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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 33-30427
REDWOOD MORTGAGE INVESTORS VII,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California 94-3094928
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063-1743
(Address of principal executive offices) (Zip Code)
(650) 365-5341
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes XX No
-------------- --------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No XX
-------------- -------------
1
Part I - Item 1. FINANCIAL STATEMENTS
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
BALANCE SHEETS
JUNE 30, 2004 and DECEMBER 31, 2003 (unaudited)
ASSETS
June 30, December 31,
2004 2003
---------------- ---------------
Cash $ 476,031 $ 321,114
---------------- ---------------
Loans
Loans, secured by deeds of trust 8,451,319 8,280,826
Loans, unsecured, net discount of $118,177 and $128,920 respectively 235,240 232,551
---------------- ---------------
8,686,559 8,513,377
Less allowance for loan losses (706,722) (680,469)
---------------- ---------------
Net loans 7,979,837 7,832,908
Interest and other receivables
Accrued interest 599,124 489,995
Advances on loans 6,404 6,484
---------------- ---------------
Total interest and other receivables 605,528 496,479
---------------- ---------------
Real estate owned, held for sale 616,043 633,053
---------------- ---------------
Total assets $ 9,677,439 $9,283,554
================ ===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ 550,000 $ 200,000
Accounts payable 4,438 4,102
Payable to affiliate 62,149 51,288
---------------- --------------
Total liabilities 616,587 255,390
---------------- --------------
Partners' capital
Limited partners' capital, subject to redemption 9,048,879 9,016,191
General partners' capital 11,973 11,973
---------------- --------------
Total partners' capital 9,060,852 9,028,164
---------------- --------------
Total liabilities and partners' capital $ 9,677,439 $9,283,554
================ ==============
The accompanying notes are an integral part of these financial statements.
2
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 and JUNE 30, 2003 (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------------------
2004 2003 2004 2003
-------------- ------------- ------------- -------------
Revenues
Interest - on loans $ 192,253 $ 181,441 $ 395,472 $ 350,911
Interest - interest bearing accounts 463 572 1,806 2,142
Late charges 5,990 6,001 10,588 12,628
Other income 8,698 4,544 17,192 5,554
-------------- ------------- ------------- -------------
207,404 192,558 425,058 371,235
-------------- ------------- ------------- -------------
Expenses
Mortgage servicing fees 19,631 17,147 39,762 33,301
Interest expense 336 1,156 1,068 1,325
Clerical costs through Redwood Mortgage Corp. 4,598 6,008 9,416 12,493
Asset management fees 8,498 8,505 16,987 17,022
Provisions for losses on loans and real estate 14,898 (29,193) 26,253 (46,194)
Professional services 8,810 16,273 29,773 33,591
Printing, supplies and postage 1,996 2,683 4,286 4,269
Other 10,192 4,123 18,972 5,327
-------------- ------------- ------------- -------------
68,959 26,702 146,517 61,134
-------------- ------------- ------------- -------------
Net income $ 138,445 $ 165,856 $ 278,541 $ 310,101
============== ============= ============= =============
Net income: To general partners (1%) $ 1,384 $ 1,659 $ 2,785 $ 3,101
To limited partners (99%) 137,061 164,197 275,756 307,000
-------------- ------------- ------------- -------------
$ 138,445 $ 165,856 $ 278,541 $ 310,101
============== ============= ============= =============
Net income per $1,000 invested by limited
partners for entire period
-where income is reinvested and compounded $15.20 $16.31 $30.83 $34.30
============== ============= ============= =============
-where partner receives income in monthly
distributions $15.12 $16.22 $30.44 $33.82
============== ============= ============= =============
The accompanying notes are an integral part of these financial statements.
3
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 and 2003 (unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------------------
2004 2003
---------------- ---------------
Cash flows from operating activities
Net income $ 278,541 $ 310,101
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for (recovery of) losses on loans and real estate 26,253 (56,937)
Early withdrawal penalty credited to income (1,061) (1,057)
Imputed interest income 10,743 10,743
Amortization of discount on unsecured loans (10,743) (10,743)
Change in operating assets and liabilities
Accrued interest and advances on loans (109,049) (64,618)
Accounts payable and other liabilities 11,197 (28,224)
---------------- ---------------
Net cash provided by operating activities 205,881 159,265
---------------- ---------------
Cash flows from investing activities
Principal collected on loans 1,628,777 1,167,884
Loans originated (1,799,270) (1,681,220)
Recoveries of (payments for) real estate held for sale 17,010 (4,364)
Investments in limited liability company - (139,555)
Proceeds from (payments for) unsecured loans (2,689) 4,801
---------------- ---------------
Net cash used in investing activities (156,172) (652,454)
---------------- ---------------
Cash flows from financing activities
Net increase in line of credit 350,000 -
Partners withdrawals (244,792) (330,825)
---------------- ---------------
Net cash provided by (used) in financing activities 105,208 (330,825)
---------------- ---------------
Net increase (decrease) in cash 154,917 (824,014)
Cash - beginning of year 321,114 1,057,845
---------------- ---------------
Cash - end of period 476,031 233,831
================ ===============
Cash payments for interest $ 1,068 $ 1,325
================ ===============
The accompanying notes are an integral part of these financial statements.
