These
workout agreements and foreclosures generally exist within our loan portfolio to
greater or lesser degrees, depending primarily on the health of the economy. The
number of foreclosures and workout agreements will rise during difficult times
and conversely fall during good economic times. The number and amount of
foreclosures and workout agreements existing at December 31, 2002, in
management's opinion, does not have a material effect on our results of
operations or liquidity. These workouts and foreclosures have been considered
when management arrived at appropriate loan loss reserves and based on our
experience, are reflective of our loan marketplace segment. Because of the
number of variables involved, the magnitude of the possible swings and the
general partners inability to control many of these factors, actual results may
and do sometimes differ significantly from estimates made by the general
partners. Management provided $65,664, $37,371, and ($20,039), as provisions for
losses on loans and real estate for the years ended December 31, 2000, 2001, and
2002, respectively. The provision for losses on loans and real estate was
decreased by $263,393 to $65,664 in 2000, by $28,293 to $37,371 in 2001 and by
$57,410 to ($20,039) in 2002. These decreases reflect reduced expected REO
anticipated losses in the various years and in 2002 that current reserves for
losses are adequate to handle potential losses. If conditions change, the
Partnership may again increase its provisions for loan losses.
The Partnership makes loans primarily in Northern California. As of
December 31, 2002, approximately 52.18%, ($3,352,568) of the loans held by the
Partnership were in the six San Francisco Bay Area Counties. The remainder of
the loans held were secured primarily by Northern California real estate outside
the San Francisco Bay Area. Like the rest of the nation, the San Francisco Bay
Area has felt the recession and accompanying slow down in economic growth and
increasing unemployment. The technology companies of Silicon Valley, the airline
industry, the tourism industry and other industries are feeling the effects of
the overall United States recession, which includes lower earnings, losses and
layoffs.
As of December 31, 2002, the Partnership had an average loan to value ratio
computed as of the date the loan was made of 65.86%. 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.
Borrower Liquidity and Capital Resources.
At the time of subscription to the Partnership, limited partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound earnings in their capital account. For the years
ended December 31, 2000, 2001, and 2002, the Partnership made distributions of
earnings to limited partners after allocation of syndication costs of $454,386,
$374,689, and $303,020, respectively. Distribution of Earnings to limited
partners, which were not withdrawn after allocation of syndication costs for the
years ended December 31, 2000, 2001 and 2002 were $436,759, $438,296, and
$452,827, respectively. As of December 31 2000, 2001 and 2002, limited partners
electing to withdraw earnings represented 49%, 42% and 36% of the limited
partners' capital.
The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations (see liquidation provisions of
partnership agreement). For the years ended December 31, 2000, 2001, and 2002,
$179,343, $98,857, and $186,716 were liquidated subject to the 10% penalty for
early withdrawal. These withdrawals are within the normally anticipated range
that the general partners would expect in their experience in this and other
partnerships. The general partners expect that a small percentage of limited
partners will elect to liquidate their capital accounts over one year with a 10%
early withdrawal penalty. In originally conceiving the Partnership, the general
partners wanted to provide limited partners needing their capital returned a
degree of liquidity. Generally, limited partners electing to withdraw over one
year need to liquidate their investment to raise cash. The trend the Partnership
is experiencing in withdrawals by limited partners electing a one year
liquidation program represents a small percentage of limited partner capital as
of December 31, 2000, 2001, and 2002, respectively.
Additionally, for the years ended December 31, 2000, 2001, and 2002,
$1,250,291, $1,089,113, and $646,089, 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
12
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.
Actual liquidation of both capital and earnings from year five (1994) through
year thirteen (2002) is shown hereunder:
Years ended December 31,
Earnings Capital
Liquidation Liquidation Total
---------------- --------------- ---------------
1994 $ 263,206 *$ 340,011 $ 603,217
1995 $ 270,760 *$ 184,157 $ 454,917
1996 $ 336,341 *$ 722,536 $ 1,058,877
1997 $ 399,379 *$ 1,212,916 $ 1,612,295
1998 $ 456,358 *$ 1,400,475 $ 1,856,833
1999 $ 490,841 *$ 1,436,942 $ 1,927,783
2000 $ 454,386 *$ 1,429,634 $ 1,884,020
2001 $ 374,689 *$ 1,187,970 $ 1,562,659
2002 $ 303,020 *$ 832,805 $ 1,135,825
* These amounts represent gross of early withdrawal penalties.
In some cases in order to satisfy Broker Dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the Partnership on a basis which utilizes a per Unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the Partnership to integrate with
certain software used by the Broker Dealers and other reporting entities. In
those cases, the Partnership will report to Broker Dealers, Trust Companies and
others a "reporting" number of Units based upon a $1.00 per Unit calculation.
The number of reporting Units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the Partnership account statement
provided to investors. The reporting Units are solely for Broker Dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the Partnership. Each investor's
capital account balance is set forth periodically on the Partnership account
statement provided to investors. The amount of Partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per Unit estimated value
of the client's investment in the Partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the Partnership
Units, such determination may not be representative of the ultimate price
realized by an investor for such Units upon sale. No public trading market
exists for the Partnership's Units and none is likely to develop. Thus, there is
no certainty that the Units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
Partnership, which may include early withdrawal penalties (See the section of
the Prospectus entitled "Risk Factors - Purchase of Units is a long term
investment").
13
Current Economic Conditions.
As contained in a collection of real estate statistics in the San Francisco
Chronicle dated December 20, 2002 Bay Area home prices rose again in November
2002. The article states, "Despite a struggling economy, the median home price
in the Bay Area in November rose 13% on a year-over-year basis, though the price
has leveled since its all-time high this summer, a real estate information firm
reported Thursday. Driven by historically low interest rates, the number of
homes sold increased 24.4% between November 2001 and November 2002; however,
that comparison is somewhat skewed given that sales plunged after September 11,
2001. The median home price in the nine Bay Area counties was $416,000 in
November, compared with $368,000 last November, said DataQuick Information
Systems in La Jolla (San Diego County). Compared with October, the median rose
2%, and the number of sales fell 12.8%. In July and August, the Bay Area median
hit a record high $417,000. Last fall, in the wake of a sagging economy and the
terrorist attacks, home prices and sales cooled considerably. But beginning in
January, prices and sales shot up around the country as interest rates plummeted
and consumers looked for an alternative to the gyrating stock market. At the
same time, many economists have suggested a housing bubble is brewing and
predict home prices may fall, particularly in expensive markets such as San
Francisco and Boston. The median price of a single-family home nationwide is
$159,600, according to the National Association of Realtors. (DataQuick's
figures include both single-family homes and condos.) `The days of rapid
appreciation have ended,' said Ken Rosen, a real estate and economics professor
at UC Berkeley. He noted that home prices have appreciated far faster than
personal income in the Bay Area in recent years. `Next year, we may see a small
rise (in home prices), but there could be some significant weakness if interest
rates go up and the economy gets worse,' Rosen said. On the other hand,
DataQuick researcher John Karevoll said he sees no evidence of a major price dip
in the Bay Area despite an uptick in the number of notices of default, the first
step in the foreclosure process. `Housing is in a fairly good state,' Karevoll
said. `Default activity would have to double for it to be a concern.' The
typical monthly mortgage payment Bay Area residents committed to in November was
$1,843. The peak was $2,124 in May 2000. Marin County posted the highest median
home price - $602,000 - in November. Solano County had the lowest median price -
$291,000 - but it experienced the biggest year-over-year percentage price
increase. In November 2001, the county's median was $247,000. The median is the
price at which half of sales are above and half are below. Sales in Santa Clara
County, where the high-tech tumble has pushed unemployment to 7.8%, showed the
largest jump, from 1,284 last November to 1,894 last month. But that falls short
of the county's typical November sales count of between 1,900 and 2,300. Re/Max
real estate agent Bruce Scheer in Cupertino said DataQuick's numbers don't tell
the whole story. Although sales in the county are up nearly 48% year over year,
the number of homes on the market is up more than 60%. `There's a lot more
inventory, and sales have slowed,' Scheer said, `I think people are worried that
the economy is going to get worse, and they think that if they wait to sell
their home, they'll get less for it.'"
