-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HT+6qCB+64zA2Tpx1CCjFQCM6CW3PJatwnv2HWbDWcALNgZ4FMplqqJQNBciruDj 6d+tar9RooeMXltYo3BPSA== 0000811592-99-000009.txt : 19990809 0000811592-99-000009.hdr.sgml : 19990809 ACCESSION NUMBER: 0000811592-99-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REDWOOD MORTGAGE INVESTORS VII CENTRAL INDEX KEY: 0000854092 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 943094928 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19992 FILM NUMBER: 99679398 BUSINESS ADDRESS: STREET 1: 650 EL CAMINO STE G CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 4153670121 MAIL ADDRESS: STREET 1: 650 EL CAMINO REAL STE K CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-Q 1 10-Q FORM 10-Q SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Period Ended June 30, 1999 - -------------------------------------------------------------------------------- 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 incorporation of organization) Identification No. 650 El Camino Real, Suite G, Redwood City, CA. 94063 - -------------------------------------------------------------------------------- (address of principal executive office) (650) 365-5341 - -------------------------------------------------------------------------------- (Registran'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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES XX NO ------------ -------------------- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES NO NOT APPLICABLE X ------- --------- ---------------- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest date. NOT APPLICABLE REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) BALANCE SHEETS DECEMBER 31, 1998 (audited) and JUNE 30, 1999 (unaudited) ASSETS Jun 30, 1999 Dec 31, 1998 (unaudited) (audited) -------------- --------------- Cash $365,763 $461,544 -------------- --------------- Accounts receivable: Mortgage Investments, secured by deeds of trust 14,784,728 13,209,186 Accrued Interest on Mortgage Investments 184,299 442,350 Advances on Mortgage Investments 52,610 39,733 Accounts receivables, unsecured 243,118 242,493 -------------- --------------- 15,264,755 13,933,762 Less allowance for doubtful accounts 999,755 787,042 -------------- --------------- 14,265,000 13,146,720 -------------- --------------- Real estate owned, acquired through foreclosure, held for sale 358,052 397,396 -------------- --------------- $14,988,815 $14,005,660 ============== =============== LIABILITIES AND PARTNERS' CAPITAL Liabilities: Notes payable - bank line of credit $3,500,000 $1,912,663 Accounts payable and accrued expenses 4,334 12,547 Deferred Interest 0 131,743 ------------- -------------- 3,504,334 2,056,953 ------------- -------------- Partners' Capital Limited partners' capital, subject to redemption (Note 4E): Net of formation loan receivable of $209,443 and $253,387 for 1999, and 1998 respectively 11,472,503 11,936,729 General partner' capital 11,978 11,978 ------------- -------------- Total Partners' Capital 11,484,481 11,948,707 ------------- -------------- Total Liabilities and Partners' Capital $14,988,815 $14,005,660 ============= ============== See accompanying notes to financial statements. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF INCOME FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1999 and 1998 (unaudited) 6 months 6 months 3 months 3 months ended ended ended ended June 30, June 30, 1998 Jun 30, 1999 June 30, 1998 1999 (unaudited) (unaudited) (unaudited) (unaudited) Revenues: Interest on Mortgage Investments $902,185 $776,983 $485,336 $390,113 Interest on bank deposits 1,269 3,240 411 1,044 Late charges 11,238 7,377 10,593 6,813 Other 4,068 5,858 2,067 2,888 -------------- ------------- ------------- ------------ 918,760 793,458 498,407 400,858 -------------- ------------- ------------- ------------ Expenses: Interest on note payable - bank 118,023 88,076 70,796 35,630 Clerical costs through Redwood Mortgage Corp. 15,605 17,499 7,638 8,705 Mortgage Servicing Fees 85,904 58,999 54,341 32,586 General Partner asset management fees 7,579 8,219 3,752 4,074 Provision for doubtful accounts and losses on real estate acquired through foreclosure 212,713 185,091 131,182 111,693 Professional Services 19,621 18,350 (1,312) 1,408 Printing, supplies and postage 7,661 6,271 4,197 3,373 Other 4,043 4,408 747 500 ------------ ------------- ------------- ------------ 471,149 386,913 271,341 197,969 ------------ ------------- ------------- ------------- Net income $447,611 $406,545 $227,066 $202,889 ============ ============== ============= ============ Net income: to General Partners (1%) $4,476 $4,065 $2,271 $2,029 Net income: to Limited Partners (99%) 443,135 402,480 224,795 200,860 ------------- ============= ============= ============ $447,611 $406,545 $227,066 $202,889 ============= ============== ============= ============ Net income per $1000 invested by Limited Partners for entire period: - where income is reinvested and compounded $37.11 $31.00 $18.84 $15.49 ------------- -------------- ------------- ------------- - where partner receives income in monthly $36.55 $30.61 $18.72 $15.41 distributions ------------- -------------- ------------- ------------- See accompanying notes to Financial Statements
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (audited) AND THE SIX MONTHS ENDED JUNE 30, 1999 (unaudited) PARTNERS' CAPITAL --------------------------------------------------------------------------- LIMITED PARTNERS' CAPITAL --------------------------------------------------------------------------- Capital Account Unallocated Formation Limited Syndication Loan Partners Costs Receivable Total -------------- --------------- --------------- -------------- Balances at December 31, 1995 $14,216,032 ($13,588) ($517,051) $13,685,393 Formation Loan collections 0 0 62,225 62,225 Net income 850,508 0 0 850,508 Allocation of syndication costs (13,588) 13,588 0 0 Early withdrawal penalties (37,345) 0 25,663 (11,682) Partners' withdrawals (1,013,078) 0 0 (1,013,078) -------------- --------------- --------------- -------------- Balances at December 31, 1996 $14,002,529 $0 ($429,163) $13,573,366 Formation Loan collections 0 0 60,223 60,223 Net Income 818,610 0 0 818,610 Early withdrawal penalties (40,258) 0 27,665 (12,593) Partners' withdrawals (1,572,037) 0 0 (1,572,037) -------------- --------------- --------------- -------------- Balances at December 31, 1997 $13,208,844 $0 ($341,275) $12,867,569 Formation Loan collections 0 0 66,908 66,908 Net Income 838,105 0 0 838,105 Early withdrawal penalties (30,529) 0 20,980 (9,549) Partners' withdrawals (1,826,304) 0 0 (1,826,304) -------------- --------------- --------------- -------------- Balances at December 31, 1998 $12,190,116 $0 ($253,387) $11,936,729 Formation Loan collections 0 0 37,369 37,369 Net Income 443,135 0 0 443,135 Early withdrawal penalties (9,568) 0 6,575 (2,993) Partners' withdrawals (941,737) 0 0 (941,737) -------------- --------------- --------------- -------------- Balances at June 30, 1999 $11,681,946 $0 ($209,443) $11,472,503 ============== =============== =============== ============== See accompanying notes to financial statements