4
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004 (unaudited)
NOTE 1 - GENERAL
In the opinion of the management of the Partnership, the accompanying
unaudited financial statements contain all adjustments, consisting of normal,
recurring adjustments, necessary to present fairly the financial information
included therein. These financial statements should be read in conjunction with
the audited financial statements included in the Partnership's Form 10-K for the
fiscal year ended December 31, 2003 filed with the Securities and Exchange
Commission. The results of operations for the six month period ended June 30,
2004 are not necessarily indicative of the operating results to be expected for
the full year.
note 2 - Summary of Significant Accounting Policies
Loans, secured by deeds of trust
At June 30, 2004 and December 31, 2003 there was one loan categorized as
impaired by the Partnership in the total aggregate amount of $96,716. In
addition, the impaired loans had accrued interest and advances totaling $7,841
at June 30, 2004 and December 31, 2003. The reduction in carrying value of the
impaired loans of $14,596 at June 30, 2004 and December 31, 2003, is included in
the allowance for loan losses. The average recorded investment in the impaired
loans was $96,716 for the six month period ended June 30, 2004 and the year
ended December 31, 2003.
At June 30, 2004 and December 31, 2003, the Partnership had four and five
loans past due 90 days or more on interest payments totaling $1,985,459 and
$2,259,756 (23.49% and 27.29% of the secured loan portfolio), respectively. All
of these loans are past maturity. The Partnership does not consider these loans
to be impaired because, in the opinion of management, there is sufficient
collateral to cover the amount outstanding to the Partnership and is still
accruing interest on these loans.
Allowance for loan losses
The composition of the allowance for loan losses as of June 30, 2004 and
December 31, 2003 was as follows:
June 30, December 31,
2004 2003
--------------- ---------------
Impaired loans $ 14,596 $ 14,596
Specified loans 321,263 321,263
General 252,494 236,984
Unsecured loans 118,369 107,626
--------------- ---------------
$ 706,722 $ 680,469
=============== ===============
Activity in the allowance for loan losses is as follows for the six month
period ended June 30, 2004 and the year ended December 31, 2003:
June 30, December 31,
2004 2003
--------------- ---------------
Beginning balance $ 680,469 $ 791,882
Provision for loan losses 26,253 -
Recoveries - (18,299)
Restructures - (50,083)
Write-offs - (43,031)
--------------- ---------------
$ 706,722 $ 680,469
=============== ===============
5
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004 (unaudited)
note 2 - Summary of Significant Accounting Policies (continued)
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the financial statements since income taxes are the
obligation of the partners if and when income taxes apply.
Reclassifications
Certain reclassifications, not affecting previously reported net income or
total partners' capital, have been made to the previously issued financial
statements to conform to the current year classification.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities, and disclosures of contingent assets and liabilities, at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Such estimates relate principally to the
determination of the allowance for loan losses, including the valuation of
impaired loans and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.
note 3 - General Partners and Related Parties
The following are commissions and fees, which will be paid to the general
partners.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, Redwood Mortgage Corp., an affiliate of the general
partners, may collect an amount equivalent to 12% of the loaned amount until 6
months after the termination date of the offering. Thereafter, loan brokerage
commissions (points) will be limited to an amount not to exceed 4% of the total
Partnership assets per year. The loan brokerage commissions are paid by the
borrowers and thus, are not an expense of the Partnership.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued. Additional service fees are recorded upon the receipt of any
subsequent payments on impaired loans.
6
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004 (unaudited)
note 3 - General Partners and Related Parties (continued)
Asset management fees
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually).
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to parties related to the general partners.
Operating expenses
Redwood Mortgage Corp., an affiliate of the general partners, is reimbursed
by the Partnership for all operating expenses actually incurred by it on behalf
of the Partnership, including without limitation, out-of-pocket general and
administration expenses of the Partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
note 4 - Real Estate Held for Sale
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell as of June 30, 2004 and December 31, 2003:
June 30, December 31,
2004 2003
--------------- ---------------
Costs of properties $ 1,263,222 $ 1,263,222
Reduction in value (647,179) (630,169)
--------------- ---------------
Real estate held for sale $ 616,043 $ 633,053
=============== ===============
note 5 - Bank Line of Credit
The Partnership has a bank line of credit secured by its loan portfolio of
up to $3,500,000 at .25% over prime. The balances outstanding as of June 30,
2004 and December 31, 2003 were $550,000 and $200,000; and the interest rate was
4.25% (4.00% prime + .25%) at June 30, 2004 and December 31, 2003. This line of
credit expires December 2004 and requires the Partnership to meet certain
financial covenants. To the best of its knowledge, the Partnership was in
compliance with all loan covenants for the six month period ended June 30, 2004
and for the year ended December 31, 2003.
Should the general partners choose not to renew the line of credit, any
balance then outstanding would be converted to a three-year term loan.
7
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004 (unaudited)
note 6 - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Secured loans had a carrying value of $8,451,319 and $8,280,826, at June
30, 2004 and December 31, 2003, respectively. The fair value of these loans of
$8,501,875 and $8,159,401, respectively, was estimated based upon projected cash
flows discounted at the estimated current interest rates at which similar loans
would be made. The applicable amount of the allowance for loan losses along with
accrued interest and advances related thereto should also be considered in
evaluating the fair value versus the carrying value.