The San Francisco Chronicle dated December 20, 2002 further analyzed the
home sale price by county comparing sales of November 2001 versus November 2002
as follows:
Homes sold Percent Median* Percent
County Nov. `01 Nov. `02 Change Nov. `01 Nov. `02 change
- -------------------- ----------- ---------- ------------- ----------- ------------- ------------
Alameda 1,309 1,771 35.3% $352 $407 15.6%
Contra Costa 1,464 1,599 9.2 308 352 4.3
Marin 309 334 8.1 513 602 17.3
Napa 159 171 7.5 341 398 16.7
San Francisco 355 493 38.9 492 568 15.4
San Mateo 531 620 16.8 490 522 6.5
Santa Clara 1,284 1,894 47.5 421 446 5.9
Solano 635 733 15.4 247 291 17.8
Sonoma 598 650 8.7 319 342 7.2
=========== ========== ============= =========== ============= ============
Bay Area 6,644 8,265 24.4% $368 $416 13.0%
*in thousands
For the Partnership, these statistics imply that the values of the homes
secured by mortgages should remain firm and assist in reducing losses if the
take back of collateral through the foreclosure process should eventuate.
14
On the commercial scene, the San Francisco Business Times dated October 10,
2002 states "Grubb & Ellis has reported a slight decrease in office vacancy in
San Francisco for the third quarter, breaking a two-year losing streak. The
commercial real estate firm said vacancy dropped to 21.9% with 127,000 square
feet of positive absorption. Colin Yasukochi, research director of Grubb &
Ellis' San Francisco office, said office demand has turned positive for the
first time in two years. He reported 1.3 million square feet of gross leasing
activity in the quarter. The five biggest deals of the quarter:
o Zurich Insurance took 77,000 square feet at 560 Mission street;
o Gensler Architecture signed a 57,000-square-foot lease at 2 Harrison Street;
o Law firm Clifford Chance opening its Bay Area headquarters at One market with
47,000 square feet;
o Bank of the West and PayMap each signed leases of at least 50,000 square feet.
`The sustained gross leasing activity bodes well for more positive news in
the fourth quarter,' Yasukochi said. `However, over 650,000 square feet of
mostly vacant new space scheduled for delivery in that same quarter will likely
cause vacancy to rise.' He predicts a sustained recovery is two to three years
away."
To the Partnership, stabilizing vacancy rates may mean that we are at the
vacancy rate bottom. High levels of space exist, and as tenants leases expire
they may be able to negotiate lower rental rates. This could lead to lower cash
flows for owners, which may mean we could experience higher delinquencies or
foreclosures on commercial properties.
On or about March 19, 2003, the United States entered into an armed
conflict with Iraq. While the general partners do not anticipate that this
conflict will affect the real estate market in Northern California, a prolonged
military conflict could have adverse effects on the economy of the United
States, which could eventually impact the local real estate market.
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, secured loans held in the Partnership's portfolio and a note
payable on our line of credit as of December 31, 2002. The presentation, for
each category of information, aggregates the assets and liabilities by their
maturity dates for maturities occurring in each of the years 2003 through 2007
and separately aggregates the information for all maturities arising after 2007.
The carrying values of these assets and liabilities approximate their fair
market values as of December 31, 2002:
2003 2004 2005 2006 2007 Thereafter Total
------------- ------------ ------------ ----------- ------------ ------------ -------------
Interest earning assets:
Money market accounts $1,013,637 $1,013,637
Avg. interest rate 1.00% 1.00%
Loans secured by deeds
Of trust $3,095,300 1,014,056 40,125 96,716 1,662,819 514,968 $6,423,984
Average interest rate 11.22% 10.62% 7.00% 6.50% 8.46% 7.75% 10.04%
Interest bearing
liabilities:
Note payable to bank - -
Average interest rate 4.50% 4.50%
Market Risk.
The Partnership's note payable to the bank for its 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 note payable. 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.
15
The Partnership's primary market risk in terms of its profitability is the
exposure to fluctuations in earnings resulting from fluctuations in general
interest rates. The majority of the Partnership's mortgage loans (100% as of
December 31, 2002) earn interest at fixed rates. Changes in interest rates may
also affect the value of the Partnership's investment in mortgage loans and the
rates at which the Partnership reinvests funds obtained from loan repayments and
new capital contributions from limited partners. If interest rates increase, the
interest rates the Partnership obtains from reinvested funds will generally
increase, but the value of the Partnership's existing loans at fixed rates will
generally tend to decrease. The risk is mitigated by the fact that the
Partnership does not intend to sell its loan portfolio, rather such loans are
held until they are paid off. If interest rates decrease, the amounts becoming
available to the Partnership for investment due to repayment of Partnership
loans may be reinvested at lower rates than the Partnership had been able to
obtain in prior investments, or than the rates on the repaid loans. In addition,
interest rate decreases may encourage borrowers to refinance their loans with
the Partnership at a time where the Partnership is unable to reinvest in loans
of comparable value.
The Partnership does not hedge or otherwise seek to manage interest rate
risk. The Partnership does not enter into risk sensitive instruments for trading
purposes.
PORTFOLIO REVIEW - For the years ended December 31, 2000, 2001 and 2002.
Loan Portfolio
The Partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of December 31, 2000,
2001 and 2002 the Partnership's loans secured by real property collateral in the
six San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara,
Alameda, Contra Costa, and Marin) represented $8,493,000 (66.4%), $6,784,000
(67.2%), and $3,353,000 (52.2%) of the outstanding loan portfolio. The remainder
of the portfolio represented loans secured by real estate located primarily in
Northern California.