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (audited) AND THE SIX MONTHS ENDED JUNE 30, 1999 (unaudited) PARTNERS' CAPITAL ------------------------------------------------------------------------------ GENERAL PARTNERS' CAPITAL ---------------------------------------------------------- Capital Account Unallocated Total General Partners Syndication Costs Partners' Total Capital ------------------ ------------------- ------------ ---------------- Balances at December 31, 1995 $11,978 $(137) $11,841 $13,697,234 Formation Loan collections 0 0 0 62,225 Net income 8,591 0 8,591 859,099 Allocation of syndication costs (137) 137 0 0 Early withdrawal penalties 0 0 0 (11,682) Partners' withdrawals (8,454) 0 (8,454) (1,021,532) ------------------ ------------------- ------------ ---------------- Balances at December 31, 1996 $11,978 $0 $11,978 $13,585,344 Formation Loan collections 0 0 0 60,223 Net income 8,269 0 8,269 826,879 Early withdrawal penalties 0 0 0 (12,593) Partners' withdrawals (8,269) 0 (8,269) (1,580,306) ------------------ ------------------- ------------ ---------------- Balances at December 31, 1997 $11,978 $0 $11,978 $12,879,547 Formation Loan collections 0 0 0 66,908 Net income 8,466 0 8,466 846,571 Early withdrawal penalties 0 0 0 (9,549) Partners' withdrawals (8,466) 0 (8,466) (1,834,770) ------------------ ------------------- ------------ ---------------- Balances at December 31, 1998 $11,978 $0 $11,978 $11,948,707 Formation Loan collections 0 0 0 37,369 Net income 4,476 0 4,476 447,611 Early withdrawal penalties 0 0 0 (2,993) Partners' withdrawals (4,476) 0 (4,476) (946,213) ------------------ ------------------- ------------ ---------------- Balances at June 30, 1999 $11,978 $0 $11,978 $11,484,481 ================== =================== ============ ================ See accompanying notes to financial statements
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (unaudited) 6 months ended 6 months ended June 30, 1999 June 30, 1998 (unaudited) (unaudited) ----------------- ----------------- Cash flows from operating activities: Net income $447,611 $406,545 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts 126,748 255,896 Provision for losses on real estate held for sale 85,965 0 Early withdrawal penalty credited to income (2,993) (4,958) (Increase) decrease in accrued interest & advances 245,174 125,826 Increase (decrease) in accounts payable and accrued expenses (8,213) 25,528 Increase (decrease) in deferred interest on Mortgage Investments (131,743) (69,316) ----------------- ----------------- Net cash provided by operating activities 762,549 739,521 ----------------- ----------------- Cash flows from investing activities: Principal collected on mortgage investments 3,426,176 3,344,181 Mortgage Investments made (5,001,718) (2,654,729) Additions to Real Estate held for sale (3,535) (24,447) Dispositions of real estate held for sale 42,879 310,227 Investment in partnership 0 346,017 Accounts receivable - Unsecured (Interest and proceeds) (625) 362 ----------------- ----------------- Net cash provided by (used in) investing activities (1,536,823) 1,321,611 ----------------- ----------------- Cash flows from financing activities: Increase (decrease) in note payable-bank 1,587,337 (909,153) Formation loan collections 37,369 33,404 Partners withdrawals (946,213) (858,782) ----------------- ----------------- Net cash provided by (used in) financing activities 678,493 (1,734,531) ----------------- ----------------- Net increase (decrease) in cash (95,781) 326,601 Cash - beginning of period 461,544 520,837 ----------------- ----------------- Cash - end of period $365,763 $847,438 ================= ================= See accompanying notes to financial statements.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND JUNE 30, 1999 (unaudited) NOTE 1 - ORGANIZATION AND GENERAL Redwood Mortgage Investors VII, (the "Partnership") is a California Limited Partnership, of which the General Partners are D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation owned and operated by the individual General Partners. The Partnership was organized to engage in business as a mortgage lender for the primary purpose of making Mortgage Investments secured by Deeds of Trust on California real estate. Mortgage Investments are being arranged and serviced by Redwood Mortgage Corp., an affiliate of the General Partners. At September 30, 1992, the offering had been closed with contributed capital totaling $11,998,359 for limited partners. A minimum of 2,500 units ($250,000) and a maximum of 120,000 units ($12,000,000) were offered through qualified broker-dealers. As Mortgage Investments were identified, partners were transferred from applicant status to admitted partners participating in Mortgage Investment operations. Each month's income is allocated to partners based upon their proportionate share of partners' capital. Some partners have elected to withdraw income on a monthly, quarterly or annual basis. A. Sales Commissions - Formation Loan Sales commissions ranging from 0% (Units sold by General Partners) to 10% of the gross proceeds were paid by Redwood Mortgage, an affiliate of the General Partners that arranges and services the Mortgage Investments. To finance the sales commissions, the Partnership was authorized to loan to Redwood Mortgage Corp., an amount not to exceed 8.3% of the gross proceeds provided that the Formation Loan for the minimum offering period could be 10% of the gross proceeds for that period. The Formation Loan is unsecured and is being repaid, without interest, in installments of principal, over a ten year period commencing January 1, 1992. At December 31, 1992, Redwood Mortgage Corp. had borrowed $914,369 from the Partnership to cover sales commissions relating to $11,998,359 Limited Partner contributions (7.62%). Through June 30, 1999, $704,926 including $130,698 in early withdrawal penalties, had been repaid leaving a balance of $209,443. The Formation Loan, which is due from an affiliate of the General Partners', has been deducted from Limited Partners' capital in the balance sheet. As amounts are collected from Redwood Mortgage Corp., the deduction from capital will be reduced. B. Other Organizational and Offering Expenses Organizational and offering expenses, other than sales commissions, (including printing costs, attorney and accountant fees, and other costs), were paid by the Partnership. Such costs were limited to 10% of the gross proceeds of the offering or $500,000 whichever was less. The General Partners were to pay any amount of such expenses in excess of 10% of the gross proceeds or $500,000. Organization costs of $10,102 and syndication costs of $415,692 were incurred by the Partnership. The sum of organization and syndication costs, $425,794, approximated 3.55% of the gross proceeds contributed by the Partners. Both the Organization and Syndication Costs have been fully amortized and allocated to the Partners. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND JUNE 30, 1999 (unaudited) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Accrual Basis Revenues and expenses are accounted for on the accrual basis of accounting wherein income is recognized as earned and expenses are recognized as incurred. Once a Mortgage Investment is categorized as impaired, interest is no longer accrued thereon. B. Management Estimates In preparing the financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the related periods. Such estimates relate principally to the determination of the allowance for doubtful accounts, including the valuation of impaired mortgage investments, and the valuation of real estate acquired through foreclosure. Actual results could differ significantly from these estimates. C. Mortgage Investments, Secured by Deeds of Trust The Partnership has both the intent and ability to hold the Mortgage Investments to maturity, i.e., held for long-term investment. They are therefore valued at cost for financial statement purposes with interest thereon being accrued by the simple interest method. Financial Accounting Standards Board Statements (SFAS) 114 and 118 (effective January 1, 1995) provide that if the probable ultimate recovery of the carrying amount of a mortgage investment, with due consideration for the fair value of collateral, is less than the recorded investment, and related amount due and the impairment is considered to be other than temporary, the carrying amount of the investment (cost) shall be reduced to the present value of future cash flows. The adoption of