-----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, Jl0PNERLxg3W1bcNI/ekpYV4d5nQ0ZcsVvTZgz6p6APwSly2uafXtV4ywgGcFE1D IjE91LZK50jPFTiCJNKgXQ== 0000854092-03-000002.txt : 20030331 0000854092-03-000002.hdr.sgml : 20030331 20030331163854 ACCESSION NUMBER: 0000854092-03-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19992 FILM NUMBER: 03631362 BUSINESS ADDRESS: STREET 1: 650 EL CAMINO STE G CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 6503655341 MAIL ADDRESS: STREET 1: 650 EL CAMINO REAL STE G CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-K 1 rmi710k2002.txt REDWOOD MORTGAGE INVESTORS VII (a California Limited Partnership) Index to Form 10-K December 31, 2002 Part I Page No. ----------- Item 1 - Business 3 Item 2 - Properties 6 Item 3 - Legal Proceedings 6 Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 6 Part II Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 7 Item 6 - Selected Financial Data 7 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7a - Quantitative and Qualitative Disclosures About Market Risk 15 Item 8 - Financial Statements and Supplementary Data 18 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 39 Part III Item 10 - Directors and Executive Officers of the Registrant 39 Item 11 - Executive Compensation 39 Item 12 - Security Ownership of Certain Beneficial Owners and Management 40 Item 13 - Certain Relationships and Related Transactions 40 Item 14 - Control and Procedures 40 Part IV Item 15 - Exhibits, Financial Statements and Schedules, and Reports on Form 8-K 41 Signatures 42 Certifications 43
1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the year ended December 31, 2002 Commission file number 33-30427 - -------------------------------------------------------------------------------- REDWOOD MORTGAGE INVESTORS VII (Exact name of registrant as specified in its charter) California 94-3094928 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification) incorporation or organization) 900 Veterans Blvd., Suite 500, Redwood City, CA 94063 - -------------------------------------------------------------------------------- (address of principal executive offices) (zip code) Registrant's telephone number including area code (650) 365-5341 - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - -------------------------------------------------------------------------------- None None - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Units Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES XXXX NO - -------------------------- ------------------------- Through December 31, 2002, the limited partnership Units purchased by non-affiliates was 119,983.59 Units computed at $100.00 a Unit for $11,998,359. The offering was closed on September 30, 1992. Documents incorporated by reference: Portions of the Prospectus dated October 20, 1989, and Supplement #5 dated February 14, 1992, filed on form S-11, are incorporated in Parts II, III, and IV. Exhibits filed as part of Form S-11 Registration Statement #33-30427 are incorporated in part IV. 2 Part I Item 1 - Business Redwood Mortgage Investors VII, a California limited partnership (the "Partnership"), was organized in 1989 of which Michael R. Burwell and Gymno Corporation, a California corporation, are the general partners. The address of the Partnership and the general partners is 900 Veterans Blvd., Suite 500, Redwood City, California 94063. The Partnership is organized to engage in business as a mortgage lender, for the primary purpose of making loans secured by deeds of trust on California real estate. Loans are arranged and serviced by Redwood Mortgage Corp., an affiliate of the general partners. The Partnership's objectives are to make investments, as referred to above, which will: (i) provide the maximum possible cash returns which limited partners may elect to (a) receive as monthly, quarterly or annual cash distributions or (b) have credited to their capital accounts and applied to Partnership activities; and (ii) preserve and protect the Partnership's capital. The Partnership's general business is more fully described under the section entitled "Investment Objectives and Criteria" pages 26-31 of the Prospectus, which is incorporated by reference. Originally, 60,000 Units were offered on a "best efforts" basis through broker/dealer member firms of the National Association of Security Dealers, Inc. In accordance with the terms of the Prospectus, the general partners increased the number of Units for sale from 60,000 to 120,000 and elected to continue the offering until September 30, 1992. The offering closed on September 30, 1992, and the limited partners contributed capital totaled $11,998,359 of an approved $12,000,000 issue, in Units of $100 each. At that date all the applicants had been admitted into the Partnership with none left in the applicant status. The final SR report (Report of Sales of Securities and use of proceeds therefrom) was filed on September 21, 1992. The Partnership began selling Units in October 1989 and began investing in mortgages in December 1989. At December 31, 2002, the Partnership had a balance in its secured loans portfolio totaling $6,423,984 with interest rates thereon ranging from 6.125% to 13.00%. Currently, loans secured by First Trust Deeds comprise 50.90% of the amount of funds in the secured loan portfolio followed by Second Trust Deeds of 45.76% and Third Trust Deeds of 3.34%. Owner-occupied homes combined with non-owner occupied homes total 25.10% of the secured loans. Commercial loans origination decreased from last year, now comprising 63.87% of the secured portfolio, a decrease of 1.31%. Loans to apartments totaled 11.03%. Of the total secured loans, 52.18% are in six counties of the Bay Area. The County of Stanislaus makes up 41.38% of the loans. Stanislaus County is an adjacent county to the San Francisco Bay Area, located approximately 65 miles from San Francisco. The balance of loans are primarily in Northern California. Loan size decreased the past year, and is now averaging $256,959 per loan, a decrease of $23,352. Some of the larger loans invested in by the Partnership are fractionalized between other affiliated partnerships with objectives similar to those of the Partnership to further reduce risk. Average equity per loan transaction, which is our loan plus any senior loans, divided by the property's appraised value, subtracted from 100%, stood at 34.14%. A 40% equity average on loan origination is generally considered very conservative. Generally, the more equity, the more protection for the lender. The Partnership's loan portfolio is in good condition with two properties in foreclosure as of December 2002. Delinquencies are discussed under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. During the year the Partnership acquired one piece of real estate property through foreclosure. To protect its own assets and reduce liability, it subsequently transferred the title to a newly formed LLC, Stockton Street Property Company, LLC. The Partnership owns a minority interest of 34% together with another partnership, an affiliate of the general partners, the other investor in the foreclosed loan, who owns the majority interest of 66% and participated in the original loan. The LLC is further discussed under Notes to Financial Statements (Note 6). 3 Competition and General Economic Conditions The Partnership's major competitors in providing mortgage loans are banks, savings and loan associates, thrifts, conduit lenders, mortgage brokers, and other entities both larger and smaller than the Partnership. The Partnership is competitive in large part because the general partners generate all of their loans. The general partners have been in the business of making or investing in mortgage loans in Northern California since 1978 and have developed a quality reputation and recognition within the field. Mortgage interest rates have fallen during the last 18 to 24 months. This has been partially due to actions by the Federal Reserve Bank to reduce the discount rate on borrowings charged to member banks, a slowing economy and low rates of inflation. Although the general trend for interest rates has been down, many lenders have tightened their credit and reduced their lending exposure in various markets and property types. This credit tightening from competing lenders would generally provide the Partnership with additional lending opportunities at attractive interest rates. However, as a result of the slowing economy, there are now fewer transactions in the marketplace, which could potentially reduce the number of lending opportunities to the Partnership. Continued rate reductions by the Federal Reserve Bank, a continued slowing economy, and a continued low threat of inflation could have the effect of reducing mortgage yields in the future. Current loans with relatively high yields could be replaced with loans with lower yields, which in turn could reduce the net yield paid to the limited partners. In addition, if there is less demand by borrowers for loans and, thus, fewer loans for the Partnership to invest in, it will invest its excess cash in shorter-term alternative investments yielding considerably less than the current investment portfolio. Loan Portfolio A summary of the Partnership's secured loan portfolio as of December 31, 2002 is set forth below. Secured Loans as a Percentage of Appraised Values First Trust Deeds $3,269,897 Appraised Value of Properties 4,618,205 ---------------- Total Investment as a % of Appraisal 70.80% ================ First Trust Deeds $3,269,897 Second Trust Deed Loans 2,939,753 Third Trust Deed Loans 214,334 ---------------- 6,423,984 Priority positions due other Lenders First Trust Deeds due other Lenders 4,097,086 Second Trust Deeds due other Lenders 1,378,639 ---------------- Total Debt $11,899,709 ================ Appraised Property Value $18,069,602 Total Investments as a % of Appraisal 65.86% ================ Number of Secured Loans Outstanding 25 Average Investment 256,959 Average Investment as a % of Loans Outstanding 4.00% Largest Investment Outstanding 1,000,000 Largest Investment as a % of Loans Outstanding 15.57% Secured Loans as a Percentage of Total Loans Percent ---------------------------------------------------- ------------- First Trust Deeds 50.90% Second Trust Deeds 45.76% Third Trust Deeds 3.34% ------------- Total 100.00% 4 Secured Loans as a Percentage of Appraised Values (continued) Secured Loans by Type of Property Amount Percent ----------------------------------------- --------------- ------------- Owner Occupied Homes $1,037,474 16.15% Non-Owner Occupied Homes 575,051 8.95% Apartments 608,648 11.03% Commercial 4,202,811 63.87% --------------- ------------- Total $6,423,984 100.00 % =============== ============= The following is a distribution of secured loans outstanding as of December 31, 2002 by Counties. Total Mortgage County Investments Percent --------------------------------- ----------------- ---------------- Stanislaus $2,658,350 41.38% Alameda 891,400 13.88% San Mateo 842,474 13.11% Santa Clara 