As of December 31, 2000, approximately 14.6% ($1,863,000), was invested in
loans secured by single family homes (1-4 units), approximately 20.2%
($2,590,000), was invested in loans secured by multifamily dwellings (apartments
over 4 units), approximately 41.3% ($5,286,000), was invested in loans secured
by commercial properties, and approximately 23.9% ($3,055,000) was invested in
loans secured by land. As of December 31, 2001, approximately, 20.4%
($2,058,000), was invested in loans secured by single family homes (1-4 units),
approximately 15.5% ($1,563,000) was invested in loans secured by multifamily
dwellings (apartments over 4 units), approximately 32.5% ($3,280,000) was
invested in loans secured by commercial properties, and approximately 31.6%
($3,190,000) was invested in loans secured by land. As of December 31, 2002,
approximately, 25.1% ($1,612,000), was invested in loans secured by single
family homes (1-4 units), approximately 9.5% ($709,000) was invested in loans
secured by multi-family dwellings (apartments over 4 units), approximately,
31.8% ($2,046,000) was invested in loans secured by commercial properties, and
approximately 33.6% ($2,057,000) was invested in loans secured by land.
16
As of December 31, 2002, the Partnership held 25 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 December 31, 2002.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of December 31, 2002
# of Loans Amount Percent
--------------- ------------------ -----------------
1st Mortgages 12 $ 3,270,000 51%
2nd Mortgages 11 2,940,000 46%
3rd Mortgages 2 214,000 3%
=============== ================== =================
Total 25 $ 6,424,000 100%
Maturing 12/31/03 and prior 13 $ 3,095,000 48%
Maturing prior to 12/31/04 4 1,014,000 16%
Maturing prior to 12/31/05 1 40,000 1%
Maturing after 12/31/05 7 2,275,000 35%
=============== ================== =================
Total 25 $ 6,424,000 100%
Average Loan $ 257,000 4%
Largest Loan 1,000,000 16%
Smallest Loan 11,000 0.2%
Average Loan-to-Value 66%
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 these practices. Rather, the general partners, in connection with
the periodic closing of the accounting records of the Partnership and the
preparation of the financial statements, determine whether the allowance for
loan losses is adequate to cover potential loan losses of the Partnership. As of
December 31, 2002 the general partners have determined that the allowance for
loan losses of $792,000 (8.7% of net assets) is adequate in amount. Because of
the number of variables involved, the magnitude of the swings possible and the
general partners' inability to control many of these factors, actual results may
and do sometimes differ significantly from estimates made by the general
partners. As of December 31, 2002, 10 loans were delinquent over 90 days
amounting to $2,401,000, which represents an increase of 34% of loans that were
delinquent as of December 31, 2001.
17
Item 8 - Financial Statements and Supplementary Data
A - Financial Statements
The following financial statements of Redwood Mortgage Investors VII are
included in Item 8:
o Independent Auditors' Report
o Balance Sheets - December 31, 2002, and December 31, 2001
o Statements of Income for the years ended December 31, 2002, 2001 and 2000
o Statements of Changes in Partners' Capital for the years ended December 31,
2002, 2001 and 2000
o Statements of Cash Flows for the years ended December 31, 2002, 2001 and
2000
o Notes to Financial Statements
B - Financial Statement Schedules
The following financial statement schedules of Redwood Mortgage Inventors
VII are included in Item 8.
o Schedule II - Valuation and Qualifying Accounts
o Schedule IV - Mortgage Loans on Real Estate
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
18
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2002
19
ARMANINO McKENNA LLP
CERTIFIED PUBLIC ACCOUNTANTS
12667 Alcosta Blvd., Suite 500
San Ramon, CA 94583
(925) 790-2600
INDEPENDENT AUDITORS' REPORT
To the Partners
Redwood Mortgage Investors VII
Redwood City, California
We have audited the accompanying balance sheets of Redwood Mortgage
Investors VII (a California limited partnership) as of December 31, 2002 and
2001 and the related statements of income, changes in partners' capital and cash
flows for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Redwood Mortgage Investors
VII as of December 31, 2002 and 2001 and the results of its operations and cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedules II and IV are presented
for purposes of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARMANINO McKENNA LLP
San Ramon, California
February 21, 2003
20
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Balance Sheets
December 31, 2002 and 2001
ASSETS
2002 2001
------------------ ------------------
Cash and cash equivalents $ 1,057,845 $ 389,844
------------------ ------------------
Loans
Loans secured by deeds of trust 6,423,984 10,091,195
Loans, unsecured, net of discount of $150,407 in 2002 216,770 173,731
Allowance for loan losses (791,882) (887,578)
------------------ ------------------
Net loans 5,848,872 9,377,348
------------------ ------------------
Interest and other receivables
Accrued interest and late fees 304,936 666,189
Advances on loans 17,230 50,665
------------------ ------------------
322,166 716,854
------------------ ------------------
Investment in limited liability company 1,212,722 -
------------------ ------------------
Real estate held for sale, net 683,136 872,133
------------------ ------------------
Total assets $ 9,124,741 $ 11,356,179
================== ==================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ - $ 1,907,000
Accounts payable 2,593 11,295
Payable to affiliate 32,176 3,316
Deferred interest 37,704 2,322
------------------ ------------------
Total liabilities 72,473 1,923,933
------------------ ------------------
Partners' capital
Limited partners' capital, subject to redemption, 120,000 Units
authorized in 2002 and 2001, 119,984 Units
outstanding in 2002 and 2001 9,040,290 9,420,268
General partners' capital 11,978 11,978
------------------ ------------------
Total partners' capital 9,052,268 9,432,246
------------------ ------------------
Total liabilities and partners' capital $ 9,124,741 $11,356,179
================== ==================
The accompanying notes are an integral part of these financial statements.