these statements did not have a material effect on the financial statements of the Partnership because that was the valuation method previously used on impaired Mortgage Investments. At June 30, 1999 and at December 31, 1998, and 1997, reductions in the cost of Mortgage Investments categorized as impaired by the Partnership totalled $38,634, $38,634, and $0 respectively. The reduction in stated value was accomplished by increasing the allowance for doubtful accounts. As presented in Note 10 to the financial statements as of June 30, 1999, the average mortgage investment to appraised value of security at the time the Mortgage Investments were consummated was 62.87%. When a Mortgage Investment is valued for impairment purposes, an updating is made in the valuation of collateral security. However, such a low loan to value ratio tends to minimize reductions for impairment. D. Cash and Cash Equivalents For purposes of the statements of cash flows, cash and cash equivalents include interest bearing and non-interest bearing bank deposits. E. Real Estate Owned, Held for Sale Real estate owned, held for sale, includes real estate acquired through foreclosure, and is stated at the lower of the recorded investment in the property, net of any senior indebtedness, or at the property's estimated fair value, less estimated costs to sell. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND JUNE 30, 1999 (unaudited) The following schedule reflects the costs of real estate acquired through foreclosure and the recorded reductions to estimated fair values, less estimated costs to sell as of June 30,1999, and December 31, 1998 and 1997: June 30, December 31, December 31, 1999 1998 1997 ------------ ------------- ------------- Costs of properties $625,198 $765,986 $906,499 Reduction in value (267,146) (348,590) (219,360) REO prior lien 0 (20,000) 0 ------------ ------------- ------------- Fair value reflected in financial statements $358,052 $397,396 $687,139 ------------ ------------- ------------- Effective January 1, 1996, the Partnership adopted the provisions of statement No 121 (SFAS 121) of the Financial Accounting Standards Board, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be disposed of" The adoption of SFAS 121 did not have a material impact on the Partnership's financial position because the methods indicated were essentially those previously used by the Partnership. F. Investment in Partnership (see note 5) G. Income Taxes No provision for Federal and State income taxes is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply. H. Organization and Syndication Costs The Partnership bears its own organization and syndication costs (other than certain sales commissions and fees described above) including legal and accounting expenses, printing costs, selling expenses, a 1% wholesale brokerage fee and filing fees. Organizational costs of $10,102 were capitalized and were amortized over a five year period. Syndication costs of $415,692 were charged against partners' capital and were allocated to individual partners consistent with the Partnership Agreement. I. Allowance for Doubtful Accounts Mortgage Investments and the related accrued interest, fees and advances are analyzed on a continuous basis for recoverability. Delinquencies are identified and followed as part of the Mortgage Investment system. A provision is made for doubtful accounts to adjust the allowance for doubtful accounts to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable accounts receivable, including impaired mortgage investments, other mortgage investments, accrued interest and advances on mortgage investments, and other accounts receivable (unsecured). The composition of the allowance for doubtful accounts as of June 30, 1999, and December 31, 1998, and 1997 was as follows: REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND JUNE 30, 1999 (unaudited) June 30, December 31, December 31, 1999 1998 1997 ------------- ------------- ----------- Impaired Mortgage Investments $38,634 $38,634 $0 Other Mortgage Investments 819,012 606,299 284,738 Accounts receivable, unsecured 142,109 142,109 140,000 ============= ============= =========== $999,755 $787,042 $424,738 ============= ============= =========== J. 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 actual amounts allocated to Limited Partners who have their investment throughout the period and have elected to either leave their earnings to compound or have elected to receive monthly distributions of their net income. Individual income is allocated each month based on the Limited partners' pro rata share of Partners' Capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or select other options. However, the net income per $1,000 average invested has approximated those reflected for those whose investments and options have remained constant. NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES The following are commissions and/or fees which are paid to the General Partners and/or related parties. A. Mortgage Brokerage Commissions Redwood Mortgage Corp. receives mortgage brokerage commissions for services in connection with the review, selection, evaluation, negotiation and extension of Mortgage Investments in an amount up to 12% of the principal through the period ending 6 months after the termination date of the offering. Thereafter, commissions are limited to an amount not to exceed 4% of the total Partnership assets per year. Such commissions are paid by the borrowers, and thus, not an expense of the Partnership. B. Mortgage Servicing Fees Redwood Mortgage Corp. also receives monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal, or such lesser amount as is reasonable and customary in the geographic area where the property securing the Mortgage Investment is located. Mortgage servicing fees of $85,904, $83,559, and $97,267 were incurred for six months through June 30, 1999 and for years 1998 and 1997, respectively. C. Asset Management Fee The General Partners receive a monthly fee for managing the Partnership's Mortgage Investment portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8 of 1% annual). No management fees were incurred for year 1997. For six months through June 30, 1999, and for the year ended December 31, 1998, management fees of $7,579 and $16,141, respectively, were paid to the General Partners. D. Other Fees The Partnership Agreement provides for other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to parties related to the General Partners. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND JUNE 30, 1999 (unaudited) E. Income and Losses All income is credited or charged to partners in relation to their respective partnership interests. The partnership interest of the General Partners (combined) is a total of 1%. F. Operating Expenses The General Partners or their affiliate (Redwood Mortgage Corp.) are reimbursed by the Partnership for all operating expenses actually incurred by them on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and legal fees and expenses, postage and preparation of reports to Limited Partners. Such reimbursements are reflected as expenses in the Statements of Income. G. General Partners Contributions The General Partners collectively or severally were to contribute 1/10 of 1% in cash contributions as proceeds from the offering were admitted to limited Partner capital. As of December 31, 1992 a General Partner, GYMNO Corporation, had contributed $11,998, 1/10 of 1% of limited partner contributions in accordance with Section 4.02(a) of the Partnership Agreement. NOTE 4 - OTHER PARTNERSHIP PROVISIONS A. Applicant Status Subscription funds received from purchasers of units were not admitted to the Partnership until appropriate lending opportunities were available. During the period prior to the time of admission, which ranged between 1-120 days, purchasers' subscriptions