776,883 12.09% San Francisco 511,932 7.97% Sacramento 224,166 3.49% Marin 195,000 3.03% Contra Costa 134,879 2.10% San Joaquin 100,000 1.56% Shasta 77,485 1.21% Sonoma 11,415 0.18% ----------------- ---------------- Total $6,423,984 100.00% ================= ================ Statement of Condition of Loans: Number of Loans in Foreclosure 2 Scheduled maturity dates of secured loans as of December 31, 2002 are as follows: Year Ending December 31, Amount ------------------- ----------------- 2003 $3,095,300 2004 1,014,056 2005 40,125 2006 96,716 2007 1,662,819 Thereafter 514,968 ----------------- Total $6,423,984 ================= 5 The scheduled maturities for 2003 include seven loans totaling approximately $2,401,294 past maturity at December 31, 2002. This represents 37.38% of the secured loan portfolio. Interest payments on 6 of these loans totaling $2,266,414 were categorized as delinquent over 90 days, which represents 35.28% of the Partnership's secured loan portfolio. Four of these loans were made to a developer who is in the process of selling part of his property. By the middle of 2003 the Partnership expects to receive the sale proceeds and at that time, depending on the magnitude of the proceeds, all loans will either be brought current or paid off. Several other borrowers were in process of refinancing their loans through other institutions, as this was an opportune time for them to do so and take advantage of the lower interest rate. Additionally, the Partnership allows borrowers to occasionally continue to make the payments on debt past maturity for periods of time. The Partnership, in most instances, receives the benefit of a higher interest rate than would otherwise be available in the currently existing loan marketplace. Overall, the loan portfolio had ten loans with principal outstanding of $3,009,927 where interest payments were overdue in excess of 90 days. The principal outstanding represents 46.85% of the Partnership's portfolio as of December 31, 2002. In addition, one loan with principal outstanding of $96,716 was considered impaired at December 31, 2002. That is, interest accruals are no longer recorded thereon. This represents 1.51% of the total loan portfolio. Item 2 - Properties During 2002, the Partnership acquired the real estate security on one of its loans through foreclosure with another partnership, an affiliate of the general partners. It subsequently transferred its interest in the property to a newly formed LLC. The real estate security was seven condominium units. In order to sell these units, the Partnership was required to obtain a "White Report" from the Department of Real Estate. That report was obtained in February, 2003. Two of the condominiums were listed for sale in March, 2003. One of the seven units will require renovations estimated to cost approximately $230,000 and that work has currently commenced. The general partners have visited the property with real estate professionals, reviewed the appraisal and concluded that the collateral appears adequate to cover the collection of sums due. The Partnership's net investment at December 31, 2002 was $1,212,722. The Partnership also owns (through foreclosure) two other properties; a commercial property and the other land. The land is located in East Palo Alto. The land is owned with two other affiliated partnerships. The Partnership's net investment at December 31, 2002 is $62,733. Currently there is not an active market for land sale. The Partnership's net investment of $62,733 is less than 1% of Partnership assets. The general partners are offering the property for sale but there has been little activity, although some negotiations have ensued. The general partners believe that the property is worth considerably more than its net investment. Our final property is a commercial property located in Walnut Creek, California. The property is currently for sale. Management has set aside loss reserves, which they believe are adequate in amount to cover anticipated losses. Item 3 - Legal Proceedings In the normal course of business the Partnership may become involved in various types of legal proceedings such as assignments of rents, bankruptcy proceedings, appointments of receivers, unlawful detainers, judicial foreclosures, etc., to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes or to protect or recoup its investment from the real property secured by the deeds. As of the date hereof, the Partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business. Item 4 - Submission of Matters to a Vote of Security Holders (Partners) No matters have been submitted to a vote of the Partnership. 6 Part II Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 120,000 Units at $100 each (minimum 20 Units) were offered through broker-dealer member firms of the National Association of Securities Dealers on a "best efforts" basis (as indicated in Part I item 1). Investors have the option of withdrawing earnings on a monthly, quarterly, or annual basis or reinvesting and compounding the earnings. Limited partners may withdraw from the Partnership in accordance with the terms of the Partnership Agreement subject to possible early withdrawal penalties. There is no established public trading market. A description of the Partnership Units, transfer restrictions and withdrawal provisions is more fully described under the section entitled "Description of Units" and "Summary of Limited Partnership Agreement", pages 47 to 50 of the Prospectus, a part of the referenced Registration Statement, which is incorporated by reference. Item 6 - Selected Financial Data Redwood Mortgage Investors VII began operations in December 1989. Financial condition and results of operation for the Partnership for five years to December 31, 2002 were: Balance Sheets Assets December 31, ---------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------- --------------- -------------- -------------- --------------- Cash $1,057,845 $ 389,844 $ 269,000 $ 388,770 $ 461,544 Loans Loans, secured by deeds of trust 6,423,984 10,091,195 12,794,297 11,011,660 13,209,186 Loans, unsecured 216,770 173,731 188,421 163,085 242,493 Less allowance for losses (791,882) (887,578) (850,548) (828,563) (787,042) Interest and other receivables Accrued interest and other fees 304,936 666,189 363,321 357,177 442,350 Advances on loans 17,230 50,665 29,825 31,669 39,733 Real estate owned ("REO"), net 683,136 872,133 816,094 307,931 397,396 Real estate owned in process - - - 525,510 - Investment in LLC 1,212,722 - - - - ------------- --------------- -------------- -------------- --------------- $9,124,741 $11,356,179 $13,610,410 $11,957,239 $14,005,660 ============= =============== ============== ============== ===============
7 Liabilities and Partners' Capital December 31 ---------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------- -------------- -------------- -------------- -------------- Liabilities Note payable - bank - $ 1,907,000 $ 3,500,000 $ 800,000 $1,912,663 Accounts payable and accrued expenses 2,593 11,295 4,102 32,234 12,547 Deferred interest 37,704 2,322 - 115,709 131,743 Payable to affiliate 32,176 3,316 - - - ------------- -------------- --------------- -------------- -------------- 72,473 1,923,933 3,504,102 947,943 2,056,953 Partners' capital General partners 11,978 11,978 11,978 11,978 11,978 Limited partners subject to redemption 9,040,290 9,420,268 10,094,330 10,997,318 11,936,729 ------------- -------------- --------------- -------------- -------------- Total partners capital 9,052,268 9,432,246 10,106,308 11,009,296 11,948,707 ------------- -------------- --------------- -------------- -------------- $9,124,741 $11,356,179 $13,610,410 $11,957,239 $14,005,660 ============= ============== =============== ============== ==============
Statements of Income December 31, ------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------- ------------- ------------- ------------- -------------- Gross revenue $1,078,186 $1,192,381 $1,437,964 $1,663,245 $1,657,728 Expenses 314,704 371,184 537,818 753,664 811,157 ------------- ------------- ------------- ------------- -------------- Net income $ 763,482 $ 821,197 $ 900,146 $ 909,581 $ 846,571 ============= ============= ============= ============= ============== Net income to general partners (1%) 7,635 8,212 9,001 9,096 8,466 Net income to limited partners (99%) 755,847 812,985 891,145 900,485 838,105 ------------- ------------- ------------- ------------- -------------- $ 763,482 $ 821,197 $ 900,146 $ 909,581 $ 846,571 ============= ============= ============= ============= ============== Net income per $1,000 invested by limited partners for entire period: - where income is compounded and reinvested $85 $85 $85 $79 $67 ============= ============= ============= ============= ============== - where partner receives income in monthly distributions $82 $82 $82 $76 $65 ============= ============= ============= ============= ==============
The annualized yield for 1999 was 7.86%, for 2000 the annualized yield was 8.52%, and for 2001 the annualized yield was 8.50%, and the annualized yield for 2002 was 8.44%. Average annualized yield from inception through December 31, 2002, was 7.89%. 8 Item 7 - Management Discussion and Analysis of Financial Condition and Results of Operations Management Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies. In preparing the financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet date. Such estimates relate principally to the determination of (1) the allowance for loan losses (i.e. the amount of allowance established against loans receivable as an estimate of potential loan losses) including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the value of the property as collateral and (2) the valuation of real estate acquired through foreclosure. Loans and the related accrued interest, late fees and advances are analyzed on a continuous basis for recoverability. Delinquencies are identified and followed as part of the loan system. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible. Statement of Financial Accounting Standards Nos. 114 and 118 provide that if the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the investment shall be reduced to the present value of future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral. If events and or changes in circumstances cause management to have serious doubts about the further collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances. Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan losses. Actual results could vary from the aforementioned provisions for losses. Forward Looking Statements. Some of the information in the Form 10-K may contain forward looking statements. Uses of words such as "will", "may", "anticipate", "estimate", "continue" or other forward looking words, discuss future expectations or predictions. The foregoing analysis of 2002 includes forward looking statements and predictions about the possibility of future events, results of operations and financial condition. As such, this analysis may prove to be inaccurate because of assumptions made by the general partners or the actual development of the future events. No assurance can be given that any of these statements or predictions will ultimately prove to be correct or substantially correct. Related Parties. The general partners of the Partnership are Gymno Corporation and Michael R. Burwell. Most Partnership business is conducted through Redwood Mortgage Corp., an affiliate of the general partner, which arranges, services and maintains the loan portfolio for the benefit of the Partnership. The fees received by the affiliate to the general partners are paid pursuant to the partnership agreement and are determined at the sole discretion of the affiliate to the general partner. In the past, the affiliate to the general partners has elected not to take the maximum compensation. The following is a list of various Partnership activities for which related parties are compensated. o 9 o Mortgage Brokerage Commissions For fees in connection with the review, selection, evaluation, negotiation and extension of loans, the Partnership may collect an amount equivalent to 12% of the loaned amount until 6 months after the termination date of the offering. Thereafter, the loan brokerage commissions (points) will be limited to an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the Partnership. For the years ended December 31, 2000, 2001 and 2002 loan brokerage commissions paid by borrowers were $130,487, $84,137 and $24,661, respectively. o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% on an annual basis) of the unpaid principal of the Partnership's loans is paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Mortgage servicing fees of $110,713, $94,396 and $163,531 were incurred for the years ended December 31, 2000, 2001 and 2002, respectively. o Asset Management Fees The general partners receive monthly fees for managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net asset value' (3/8 of 1% on an annual basis). Management fees to the general partners of $38,400, $37,233 and $34,869 were incurred by the Partnership for the years ended December 31, 2000, 2001 and 2002, respectively. o Other Fees The partnership agreement provides that the general partners may receive other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to the general partners. o Income and Losses All income and losses are credited or charged to partners in relation to their respective Partnership interests. The allocation to the general partners (combined) shall be a total of 1%. o Operating Expenses An affiliate of the Partnership, Redwood Mortgage Corp., is reimbursed by the Partnership for all operating expenses actually incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. o Contributed Capital The general partners jointly and severally contributed 1/10 of 1% in cash contributions as proceeds from the offerings were received from the limited partners. As of December 31, 2002 and 2001, a general partner, Gymno Corporation, had contributed $11,978 as capital in accordance with Section 4.02(a) of the partnership agreement. Results of Operations - For the three years ended December 31, 2000, 2001 and 2002. On September 30, 1992, the Partnership had sold 119,983.59 Units and its contributed capital totaled $11,998,359 of the approved $12,000,000 issue, in Units of $100 each. As of that date, the offering was formally closed. At December 31, 2002, Partners' Capital totaled $9,052,268. The decline in interest revenues from $1,406,098 in 2000 to $1,172,474 in 2001 and to $1,037,717 in 2002 is primarily attributable to the reducing secured loan portfolio balance from $12,794,297 to $10,091,195 to $6,423,984 for the years 2000, 2001 and 2002, respectively. Significant reduction of the portfolio in 2002 represents principal pay-offs and pay-down on loans totaling $4,581,021, and one loan with a principal balance of $954,488 became REO versus funding of new loans of only $1,868,298. Late fee income was $11,219 in 2000, $8,495 in 2001 and $24,920 in 2002. The increase in 2002 mainly involves collection of additional late charges in excess of amounts recorded when some larger loans paid-off. Reduction in other income from $20,647 in 2000 to $11,412 in 2001 and to $15,549 in 2002 was mainly because of reduction in transfer fees received and reduction in interest on money market deposits. 10 Mortgage Servicing fees were $110,713 in 2000, $94,396 in 2001 and $163,531 in 2002. The increase in 2002 is primarily attributable to additional servicing fees earned related to impaired loans. The Partnership does not accrue servicing fees to Redwood Mortgage Corp. on impaired loans. Rather, servicing fees on impaired loans are incurred as borrower payments are received. Reduction in interest expense on bank line of credit is because of lesser utilization of the credit facility in 2002. The Partnership used loan pay-off proceeds received at year end and paid down the line of credit to 0. The line of credit balances were $3,500,000, $1,907,000 and $0 at December 31, 2000, 2001 and 2002, respectively. Decrease in asset management fees from $38,400 in 2000 to $37,233 in 2001 and to $34,869 in 2002 was due to a decrease in limited partners' capital under management. Limited partners' capital balances were $10,094,330, $9,420,268 and $9,040,290 at December 31, 2000, 2001 and 2002, respectively. Increase in professional fees from $22,068 in 2000 to $23,868 in 2001 and to $40,158 in 2002 was due to increased costs and the timing of services provided in 2002 versus 2001 in relation to audit and tax return processing. No provision for losses on loans was required in 2002 as the general partners felt the allowance for loan losses of $791,882 as of December 31, 2002, was adequate to offset any potential loss in loans or real estate. A negative provision of ($20,039) in 2002 was due to loan loss recoveries during 2002. All other expenses ranged within the level expected by the general partners. During the year 2002 the Partnership's annualized yield on compounding accounts was 8.40% and on monthly distributing accounts it was 8.20%. During 2001, and through December 31, 2002, the Federal Reserve reduced interest rates by cutting the Federal Funds Rate twelve times to 1.25%. The effect of the previous cuts has greatly reduced short-term interest rates and to a lesser extent reduced long-term interest rates. The general partners anticipate that new loans will be placed at rates approximately 1% to 1.50% lower than similar loans during 2002. The lowering of interest rates has encouraged those borrowers that have mortgages with higher interest rates than those currently available to seek refinancing of their obligations. The Partnership may face prepayments in the existing portfolio from borrowers taking advantage of these lower rates. However, demand for loans from qualified borrowers continues to be strong and as prepayments occur, the general partners expect to replace paid off loans with loans at somewhat lower interest rates. At this time, the general partners believe that the average loan portfolio interest rate will decline approximately .50% to .75% over the year 2003. Nevertheless, based upon the rates payable in connection with the existing loans, and anticipated interest rates to be charged by the Partnership and the general partners' experience, the general partners anticipate that the annualized yield will range between 7% and 8% in 2003. Borrower foreclosures, as set forth under Results of Operations, are a normal aspect of Partnership operations and the general partners anticipate that they will not have a material effect on liquidity. As of December 31, 2002, there were two properties in foreclosure. The principal amount of these foreclosures was $236,807.00. Cash is constantly being generated from interest earnings, late charges, pre-payment penalties, amortization of principal and loan pay-offs. Currently, cash flow exceeds Partnership expenses, earnings and capital payout requirements. Excess cash flow will be invested in new loan opportunities, when available, and will be used to reduce the Partnership credit line or in other Partnership business. Allowance for Losses. The general partners regularly review the loan portfolio, examining the status of delinquencies, the underlying collateral securing these properties, the Real Estate Owned ("REO") expenses and sales activities, borrowers payment records, etc. Data on the local real estate market and on the national and local economy are studied. Based upon this information and other data, loss reserves are increased or decreased. Borrower foreclosures are a normal aspect of Partnership operations. The Partnership is not a credit based lender and hence while it reviews the credit history and income of borrowers, and if applicable, the income from income producing properties, the general partners expect that we will on occasion take back real estate security. During 2001, and continuing in 2002, the Northern California real estate market slowed and the national and local economies have slipped into recession. As of December 31, 2002, two notices of default are currently filed beginning the process of foreclosing two 11 additional loans. The principal amounts of the two foreclosed loans total $236,807 or 3.69% of our loan portfolio. The Partnership also entered into workout agreements with borrowers who are past maturity or delinquent in their regular payments. The Partnership had workout agreements on approximately 2 loans totaling $65,108 as of December 31, 2002. Typically, a workout agreement allows the borrower to extend the maturity date of the balloon payment and allows the borrower to make current monthly payments while deferring for periods of time, past due payments, or allows time to pay the loan in full. These workout agreements and foreclosures generally exist within our loan portfolio to greater or lesser degrees, depending primarily on the health of the economy. The number of foreclosures and workout agreements will rise during difficult times and conversely fall during good economic times. The number and amount of foreclosures and workout agreements existing at December 31, 2002, in management's opinion, does not have a material effect on our results of operations or liquidity. These workouts and foreclosures have been considered when management arrived at appropriate loan loss reserves and based on our experience, are reflective of our loan marketplace segment. Because of the number of variables involved, the magnitude of the possible swings and the general partners inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. Management provided $65,664, $37,371, and ($20,039), as provisions for losses on loans and real estate for the years ended December 31, 2000, 2001, and 2002, respectively. The provision for losses on loans and real estate was decreased by $263,393 to $65,664 in 2000, by $28,293 to $37,371 in 2001 and by $57,410 to ($20,039) in 2002. These decreases reflect reduced expected REO anticipated losses in the various years and in 2002 that current