21
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Statements of Income
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
---------------- --------------- ----------------
Revenues
Interest on loans $ 1,037,717 $ 1,172,474 $ 1,406,098
Late fees 24,920 8,495 11,219
Other 15,549 11,412 20,647
---------------- --------------- ----------------
1,078,186 1,192,381 1,437,964
---------------- --------------- ----------------
Expenses
Mortgage servicing fees 163,531 94,396 110,713
Interest expense 54,724 128,224 257,640
Clerical costs from Redwood Mortgage Corp. 30,572 38,313 27,032
Asset management fees 34,869 37,233 38,400
Provisions for (recovery of) losses on loans and real estate (20,039) 37,371 65,664
Professional services 40,158 23,868 22,068
Other 10,889 11,779 16,301
---------------- --------------- ----------------
314,704 371,184 537,818
Net income $ 763,482 $ 821,197 $ 900,146
================ =============== ================
Net income
General partners (1%) $ 7,635 $ 8,212 $ 9,001
Limited partners (99%) 755,847 812,985 891,145
---------------- --------------- ----------------
$ 763,482 $ 821,197 $ 900,146
================ =============== ================
Net income per $1,000 invested by limited partners for entire period
Where income is reinvested and compounded $ 85 $ 85 $ 85
================ =============== ================
Where partner receives income in periodic distributions $ 82 $ 82 $ 82
================ =============== ================
The accompanying notes are an integral part of these financial statements
22
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Statements of Changes in Partners' Capital
For the Years Ended December 31, 2002, 2001 and 2000
Limited Partners' Capital
-------------------------------------------------
Limited Total General
Partners' Formation Limited Partners' Total
Capital Loan Partners' Capital Partners'
Accounts Receivable Capital Account Capital
-------------- --------------- ---------------- ---------------- ---------------
Balances at December 31, 1999 $ 11,162,817 $ (165,499) $ 10,997,318 $ 11,978 $ 11,009,296
Collections on Formation Loan - 79,505 79,505 - 79,505
Net income 891,145 - 891,145 9,001 900,146
Early withdrawal penalties (15,107) 10,382 (4,725) - (4,725)
Partners' withdrawals (1,868,913) - (1,868,913) (9,001) (1,877,914)
---------------- --------------- -------------- --------------- ---------------
Balances at December 31, 2000 10,169,942 (75,612) 10,094,330 11,978 10,106,308
Collections on Formation Loan - 71,460 71,460 - 71,460
Net income 812,985 - 812,985 8,212 821,197
Early withdrawal penalties (7,908) 4,152 (3,756) - (3,756)
Partners' withdrawals (1,554,751) - (1,554,751) (8,212) (1,562,963)
--------------- --------------- --------------- ---------------- ---------------
Balances at December 31, 2001 9,420,268 - 9,420,268 11,978 9,432,246
Net income 755,847 - 755,847 7,635 763,482
Early withdrawal penalties (11,619) - (11,619) - (11,619)
Partners' withdrawals (1,124,206) (7,635) (1,131,841)
(1,124,206) -
---------------- -------------- --------------- ----------------- --------------
Balances at December 31, 2002 $ 9,040,290 $ - $ 9,040,290 $ 11,978 $ 9,052,268
================ ============== =============== ================= ==============
The accompanying notes are an integral part of these financial statements
23
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------------ --------------- ---------------
Cash flows from operating activities
Net income $ 763,482 $ 821,197 $ 900,146
Adjustments to reconcile net income to net cash provided by
operating activities
Provisions for (recovery of) losses on loans and real estate (20,039) 37,371 65,664
Early withdrawal penalty credited to income (11,619) (3,756) (4,725)
Change in operating assets and liabilities:
Loans, unsecured 45,292 14,690 5,082
Accrued interest and late fees (73,456) (302,868) (34,916)
Advances on loans (47,216) (20,840) 1,844
Accounts payable (8,702) 7,193 (28,132)
Payable to affiliate 28,860 3,316 -
Deferred interest 35,382 2,322 (115,709)
------------------ --------------- ---------------
Net cash provided by operating activities 711,984 558,625 789,254
------------------ --------------- ---------------
Cash flows from investing activities
Principal collected on loans 4,569,574 6,123,575 5,324,620
Loans originated (1,447,329) (3,066,276) (7,112,078)
Payments for real estate (11,033) (449,197) (87,392)
Proceeds from disposition of real estate - 38,620 64,235
Investments in limited liability company (116,354) - -
------------------ --------------- ---------------
Net cash provided by (used in) investing activities 2,994,858 2,646,722 (1,810,615)
------------------ --------------- ---------------
Cash flows from financing activities
Borrowings (repayments) on line of credit, net (1,907,000) (1,593,000) 2,700,000
Formation loan collections - 71,460 79,505
Partners' withdrawals (1,131,841) (1,562,963) (1,877,914)
------------------ --------------- ---------------
Net cash (used in) provided by financing activities (3,038,841) (3,084,503)
901,591
------------------ --------------- ---------------
Net increase (decrease) in cash and cash equivalents 668,001 120,844 (119,770)
Cash and cash equivalents at beginning of year 389,844 269,000 388,770
------------------ --------------- ---------------
Cash and cash equivalents at end of year $ 1,057,845 $ 389,844 $ 269,000
================== =============== ===============
Supplemental disclosures of cash flow information
Cash payments for interest $ 54,724 $ 128,224 $ 257,640
================== =============== ===============
The accompanying notes are an integral part of these financial statements
24
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
NOTE 1 ORGANIZATION AND GENERAL
Redwood Mortgage Investors VII, (the "Partnership") is a California limited
partnership organized on June 30, 1989. The general partners are Michael R.
Burwell, an individual, and Gymno Corporation; a California corporation owned
and operated on an equal 50/50% basis by Michael R. Burwell and by D. Russell
Burwell, a former general partner. The Partnership was organized to engage in
business as a mortgage lender for the primary purpose of making loans secured by
deeds of trust on California real estate. Loans are being arranged and serviced
by Redwood Mortgage Corp., an affiliate of the general partners.
Term of the Partnership
The Partnership is scheduled to terminate on December 31, 2029, unless
sooner terminated as provided.
note 2 Summary of Significant Accounting Policies
Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Such estimates relate principally to the
determination of the allowance for loan losses, including the valuation of
impaired loans and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.
Loans, secured by deeds of trust
Loans generally are stated at their outstanding unpaid principal balance
with interest thereon being accrued by the effective interest method.
Statement of Financial Accounting Standards Nos. 114 and 118 provide that
if the probable ultimate recovery of the carrying amount of a loan, with due
consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the investment
shall be reduced to the present value of future cash flows discounted at the
loan's effective interest rate. If a loan is collateral dependent, it is valued
at the estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the further collectibility of the contractual payments, a loan may
be categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances
including accrued interest and advances. At December 31, 2002 and 2001, there
were loans categorized as impaired by the Partnership of $96,716 and $889,439,
respectively. In addition, the impaired loans had accrued interest and advances
totaling $7,841 and $277,479 at December 31, 2002 and 2001, respectively. The
reduction in carrying value of the impaired loans of $6,620 and $150,092 at
December 31, 2002 and 2001, respectively, is included in the allowance for loan
losses. The average recorded investment in the impaired loans was $493,074,
$890,018 and $687,563 for December 31, 2002, 2001 and 2000, respectively.
25
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 2 Summary of Significant Accounting Policies (continued)
Loans, secured by deeds of trust (continued)
At December 31, 2002 and 2001, the Partnership had nine loans past due 90
days or more totaling $2,913,212 and $3,314,054 (45.35% and 32.84% of the
secured loan portfolio), respectively. The Partnership does not consider these
loans to be impaired because there is sufficient collateral to cover the amount
outstanding to the Partnership and is still accruing interest on these loans. At
December 31, 2002 and 2001, as presented in Note 11, the average loan to
appraised value of security at the time the loans were consummated was 65.86%
and 60.66%, respectively. When loans are considered impaired, the allowance is
updated to reflect the change in the valuation of collateral security. However,
a low loan to value ratio has the tendency to minimize reductions for
impairment.