remained irrevocable and earned interest at money market rates, which were lower than the return on the Partnership's Mortgage Investment portfolio. Interest earned prior to admission was credited to partners in applicant status. As Mortgage Investments were made and partners were transferred to regular status to begin sharing in income from Mortgage Investments secured by deeds of trust, the interest credited was either paid to the investors or transferred to Partners' Capital along with the original investment. B. Term of the Partnership The term of the Partnership is approximately 40 years, unless sooner terminated as provided. The provisions provide for no capital withdrawal for the first five years, subject to the penalty provision set forth in (E) below. Thereafter, investors have the right to withdraw over a five-year period, or longer. C. Election to Receive Monthly, Quarterly or Annual Distributions Upon subscriptions, investors elected either to receive monthly, quarterly or annual distributions of earnings allocations, or to allow earnings to compound for at least a period of 5 years. D. Profits and Losses Profits and losses are allocated among the Limited Partners in proportion to their respective capital accounts after 1% is allocated to the General Partners. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND JUNE 30, 1999 (unaudited) E. Liquidity, Capital Withdrawals and Early Withdrawals There are substantial restrictions on transferability of Units and accordingly an investment in the Partnership is illiquid. Limited Partners had 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 which in all instances had accrued as of June 30, 1999. In order to provide a certain degree of liquidity to the Limited Partners after the one-year period, Limited Partners may withdraw all or part of their Capital Accounts from the Partnership in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty. The 10% penalty is applicable to the amount withdrawn as stated in the Notice of Withdrawal and will be deducted from the Capital Account and the balance distributed in four quarterly installments. Withdrawal after the one-year holding period and before the five-year holding period was permitted only upon the terms set forth above. Limited Partners also have the right after five years from the date of purchase of the Units to withdraw from the partnership on an installment basis, generally over a five year period in twenty (20) quarterly installments or longer. Once this five year period expires, no penalty will be imposed if withdrawal is made in twenty (20) quarterly installments or longer. Notwithstanding the five-year (or longer) withdrawal period, the General Partners will liquidate all or part of a Limited 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, subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn pursuant to the five-year (or longer) withdrawal period. The Partnership will not establish a reserve from which to fund withdrawals and, accordingly, the 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. F. Guaranteed Interest Rate For Offering Period During the period commencing with the day a Limited Partner was admitted to the Partnership and ending 3 months after the offering termination date, the General partners guaranteed an interest rate equal to the greater of actual earnings from mortgage operations or 2% above The Weighted Average cost of Funds Index for the Eleventh District Savings Institutions (Savings & Loan & Thrift Institutions) as computed by the Federal Home Loan Bank of San Francisco monthly, up to a maximum interest rate of 12%. The guarantee amounted to $12,855 and $5,195 in 1990 and 1991, respectively. In 1992 and 1993, actual realization exceeded the guaranteed amount each month. Beginning with fiscal years after 1993, the guarantee no longer applies. NOTE 5 - INVESTMENT IN PARTNERSHIP The Partnership's interest in land located in East Palo Alto, CA., was acquired through foreclosure. The Partnership's interest was invested with that of two other Partnerships. The Partnerships had been attempting to develop the property into single family residences. Significant community resistance, as well as environmental, and fish and wildlife concerns affected efforts to obtain the required approvals. The Partnership, in resolving disputes which arose during the course of the Partnership's attempt to obtain entitlements to develop the property, entered into agreements on May 8, 1998 with Rhone-Poulanc, Inc. These agreements, among other things, restrict the property to non-residential uses, provide for appropriate indemnifications, and include other consideration including the payment of cash. The Partnership still retains liability for the remediation of pesticide contamination affecting the property. Investigation of remediation options are ongoing. At this time management does not believe that remediation of the pesticide contaminants will have a material adverse effect on the financial condition of the Partnership. As of December 31, 1998, the Partnership had recovered $70,805 in excess of its costs. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND JUNE 30, 1999 (unaudited) NOTE 6 - LEGAL PROCEEDINGS The Partnership is not a sole defendant in any legal actions. However, legal actions against borrowers and other involved parties have been initiated by the Partnership to recover payments against unsecured accounts receivable totalling $243,118 at June 30, 1999. The Partnership, along with numerous others, including a developer, a contractor and other lenders, is named as a defendant in a lawsuit involving the Partnership's attempt to recover its investment in real estate acquired through foreclosure. Management anticipates that the ultimate results of these cases will not have a material adverse effect on the net assets of the Partnership, with due consideration having been given in arriving at the allowance for doubtful accounts. NOTE 7 - NOTE PAYABLE BANK - LINE OF CREDIT The Partnership had a bank line of credit secured by its Mortgage Investment portfolio of up to $3,000,000 at .50% over prime. The balances outstanding as of December 31, 1998, and December 31, 1997 were $1,912,663, and $2,341,816 respectively, and the interest rate was 9.00% (8.50% prime + .50%). This line of credit expired in December, 1998, but was formally extended to March 31, 1999. In 1999 a new line of credit was secured with another institution. The new borrowing limit is $3,500,000, at prime, plus .25% (7.75% + .25% = 8.00%). The balance outstanding as of June 30, 1999 is $3,500,000. NOTE 8 - INCOME TAXES The following reflects a reconciliation from net assets (Partners' Capital) reflected in the financial statements to the tax basis of those net assets: June 30, Dec. 31, Dec. 31, 1999 1998 1997 ------------- ------------ ------------ Net assets - Partners' Capital per financial statements $11,484,481 $11,948,707 $12,879,547 Formation Loan receivable 209,443 253,387 341,275 Allowance for doubtful accounts 999,755 787,042 424,738 ============= ============ ============ Net assets tax basis $12,693,679 $12,989,136 $13,645,560 ============= ============ ============ In 1998, approximately 68% of taxable income was allocated to tax exempt organizations i.e., retirement plans. Such plans do not have to file income tax returns unless their "unrelated business income" exceeds $1,000. Applicable amounts become taxable when distribution is made to participants. 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) The Carrying Value of Mortgage Investments - (see note 2 (c)) is $14,784,728. The June 30, 1999, fair value of these investments of $14,126,669 is estimated based upon projected cash flows discounted at the estimated current interest rates at which similar Mortgage Investments would be made. The applicable amount of the allowance for doubtful accounts along with accrued interest and advances related thereto should also be considered in evaluating the fair value versus the carrying value. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND JUNE 30, 1999 (unaudited) NOTE 10 - ASSET CONCENTRATIONS AND CHARACTERISTICS The Mortgage Investments are secured by recorded deeds of trust. At June 30, 1999, there were 49 Mortgage Investments outstanding with the following characteristics: Number of Mortgage Investments outstanding 49 Total Mortgage Investments outstanding $14,784,728 Average Mortgage Investment outstanding $301,729 Average Mortgage Investment as percent of total 2.04% Average Mortgage Investment as percent of Partners' Capital 2.63% Largest Mortgage Investment outstanding $1,500,000 Largest Mortgage Investment as percent of total 10.15% Largest Mortgage Investment as percent of Partners' Capital 13.06% Number of counties where security is located(all California) 14 Largest percentage of Mortgage Investments in one county 21.13% Average Mortgage Investment to appraised value of security at time Mortgage Investment was consummated 62.87% Number of Mortgage Investments in foreclosure 1 The following categories of mortgage investments are pertinent at June 30, 1999, and December 31, 1998, 1997: June 30 December 31 December 31 --------------- ---------------- ----------------- 1999 1998 1997 --------------- ---------------- ----------------- First Trust Deeds $8,389,924 $8,638,976 $6,810,113 Second Trust Deeds 4,723,217 4,188,401 5,719,369 Third Trust Deeds 1,471,586 181,808 720,258 Fourth Trust Deeds 200,001 200,001 200,001 --------------- ---------------- ----------------- Total mortgage investments 14,784,728 13,209,186 13,449,741 Prior liens due other lenders 15,935,184 12,728,867 17,951,579 ---------------- ----------------- =============== Total debt $30,719,912 $25,938,053 $31,401,320 =============== ================ ================= Appraised property value at time of loan $48,863,974 $42,393,561 $52,077,885 =============== ================ ================= Total investments as a percent of appraisals 62.87% 61.18% 60.30% =============== ================ ================= Investments by Type of Property Owner occupied homes $561,493 $746,334 $1,104,742 Non-Owner occupied homes 1,518,179 1,691,016 1,464,596 Apartments 907,674 897,292 1,666,916 Commercial 11,797,382 9,874,544 9,213,487 =============== ================ ================= $14,784,728 $13,209,186 $13,449,741 =============== ================ =================
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND JUNE 30, 1999 (unaudited) Scheduled maturity dates of mortgage investments as of June 30, 1999, are as follows: Year Ending December 31, ------------------- 1999 $2,471,313 2000 5,370,664 2001 3,884,000 2002 1,596,704 2003 1,139,111 Thereafter 322,936 =============== $14,784,728 =============== The scheduled maturities for 1999 include approximately $1,255,313 in nine mortgage investments which are past maturity at June 30, 1999. Interest payment on most of these Mortgage Investments are current. Seven Mortgage Investments with principal outstanding of $1,281,589 had interest payments overdue in excess of 90 days. Two Mortgage Investments with principal outstanding of $231,966 were considered impaired at June 30, 1999. That is interest accruals are no longer recorded thereon. The cash balance at June 30, 1999 of $365,763 was in three banks with interest bearing balances totalling $331,608. The balances exceeded FDIC insurance limits (up to $100,000 per bank) by $168,845. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On September 30, 1992, the Partnership had sold 119,983.59 units and its contributed capital totaled $11,998,359 of the approved $12,000,000 issue, in units of $100 each. As of that date, the offering was formally closed. At June 30, 1999, Partners' Capital totaled $11,484,481. At June 30, 1999, the Partnership Mortgage Investments outstanding totalled $14,784,728. This represents an increase of $1,575,542 from the 12/31/98 Mortgage Investments balance. This increase in Mortgage Investments outstanding as of 6/30/99 was chiefly due to an increase in Note Payable-Bank of $1,587,337, reinvestment of earnings of $202,227, reduction in real estate owned by $39,344 and investment of cash. The ability of the Partnership to invest in new Mortgage Investments during six months through June 30, 1999, was partially offset by withdrawals of income and capital by the Partners in the amount of $949,033 including early withdrawal penalties. Mortgage Investments increased from $12,036,293 from 1996 to $13,449,741 in 1997, an increase of $1,413,448 chiefly due to the ability of the General Partners to reduce the net amounts invested in real estate owed (REO) during the twelve months, by increasing bank credit line borrowing to $2,341,816 as of December 31, 1997 from $1,175,000 as of December 31, 1996, by reinvesting of earnings of $419,231 and investment of cash. Mortgage Investments decreased slightly, by $346,348, during the year ended December 31, 1996, from $12,382,641 as of December 31, 1995, to $12,036,293 as of December 31, 1996. This Mortgage Investment reduction was due primarily to a reduced usage of the bank line of credit. The Partnership began funding Mortgage Investments on December 27, 1989, and as of June 30, 1999, had credited the Partners accounts with income at an average annualized (compounded) yield of 7.75%. Currently, general mortgage interest rates are lower than those prevalent at the inception of the Partnership. New Mortgage Investments are being originated at these lower interest rates. The result is a reduction of the average return across the entire portfolio held by the Partnership. In the future, interest rates likely will change from their current levels. The General Partners cannot at this time predict at what levels interest rates will be in the future. The General Partners believe the rates charged by the Partnership to its borrowers will change significantly from the beginning of 1999 over the next twelve months. As of June 30, 1999 the Partnership Real Estate Owned account and the investment in Partnership account have been reduced to $358,052 and $0, respectively. These accounts had combined balances of $397,396, $1,033,156 and $1,710,739 for the years ended December 31, 1998 and 1997, and 1996, respectively. The conversion of these non-earning assets to income producing assets will generate increased income. The overall effect of these developments will allow the Partnership to increase the annualized yields paid by the Partnership in future quarters. The General Partners anticipate that the annualized yield for the year, 1999, will be higher than the previous year. The Partnership had a line of credit with a commercial bank secured by its Mortgage Investments to a limit of $3,000,000, at a variable interest rate set at one half percent above the prime rate. As of December 31, 1998, it had borrowed $1,912,663. This line of credit expired on March 31, 1999. The Partnership has successfully negotiated for a replacement line of credit, effective January, 1999, with another institution for a limit of $3,500,000 at prime plus .25% (7.75% + .25% = 8%). This added source of funds helped in maximizing the Partnership yield by allowing the Partnership to minimize the amount of funds in lower yield investment accounts when appropriate Mortgage Investments are not currently available. Since most of the Mortgage Investments made by the Partnership bear interest at a rate in excess of the rate payable to the bank which extended the line of credit, once the required principal and interest payments on the line of credit are paid to the bank, the Mortgage Investments funded using the line of credit generate revenue for the Partnership. As of June 30, 1999, the Partnership is current with