note 7 - Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At June 30, 2004 and
December 31, 2003 there were 29 and 23 secured loans outstanding, respectively,
with the following characteristics:
June 30, December 31,
2004 2003
--------------- ---------------
Number of secured loans outstanding 29 23
Total secured loans outstanding $ 8,451,319 $ 8,280,826
Average secured loan outstanding $ 291,425 $ 360,036
Average secured loan as percent of total 3.45% 4.35%
Average secured loan as percent of Partners' capital 3.22% 3.99%
Largest secured loan outstanding $ 1,000,000 $ 1,000,000
Largest secured loan as percent of total 11.83% 12.08%
Largest secured loan as percent of Partnership assets 10.33% * 10.77% *
Number of counties where security is located (all California) 11 8
Largest percentage of loans in one county 32.48% 44.11%
Average secured loan to appraised value of security based on appraisals
and senior liens(1) at time of loan inception 65.60% 60.79%
Number of secured loans in foreclosure None None
Amount of secured loans in foreclosure None None
* 6.76% and 8.71% of outstanding loans and Partners' capital at loan inception
Over time, loans may exceed 10% of the secured loan portfolio or
Partnership assets as the loan portfolio and assets of the Partnership decrease
due to limited partner withdrawals and/or loan payoffs.
- --------------------------------
(1) A senior lien(s) is a recorded encumbrance that is senior in right of
payment and priority to the Partnership's loan.
8
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004 (unaudited)
note 7 - Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at June 30, 2004 and
December 31, 2003:
June 30, December 31,
2004 2003
-------------- --------------
First trust deeds $ 4,098,362 $ 3,733,346
Second trust deeds 3,677,957 3,872,480
Third trust deeds 675,000 675,000
-------------- --------------
Total loans 8,451,319 8,280,826
Senior liens due other lenders 4,916,960 4,319,281
-------------- --------------
Total debt $13,368,279 $12,600,107
============== ==============
Appraised property value at time of loan $20,377,817 $20,728,514
-------------- --------------
Total secured loans as percent of appraisals based on appraisals
and senior liens at date of loan 65.60% 60.79%
-------------- --------------
Secured loans by type of property
Owner occupied homes $ 1,908,652 $ 853,869
Non-owner occupied homes 1,209,545 1,589,092
Apartments 1,011,594 1,367,327
Commercial 2,276,953 2,410,861
Land 2,044,575 2,059,677
-------------- --------------
$ 8,451,319 $ 8,280,826
============== ==============
Scheduled maturity dates of secured loans as of June 30, 2004 are as follows:
Year Ending December 31,
----------------------------------
2004 $ 2,186,927
2005 1,715,125
2006 872,147
2007 1,246,754
2008 198,867
Thereafter 2,231,499
----------------
Total $ 8,451,319
================
The scheduled maturities for 2004 above include approximately $2,074,581 in
six loans, which are past maturity at June 30, 2004. Interest payments on four
of these loans with an aggregate principal balance of $1,985,459 were
categorized as delinquent over 90 days. The remaining two loans are making
regular monthly interest payments.
9
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004 (unaudited)
note 7 - Asset Concentrations and Characteristics (continued)
At times, the Partnership's cash deposits exceed federally insured limits.
Management believes deposits are maintained in financially secure financial
institutions.
The Partnership has a substantial amount of its loan receivable balance due
on two loans from one borrower. This borrower accounted for approximately 15% of
the loan balance and approximately 13% of interest revenue for the half year
ended June 30, 2004. The value of collateral securing these loans was less than
the principal balance due under the loans. Redwood Mortgage Corp. has provided
an indemnity to the Partnership whereby it has agreed to indemnify and hold
harmless, the Partnership from any expenses or losses incurred by the
Partnership by reason of the Partnership's inability to collect all principal
due under the loans after the Partnership has exhausted all reserves set aside
for these loans and all remedies available to it including foreclosure of the
underlying collateral. Therefore, these loans are not considered impaired solely
because the value of the collateral securing the loans is less than the
principal balance due to the Partnership.
The Partnership also has a substantial amount of its loan receivable
balance due on three loans from another borrower. This borrower accounted for
approximately 23% of the loan balance and approximately 25% of interest revenue
for the half year ended June 30, 2004.
note 8 - Commitments and Contingencies
Workout agreements
The Partnership has negotiated various contractual workout agreements with
borrowers whose loans are past maturity or who are delinquent in making
payments. Under the terms of these workout agreements the Partnership is not
obligated to make any additional monetary advances for the maintenance or repair
of the collateral securing the loans as of June 30, 2004 and December 31, 2003.
As of June 30, 2004 the Partnership had three loans under workout agreements
totaling $164,433.
Construction loans
The Partnership has construction loans, which are at various stages of
completion of the construction process and loans, which are not fully disbursed
at June 30, 2004. The Partnership has approved the borrowers up to a maximum
loan balance; however, disbursements are made during completion phases
throughout the construction process or incrementally upon certain conditions
being met. At June 30, 2004, there were $1,185 of undistributed loans which will
be funded by a combination of borrower monthly mortgage payments, line of credit
draw-downs, retirement of principal on current loans, cash and reinvestment of
investors' earnings.
Legal proceedings
The Partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the Partnership.
10
Part I - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet dates and revenue and expenses
for the reporting periods. Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
held for sale.
Loans and the related accrued interest, late fees and advances are analyzed
on a regular basis for recoverability. Delinquencies are identified and followed
as part of the loan system. A provision is made for loan losses to adjust the
allowance for loan losses to an amount considered by management to be adequate,
with due consideration to collateral value, to provide for unrecoverable loans
and receivables, including impaired loans, other loans, accrued interest, late
fees and advances on loans and other accounts receivable (unsecured). The
Partnership charges off uncollectible loans and related receivables directly to
the allowance account once it is determined that the full amount is not
collectible.