During 2002, the Partnership restructured four previously impaired loans
into two new loans with a lower interest rate. The amount restructured was
$1,246,754. Had the loans been current in accordance with their original terms
and had they been outstanding throughout the entire year, the Partnership would
have recognized gross interest income of $144,772 for 2002. The Partnership
recognized $70,130 of income on the restructured loans for 2002.
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. A provision is made for loan losses to
adjust the allowance for loan losses to an amount considered by management to be
adequate, with due consideration to collateral value, to provide for
unrecoverable loans and receivables, including impaired loans, other loans,
accrued interest, late fees and advances on loans and other accounts receivable
(unsecured). The Partnership charges off uncollectible loans and related
receivables directly to the allowance account once it is determined that the
full amount is not collectible.
The composition of the allowance for loan losses as of December 31, 2002
and 2001 was as follows:
2002 2001
------------------ ----------------
Impaired loans $ 6,620 $150,092
Specified loans 163,731 -
General 533,200 593,500
Unsecured loans 88,331 143,986
------------------ ----------------
$791,882 $887,578
================== ================
Activity in the allowance for loan losses is as follows for the years ended
December 31:
2002 2001 2000
------------- -------------- --------------
Beginning balance $887,578 $850,548 $828,563
Provision for loan losses 20,394 37,371 25,160
Recoveries (40,433) - -
Restructures (64,210) - -
Write-offs (11,447) (341) (3,175)
------------- -------------- --------------
$791,882 $887,578 $850,548
============= ============== ==============
26
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 2 Summary of Significant Accounting Policies (continued)
Cash and cash equivalents
The Partnership considers all highly liquid financial instruments with
maturities of three months or less at the time of purchase to be a cash
equivalent.
Real estate held for sale
Real estate held for sale includes real estate acquired through foreclosure
and is stated at the lower of the recorded investment in the loan, plus any
senior indebtedness, or at the property's estimated fair value, less estimated
costs to sell.
In accordance with Statement of Financial Accounting Standards No 144,
"Accounting for the Impairment or Disposition of Long Lived Assets," the
Partnership periodically compares the carrying value of real estate to expected
future undiscounted cash flows for the purpose of assessing the recoverability
of the recorded amounts. If the carrying value exceeds future undiscounted cash
flows, the assets are reduced to estimated fair value. During 2002, the
Partnership transferred $200,030 from the allowance for loan losses to the
allowance for losses on real estate held for sale.
Investment in limited liability company
Investment in limited liability company is accounted for using the equity
method. In 2002, the Company had a 34% interest in the Stockton Street Property
Company, LLC (see Note 6).
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the financial statements since income taxes are the
obligation of the partners if and when income taxes apply.
Net income per $1,000 invested
Amounts reflected in the statements of income as net income per $1,000
invested by limited partners for the entire period are amounts allocated to
limited partners who had their investment throughout the period and have elected
to either leave their earnings to compound or have elected to receive periodic
distributions of their net income. Individual income is allocated each month
based on the limited partners' pro rata share of partners' capital. Because the
net income percentage varies from month to month, amounts per $1,000 will vary
for those individuals who made or withdrew investments during the period, or
select other options.
Late fee revenue
Late fees are generally charged at 6% of the monthly installment payment
past due. During 2002, 2001 and 2000, late fee revenue of $24,920, $8,495 and
$11,219, respectively, were recorded. The Partnership has a late fee receivable
at December 31, 2002 and 2001 of $13,320 and $0.
Reclassification
Certain reclassifications, not affecting previously reported net income or
total partners' capital, have been made to the previously issued financial
statements to conform to the current year classification.
27
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 2 Summary of Significant Accounting Policies (continued)
Recently issued accounting pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 46 "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (FIN 46). FIN 46 is effective immediately for any
variable interest entities created after January 31, 2003 and is effective
beginning in the third quarter of 2002 to any variable interest entities created
prior to the issuance of the interpretation. FIN 46 provides a new framework to
identify variable interest entities and determining when an entity should
include the assets, liabilities, non-controlling interests and the results of
activities of a variable interest entity in its financial statements. The
implementation of FIN 46 is not anticipated to have any significant effect on
the Partnership.
note 3 Other Partnership Provisions
The Partnership is a California limited partnership. The rights, duties and
powers of the general and limited partners of the Partnership are governed by
the limited Partnership agreement and Sections 15611 et seq. of the California
Corporations Code.
The general partners are in complete control of the Partnership business,
subject to the voting rights of the limited partners on specified matters. Any
one of the general partners acting alone has the power and authority to act for
and bind the Partnership.
A majority of the outstanding limited partnership interests may, without
the permission of the general partners, vote to: (i) terminate the Partnership,
(ii) amend the limited partnership agreement, (iii) approve or disapprove the
sale of all or substantially all of the assets of the Partnership and (iv)
remove or replace one or all of the general partners.
The approval of all limited partners is required to elect a new general
partner to continue the Partnership business where there is no remaining general
partner after a general partner ceases to be a general partner other than by
removal.
Election to receive monthly, quarterly or annual distributions
At subscription, investors elected either to receive monthly, quarterly or
annual distributions of earnings allocations, or to allow earnings to compound.
Subject to certain limitations, a compounding investor may subsequently change
his election, but an investor's election to have cash distributions is
irrevocable.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of Partnership Units
and accordingly an investment in the Partnership is not liquid. Limited partners
have no right to withdraw from the Partnership or to obtain the return of their
capital account for at least one year from the date of purchase of Units.
In order to provide a certain degree of liquidity to the limited partners
after the one-year period, limited partners may withdraw all or part of their
capital accounts from the Partnership in four quarterly installments beginning
on the last day of the calendar quarter following the quarter in which the
notice of withdrawal is given, subject to a 10% early withdrawal penalty. The
10% penalty is applicable to the amount withdrawn early and will be deducted
from the capital account.
28
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 3 Other Partnership Provisions (continued)
Liquidity, capital withdrawals and early withdrawals (continued)
After five years from the date of purchase of the Units, limited partners
have the right to withdraw from the Partnership, on an installment basis.
Generally this is done over a five-year period in twenty quarterly installments.
Once a limited partner has been in the Partnership for the minimum five-year
period, no penalty will be imposed if withdrawal is made in twenty quarterly
installments or longer. Notwithstanding the five-year (or longer) withdrawal
period, the general partners may liquidate all or part of a limited partner's
capital account in four quarterly installments beginning on the last day of the
calendar quarter following the quarter in which the notice of withdrawal is
given. This withdrawal is subject to a 10% early withdrawal penalty applicable
to any sums withdrawn prior to the time when such sums could have been withdrawn
without penalty.
The Partnership will not establish a reserve from which to fund withdrawals
and, accordingly, the Partnership's capacity to return a limited partner's
capital account is restricted to the availability of Partnership cash flow.
Furthermore, no more than 20% of the total limited partners' capital accounts
outstanding at the beginning of any year shall be liquidated during any calendar
year.
note 4 General Partners and Related Parties
The following are commissions and fees which will be paid to the general
partners.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, the Partnership may collect an amount equivalent to 12%
of the loaned amount until 6 months after the termination date of the offering.