its interest payments on the line of credit. In 1996, interest payments decreased to $127,454 reflecting the Partnership's overall smaller average outstanding credit line balance due primarily to a large number of Mortgage Investment payoffs. For the years ended December 31, 1997 and 1998, interest paid was $198,316 and $170,867 respectively, reflecting an overall greater average utilization of the credit line from the previous three years. The Partnership's income and expenses, accruals and delinquencies are within the normal range of the General Partners' expectations, based upon their experience in managing similar partnerships over the last twenty-two years. Mortgage Servicing Fees decreased from $97,267 in 1996, to $83,559 in 1997, primarily due to timing of receipt of payments from borrowers and actual payment of the Mortgage Servicing Fee. Mortgage Servicing Fees increased in 1998 to $128,493 from $83,559 in 1997 chiefly due to an increase during the 1998 year of the monthly loan service fee to 1/12% (1% per year). For six months through June 30, 1999, Mortgage Servicing Fees incurred were $85,904. Asset Management Fees increased from $0 in 1997 and $0 in 1996 to $16,141 in 1998. Asset Management Fees for six months under review were $7,579. All other expenses fluctuated in a very close range except for Interest on Note Payable - bank and Provision for Doubtful Accounts and losses on Real Estate acquired through foreclosure each discussed elsewhere in this Management Discussion and Analysis of Financial Condition and Results of Operations. 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 June 30, 1999, there was one property in foreclosure. Cash is constantly being generated from interest earnings, late charges, pre-payment penalties, amortization of Mortgage Investments and pay-off on notes. Currently, cash flow exceeds Partnership expenses, earnings and capital payout requirements. Excess cash flow will be invested in new Mortgage Investment opportunities when available, used to reduce the Partnership credit line or other Partnership business. The General Partners regularly review the Mortgage Investment portfolio, examining the status of delinquencies, the underlying collateral securing these properties, the REO expenses and sales activities, borrowers payment records, etc. Data on the local real estate market and on the national and local economy are studied. Based upon this information and other data, loss reserves are increased or decreased. Because of the number of variables involved, the magnitude of the possible swings and the General Partners inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the General Partners. Management provided $419,437, $434,495 and $423,054 as provision for doubtful accounts for the years ended December 31, 1996, 1997 and 1998, respectively. During six months through June 30, 1999, the Partnership provided $212,713 for doubtful accounts. The provision for doubtful account was increased by $15,058 in 1997, to $434,495 as the selling of REO accumulated primarily in the California recession of the early to mid 1990's netted less proceeds than originally anticipated and the General Partners further refinement of anticipated sales proceeds on remaining REO, collections of unsecured receivables, and additional provisions for unspecified losses. The provision for doubtful accounts was decreased by $11,441 to $423,054 in 1998. This decrease reflected reduced expected REO anticipated losses and improved collections of secured and unsecured receivables. The May 1999 issue of "Economic Advisory Council", published by the California Chamber of Commerce, said the following about the California economy: "The state's economy continued to grow at a solid pace in early 1999 and, despite a few areas of emerging weakness, will have another above average year in 1999. Last year, payroll employment rose 3.6 percent - the biggest annual gain of the 1990's. This year, it looks like employment will be up an impressive 3 percent to 3.5 percent. The better-than-expected situation results from three main factors:" "First, the Asian economic and financial crisis didn't hit California's economy as badly as feared and now appears to be stabilizing or even turning up." "Second, the U.S. economy has been stronger than had been expected. It expanded at about a 4 percent rate in 1998 in real terms and continued to maintain good momentum into 1999." "Third, after some volatility, the financial markets continued to perform well, which gave a high level of confidence on which to base buying and investment decisions. Given that confidence, consumers and business continued to buy and invest." "One measure of the strong growth within the state is that payroll tax withholding was 14.5 percent higher in the first quarter of 1999 than it was four quarters ago. That very large gain is reflective of the strong labor markets, good profitability that fed bonuses and big gains in equities markets that were realized through stock options." "Within the state, growth varies by regions." "The southern metropolitan areas (San Diego, Orange, Riverside and San Bernardino counties) were very strong in 1998. Weakness in aerospace will be a negative influence, but booming construction should be a major stimulus." "Los Angeles continues to expand, but at a slower pace than the state. It is losing some of its apparel manufacturing to lower cost venues." "The San Francisco Bay Area has very tight labor markets and, though the high technology manufacturing is not too strong, the software industry is very robust." High Technology "This key industry is seeing the leading signs of better times. Asia is coming back, in terms of orders, and there is now a year-over-year increase in the value of orders. Those trends are welcome news." "The industry still suffers from excess capacity of production, but the size of the problem is diminishing. The Y2K issue is still driving a higher level of employment and spending and that strength should continue over the year." To the Partnership, the above evaluation of the California economy means an increase in property values, job growth, personal income growth, etc., which all translates into more loan activity, which of course, is healthy for the Partnership' lending activity. The Partnership's interest in land located in East Palo Alto, Ca, was acquired through foreclosure. The Partnership' interest was invested with that of two other Partnerships. The Partnership's basis of $ 0, $346,017 and $242,394 for the years ended December 31, 1998, 1997 and 1996 respectively, has been invested with that of two other Partnerships. The Partnership had been attempting to develop property into an approximately 63 units residential subdivision, (the "Development"). The proposed Development had gained significant public awareness as a result of certain environmental, fish and wildlife, density, and other concerns. Incorporated into the proposed Development were various mitigation measures which included remediation of hazardous material existing on the property, and protection of potentially affected species due to the proximity of the property to the San Francisco Baylands. These issues and others sparked significant public controversy. Opposition against and support for the proposed Development existed. Among those in opposition to the project was Rhone Poulanc, Inc. which is responsible for a nearby hazardous waste site. Rhone Poulanc, Inc. has been identified as the Responsible Party for the Arsenic Contamination which affected a portion of the property. On May 8, 1998, the Partnership, in order to resolve disputes which arose during the course of the attempts to obtain entitlements for this Development, entered into agreements with Rhone-Poulanc, Inc which among other things, restricted the property to non residential uses, provided for appropriate indemnification and included other considerations including a cash payment to the Partnership. The Partnership has retained ownership of the property, which is subject to various deed restrictions, options and or first rights of refusal. The General Partners are pleased with this outcome to the residential development attempt. The General Partners may now explore other available options with respect to alternative uses for the property. In order to pursue these options, rezoning of the property's existing residential zoning classification will be required. The Partnership is continuing to explore remediation options available to mitigate the pesticide contamination, which affects the property. This pesticide contamination appears to be the result of agricultural operations by prior owners, and is unrelated to the Arsenic Contamination for which Rhone-Poulanc, Inc. remains responsible. The General Partners do not believe at this time that remediation of the pesticide contaminants will have a material adverse effect on the financial condition of the Partnership. 