If the probable ultimate recovery of the carrying amount of a loan, with
due consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the investment
shall be reduced to the present value of future cash flows discounted at the
loan's effective interest rate. If a loan is collateral dependent, it is valued
at the estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the further collectibility of the contractual payments, a loan may
be categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances
including accrued interest and advances.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Forward Looking Statements.
Some of the information in the Form 10-Q may contain forward looking
statements. Uses of words such as "will", "may", "anticipate", "estimate",
"continue" or other forward looking words, discuss future expectations or
predictions. The foregoing analysis of 2004 includes forward looking statements
and predictions about the possibility of future events, results of operations
and financial condition. As such, this analysis may prove to be inaccurate
because of assumptions made by the general partners or the actual development of
the future events. No assurance can be given that any of these statements or
predictions will ultimately prove to be correct or substantially correct.
Related Parties.
The general partners of the Partnership are Gymno Corporation and Michael
R. Burwell. Most Partnership business is conducted through Redwood Mortgage
Corp., an affiliate of the general partner, which arranges, services and
maintains the loan portfolio for the benefit of the Partnership. Michael R.
Burwell is President and Chief Financial Officer of Gymno Corporation and
Redwood Mortgage Corp. The fees received by the affiliate to the general
partners are paid pursuant to the Partnership agreement and are determined at
the sole discretion of the affiliate to the general partner. In the past, the
affiliate to the general partners has elected not to take the maximum
compensation. The following is a list of various Partnership activities for
which related parties are compensated.
11
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, Redwood Mortgage
Corp. may collect an amount equivalent to 12% of the loaned amount until 6
months after the termination date of the offering. Thereafter, the loan
brokerage commissions (points) will be limited to an amount not to exceed 4% of
the total Partnership assets per year. The loan brokerage commissions are paid
by the borrowers, and thus, are not an expense of the Partnership. Loan
brokerage commissions paid by the borrowers were $49,528 and $48,775 for the six
month period ended June 30, 2004 and 2003, and $31,894 and $6,000 for the three
month period ended June 30, 2004 and 2003, respectively.
o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the Partnership's loans
is paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Mortgage servicing fees of $39,762 and $33,301 were incurred for the
six month periods ended June 30, 2004 and 2003, and $19,631 and $17,147 were
incurred for the three month periods ended June 30, 2004 and 2003, respectively.
o Asset Management Fees The general partners receive monthly fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $16,987 and $17,022 were incurred by the Partnership for the six
month period ended June 30, 2004 and 2003, and $8,498 and $8,505 were incurred
for the three month period ended June 30, 2004 and 2003, respectively.
o Other Fees The Partnership agreement provides that the general partners
may receive other fees such as reconveyance, mortgage assumption and mortgage
extension fees. Such fees are incurred by the borrowers and are paid to the
general partners.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective Partnership interests. The allocation
to the general partners (combined) shall be a total of 1%.
o Operating Expenses An affiliate of the Partnership, Redwood Mortgage
Corp., is reimbursed by the Partnership for all operating expenses actually
incurred by it on behalf of the Partnership, including without limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees, legal fees and expenses, postage and preparation of reports to
limited partners. Such reimbursements are reflected as expenses in the statement
of income. During the six and three months through June 30, 2004 and 2003,
operating expenses totaling $9,416 and $12,493 for the six month periods and
$4,598 and $6,008 for the three month periods, respectively, were reimbursed to
Redwood Mortgage Corp.
o Contributed Capital The general partners jointly and severally
contributed 1/10 of 1% in cash contributions as proceeds from the offerings were
received from the limited partners. As of June 30, 2004 and 2003, a general
partner, Gymno Corporation, had contributed $11,973 as capital in accordance
with Section 4.02(a) of the Partnership Agreement.
12
Results of Operations - For the six and three months ended June 30, 2004
and 2003
The following increases/(decreases) took place in the Partnership's
operating results for the six and three month periods ended June 30, 2004 versus
2003 and are summarized here under :
Changes during the Changes during the
six months ended three months ended
June 30, 2004 versus 2003 June 30, 2004 versus 2003
--------------------------- ----------------------------
Net income increase (decrease) $ (31,560) $ ( 27,411)
=============== =================
Revenue
Interest on loans $ 44,561 $ 10,812
Interest - interest bearing accounts (336) (109)
Late charges (2,040) (11)
Other income 11,638 4,154
--------------- -----------------
$ 53,823 $ 14,846
--------------- -----------------
Expenses
Mortgage servicing fees $ 6,461 $ 2,484
Interest expense (257) (820)
Clerical costs (3,077) (1,410)
Asset management fees (35) (7)
Provisions for losses on loans and real estate 72,447 44,091
Professional services (3,818) (7,463)
Printing, supplies and postage 17 (687)
Other 13,645 6,069
--------------- -----------------
$ 85,383 $ 42,257
--------------- -----------------
Net income (decrease) $ (31,560) $ (27,411)
=============== =================
The increase in interest on loans of $44,561 (12.70%) for the six month
period, and $10,812 (5.96%) for the three month period ended June 30, 2004
versus June 30, 2003 was due primarily to an increase in the average loan
portfolio outstanding during these periods to $8,451,319 as of June 30, 2004
from $6,937,320 as of June 30, 2003. The increase in interest is also attributed
to an increase of the average interest rate, which stood at 9.67% as of June 30,
2004 versus 9.63% as of June 30, 2003. The interest revenue increase also
includes $10,743 and $5,372 in imputed interest on discount notes for the six
and three month periods ended June 30, 2004 and 2003, respectively.