Thereafter, loan brokerage commissions (points) will be limited to an amount not
to exceed 4% of the total Partnership assets per year. The loan brokerage
commissions are paid by the borrowers and thus, are not an expense of the
Partnership. During 2002, 2001 and 2000, loan brokerage commissions paid by the
borrowers were $24,661 and $84,137 and $130,487, respectively.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued. Additional service fees are recorded upon the receipt of any
subsequent payments on impaired loans. Mortgage servicing fees of $163,531,
$94,396 and $110,713 were incurred for 2002, 2001 and 2000, respectively. The
Partnership has a payable to Redwood Mortgage Corp. for servicing fees of
$32,176 and $3,316 at December 31, 2002 and 2001, respectively.
Asset management fee
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually). Asset management fees of $34,869, $37,233 and $38,400 were
incurred for 2002, 2001 and 2000, respectively.
29
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 4 General Partners and Related Parties (continued)
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to parties related to the general partners.
Operating expenses
Redwood Mortgage Corp., an affiliate of the general partners, is reimbursed
by the Partnership for all operating expenses actually incurred by it on behalf
of the Partnership, including without limitation, out-of-pocket general and
administration expenses of the Partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
During 2002, 2001 and 2000, operating expenses totaling $30,572, $38,313 and
$27,032, respectively, were reimbursed to Redwood Mortgage Corp.
note 5 Real Estate Held for Sale
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell as of December 31, 2002 and 2001:
2002 2001
----------------- -----------------
Costs of properties $1,263,222 $1,252,189
Reduction in value (580,086) (380,056)
----------------- -----------------
Real estate held for sale $ 683,136 $ 872,133
================= =================
note 6 Investment in Limited Liability Company
As a result of acquiring real property through foreclosure, the Partnership
transferred its interest (principally land and building) to a limited liability
company ("LLC"), Stockton Street Property Company LLC, which is owned 34% by the
Partnership and 66% by an affiliate. Development costs are being capitalized;
thus, there was no income or expense recognized by Stockton Street Property
Company during 2002. During 2002, the LLC completed construction and now intends
to sell the property. The Partnership expects to realize a profit from the
venture.
Summarized financial information of the LLC at December 31, 2002 is as
follows:
Assets $1,814,186
Liabilities (601,464)
------------------
Total $1,212,722
==================
30
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 7 Bank Line of Credit
The Partnership has a bank line of credit secured by its loan portfolio of
up to $3,500,000 at .25% over prime. The balances outstanding as of December 31,
2002 and 2001 were $0 and $1,907,000, respectively; the interest rate was 4.50%
(4.25% prime + .25%) at December 31, 2002. This line of credit expires May 1,
2003 and requires the Partnership to meet certain financial covenants. As of
December 31, 2002, the Partnership was in compliance with all loan covenants.
Should the general partners choose not to renew the line of credit, the
balance then outstanding would be converted to a three-year term loan.
note 8 Income Taxes
The following reflects a reconciliation of partners' capital reflected in
the financial statements to the tax basis of the Partnership capital:
2002 2001
--------------- --------------
Partners' capital per financial statements $ 9,052,268 $9,432,246
Allowance for loan losses 791,882 887,578
Allowance for real estate losses 580,086 380,056
--------------- --------------
Partners' capital tax basis $10,424,236 $10,699,910
=============== ==============
In 2002 and 2001, approximately 69% and 68%, respectively, of taxable
income was allocated to tax exempt organizations (i.e., retirement plans). Such
organizations generally do not have to file income tax returns.
note 9 Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
(a) Cash and Cash Equivalents - The carrying amount equals fair value. All
amounts, including interest bearing, are subject to immediate withdrawal.
(b) Secured loans had a carrying value of $6,423,984 and $10,091,195, at
December 31, 2002 and 2001, respectively. The fair value of these loans of
$6,030,669 and $10,107,321, 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.
31
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 10 Non-cash Transactions
During 2002, the Partnership foreclosed on one property and transferred its
interest into a LLC (see Note 6), which resulted in an increase in investments
of $1,096,368 and a decrease in loans receivable, accrued interest and advances
of $954,488, $88,913 and $52,967, respectively.
During 2002, the Partnership restructured four loans that resulted in an
increase to loans receivable and the allowance for loan losses of $420,969 and
$47,489, respectively, and a decrease to accrued interest and advances of
$345,796 and $27,684, respectively.
During 2002, the Partnership originated two unsecured non-interest bearing
loans, which resulted in an increase to unsecured loans of $238,738 and the
allowance for loan losses of $88,331. The Partnership imputed interest on these
loans at 10.5% per annum, which resulted in a decrease to unsecured loans and an
increase to discount on loans of $150,407.
note 11 Asset Concentrations and Characteristics
The loans are secured by recorded deeds of trust. At December 31, 2002 and
2001, there were 25 and 36 secured loans outstanding, respectively, with the
following characteristics:
2002 2001
------------------ ------------------
Number of secured loans outstanding 25 36
Total secured loans outstanding $6,423,984 $ 10,091,195
Average secured loan outstanding $ 256,959 $ 280,311
Average secured loan as percent of total 4.00% 2.78%
Average secured loan as percent of Partners' capital 2.84% 2.97%
Largest secured loan outstanding $1,000,000 $1,000,000
Largest secured loan as percent of total 15.57% 9.91%
Largest secured loan as percent of Partners' capital 11.05% 10.60%
Number of counties where security is located (all California) 11 11
Largest percentage of loans in one county 41.38% 31.92%
Average secured loan to appraised value of security at time
loan was consummated 65.86% 60.66%
Number of secured loans in foreclosure 2 2
Amount of secured loans in foreclosure $ 236,807 $ 216,493
32
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 11 Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at December 31, 2002
and 2001:
2002 2001
-------------------- ------------------
First trust deeds $ 3,269,897 $ 5,042,062
Second trust deeds 2,939,753 4,803,146
Third trust deeds 214,334 245,987
-------------------- ------------------
Total loans 6,423,984 10,091,195
Prior liens due other lenders 5,475,725 9,318,486
-------------------- ------------------
Total debt $ 11,899,709 $ 19,409,681
==================== ==================
Appraised property value at time of loan $ 18,069,602 $ 31,997,080
Total investments as percent of appraisals 65.86% 60.66%
Investments by type of property
Owner occupied homes $ 1,037,474 $ 622,435
Non-owner occupied homes 575,051 1,435,444
Apartments 708,648 1,563,214
Commercial 4,102,811 6,470,103
-------------------- ------------------
$6,423,984 $ 10,091,195
==================== ==================
Scheduled maturity dates of secured loans as of December 31, 2002 are as
follows:
Year Ending December 31,
--------------------------
2003 $ 3,095,300
2004 1,014,056
2005 40,125
2006 96,716
2007 1,662,819
Thereafter 514,968
----------------
Total $ 6,423,984
================
33
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 11 Asset Concentrations and Characteristics (continued)
The scheduled maturities for 2003 above include approximately $2,401,294 in
7 loans, which are past maturity at December 31, 2002. Interest payments on six
of these loans with an aggregate principal balance of $2,266,414 were
categorized as delinquent over 90 days.