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, 1996, December 31, 1997, December 31, 1998, and six months through June 30, 1999, the Partnership made distributions of earnings to Limited Partners after allocation of syndication costs of, $327,887, $399,379, $456,358 and $240,908, respectively. Distribution of Earnings to Limited Partners after allocation of syndication costs for the years ended December 31, 1996, December 31, 1997, December 31, 1998 and six months through June 30, 1999, to Limited Partners' capital accounts and not withdrawn was $522,621, $419,231, $381,747 and $202,227, respectively. As of December 31, 1996, December 31, 1997, December 31, 1998 and six months through June 30, 1999, Limited Partners electing to withdraw earnings represented 36%, 44%, 53%, 54% and 56% 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, 1996, December 31, 1997, December 31, 1998, and six months through June 30, 1999, $412,798, $475,348, $381,458 and $119,294, 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 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, 1996, December 31, 1997, December 31, 1998 and June 30, 1999, respectively and is expected by the General Partners to commonly occur at these levels. Additionally, for the years ended December 31, 1996, December 31, 1997, December 31, 1998 and six months through June 30, 1999, $318,902, $737,568, $1,019,017 and $591,103, 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 which the General Partners then expect a portion of the Limited Partners to avail themselves of. 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, at which time the bulk of those Limited Partners who have sought withdrawal have been liquidated. After year eleven, liquidation generally subsides and the Partnership capital again tends to increase. Actual liquidation of both capital and earnings from year five (1994) through year nine (1998), and six months through June 30, 1999, is shown hereunder: Years ended December 31, 1994 1995 1996 ------------- -------------- -------------- Earnings $263,206 270,760 336,341 Capital* $340,011 184,157 722,536 ------------- ============== ============== Total $603,217 $454,917 $1,058,877 ============== ============== ============== 6 months through 1997 1998 6/30/99 ------------- -------------- -------------- Earnings 399,379 456,358 240,908 Capital* 1,212,916 1,400,475 710,397 ------------- -------------- -------------- Total $1,612,295 $1,856,833 $951,305 ============= ============== ============== * These amounts represent gross of early withdrawal penalties. The Year 2000 will be a challenge for the entire world, with respect to the conversion of existing computerized operations. The Partnership is completing an assessment of Year 2000 hardware and software issues. The hardware issue is fully complete but the software issue is not. The Partnership relies on Redwood Mortgage Corp., an affiliate of the Partnership, and third parties to provide loan and investor services and other computerized functions, affected by Year 2000 computerized operations. Major services provided to the Partnership by these companies are loan servicing, accounting and investor services. The vendors that supply the software for loan servicing is installed and is in compliance with Year 2000 issues. Installation of accounting software that is Year 2000 compliant began and completed during the second quarter of 1999 and will be tested until September 30, 1999. The investor servicing software Year 2000 compliance is still being modified. Existing investor servicing software maintenance agreements provide for conversion to Year 2000 compliance. Additionally, the Partnership has contacted several vendors that provide investor services as a possible alternative to continuing to provide investors services in house. It would appear that these service providers would be more expensive than the current in house systems but they do provide a back-up alternative in the event of our own failure to fully convert. Hardware utilized by Redwood Mortgage Corp., is currently being tested to insure that any modifications necessary to be made prior to Year 2000, can be accomplished. At this juncture, existing hardware appears to be in compliance with Year 2000 issues. Reports are being run parallel to insure accuracy of Year 2000 compliance. This will continue until December, 1999. The costs of updating the various software systems will be borne by the various companies that supply the Partnership with services. Therefore, no significant capital outlays are anticipated and the Partnership expects only incidental costs of conversion for Year 2000 issues. The Partnership is in the business of making Mortgage Investments secured by real estate. The most important factor in making the Mortgage Investments is the value of the real estate security. Year 2000 issues have some potential to affect industries and businesses located in the marketplaces in which the Partnership places its Mortgage Investments. This would only have an effect on the Partnership if Year 2000 issues cause a significant downturn in the northern California economy. In fact, Silicon Valley is located in our marketplace. There may be significant increased demand for Silicon Valley type services and goods as companies make ready for the Year 2000 conversion. Although almost fully developed, if all or any accounting, loan servicing and investor services conversions should fail, the size and scope of the Partnership's activities are such that they could be handled at an equal or higher cost on a manual basis or outsourced to other servicers existing in the industry, while correcting systems problems and are likely to be temporarily in nature. While this would entail some initial set up costs, these costs would likely not be so significant as to have a material effect upon the Partnership. Shifting portions of daily operations to manual or outsourced systems may result in time delays. Time delays in providing accurate and pertinent information could negatively affect customer relations and lead to the potential loss of new loans and Limited Partner investments. The foregoing analysis of Year 2000 issues includes forward-looking statements and predictions about possible or future events, results of operations and financial condition. As such, this analysis may prove to be inaccurate because of the assumptions made by the General Partner or the actual development of future events. No assurance can be given that any of these forward-looking statements and predictions will ultimately prove to be correct or even substantially correct. Various compliances and modifications will come to an actual test upon arrival of Year 2000. Only time will tell whether the transition will be smooth, manageable or otherwise. Various other