The increase in mortgage servicing fees of $6,461 (19.40%) for the six
month period, and $2,484 (14.49%) for the three month period ended June 30, 2004
versus June 30, 2003 is attributable to a larger average loan portfolio than in
2003.
Loan loss provisions were $26,253 for the six month period, and $14,898 for
the three month period ended June 30, 2004, as compared to loan loss recoveries
of $(46,194) for the six month period, and $(29,193) for the three month period
ended June 30, 2003. The general partners believe that the allowance for loan
losses of $706,722 as of June 30, 2004 was adequate to offset potential losses
on loans.
The decrease in professional fees of $3,818 (11.37%) for the six month
period, and $7,463 (45.86%) for the three month period ended June 30, 2004
versus June 30, 2003 is due to timing of services provided in 2004 compared to
2003.
13
Partnership capital increased during the first half of 2004 as both
earnings distributions and capital liquidations declined. For the six and three
month periods ended June 30, 2004 earnings and capital liquidated was $95,247
and $147,820 for the six month period, and $47,050 and $80,212 for the three
month period, respectively, versus $110,116 and $218,663 for the six month
period, and $52,958 and $105,512 for the three month period, respectively for
the corresponding period in 2003. Earnings and capital liquidations are a factor
of limited partner elections and currently limited partners seeking liquidations
of earnings or their capital account has declined.
For the six and three month periods ended June 30, 2004, other income was
mainly comprised of $15,429 and $7,714, respectively, of non-refundable option
payments against the purchase price of real estate held for sale. Other expenses
consisted of $15,486 for the six month period and $8,141 for the three month
period ended June 30, 2004, spent on the upkeep of Partnership properties.
At June 30, 2004, outstanding foreclosures were reduced to none ($0) from
the two ($500,000) that existed at June 30, 2003. These foreclosures reflected
more difficult economic times at June 30, 2003, yet were not unusual in the
general partners' experience.
Redwood Mortgage Corp., an affiliate of the general partners, received
Mortgage Brokerage Commissions from the loan borrowers of $49,528 and $31,894
for the six and three month periods ended June 30, 2004 as compared to $48,775
and $6,000 for the six and three month periods ended June 30, 2003. The increase
is due to more loans written in the six and three month periods ended June 30,
2004.
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these loans,
borrowers' payment records, etc. Based upon this information and other data, the
allowance for loan losses is increased or decreased. Borrower foreclosures are a
normal aspect of Partnership operations. The Partnership is not a credit based
lender and hence while it reviews the credit history and income of borrowers,
and if applicable, the income from income producing properties, the general
partners expect that we will on occasion take back real estate security. During
2001, the Northern California real estate market slowed and the national and
local economies slipped into recession. During 2002 and 2003, the economy
stabilized. During 2004 the economy and the Northern California Real Estate
Market has strengthened. At June 30, 2004 the Partnership had 4 loans past due
90 days or more totaling $1,985,459 with no loans in foreclosure.
The Partnership has entered into workout agreements with borrowers who are
past maturity or delinquent in their regular payments. The total number of
Partnership loans in workout agreements with borrowers is three, consisting of
two matured loans totaling $64,888 and one current loan totaling $99,545.
Typically, a workout agreement allows the borrower to extend the maturity date
of the balloon payment and/or allows the borrower to make current monthly
payments while deferring for periods of time, past due payments and balloon
payments and allows time to pay the loan in full. These workout agreements and
foreclosures generally exist within our loan portfolio to greater or lesser
degrees, depending primarily on the health of the economy. The number of
foreclosures and workout agreements will generally rise during difficult
economic times and conversely fall during good economic times. The number and
amount of workout agreements existing at June 30, 2004, in management's opinion,
does not have a material effect on our results of operations or liquidity. These
workouts have been considered when management arrived at an appropriate
allowance for loan losses and based on our experience, are reflective of our
loan marketplace segment. In 2004, we may initiate foreclosure on delinquent
borrowers or borrowers who become delinquent during the year. We may take back
additional real estate through the foreclosure process in 2004. Borrower
foreclosures are a normal aspect of Partnership operations and the general
partners anticipate that they will not have a material effect on liquidity. As a
prudent guard against potential losses, the general partners have made
provisions for losses on loans and real estate owned through foreclosure of
$1,353,901 at June 30, 2004. These provisions for losses were made to guard
against collection losses. The total cumulative provision for losses as of June
30, 2004 is considered by the general partners to be adequate. Because of the
number of variables involved, the magnitude of the swings possible and the
general partners inability to control many of these factors, actual results may
and do sometimes differ significantly from estimates made by the general
partners. Total provisions for losses on loans of $706,722 and real estate held
for sale of $647,179 as of June 30, 2004, is considered to be reasonable.
14
As of June 30, 2004, the Partnership had an average loan to value ratio
computed based on appraised values and prior liens as of the date the loan was
made of 65.60%. 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.