Cash deposits per bank at December 31, 2002 of $1,351,327 were in one bank.
The balance exceeded FDIC insurance limits (up to $100,000 per bank) by
$1,251,327. The Partnership's main bank is the same financial institution that
has provided the Partnership with the $3,500,000 limit line of credit.
The Partnership has a substantial amount of its loan receivable balance due
from one borrower in 2002. This borrower accounted for approximately 22% of the
loan balance at December 31, 2002.
note 12 Commitments and Contingencies
Workout agreements
The Partnership has negotiated various contractual workout agreements with
borrowers whose loans are past maturity or who are delinquent in making
payments. The Partnership is not obligated to fund additional money as of
December 31, 2002. As of December 31, 2002 the Partnership had approximately two
loans under workout agreements totaling $65,108.
Construction loans
The Partnership has construction loans, which are at various stages of
completion of the construction process at December 31, 2002. The Partnership has
approved the borrowers up to a maximum loan balance; however, disbursements are
made during completion phases throughout the construction process. At December
31, 2002, there were $8,837 of undistributed construction loans which will be
funded by a combination of borrower interest payments, line of credit draw-downs
and retirement of principal on current loans.
Legal proceedings
The Partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the Partnership.
34
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 13 Selected Financial Information (Unaudited)
Calendar Quarter
First Second Third Fourth Annual
------------- ------------ ------------ ------------- --------------
Revenues
2002 as previously stated $ 389,922 $ 278,648 $ 260,548 $ 226,946 $1,156,064
Adjustment (77,878) - - - (77,878)
------------- ------------ ------------ ------------- --------------
2002 restated 312,044 278,648 260,548 226,946 1,078,186
2001 349,061 291,342 261,312 290,666 1,192,381
2000 307,831 356,247 362,586 411,300 1,437,964
Expenses
2002 as previously stated 193,291 81,173 69,770 48,348 392,582
Adjustment (77,878) - - - (77,878)
------------- ------------ ------------ ------------- --------------
2002 restated 115,413 81,173 69,770 48,348 314,704
2001 137,576 84,453 58,231 90,924 371,184
2000 74,265 128,581 140,617 194,355 537,818
Net income allocated to general partners
2002 1,966 1,975 1,908 1,786 7,635
2001 2,115 2,069 2,031 1,997 8,212
2000 2,336 2,276 2,220 2,169 9,001
Net income allocated to limited partners
2002 194,665 195,500 188,870 176,812 755,847
2001 209,370 204,820 201,050 197,745 812,985
2000 231,230 225,390 219,749 214,776 891,145
Net income per $1,000 invested
Where income is reinvested
2002 $ 21 $ 21 $ 21 $ 22 $ 85
2001 21 21 21 22 85
2000 21 21 21 22 85
Where income is withdrawn
2002 21 21 21 19 82
2001 20 21 21 20 82
2000 21 21 21 19 82
The adjustments represent correction of amounts missposted to interest
revenue and the provision for loan losses in the first quarter of 2002.
35
SCHEDULE II
REDWOOD MORTGAGE INVESTORS VII
VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Description Balance at Additions Deductions Balance at
------------------------------------
Beginning of (1) (2) Describe (a) End of Period
Period Charged to Charged to
Costs & Other accounts-
Expenses Describe (b)
---------------------- ----------------- ---------------- ------------------- --------------- -----------------
Year Ended
12/31/02
Deducted from asset accounts:
Allowance for
doubtful accts $ 887,578 $ (20,039) $ (64,210) $ (11,447) $ 791,882
Cumulative
write-down of
Real Estate held
for sale (REO) $ 380,056 $ 0 $ 200,030 $ 0 $ 580,086
----------------- ---------------- ------------------- --------------- -----------------
Total $1,267,634 $ (20,039) $ 135,820 $ (11,447) $1,371,968
================= ================ =================== =============== =================
(a) Represents write-offs on loans.
(b) Represents restructure of loans.
36
SCHEDULE IV
REDWOOD MORTGAGE INVESTORS VII
MORTGAGE LOANS ON REAL ESTATE
RULE 12-29 LOANS ON REAL ESTATE
DECEMBER 31, 2002
Col. A Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J
Descrip. Interest Final Period Prior Face Amt. Carry Amt. Principal Type Geographic
Rate Maturity Payment Liens Mortgage Mortgage or interest Lien Location
Amount
Delinquent
- ------------------------------------------------------------------------------------------------------------------
Apts. 12.00% 8/1/2003 $ 4,400 $ - $ 720,000 $ 440,000 $ 52,800 1st San Francisco
Apts. 10.50% 06/01/03 875 - 100,000 100,000 - 1st San Joaquin
Apts. 6.50% 05/01/06 541 89,904 75,000 96,716 34,072 2nd Sacramento
Apts. 7.00% 02/10/05 234 80,250 40,125 40,125 - 2nd San Francisco
Apts. 12.50% 04/01/02 120 440,000 31,884 31,807 35,460 2nd San Francisco
Comm. 9.00% 05/10/02 671 - 83,333 77,485 - 1st Shasta
Comm. 7.00% 07/01/02 1,131 - 146,667 134,880 134,880 1st Contra Costa
Comm. 10.00% 12/01/03 471 - 53,636 53,309 - 1st Stanislaus
Comm. 10.00% 07/01/11 1,995 - 219,538 216,529 - 1st Santa Clara
Comm. 7.50% 02/28/07 3,206 - 513,000 560,354 - 1st Santa Clara
Comm. 7.50% 02/28/07 4,290 - 686,400 686,400 - 1st Alameda
Comm. 13.00% 11/01/02 2,221 310,381 205,000 205,000 220,546 2nd Alameda
Comm. 10.00% 12/01/01 105 82,723 11,919 11,797 732 2nd Stanislaus
Land 8.00% 12/01/04 900 - 135,000 127,450 - 1st Sacramento
Land 11.00% 01/01/01 9,167 201,686 1,000,000 773,510 824,851 2nd Stanislaus
Land 11.00% 07/01/01 9,167 137,737 1,000,000 1,000,000 1,064,167 2nd Stanislaus
Land 11.50% 07/01/01 1,753 1,000,000 182,927 182,927 195,198 2nd Stanislaus
Land 11.00% 11/01/00 783 1,141,690 85,366 73,171 92,734 3rd Stanislaus
Res. 8.00% 09/30/03 90 - 12,226 11,415 - 1st Sonoma
Res. 6.13% 08/01/32 1,823 - 300,000 298,439 - 1st San Mateo
Res. 11.00% 09/01/04 5,167 - 563,636 563,636 - 1st Stanislaus
Res. 11.00% 11/01/04 1,238 553,179 130,000 127,969 - 2nd San Mateo
Res. 11.00% 02/01/04 1,788 348,257 195,000 195,000 7,150 2nd Marin
Res. 11.00% 09/01/07 2,619 415,386 275,000 274,902 - 2nd San Mateo
Res. 12.00% 03/01/06 810 674,532 130,000 141,163 - 3rd San Mateo
-------------------------------------------------------------
Total $55,561 $5,475,725 $6,895,657 $6,423,984 $2,662,590
=============================================================
Notes: Loans classified as `impaired loans' had principal balances totaling
$96,716 at December 31, 2002. Impaired loans are defined as loans where the
carrying value of related balances exceeds the anticipated fair value less costs
to collect. Accrued interest is no longer recorded thereon. Amounts reflected in
column G (carrying amount of loans) represents both costs and the tax basis of
the loans.