risks and uncertainties could also affect the Year 2000 analysis causing the effect on the Partnership to be more severe than discussed above. The General Partners Year 2000 compliance testing cannot guarantee that all computer systems will function without error beyond the Year 2000. Risks also exist with respect to Year 2000 compliance by external parties who may have no relationship to the Partnership or the General Partners, but who have a significant relationship with one or more third parties, and may have a system failure that adversely affects the Partnership's ability to conduct business. While the General Partners are attempting to identify such external parties, no assurance can be given that it will be able to do so. Furthermore, third parties with direct relationships with the Partnership, whose systems have been identified as likely to be Year 2000 compliant, may suffer a breakdown due to unforeseen circumstances. It is also possible that the information collected by the General Partners for these third parties regarding their compliance with Year 2000 issues may be incorrect. Finally, it should be noted that the foregoing discussion of Year 2000 issues assumes that to the extent the General Partners systems fail, whether because of unforeseen complications or because of third parties' failure, switching to manual operations will allow the Partnership to continue to conduct its business. While the General Partner believes this assumption to be reasonable, if it is incorrect, the Partnership's results of operations would likely be adversely affected. 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, 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 six months period ended June 30, 1999. All such compensation is in compliance with the guidelines and limitations set forth in the Prospectus. Entity Receiving Description of Compensation and Amount Compensation Services Rendered - -------------------------- ----------------------------------------------------- I. Redwood Mortgage Mortgage Servicing Fee for servicing Corp. Mortgage Investments $85,904 General Partners &/or Affiliate Asset Management Fee for managing assets.........................................$7,579 General Partners 1% interest in profits.........................$4,476 II. FEES PAID BY BORROWERS ON MORTGAGE INVESTMENTS PLACED BY COMPANIES RELATED TO THE GENERAL PARTNERS WITH THE PARTNERSHIP (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP) Redwood Mortgage Mortgage Brokerage Commissions for services in connection Corp. with the review, selection, evaluation, negotiation, and extension of the Mortgage Investments paid by the borrowers and not by the Partnership...............$124,463 Redwood Mortgage Processing and Escrow Fees for services in connection Corp. with notary, document preparation, credit investigation, and escrow fees payable by the borrowers and not by the Partnership..........................................$3,168 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. ....................................................$15,605 MORTGAGE INVESTMENT PORTFOLIO SUMMARY AS OF JUNE 30, 1999 Partnership Highlights Mortgage Investment to Value Ratios First Trust Deeds $8,389,924.44 Appraised Value of Properties * 14,694,134.00 Total Investment as a % of Appraisal 57.10% First Trust Deed Mortgage Investments 8,389,924.44 Second Trust Deed Mortgage Investments 4,723,217.18 Third Trust Deed Mortgage Investments 1,471,585.55 Fourth Trust Deed Mortgage Investments ** 200,001.20 ----------------- $14,784,728.37 First Trust Deeds due other Lenders 13,940,838.00 Second Trust Deeds due other Lenders 1,851,488.00 Third Trust Deeds due other Lenders 142,858.00 ----------------- Total Debt $30,719,912.37 Appraised Property Value * 48,863,974.00 Total Investment as a % of Appraisal 62.87% Number of Mortgage Investments Outstanding 49 Average Investment $301,729.15 Average Investment as a % of Net Assets 2.63% Largest Investment Outstanding 1,500,000.00 Largest Investment as a % of Net Assets 13.06% Loans as a Percentage of Total Mortgage Investments First Trust Deed Mortgage Investments 56.75% Second Trust Deed Mortgage Investments 31.95% Third Trust Deed Mortgage Investments 9.95% Fourth Trust Deed Mortgage Investments 1.35% ---------------- Total 100.00% Mortgage Investments by Type of Property Amount Percent Owner Occupied Homes $561,492.81 3.80% Non Owner Occupied Homes 1,518,179.48 10.27% Apartments 907,674.43 6.14% Commercial 11,797,381.65 79.79% ---------------- ------------------ Total $14,784,728.37 100.00% Statement of Conditions of Mortgage Investments Number of Mortgage Investments in Foreclosure 1 *Values used are the appraisal values utilized at the time the mortgage investment was consummated. Diversification by County County Total Loans Percent Stanislaus $3,124,456.60 21.13% San Mateo 2,706,699.33 18.31% San Francisco 2,500,580.12 16.91% Alameda 1,798,117.99 12.16% Santa Clara 1,712,387.34 11.58% Solano 898,930.76 6.08% Contra Costa 741,759.49 5.02% Marin 724,999.98 4.90% Sonoma 158,800.71 1.07% Sacramento 121,908.46 0.83% Ventura 91,000.00 0.62% Shasta 80,649.70 0.55% Monterey 77,269.33 0.52% Santa Cruz 47,168.56 0.32% ------------------- ----------- Total $14,784,728.37 100.00% ** Redwood Mortgage Investors VII, together with other Redwood Partnerships, holds a second and a fourth trust deed against the secured property. In addition, the principals behind the borrower corporation have given personal guarantees as collateral. The overall loan to value ratio on this loan is 76.52%. Besides the borrower paying a fixed interest rate of 12.25%, the partnership and other lenders will also be entitled to share in profits generated by the corporation with respect to the secured property. The affiliates of the Partnership had entered into previous loan transactions with this borrower which had been concluded successfully, resulting in additional revenue beyond interest payments for the affiliates involved. PART 2 OTHER INFORMATION Item 1. Legal Proceedings None, where the Partnership is a defendant. Please refer to Note 6 of Notes to 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 Not Applicable (b) Form 8-K The registrant has not filed any reports on Form 8-K during the nine month period ending June 30, 1999 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 3rd day of August, 1999. REDWOOD MORTGAGE INVESTORS VII By: /s/ D. Russell Burwell --------------------------------------------- D. Russell Burwell, General Partner By: /s/ Michael R. Burwell --------------------------------------------- Michael R. Burwell, General Partner By: Gymno Corporation, General Partner By: /s/ D. Russell Burwell --------------------------------------------- D. Russell Burwell, President By: /s/ Michael R. Burwell --------------------------------------------- Michael R. Burwell, Secretary/Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity indicated on the 3rd day of August, 1999. Signature Title Date /s/ D. Russell Burwell - ----------------------------- D. Russell Burwell General Partner August 3, 1999 /s/ Michael R. Burwell - ----------------------------- Michael R. Burwell General Partner August 3, 1999 /s/ D. Russell Burwell - ----------------------------- D. Russell Burwell President of Gymno Corporation, August 3, 1999 (Principal Executive Officer); Director of Gymno Corporation /s/ Michael R. Burwell - ----------------------------- Michael R. Burwell Secretary/Treasurer of Gymno August 3, 1999 Corporation (Principal Financial and Accounting Officer); Director of Gymno Corporation EX-27 2 FDS --
5 3-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 365,763 0 15,264,755 999,755 0 0 0 0 14,988,815 0 0 3,504,334 0 0 11,484,481 14,988,815 0 918,760 0 140,413 0 212,713 118,023 447,611 0 447,611 0 0 0 447,611 .00 .00
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