Since January, 2001 and continuing through June, 2004, the Federal Reserve
reduced interest rates significantly by cutting the Federal Funds Rate to one
percent. These interest rate cuts significantly lowered long and short term
interest rates. On July 1, 2004, the Federal Reserve increased the Federal Funds
Rate by one quarter percentage point (1/4 of one percent) to 1.25%. This was the
first Federal Funds Rate increase in more than three years and may indicate that
the Federal Reserve has changed its interest rate policy to increased rates for
the foreseeable future. A 1/4 of one percent upward shift in the Federal Funds
Rate will have an almost negligible effect upon the interest rates the
Partnership charges borrowers. If, however, there are future interest rate
increases or if they remain at their current levels, borrowers will no longer be
encouraged through continually declining interest rates to prepay their debts
through refinancing of their obligations. This could mean that the Partnership
may begin experiencing less prepayments by borrowers in its portfolio. This
would reduce the need for the Partnership to replace these prepaid loans with
new loans at lower interest rates. Additionally, the overall real estate
marketplace has become much more active in the last six months, particularly in
Northern California. This has translated into more loan activity for the
Partnership, as demand for loans is strong from qualified borrowers. The general
partners believe that the average loan portfolio interest rate may decline as
some remaining borrowers that did not refinance their loans to lower interest
rates take advantage of the current low rates of interest available. Based upon
existing note rates in the portfolio and the Partnership's expectations of
stable interest rates in the near future, the Partnership anticipates that the
average loan portfolio interest rate will decline approximately 0.25% over the
remainder of 2004. From the general partners' experience, we anticipate that the
annualized yield for 2004 will range between 6% and 7%.
PORTFOLIO REVIEW - For the six month period ended June 30, 2004 and 2003
Loan Portfolio
The Partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of June 30, 2004 and
2003 the Partnership's loans secured by real property collateral in the six San
Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, and Marin) represented $5,424,371 (64.18%) and $4,684,545 (62.76%)
of the outstanding secured loan portfolio. The remainder of the portfolio
represented loans secured by real estate located primarily in Northern
California.
As of June 30, 2004 and June 30, 2003, the Partnership held 29 and 24 loans
respectively in the following categories:
June 30, June 30,
2004 2003
---------------------------- -----------------------------
Single Family Residences (1-4 units) $ 3,118,197 36.90% $ 1,077,213 15.53%
Multiple family dwellings (5+ units) 1,011,594 11.97% 1,759,955 25.37%
Commercial 2,276,953 26.94% 1,943,095 28.01%
Land 2,044,575 24.19% 2,157,057 31.09%
-------------- ----------- -------------- -----------
Total $ 8,451,319 100.00% $ 6,937,320 100.00%
============== =========== ============== ===========
15
As of June 30, 2004, the Partnership held 29 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the Partnership as of June 30, 2004:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of June 30, 2004
# of
Loans Amount Percent
----------- -------------- -------------
1st Mortgages 17 $ 4,098,362 48%
2nd Mortgages 11 3,677,957 44%
3rd Mortgages 1 675,000 8%
=========== ============== =============
Total 29 $ 8,451,319 100%
Maturing 12/31/04 and prior 7 $ 2,186,927 26%
Maturing prior to 12/31/05 3 1,715,125 20%
Maturing prior to 12/31/06 2 872,147 10%
Maturing after 12/31/06 17 3,677,120 44%
=========== ============== =============
Total 29 $ 8,451,319 100%
Average Loan $291,425 3%
Largest Loan 1,000,000 12%
Smallest Loan 11,659 0.14%
Average Loan-to-Value based upon appraisal and senior
liens at date of loan 65.60%
The Partnership's largest loan in the principal amount of $1,000,000
represents 11.83% of outstanding secured loans and 10.33% of Partnership assets.
Over time, loans may increase above 10% of the secured loan portfolio or
Partnership assets as the loan portfolio and assets of the Partnership decrease
due to limited partner withdrawals and/or loan payoffs.
Borrower Liquidity and Capital Resources.
At the time of subscription to the Partnership, limited partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound earnings in their capital account. For the six and
three month periods ended June 30, 2004 and 2003, the Partnership made
distributions of earnings to limited partners of $95,247 and $110,116 for the
six month periods, and $47,050 and $52,958 for the three month periods,
respectively. Distribution of earnings to limited partners, which were not
withdrawn for the six and three month periods ended June 30, 2004 and 2003 were
$180,509 and $196,884 for the six month periods, and $90,011 and $111,239 for
the three month periods, respectively. As of June 30, 2004 and 2003, limited
partners electing to withdraw earnings represented 34% and 37% of the limited
partners' capital.
The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations (see liquidation provisions of
Partnership agreement). For the six and three month periods ended June 30, 2004
and 2003, $13,263 and $13,190 for the six month periods, and $8,513 and $3,750
for the three month periods, respectively, were liquidated subject to the 10%
penalty for early withdrawal. These withdrawals are within the normally
anticipated range that the general partners would expect in their experience in
this and other Partnerships. The general partners expect that a small percentage
of limited partners will elect to liquidate their capital accounts over one year
with a 10% early withdrawal penalty. In originally conceiving the Partnership,
the general partners wanted to provide limited partners needing their capital
returned a degree of liquidity. Generally, limited partners electing to withdraw
over one year need to liquidate their investment to raise cash. The trend the
Partnership is experiencing in withdrawals by limited partners electing a one
year liquidation program represents a small percentage of limited partner
capital as of June 30, 2004 and 2003.
16
Additionally, for the six and three month periods ended June 30, 2004 and
2003, $134,557 and $205,473 for the six month periods, and $71,699 and $101,762
for the three month periods, respectively, were liquidated by limited partners
who have elected a liquidation program over a period of five years or longer.