reserves for losses are adequate to handle potential losses. If conditions change, the Partnership may again increase its provisions for loan losses. The Partnership makes loans primarily in Northern California. As of December 31, 2002, approximately 52.18%, ($3,352,568) of the loans held by the Partnership were in the six San Francisco Bay Area Counties. The remainder of the loans held were secured primarily by Northern California real estate outside the San Francisco Bay Area. Like the rest of the nation, the San Francisco Bay Area has felt the recession and accompanying slow down in economic growth and increasing unemployment. The technology companies of Silicon Valley, the airline industry, the tourism industry and other industries are feeling the effects of the overall United States recession, which includes lower earnings, losses and layoffs. As of December 31, 2002, the Partnership had an average loan to value ratio computed as of the date the loan was made of 65.86%. This percentage does not account for any increases or decreases in property values since the date the loan was made, nor does it include any reductions in principal through amortization of payments after the loan was made. This low loan to value ratio will assist the Partnership in weathering loan delinquencies and foreclosures should they eventuate. Borrower Liquidity and Capital Resources. At the time of subscription to the Partnership, limited partners made an irrevocable decision to either take distributions of earnings monthly, quarterly or annually or to compound earnings in their capital account. For the years ended December 31, 2000, 2001, and 2002, the Partnership made distributions of earnings to limited partners after allocation of syndication costs of $454,386, $374,689, and $303,020, respectively. Distribution of Earnings to limited partners, which were not withdrawn after allocation of syndication costs for the years ended December 31, 2000, 2001 and 2002 were $436,759, $438,296, and $452,827, respectively. As of December 31 2000, 2001 and 2002, limited partners electing to withdraw earnings represented 49%, 42% and 36% of the limited partners' capital. The Partnership also allows the limited partners to withdraw their capital account subject to certain limitations (see liquidation provisions of partnership agreement). For the years ended December 31, 2000, 2001, and 2002, $179,343, $98,857, and $186,716 were liquidated subject to the 10% penalty for early withdrawal. These withdrawals are within the normally anticipated range that the general partners would expect in their experience in this and other partnerships. The general partners expect that a small percentage of limited partners will elect to liquidate their capital accounts over one year with a 10% early withdrawal penalty. In originally conceiving the Partnership, the general partners wanted to provide limited partners needing their capital returned a degree of liquidity. Generally, limited partners electing to withdraw over one year need to liquidate their investment to raise cash. The trend the Partnership is experiencing in withdrawals by limited partners electing a one year liquidation program represents a small percentage of limited partner capital as of December 31, 2000, 2001, and 2002, respectively. Additionally, for the years ended December 31, 2000, 2001, and 2002, $1,250,291, $1,089,113, and $646,089, respectively, were liquidated by limited partners who have elected a liquidation program over a period of five years or longer. This ability to withdraw after five years by limited partners has the effect of providing limited partner liquidity. The general partners expect a portion of the limited partners to take advantage of this provision. This has the anticipated effect of the Partnership growing, primarily through 12 reinvestment of earnings in years one through five. The general partners expect to see increasing numbers of limited partner withdrawals in years five through eleven, after which time the bulk of those limited partners who have sought withdrawal have been liquidated. After year eleven, liquidation generally subsides. Actual liquidation of both capital and earnings from year five (1994) through year thirteen (2002) is shown hereunder: Years ended December 31, Earnings Capital Liquidation Liquidation Total ---------------- --------------- --------------- 1994 $ 263,206 *$ 340,011 $ 603,217 1995 $ 270,760 *$ 184,157 $ 454,917 1996 $ 336,341 *$ 722,536 $ 1,058,877 1997 $ 399,379 *$ 1,212,916 $ 1,612,295 1998 $ 456,358 *$ 1,400,475 $ 1,856,833 1999 $ 490,841 *$ 1,436,942 $ 1,927,783 2000 $ 454,386 *$ 1,429,634 $ 1,884,020 2001 $ 374,689 *$ 1,187,970 $ 1,562,659 2002 $ 303,020 *$ 832,805 $ 1,135,825 * These amounts represent gross of early withdrawal penalties. In some cases in order to satisfy Broker Dealers and other reporting requirements, the general partners have valued the limited partners' interest in the Partnership on a basis which utilizes a per Unit system of calculation, rather than based upon the investors' capital account. This information has been reported in this manner in order to allow the Partnership to integrate with certain software used by the Broker Dealers and other reporting entities. In those cases, the Partnership will report to Broker Dealers, Trust Companies and others a "reporting" number of Units based upon a $1.00 per Unit calculation. The number of reporting Units provided will be calculated based upon the limited partner's capital account value divided by $1.00. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The reporting Units are solely for Broker Dealers requiring such information for their software programs and do not reflect actual Units owned by a limited partner or the limited partners' right or interest in cash flow or any other economic benefit in the Partnership. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The amount of Partnership earnings each investor is entitled to receive is determined by the ratio that each investor's capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any NASD member client account statement in providing a per Unit estimated value of the client's investment in the Partnership in accordance with NASD Rule 2340. While the general partners have set an estimated value for the Partnership Units, such determination may not be representative of the ultimate price realized by an investor for such Units upon sale. No public trading market exists for the Partnership's Units and none is likely to develop. Thus, there is no certainty that the Units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the Partnership, which may include early withdrawal penalties (See the section of the Prospectus entitled "Risk Factors - Purchase of Units is a long term investment"). 13 Current Economic Conditions. As contained in a collection of real estate statistics in the San Francisco Chronicle dated December 20, 2002 Bay Area home prices rose again in November 2002. The article states, "Despite a struggling economy, the median home price in the Bay Area in November rose 13% on a year-over-year basis, though the price has leveled since its all-time high this summer, a real estate information firm reported Thursday. Driven by historically low interest rates, the number of homes sold increased 24.4% between November 2001 and November 2002; however, that comparison is somewhat skewed given that sales plunged after September 11, 2001. The median home price in the nine Bay Area counties was $416,000 in November, compared with $368,000 last November, said DataQuick Information Systems in La Jolla (San Diego County). Compared with October, the median rose 2%, and the number of sales fell 12.8%. In July and August, the Bay Area median hit a record high $417,000. Last fall, in the wake of a sagging economy and the terrorist attacks, home prices and sales cooled considerably. But beginning in January, prices and sales shot up around the country as interest rates plummeted and consumers looked for an alternative to the gyrating stock market. At the same time, many economists have suggested a housing bubble is brewing and predict home prices may fall, particularly in expensive markets such as San Francisco and Boston. The median price of a single-family home nationwide is $159,600, according to the National Association of Realtors. (DataQuick's figures include both single-family homes and condos.) `The days of rapid appreciation have ended,' said Ken Rosen, a real estate and economics professor at UC Berkeley. He noted that home prices have appreciated far faster than personal income in the Bay Area in recent years. `Next year, we may see a small rise (in home prices), but there could be some significant weakness if interest rates go up and the economy gets worse,' Rosen said. On the other hand, DataQuick researcher John Karevoll said he sees no evidence of a major price dip in the Bay Area despite an uptick in the number of notices of default, the first step in the foreclosure process. `Housing is in a fairly good state,' Karevoll said. `Default activity would have to double for it to be a concern.' The typical monthly mortgage payment Bay Area residents committed to in November was $1,843. The peak was $2,124 in May 2000. Marin County posted the highest median home price - $602,000 - in November. Solano County had the lowest median price - $291,000 - but it experienced the biggest year-over-year percentage price increase. In November 2001, the county's median was $247,000. The median is the price at which half of sales are above and half are below. Sales in Santa Clara County, where the high-tech tumble has pushed unemployment to 7.8%, showed the largest jump, from 1,284 last November to 1,894 last month. But that falls short of the county's typical November sales count of between 1,900 and 2,300. Re/Max real estate agent Bruce Scheer in Cupertino said DataQuick's numbers don't tell the whole story. Although sales in the county are up nearly 48% year over year, the number of homes on the market is up more than 60%. `There's a lot more inventory, and sales have slowed,' Scheer said, `I think people are worried that the economy is going to get worse, and they think that if they wait to sell their home, they'll get less for it.'" The San Francisco Chronicle dated December 20, 2002 further analyzed the home sale price by county comparing sales of November 2001 versus November 2002 as follows: Homes sold Percent Median* Percent County Nov. `01 Nov. `02 Change Nov. `01 Nov. `02 change - -------------------- ----------- ---------- ------------- ----------- ------------- ------------ Alameda 1,309 1,771 35.3% $352 $407 15.6% Contra Costa 1,464 1,599 9.2 308 352 4.3 Marin 309 334 8.1 513 602 17.3 Napa 159 171 7.5 341 398 16.7 San Francisco 355 493 38.9 492 568 15.4 San Mateo 531 620 16.8 490 522 6.5 Santa Clara 1,284 1,894 47.5 421 446 5.9 Solano 635 733 15.4 247 291 17.8 Sonoma 598 650 8.7 319 342 7.2 =========== ========== ============= =========== ============= ============ Bay Area 6,644 8,265 24.4% $368 $416 13.0%