37
SCHEDULE IV
Reconciliation of carrying amount (cost) of secured loans at close of periods
Year ended December 31,
---------------------------------------------------------------
2002 2001 2000
---------------- -------------- ----------------
Balance at beginning of year $10,091,195 $12,794,297 $11,011,660
---------------- -------------- ----------------
Additions during period:
New loans 1,447,329 3,065,934 7,112,078
Other 420,969 354,538 -
---------------- -------------- ----------------
Total Additions 1,868,298 3,420,472 7,112,078
---------------- -------------- ----------------
Deduction during period:
Collections of principal 4,569,574 6,123,574 5,324,620
Foreclosures 954,488 - -
Other 11,447 - 4,821
---------------- -------------- ----------------
Total Deductions 5,535,509 6,123,574 5,329,441
---------------- -------------- ----------------
Balance at close of year $6,423,984 $10,091,195 $12,794,297
================ ============== ================
38
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10 - Directors and Executive Officers of the Registrant
The Partnership has no Officers or Directors. Rather, the activities of the
Partnership are managed by the two general partners, one of whom is an
individual, Michael R. Burwell. The second general partner is Gymno Corporation,
a California corporation, formed in 1986. Mr. Burwell is one of the two
shareholders of Gymno Corporation, a California corporation, and has a 50%
interest in the corporation.
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, 2002. All
such compensation is in compliance with the guidelines and limitations set forth
in the Prospectus.
Entity Receiving Compensation Description of Compensation and Services Rendered Amount
I. Redwood Mortgage Corp. Mortgage Servicing Fee for servicing loans.......................$165,531
General Partners &/or Affiliates Asset Management Fee for managing assets..........................$34,869
General Partners 1% interest in profits.............................................$7,635
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY
COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE
PARTNERSHIP)
Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection with the
review, selection, evaluation, negotiation, and extension of the loans
paid by the borrowers and not by the Partnership.................................$24,661
Redwood Mortgage Corp. 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..........................................$1,767
Gymno Corporation Reconveyance Fee....................................................................$364
39
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 . . . . . . . . . . . . . . . . . . . . . . . . . . $30,572
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The general partners are to own an aggregate total of 1% of the Partnership
including a 1% portion of income and losses.
Item 13 - Certain Relationships and Related Transactions
Refer to footnotes 3 and 4 of the Notes to Financial Statements in Part II
item 8, which describes related party fees and data.
Also refer to the Prospectus dated October 20, 1989 (incorporated herein by
reference) on page 12 "Compensation of General Partners and Affiliates" and page
14 "Conflicts of Interest".
Item 14 - Controls and Procedures
Based on their evaluation of the effectiveness of the Partnership's
disclosure controls and procedures, as of a date within 90 days prior to the
date of the filing of this report, the President and Chief Financial Officer of
Gymno Corporation, the Partnership's corporate general partner, has concluded
that the Partnership's disclosure controls and procedures are effective and
sufficient to ensure that the Partnership record, process, summarize, and report
information required to be disclosed in its periodic reports filed under the
Securities Exchange Act within the time periods specified by the Securities and
Exchange Commission's rules and forms.
Subsequent to the date of such evaluation, there have not been any
significant changes in the Partnership's internal controls or in other factors
that could significantly affect these controls, including any corrective action
with regard to significant deficiencies and material weaknesses.
40
Part IV
Item 15 - Exhibits, Financial Statements and Schedules, and Reports on Form 8-K
A Documents filed as part of this report are incorporated:
1. In Part II, Item 8 under A - Financial Statements.
2. The Financial Statement Schedules are listed in Part II - Item 8
under B - Financial Statement Schedules.
3. Exhibits.
Exhibit No. Description of Exhibits
- ------------------ -------------------------
3.1 Limited Partnership Agreement
3.2 Form of Certificate of Limited Partnership Interest
3.3 Certificate of Limited Partnership
10.1 Escrow Agreement
10.2 Servicing Agreement
10.3 (a) Form of Note secured by Deed of Trust which
provides for principal and interest payments.
(b) Form of Note secured by Deed of Trust which
provides principal and interest payments and right of
assumption
(c) Form of Note secured by Deed of Trust which
provides for interest only payments
(d) Form of Note
10.4 (a) Deed of Trust and Assignment of Rents to
accompany Exhibits 10.3 (a), and (c)
(b) Deed of Trust and Assignment of Rents to accompany
Exhibit 10.3 (b) (c) Deed of Trust to accompany
Exhibit 10.3 (d)
10.5 Promissory Note for Formation Loan
10.6 Agreement to Seek a Lender
All of these exhibits were previously filed as the exhibits to Registrant's
Statement on Form S-11 (Registration No. 33-30427 and incorporated by reference
herein).
B. Reports of Form 8-K.
No reports on Form 8-K have been filed during the last quarter
of the period covered by this report.
C. See A (3) above.
D. See A (2) above. Additional reference is made to the prospectus (S-11
filed as part of the Registration statement) dated October 20, 1989 to
pages 65 through 67 and Supplement #5 dated February 14, 1992 for
financial data related to Gymno Corporation, a general partner.
41
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 31st day of March
2003.
REDWOOD MORTGAGE INVESTORS VII
By: /S/ Michael R. Burwell
---------------------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
--------------------------------------------------
Michael R. Burwell, President, Secretary & 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 31st day of March 2003.
Signature Title Date
/S/ Michael R. Burwell
- -------------------------
Michael R. Burwell General Partner March 31, 2003
/S/ Michael R. Burwell
- -------------------------
Michael R. Burwell President, Secretary & Chief March 31, 2003
Financial Officer of Gymno
Corporation (Principal Financial
and Accounting Officer);
Director of Gymno Corporation
42
Exhibit 99.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner of the Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- ----------------------------
Michael R. Burwell, General Partner
March 31, 2003
43
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VII (the
"Partnership") on Form 10-K for the period ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
March 31, 2003
44
Exhibit 99.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner of the Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- --------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2003
45
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VII (the
"Partnership") on Form 10-K for the period ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial
Officer of Gymno Corporation, General Partner of the Partnership, certify that
to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2003
46