This ability to withdraw after five years by limited partners has the effect of
providing limited partner liquidity. The general partners expect a portion of
the limited partners to take advantage of this provision. This has the
anticipated effect of the Partnership growing, primarily through reinvestment of
earnings in years one through five. The general partners expect to see
increasing numbers of limited partner withdrawals in years five through eleven,
after which time the bulk of those limited partners who have sought withdrawal
have been liquidated. After year eleven, liquidation generally subsides.
In some cases in order to satisfy Broker Dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the Partnership on a basis which utilizes a per Unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the Partnership to integrate with
certain software used by the Broker Dealers and other reporting entities. In
those cases, the Partnership will report to Broker Dealers, Trust Companies and
others a "reporting" number of Units based upon a $1.00 per Unit calculation.
The number of reporting Units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the Partnership account statement
provided to investors. The reporting Units are solely for Broker Dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the Partnership. Each investor's
capital account balance is set forth periodically on the Partnership account
statement provided to investors. The amount of Partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per Unit estimated value
of the client's investment in the Partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the Partnership
Units, such determination may not be representative of the ultimate price
realized by an investor for such Units upon sale. No public trading market
exists for the Partnership's Units and none is likely to develop. Thus, there is
no certainty that the Units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
Partnership, which may include early withdrawal penalties (See the section of
the Prospectus entitled "Risk Factors - Purchase of Units is a long term
investment").
Current Economic Conditions.
The Partnership makes loans primarily in Northern California. As of June
30, 2004, approximately 64.18%, ($5,424,371) of the secured loans held by the
Partnership were in six San Francisco Bay Area Counties. The remainder of the
loans held was secured primarily by Northern California real estate outside the
San Francisco Bay Area. Like the rest of the nation, the San Francisco Bay Area
has felt the recession and accompanying slow down in economic growth and
increasing unemployment.
In 2004 the Northern California economy has begun to rebound. Unemployment
is still a concern as job creation is an important aspect of continued economic
expansion. The unemployment rate in California was 6.3% as of June, 2004 as
compared to an unemployment rate of 6.9% in June, 2003. This decrease in
unemployment indicates improvement but is still higher than many economists
would like. The Labor Department reported that the consumer price index rose
0.3% in June, 2004 and for the first six months of this year, consumer prices
went up at an annual rate of 4.9% compared with a rate of 1.9% for all of 2003.
Core prices have risen at a more moderate 2.6% rate so far this year. In July,
2004, the Federal Reserve, after more than three years of lowering its core
interest rates, raised its core interest rate .25% to 1.25%. This marks a
dramatic change in policy from lowering interest rates to a probable policy of
raising interest rates over the foreseeable future. Real estate prices are, in
part, directly impacted by the cost of money. The value of real estate is
important to the Partnership as real estate collateral is backing each of our
loans. At current interest rates, demand for residential real estate is at all
time highs. DataQuick Information Systems reported all time high numbers in
June, 2004 for many tracked California real estate categories. These included a
record $382,000 median sales price for a California home, a record 14,184 house
and condominium sales in the nine county San Francisco Bay Area marketplace, and
a record $545,000 median home sales price in the San Francisco Bay Area. Home
affordability in the San Francisco Bay Area, as measured by the affordability
17
index, has declined from 32% to 22% as both real estate prices and interest
rates have risen in the year ended May, 2004. A lower number of households being
able to afford homes will serve to mitigate future price increases in
residential real estate particularly if interest rates continue to rise. Freddie
Mac, which has said it expects 30-year mortgages to range between 6% and 7% in
2004, said the housing market should remain buoyant for at least the rest of the
year. For the Partnership, stable and rising residential real estate values are
good as the Partnership is more collateral dependent than credit dependent in
its loan underwriting decisions. A strong and active real estate marketplace
also serves to produce a substantial number of real estate financing
opportunities which the Partnership may compete for.
The San Francisco Bay Area commercial real estate marketplace is improving.
Vacancy in office buildings declined to 18.2% in the second quarter of 2004 as
reported by Colliers International. Cushman Wakefield reported an office vacancy
of 20.5% in 2004 versus 22.9% in 2003. These reduced vacancies continue a trend
which began in the third quarter of 2003. Improved occupancies in commercial
properties will assist the owners of those properties in handling their debt
payments. Improved occupancies will help stabilize commercial real estate
values, which is a benefit to the partnership.
For Partnership loans outstanding as of June 30, 2004, the Partnership had
an average loan to value ratio of 65.60%, computed based on appraised values and
senior liens as of the date the loan was made. This percentage does not account
for any increases or decreases in property values since the date the loan was
made, nor does it include any reductions in principal on senior indebtedness
through amortization of payments after the loan was made. This low loan to value
ratio will assist the Partnership in weathering loan delinquencies and
foreclosures should they eventuate.
Part I - Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, secured loans held in the Partnership's portfolio and our line
of credit as of June 30, 2004. The presentation, for each category of
information, aggregates the assets and liabilities by their maturity dates for
maturities occurring in each of the years 2004 through 2008 and separately
aggregates the information for all maturities arising after 2008. The carrying
values of these assets and liabilities approximate their fair market values as
of June 30, 2004:
2004 2005 2006 2007 2008 Thereafter Total
--------------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 292,683 $ 292,683
Average interest rate 0.59% 0.59%
Unsecured loans $ 235,240 $ 235,240
Loans secured by deeds
of trust $ 2,186,927 1,715,125 872,147 1,246,754 198,867 2,231,499 $ 8,451,319
Average interest rate 10.85% 9.73% 8.72% 9.00% 10.50% 9.14% 9.67%
Interest bearing
liabilities
Line of credit $ 550,000 $ 550,000
Average interest rate 4.25% 4.25%
Market Risk.
The Partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the Partnership's primary market risk exposure with
respect to its obligations is to changes in interest rates, which will affect
the interest cost of outstanding amounts on the line of credit. The Partnership
may also suffer market risk tied to general trends affecting real estate values
that may impact the Partnership's security for its loans.
18
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
June 30, 2004) earn interest at fixed rates. Changes in interest rates may also
affect the value of the Partnership's investment in mortgage loans and the rates
at which the Partnership reinvests funds obtained from loan repayments and new
capital contributions from limited partners. If interest rates increase, the
interest rates the Partnership obtains from reinvested funds will generally
increase, but the value of the Partnership's existing loans at fixed rates will
generally tend to decrease. The risk is mitigated by the fact that the
Partnership does not intend to sell its loan portfolio, rather such loans are
held until they are paid off. If interest rates decrease, the amounts becoming
available to the Partnership for investment due to repayment of Partnership
loans may be reinvested at lower rates than the Partnership had been able to
obtain in prior investments, or than the rates on the repaid loans. In addition,
interest rate decreases may encourage borrowers to refinance their loans with
the Partnership at a time where the Partnership is unable to reinvest in loans
of comparable value.
The Partnership does not hedge or otherwise seek to manage interest rate
risk. The Partnership does not enter into risk sensitive instruments for trading
purposes.
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the loan portfolio as affected by
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not adopted certain of these practices. Rather, the general partners, in
connection with the periodic closing of the accounting records of the
Partnership and the preparation of the financial statements, determine whether
the allowance for loan losses is adequate to cover potential loan losses of the
Partnership. As of June 30, 2004 the general partners have determined that the
allowance for loan losses of $706,722 (7.80% 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 June 30, 2004, 4 loans were delinquent over 90 days
amounting to $1,985,459. The Partnership does not consider these loans to be
impaired because in the opinion of management there is sufficient collateral to
cover the amount outstanding to the Partnership and is still accruing interest
on the loans. In addition, allowance for loan losses of $706,722 as of June 30,
2004 is considered reasonable to offset any potential loss in loan collections
in the future.
Part I - Item 4. Controls and Procedures
As of June 30, 2004, the general partner of the Partnership carried out an
evaluation, under the supervision and with the participation of the general
partner's management, including the general partner's President and Chief
Financial Officer, of the effectiveness of the design and operation of the
Partnership's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the President and Chief Financial Officer of
the general partner concluded that the Partnership's disclosure controls and
procedures are effective. There were no significant changes in the Partnership's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
19
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
The Partnership has no officers or directors. The Partnership is managed by
the general partners. There are certain fees and other items paid to management
and related parties.
A more complete description of management compensation is found in the
Prospectus part of Form S-11 and subsequent amendments related to the offering
of Partnership interests, pages 12-13, under the section "Compensation of the
General Partners and the Affiliates", which are incorporated by reference. Such
compensation is summarized below.
The following compensation has been paid to the general partners and
affiliates for services rendered during the six month period ended June 30,
2004. All such compensation is in compliance with the guidelines and limitations
set forth in the Prospectus.
Entity Receiving
Compensation Description of Compensation and Services Rendered Amount
- ---------------------------------------------------------------------------------------------------------------
I. Redwood Mortgage Corp. Loan Servicing Fee for servicing loan ................................$39,762
General Partners
&/or Affiliates Asset Management Fee for managing assets .............................$16,987
General Partners 1% interest in profits ................................................$2,785
II. FEES PAID BY BORROWERS ON LOANS PLACED BY COMPANIES RELATED TO THE
GENERAL PARTNERS WITH THE PARTNERSHIP (EXPENSES OF BORROWERS NOT OF THE
PARTNERSHIP)
Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection
with the review, selection, evaluation, negotiation,
and extension of the loan paid by the borrowers and not by
the Partnership.......................................................$49,528
Redwood Mortgage Corp. Processing and Escrow Fees for services in connection with
notary, document preparation, credit investigation, and escrow
fees paid by the borrowers and not by the Partnership .................$4,983
Gymno Corporation, Inc. Reconveyance Fee.........................................................$717
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,416
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership periodically is a defendant in various legal
actions. Please refer to Note 8 of the Financial Statements.
Item 2. Changes in the Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99.1) Certification of Michael R. Burwell, General
Partner
(99.2) Certification of Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of
Gymno Corporation, General Partner
(b) Form 8-K
Not Applicable
21
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 16th day of August
2004.
REDWOOD MORTGAGE INVESTORS VII
By: /S/ Michael R. Burwell
---------------------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
------------------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 16th day of August 2004.
Signature Title Date
/S/ Michael R. Burwell
- ----------------------
Michael R. Burwell General Partner August 16, 2004
/S/ Michael R. Burwell
- ----------------------
Michael R. Burwell President, Secretary/Treasurer August 16, 2004
of Gymno Corporation (Principal
Financial and Accounting
Officer); Director of Gymno
Corporation
22
Exhibit 99.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of June 30, 2004 (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
August 16, 2004
23
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VII
(the "Partnership") on Form 10-Q for the period ending June 30, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
August 16, 2004
24
Exhibit 99.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of June 30, 2004 (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- ---------------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
August 16, 2004
25
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VII
(the "Partnership") on Form 10-Q for the period ending June 30, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General
Partner of the Partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- ------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner
August 16, 2004
26