*in thousands For the Partnership, these statistics imply that the values of the homes secured by mortgages should remain firm and assist in reducing losses if the take back of collateral through the foreclosure process should eventuate. 14 On the commercial scene, the San Francisco Business Times dated October 10, 2002 states "Grubb & Ellis has reported a slight decrease in office vacancy in San Francisco for the third quarter, breaking a two-year losing streak. The commercial real estate firm said vacancy dropped to 21.9% with 127,000 square feet of positive absorption. Colin Yasukochi, research director of Grubb & Ellis' San Francisco office, said office demand has turned positive for the first time in two years. He reported 1.3 million square feet of gross leasing activity in the quarter. The five biggest deals of the quarter: o Zurich Insurance took 77,000 square feet at 560 Mission street; o Gensler Architecture signed a 57,000-square-foot lease at 2 Harrison Street; o Law firm Clifford Chance opening its Bay Area headquarters at One market with 47,000 square feet; o Bank of the West and PayMap each signed leases of at least 50,000 square feet. `The sustained gross leasing activity bodes well for more positive news in the fourth quarter,' Yasukochi said. `However, over 650,000 square feet of mostly vacant new space scheduled for delivery in that same quarter will likely cause vacancy to rise.' He predicts a sustained recovery is two to three years away." To the Partnership, stabilizing vacancy rates may mean that we are at the vacancy rate bottom. High levels of space exist, and as tenants leases expire they may be able to negotiate lower rental rates. This could lead to lower cash flows for owners, which may mean we could experience higher delinquencies or foreclosures on commercial properties. On or about March 19, 2003, the United States entered into an armed conflict with Iraq. While the general partners do not anticipate that this conflict will affect the real estate market in Northern California, a prolonged military conflict could have adverse effects on the economy of the United States, which could eventually impact the local real estate market. Item 7a - Quantitative and Qualitative Disclosures About Market Risk The following table contains information about the cash held in money market accounts, secured loans held in the Partnership's portfolio and a note payable on our line of credit as of December 31, 2002. The presentation, for each category of information, aggregates the assets and liabilities by their maturity dates for maturities occurring in each of the years 2003 through 2007 and separately aggregates the information for all maturities arising after 2007. The carrying values of these assets and liabilities approximate their fair market values as of December 31, 2002: 2003 2004 2005 2006 2007 Thereafter Total ------------- ------------ ------------ ----------- ------------ ------------ ------------- Interest earning assets: Money market accounts $1,013,637 $1,013,637 Avg. interest rate 1.00% 1.00% Loans secured by deeds Of trust $3,095,300 1,014,056 40,125 96,716 1,662,819 514,968 $6,423,984 Average interest rate 11.22% 10.62% 7.00% 6.50% 8.46% 7.75% 10.04% Interest bearing liabilities: Note payable to bank - - Average interest rate 4.50% 4.50%
Market Risk. The Partnership's note payable to the bank for its line of credit bears interest at a variable rate, tied to the prime rate. As a result, the Partnership's primary market risk exposure with respect to its obligations is to changes in interest rates, which will affect the interest cost of outstanding amounts on the note payable. The Partnership may also suffer market risk tied to general trends affecting real estate values that may impact the Partnership's security for its loans. 15 The Partnership's primary market risk in terms of its profitability is the exposure to fluctuations in earnings resulting from fluctuations in general interest rates. The majority of the Partnership's mortgage loans (100% as of December 31, 2002) earn interest at fixed rates. Changes in interest rates may also affect the value of the Partnership's investment in mortgage loans and the rates at which the Partnership reinvests funds obtained from loan repayments and new capital contributions from limited partners. If interest rates increase, the interest rates the Partnership obtains from reinvested funds will generally increase, but the value of the Partnership's existing loans at fixed rates will generally tend to decrease. The risk is mitigated by the fact that the Partnership does not intend to sell its loan portfolio, rather such loans are held until they are paid off. If interest rates decrease, the amounts becoming available to the Partnership for investment due to repayment of Partnership loans may be reinvested at lower rates than the Partnership had been able to obtain in prior investments, or than the rates on the repaid loans. In addition, interest rate decreases may encourage borrowers to refinance their loans with the Partnership at a time where the Partnership is unable to reinvest in loans of comparable value. The Partnership does not hedge or otherwise seek to manage interest rate risk. The Partnership does not enter into risk sensitive instruments for trading purposes. PORTFOLIO REVIEW - For the years ended December 31, 2000, 2001 and 2002. Loan Portfolio The Partnership's loan portfolio consists primarily of short-term (one to five years), fixed rate loans secured by real estate. As of December 31, 2000, 2001 and 2002 the Partnership's loans secured by real property collateral in the six San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda, Contra Costa, and Marin) represented $8,493,000 (66.4%), $6,784,000 (67.2%), and $3,353,000 (52.2%) of the outstanding loan portfolio. The remainder of the portfolio represented loans secured by real estate located primarily in Northern California. As of December 31, 2000, approximately 14.6% ($1,863,000), was invested in loans secured by single family homes (1-4 units), approximately 20.2% ($2,590,000), was invested in loans secured by multifamily dwellings (apartments over 4 units), approximately 41.3% ($5,286,000), was invested in loans secured by commercial properties, and approximately 23.9% ($3,055,000) was invested in loans secured by land. As of December 31, 2001, approximately, 20.4% ($2,058,000), was invested in loans secured by single family homes (1-4 units), approximately 15.5% ($1,563,000) was invested in loans secured by multifamily dwellings (apartments over 4 units), approximately 32.5% ($3,280,000) was invested in loans secured by commercial properties, and approximately 31.6% ($3,190,000) was invested in loans secured by land. As of December 31, 2002, approximately, 25.1% ($1,612,000), was invested in loans secured by single family homes (1-4 units), approximately 9.5% ($709,000) was invested in loans secured by multi-family dwellings (apartments over 4 units), approximately, 31.8% ($2,046,000) was invested in loans secured by commercial properties, and approximately 33.6% ($2,057,000) was invested in loans secured by land. 16 As of December 31, 2002, the Partnership held 25 loans secured by deeds of trust. The following table sets forth the priorities, asset concentrations and maturities of the loans held by the Partnership as of December 31, 2002. PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS As of December 31, 2002 # of Loans Amount Percent --------------- ------------------ ----------------- 1st Mortgages 12 $ 3,270,000 51% 2nd Mortgages 11 2,940,000 46% 3rd Mortgages 2 214,000 3% =============== ================== ================= Total 25 $ 6,424,000 100% Maturing 12/31/03 and prior 13 $ 3,095,000 48% Maturing prior to 12/31/04 4 1,014,000 16% Maturing prior to 12/31/05 1 40,000 1% Maturing after 12/31/05 7 2,275,000 35% =============== ================== ================= Total 25 $ 6,424,000 100% Average Loan $ 257,000 4% Largest Loan 1,000,000 16% Smallest Loan 11,000 0.2% Average Loan-to-Value 66%
ASSET QUALITY A consequence of lending activities is that occasionally losses will be experienced and that the amount of such losses will vary from time to time, depending upon the risk characteristics of the loan portfolio as affected by economic conditions and the financial experiences of borrowers. Many of these factors are beyond the control of the general partners. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on particular segments of the loan portfolio, especially in light of the current economic environment. The conclusion that a loan may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to requirements and regulations that, among other things, require them to perform ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and to obtain and maintain current information regarding their borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted these practices. Rather, the general partners, in connection with the periodic closing of the accounting records of the Partnership and the preparation of the financial statements, determine whether the allowance for loan losses is adequate to cover potential loan losses of the Partnership. As of December 31, 2002 the general partners have determined that the allowance for loan losses of $792,000 (8.7% of net assets) is adequate in amount. Because of the number of variables involved, the magnitude of the swings possible and the general partners' inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. As of December 31, 2002, 10 loans were delinquent over 90 days amounting to $2,401,000, which represents an increase of 34% of loans that were delinquent as of December 31, 2001. 17 Item 8 - Financial Statements and Supplementary Data A - Financial Statements The following financial statements of Redwood Mortgage Investors VII are included in Item 8: o Independent Auditors' Report o Balance Sheets - December 31, 2002, and December 31, 2001 o Statements of Income for the years ended December 31, 2002, 2001 and 2000 o Statements of Changes in Partners' Capital for the years ended December 31, 2002, 2001 and 2000 o Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 o Notes to Financial Statements B - Financial Statement Schedules The following financial statement schedules of Redwood Mortgage Inventors VII are included in Item 8. o Schedule II - Valuation and Qualifying Accounts o Schedule IV - Mortgage Loans on Real Estate All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 18 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 AND 2001 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002 19 ARMANINO McKENNA LLP CERTIFIED PUBLIC ACCOUNTANTS 12667 Alcosta Blvd., Suite 500 San Ramon, CA 94583 (925) 790-2600 INDEPENDENT AUDITORS' REPORT To the Partners Redwood Mortgage Investors VII Redwood City, California We have audited the accompanying balance sheets of Redwood Mortgage Investors VII (a California limited partnership) as of December 31, 2002 and 2001 and the related statements of income, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Redwood Mortgage Investors VII as of December 31, 2002 and 2001 and the results of its operations and cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedules II and IV are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARMANINO McKENNA LLP San Ramon, California February 21, 2003 20 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Balance Sheets December 31, 2002 and 2001 ASSETS 2002 2001 ------------------ ------------------ Cash and cash equivalents $ 1,057,845 $ 389,844 ------------------ ------------------ Loans Loans secured by deeds of trust 6,423,984 10,091,195 Loans, unsecured, net of discount of $150,407 in 2002 216,770 173,731 Allowance for loan losses (791,882) (887,578) ------------------ ------------------ Net loans 5,848,872 9,377,348 ------------------ ------------------ Interest and other receivables Accrued interest and late fees 304,936 666,189 Advances on loans 17,230 50,665 ------------------ ------------------ 322,166 716,854 ------------------ ------------------ Investment in limited liability company 1,212,722 - ------------------ ------------------ Real estate held for sale, net 683,136 872,133 ------------------ ------------------ Total assets $ 9,124,741 $ 11,356,179 ================== ================== LIABILITIES AND PARTNERS' CAPITAL Liabilities Line of credit $ - $ 1,907,000 Accounts payable 2,593 11,295 Payable to affiliate 32,176 3,316 Deferred interest 37,704 2,322 ------------------ ------------------ Total liabilities 72,473 1,923,933 ------------------ ------------------ Partners' capital Limited partners' capital, subject to redemption, 120,000 Units authorized in 2002 and 2001, 119,984 Units outstanding in 2002 and 2001 9,040,290 9,420,268 General partners' capital 11,978 11,978 ------------------ ------------------ Total partners' capital 9,052,268 9,432,246 ------------------ ------------------ Total liabilities and partners' capital $ 9,124,741 $11,356,179 ================== ==================
The accompanying notes are an integral part of these financial statements. 21 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Statements of Income For the Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 ---------------- --------------- ---------------- Revenues Interest on loans $ 1,037,717 $ 1,172,474 $ 1,406,098 Late fees 24,920 8,495 11,219 Other 15,549 11,412 20,647 ---------------- --------------- ---------------- 1,078,186 1,192,381 1,437,964 ---------------- --------------- ---------------- Expenses Mortgage servicing fees 163,531 94,396 110,713 Interest expense 54,724 128,224 257,640 Clerical costs from Redwood Mortgage Corp. 30,572 38,313 27,032 Asset management fees 34,869 37,233 38,400 Provisions for (recovery of) losses on loans and real estate (20,039) 37,371 65,664 Professional services 40,158 23,868 22,068 Other 10,889 11,779 16,301 ---------------- --------------- ---------------- 314,704 371,184 537,818 Net income $ 763,482 $ 821,197 $ 900,146 ================ =============== ================ Net income General partners (1%) $ 7,635 $ 8,212 $ 9,001 Limited partners (99%) 755,847 812,985 891,145 ---------------- --------------- ---------------- $ 763,482 $ 821,197 $ 900,146 ================ =============== ================ Net income per $1,000 invested by limited partners for entire period Where income is reinvested and compounded $ 85 $ 85 $ 85 ================ =============== ================ Where partner receives income in periodic distributions $ 82 $ 82 $ 82 ================ =============== ================
The accompanying notes are an integral part of these financial statements 22 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Statements of Changes in Partners' Capital For the Years Ended December 31, 2002, 2001 and 2000 Limited Partners' Capital ------------------------------------------------- Limited Total General Partners' Formation Limited Partners' Total Capital Loan Partners' Capital Partners' Accounts Receivable Capital Account Capital -------------- --------------- ---------------- ---------------- --------------- Balances at December 31, 1999 $ 11,162,817 $ (165,499) $ 10,997,318 $ 11,978 $ 11,009,296 Collections on Formation Loan - 79,505 79,505 - 79,505 Net income 891,145 - 891,145 9,001 900,146 Early withdrawal penalties (15,107) 10,382 (4,725) - (4,725) Partners' withdrawals (1,868,913) - (1,868,913) (9,001) (1,877,914) ---------------- --------------- -------------- --------------- --------------- Balances at December 31, 2000 10,169,942 (75,612) 10,094,330 11,978 10,106,308 Collections on Formation Loan - 71,460 71,460 - 71,460 Net income 812,985 - 812,985 8,212 821,197 Early withdrawal penalties (7,908) 4,152 (3,756) - (3,756) Partners' withdrawals (1,554,751) - (1,554,751) (8,212) (1,562,963) --------------- --------------- --------------- ---------------- --------------- Balances at December 31, 2001 9,420,268 - 9,420,268 11,978 9,432,246 Net income 755,847 - 755,847 7,635 763,482 Early withdrawal penalties (11,619) - (11,619) - (11,619) Partners' withdrawals (1,124,206) (7,635) (1,131,841) (1,124,206) - ---------------- -------------- --------------- ----------------- -------------- Balances at December 31, 2002 $ 9,040,290 $ - $ 9,040,290 $ 11,978 $ 9,052,268 ================ ============== =============== ================= ==============
The accompanying notes are an integral part of these financial statements 23 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Statements of Cash Flows For the Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 ------------------ --------------- --------------- Cash flows from operating activities Net income $ 763,482 $ 821,197 $ 900,146 Adjustments to reconcile net income to net cash provided by operating activities Provisions for (recovery of) losses on loans and real estate (20,039) 37,371 65,664 Early withdrawal penalty credited to income (11,619) (3,756) (4,725) Change in operating assets and liabilities: Loans, unsecured 45,292 14,690 5,082 Accrued interest and late fees (73,456) (302,868) (34,916) Advances on loans (47,216) (20,840) 1,844 Accounts payable (8,702) 7,193 (28,132) Payable to affiliate 28,860 3,316 - Deferred interest 35,382 2,322 (115,709) ------------------ --------------- --------------- Net cash provided by operating activities 711,984 558,625 789,254 ------------------ --------------- --------------- Cash flows from investing activities Principal collected on loans 4,569,574 6,123,575 5,324,620 Loans originated (1,447,329) (3,066,276) (7,112,078) Payments for real estate (11,033) (449,197) (87,392) Proceeds from disposition of real estate - 38,620 64,235 Investments in limited liability company (116,354) - - ------------------ --------------- --------------- Net cash provided by (used in) investing activities 2,994,858 2,646,722 (1,810,615) ------------------ --------------- --------------- Cash flows from financing activities Borrowings (repayments) on line of credit, net (1,907,000) (1,593,000) 2,700,000 Formation loan collections - 71,460 79,505 Partners' withdrawals (1,131,841) (1,562,963) (1,877,914) ------------------ --------------- --------------- Net cash (used in) provided by financing activities (3,038,841) (3,084,503) 901,591 ------------------ --------------- --------------- Net increase (decrease) in cash and cash equivalents 668,001 120,844 (119,770) Cash and cash equivalents at beginning of year 389,844 269,000 388,770 ------------------ --------------- --------------- Cash and cash equivalents at end of year $ 1,057,845 $ 389,844 $ 269,000 ================== =============== =============== Supplemental disclosures of cash flow information Cash payments for interest $ 54,724 $ 128,224 $ 257,640 ================== =============== ===============
The accompanying notes are an integral part of these financial statements 24 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 NOTE 1 ORGANIZATION AND GENERAL Redwood Mortgage Investors VII, (the "Partnership") is a California limited partnership organized on June 30, 1989. The general partners are Michael R. Burwell, an individual, and Gymno Corporation; a California corporation owned and operated on an equal 50/50% basis by Michael R. Burwell and by D. Russell Burwell, a former general partner. The Partnership was organized to engage in business as a mortgage lender for the primary purpose of making loans secured by deeds of trust on California real estate. Loans are being arranged and serviced by Redwood Mortgage Corp., an affiliate of the general partners. Term of the Partnership The Partnership is scheduled to terminate on December 31, 2029, unless sooner terminated as provided. note 2 Summary of Significant Accounting Policies Management estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans and the valuation of real estate held for sale. Actual results could differ significantly from these estimates. Loans, secured by deeds of trust Loans generally are stated at their outstanding unpaid principal balance with interest thereon being accrued by the effective interest method. Statement of Financial Accounting Standards Nos. 114 and 118 provide that if the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the investment shall be reduced to the present value of future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral. If events and or changes in circumstances cause management to have serious doubts about the further collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances. At December 31, 2002 and 2001, there were loans categorized as impaired by the Partnership of $96,716 and $889,439, respectively. In addition, the impaired loans had accrued interest and advances totaling $7,841 and $277,479 at December 31, 2002 and 2001, respectively. The reduction in carrying value of the impaired loans of $6,620 and $150,092 at December 31, 2002 and 2001, respectively, is included in the allowance for loan losses. The average recorded investment in the impaired loans was $493,074, $890,018 and $687,563 for December 31, 2002, 2001 and 2000, respectively. 25 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 2 Summary of Significant Accounting Policies (continued) Loans, secured by deeds of trust (continued) At December 31, 2002 and 2001, the Partnership had nine loans past due 90 days or more totaling $2,913,212 and $3,314,054 (45.35% and 32.84% of the secured loan portfolio), respectively. The Partnership does not consider these loans to be impaired because there is sufficient collateral to cover the amount outstanding to the Partnership and is still accruing interest on these loans. At December 31, 2002 and 2001, as presented in Note 11, the average loan to appraised value of security at the time the loans were consummated was 65.86% and 60.66%, respectively. When loans are considered impaired, the allowance is updated to reflect the change in the valuation of collateral security. However, a low loan to value ratio has the tendency to minimize reductions for impairment. During 2002, the Partnership restructured four previously impaired loans into two new loans with a lower interest rate. The amount restructured was $1,246,754. Had the loans been current in accordance with their original terms and had they been outstanding throughout the entire year, the Partnership would have recognized gross interest income of $144,772 for 2002. The Partnership recognized $70,130 of income on the restructured loans for 2002. Allowance for loan losses Loans and the related accrued interest, late fees and advances are analyzed on a continuous basis for recoverability. Delinquencies are identified and followed as part of the loan system. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible. The composition of the allowance for loan losses as of December 31, 2002 and 2001 was as follows: 2002 2001 ------------------ ---------------- Impaired loans $ 6,620 $150,092 Specified loans 163,731 - General 533,200 593,500 Unsecured loans 88,331 143,986 ------------------ ---------------- $791,882 $887,578 ================== ================ Activity in the allowance for loan losses is as follows for the years ended December 31: 2002 2001 2000 ------------- -------------- -------------- Beginning balance $887,578 $850,548 $828,563 Provision for loan losses 20,394 37,371 25,160 Recoveries (40,433) - - Restructures (64,210) - - Write-offs (11,447) (341) (3,175) ------------- -------------- -------------- $791,882 $887,578 $850,548 ============= ============== ============== 26 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 2 Summary of Significant Accounting Policies (continued) Cash and cash equivalents The Partnership considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be a cash equivalent. Real estate held for sale Real estate held for sale includes real estate acquired through foreclosure and is stated at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the property's estimated fair value, less estimated costs to sell. In accordance with Statement of Financial Accounting Standards No 144, "Accounting for the Impairment or Disposition of Long Lived Assets," the Partnership periodically compares the carrying value of real estate to expected future undiscounted cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value. During 2002, the Partnership transferred $200,030 from the allowance for loan losses to the allowance for losses on real estate held for sale. Investment in limited liability company Investment in limited liability company is accounted for using the equity method. In 2002, the Company had a 34% interest in the Stockton Street Property Company, LLC (see Note 6). Income taxes No provision for federal and state income taxes (other than an $800 state minimum tax) is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply. Net income per $1,000 invested Amounts reflected in the statements of income as net income per $1,000 invested by limited partners for the entire period are amounts allocated to limited partners who had their investment throughout the period and have elected to either leave their earnings to compound or have elected to receive periodic distributions of their net income. Individual income is allocated each month based on the limited partners' pro rata share of partners' capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or select other options. Late fee revenue Late fees are generally charged at 6% of the monthly installment payment past due. During 2002, 2001 and 2000, late fee revenue of $24,920, $8,495 and $11,219, respectively, were recorded. The Partnership has a late fee receivable at December 31, 2002 and 2001 of $13,320 and $0. Reclassification Certain reclassifications, not affecting previously reported net income or total partners' capital, have been made to the previously issued financial statements to conform to the current year classification. 27 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 2 Summary of Significant Accounting Policies (continued) Recently issued accounting pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46 "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46 is effective immediately for any variable interest entities created after January 31, 2003 and is effective beginning in the third quarter of 2002 to any variable interest entities created prior to the issuance of the interpretation. FIN 46 provides a new framework to identify variable interest entities and determining when an entity should include the assets, liabilities, non-controlling interests and the results of activities of a variable interest entity in its financial statements. The implementation of FIN 46 is not anticipated to have any significant effect on the Partnership. note 3 Other Partnership Provisions The Partnership is a California limited partnership. The rights, duties and powers of the general and limited partners of the Partnership are governed by the limited Partnership agreement and Sections 15611 et seq. of the California Corporations Code. The general partners are in complete control of the Partnership business, subject to the voting rights of the limited partners on specified matters. Any one of the general partners acting alone has the power and authority to act for and bind the Partnership. A majority of the outstanding limited partnership interests may, without the permission of the general partners, vote to: (i) terminate the Partnership, (ii) amend the limited partnership agreement, (iii) approve or disapprove the sale of all or substantially all of the assets of the Partnership and (iv) remove or replace one or all of the general partners. The approval of all limited partners is required to elect a new general partner to continue the Partnership business where there is no remaining general partner after a general partner ceases to be a general partner other than by removal. Election to receive monthly, quarterly or annual distributions At subscription, investors elected either to receive monthly, quarterly or annual distributions of earnings allocations, or to allow earnings to compound. Subject to certain limitations, a compounding investor may subsequently change his election, but an investor's election to have cash distributions is irrevocable. Profits and losses Profits and losses are allocated among the limited partners according to their respective capital accounts monthly after 1% of the profits and losses are allocated to the general partners. Liquidity, capital withdrawals and early withdrawals There are substantial restrictions on transferability of Partnership Units and accordingly an investment in the Partnership is not liquid. Limited partners have no right to withdraw from the Partnership or to obtain the return of their capital account for at least one year from the date of purchase of Units. In order to provide a certain degree of liquidity to the limited partners after the one-year period, limited partners may withdraw all or part of their capital accounts from the Partnership in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty. The 10% penalty is applicable to the amount withdrawn early and will be deducted from the capital account. 28 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 3 Other Partnership Provisions (continued) Liquidity, capital withdrawals and early withdrawals (continued) After five years from the date of purchase of the Units, limited partners have the right to withdraw from the Partnership, on an installment basis. Generally this is done over a five-year period in twenty quarterly installments. Once a limited partner has been in the Partnership for the minimum five-year period, no penalty will be imposed if withdrawal is made in twenty quarterly installments or longer. Notwithstanding the five-year (or longer) withdrawal period, the general partners may liquidate all or part of a limited partner's capital account in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given. This withdrawal is subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn without penalty. The Partnership will not establish a reserve from which to fund withdrawals and, accordingly, the Partnership's capacity to return a limited partner's capital account is restricted to the availability of Partnership cash flow. Furthermore, no more than 20% of the total limited partners' capital accounts outstanding at the beginning of any year shall be liquidated during any calendar year. note 4 General Partners and Related Parties The following are commissions and fees which will be paid to the general partners. Mortgage brokerage commissions For fees in connection with the review, selection, evaluation, negotiation and extension of loans, the Partnership may collect an amount equivalent to 12% of the loaned amount until 6 months after the termination date of the offering. Thereafter, loan brokerage commissions (points) will be limited to an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers and thus, are not an expense of the Partnership. During 2002, 2001 and 2000, loan brokerage commissions paid by the borrowers were $24,661 and $84,137 and $130,487, respectively. Mortgage servicing fees Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid principal balance of the loan portfolio, or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Once a loan is categorized as impaired, mortgage servicing fees are no longer accrued. Additional service fees are recorded upon the receipt of any subsequent payments on impaired loans. Mortgage servicing fees of $163,531, $94,396 and $110,713 were incurred for 2002, 2001 and 2000, respectively. The Partnership has a payable to Redwood Mortgage Corp. for servicing fees of $32,176 and $3,316 at December 31, 2002 and 2001, respectively. Asset management fee The general partners receive monthly fees for managing the Partnership's loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8 of 1% annually). Asset management fees of $34,869, $37,233 and $38,400 were incurred for 2002, 2001 and 2000, respectively. 29 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 4 General Partners and Related Parties (continued) Other fees The Partnership Agreement provides for other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to parties related to the general partners. Operating expenses Redwood Mortgage Corp., an affiliate of the general partners, is reimbursed by the Partnership for all operating expenses actually incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. During 2002, 2001 and 2000, operating expenses totaling $30,572, $38,313 and $27,032, respectively, were reimbursed to Redwood Mortgage Corp. note 5 Real Estate Held for Sale The following schedule reflects the costs of real estate acquired through foreclosure and the recorded reductions to estimated fair values, including estimated costs to sell as of December 31, 2002 and 2001: 2002 2001 ----------------- ----------------- Costs of properties $1,263,222 $1,252,189 Reduction in value (580,086) (380,056) ----------------- ----------------- Real estate held for sale $ 683,136 $ 872,133 ================= ================= note 6 Investment in Limited Liability Company As a result of acquiring real property through foreclosure, the Partnership transferred its interest (principally land and building) to a limited liability company ("LLC"), Stockton Street Property Company LLC, which is owned 34% by the Partnership and 66% by an affiliate. Development costs are being capitalized; thus, there was no income or expense recognized by Stockton Street Property Company during 2002. During 2002, the LLC completed construction and now intends to sell the property. The Partnership expects to realize a profit from the venture. Summarized financial information of the LLC at December 31, 2002 is as follows: Assets $1,814,186 Liabilities (601,464) ------------------ Total $1,212,722 ================== 30 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 7 Bank Line of Credit The Partnership has a bank line of credit secured by its loan portfolio of up to $3,500,000 at .25% over prime. The balances outstanding as of December 31, 2002 and 2001 were $0 and $1,907,000, respectively; the interest rate was 4.50% (4.25% prime + .25%) at December 31, 2002. This line of credit expires May 1, 2003 and requires the Partnership to meet certain financial covenants. As of December 31, 2002, the Partnership was in compliance with all loan covenants. Should the general partners choose not to renew the line of credit, the balance then outstanding would be converted to a three-year term loan. note 8 Income Taxes The following reflects a reconciliation of partners' capital reflected in the financial statements to the tax basis of the Partnership capital: 2002 2001 --------------- -------------- Partners' capital per financial statements $ 9,052,268 $9,432,246 Allowance for loan losses 791,882 887,578 Allowance for real estate losses 580,086 380,056 --------------- -------------- Partners' capital tax basis $10,424,236 $10,699,910 =============== ============== In 2002 and 2001, approximately 69% and 68%, respectively, of taxable income was allocated to tax exempt organizations (i.e., retirement plans). Such organizations generally do not have to file income tax returns. note 9 Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments: (a) Cash and Cash Equivalents - The carrying amount equals fair value. All amounts, including interest bearing, are subject to immediate withdrawal. (b) Secured loans had a carrying value of $6,423,984 and $10,091,195, at December 31, 2002 and 2001, respectively. The fair value of these loans of $6,030,669 and $10,107,321, respectively was estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made. The applicable amount of the allowance for loan losses along with accrued interest and advances related thereto should also be considered in evaluating the fair value versus the carrying value. 31 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 10 Non-cash Transactions During 2002, the Partnership foreclosed on one property and transferred its interest into a LLC (see Note 6), which resulted in an increase in investments of $1,096,368 and a decrease in loans receivable, accrued interest and advances of $954,488, $88,913 and $52,967, respectively. During 2002, the Partnership restructured four loans that resulted in an increase to loans receivable and the allowance for loan losses of $420,969 and $47,489, respectively, and a decrease to accrued interest and advances of $345,796 and $27,684, respectively. During 2002, the Partnership originated two unsecured non-interest bearing loans, which resulted in an increase to unsecured loans of $238,738 and the allowance for loan losses of $88,331. The Partnership imputed interest on these loans at 10.5% per annum, which resulted in a decrease to unsecured loans and an increase to discount on loans of $150,407. note 11 Asset Concentrations and Characteristics The loans are secured by recorded deeds of trust. At December 31, 2002 and 2001, there were 25 and 36 secured loans outstanding, respectively, with the following characteristics: 2002 2001 ------------------ ------------------ Number of secured loans outstanding 25 36 Total secured loans outstanding $6,423,984 $ 10,091,195 Average secured loan outstanding $ 256,959 $ 280,311 Average secured loan as percent of total 4.00% 2.78% Average secured loan as percent of Partners' capital 2.84% 2.97% Largest secured loan outstanding $1,000,000 $1,000,000 Largest secured loan as percent of total 15.57% 9.91% Largest secured loan as percent of Partners' capital 11.05% 10.60% Number of counties where security is located (all California) 11 11 Largest percentage of loans in one county 41.38% 31.92% Average secured loan to appraised value of security at time loan was consummated 65.86% 60.66% Number of secured loans in foreclosure 2 2 Amount of secured loans in foreclosure $ 236,807 $ 216,493
32 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 11 Asset Concentrations and Characteristics (continued) The following categories of secured loans were held at December 31, 2002 and 2001: 2002 2001 -------------------- ------------------ First trust deeds $ 3,269,897 $ 5,042,062 Second trust deeds 2,939,753 4,803,146 Third trust deeds 214,334 245,987 -------------------- ------------------ Total loans 6,423,984 10,091,195 Prior liens due other lenders 5,475,725 9,318,486 -------------------- ------------------ Total debt $ 11,899,709 $ 19,409,681 ==================== ================== Appraised property value at time of loan $ 18,069,602 $ 31,997,080 Total investments as percent of appraisals 65.86% 60.66% Investments by type of property Owner occupied homes $ 1,037,474 $ 622,435 Non-owner occupied homes 575,051 1,435,444 Apartments 708,648 1,563,214 Commercial 4,102,811 6,470,103 -------------------- ------------------ $6,423,984 $ 10,091,195 ==================== ==================
Scheduled maturity dates of secured loans as of December 31, 2002 are as follows: Year Ending December 31, -------------------------- 2003 $ 3,095,300 2004 1,014,056 2005 40,125 2006 96,716 2007 1,662,819 Thereafter 514,968 ---------------- Total $ 6,423,984 ================ 33 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 11 Asset Concentrations and Characteristics (continued) The scheduled maturities for 2003 above include approximately $2,401,294 in 7 loans, which are past maturity at December 31, 2002. Interest payments on six of these loans with an aggregate principal balance of $2,266,414 were categorized as delinquent over 90 days. Cash deposits per bank at December 31, 2002 of $1,351,327 were in one bank. The balance exceeded FDIC insurance limits (up to $100,000 per bank) by $1,251,327. The Partnership's main bank is the same financial institution that has provided the Partnership with the $3,500,000 limit line of credit. The Partnership has a substantial amount of its loan receivable balance due from one borrower in 2002. This borrower accounted for approximately 22% of the loan balance at December 31, 2002. note 12 Commitments and Contingencies Workout agreements The Partnership has negotiated various contractual workout agreements with borrowers whose loans are past maturity or who are delinquent in making payments. The Partnership is not obligated to fund additional money as of December 31, 2002. As of December 31, 2002 the Partnership had approximately two loans under workout agreements totaling $65,108. Construction loans The Partnership has construction loans, which are at various stages of completion of the construction process at December 31, 2002. The Partnership has approved the borrowers up to a maximum loan balance; however, disbursements are made during completion phases throughout the construction process. At December 31, 2002, there were $8,837 of undistributed construction loans which will be funded by a combination of borrower interest payments, line of credit draw-downs and retirement of principal on current loans. Legal proceedings The Partnership is involved in various legal actions arising in the normal course of business. In the opinion of management, such matters will not have a material effect upon the financial position of the Partnership. 34 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 13 Selected Financial Information (Unaudited) Calendar Quarter First Second Third Fourth Annual ------------- ------------ ------------ ------------- -------------- Revenues 2002 as previously stated $ 389,922 $ 278,648 $ 260,548 $ 226,946 $1,156,064 Adjustment (77,878) - - - (77,878) ------------- ------------ ------------ ------------- -------------- 2002 restated 312,044 278,648 260,548 226,946 1,078,186 2001 349,061 291,342 261,312 290,666 1,192,381 2000 307,831 356,247 362,586 411,300 1,437,964 Expenses 2002 as previously stated 193,291 81,173 69,770 48,348 392,582 Adjustment (77,878) - - - (77,878) ------------- ------------ ------------ ------------- -------------- 2002 restated 115,413 81,173 69,770 48,348 314,704 2001 137,576 84,453 58,231 90,924 371,184 2000 74,265 128,581 140,617 194,355 537,818 Net income allocated to general partners 2002 1,966 1,975 1,908 1,786 7,635 2001 2,115 2,069 2,031 1,997 8,212 2000 2,336 2,276 2,220 2,169 9,001 Net income allocated to limited partners 2002 194,665 195,500 188,870 176,812 755,847 2001 209,370 204,820 201,050 197,745 812,985 2000 231,230 225,390 219,749 214,776 891,145 Net income per $1,000 invested Where income is reinvested 2002 $ 21 $ 21 $ 21 $ 22 $ 85 2001 21 21 21 22 85 2000 21 21 21 22 85 Where income is withdrawn 2002 21 21 21 19 82 2001 20 21 21 20 82 2000 21 21 21 19 82
The adjustments represent correction of amounts missposted to interest revenue and the provision for loan losses in the first quarter of 2002. 35 SCHEDULE II REDWOOD MORTGAGE INVESTORS VII VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E Description Balance at Additions Deductions Balance at ------------------------------------ Beginning of (1) (2) Describe (a) End of Period Period Charged to Charged to Costs & Other accounts- Expenses Describe (b) ---------------------- ----------------- ---------------- ------------------- --------------- ----------------- Year Ended 12/31/02 Deducted from asset accounts: Allowance for doubtful accts $ 887,578 $ (20,039) $ (64,210) $ (11,447) $ 791,882 Cumulative write-down of Real Estate held for sale (REO) $ 380,056 $ 0 $ 200,030 $ 0 $ 580,086 ----------------- ---------------- ------------------- --------------- ----------------- Total $1,267,634 $ (20,039) $ 135,820 $ (11,447) $1,371,968 ================= ================ =================== =============== =================
(a) Represents write-offs on loans. (b) Represents restructure of loans. 36 SCHEDULE IV REDWOOD MORTGAGE INVESTORS VII MORTGAGE LOANS ON REAL ESTATE RULE 12-29 LOANS ON REAL ESTATE DECEMBER 31, 2002 Col. A Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J Descrip. Interest Final Period Prior Face Amt. Carry Amt. Principal Type Geographic Rate Maturity Payment Liens Mortgage Mortgage or interest Lien Location Amount Delinquent - ------------------------------------------------------------------------------------------------------------------ Apts. 12.00% 8/1/2003 $ 4,400 $ - $ 720,000 $ 440,000 $ 52,800 1st San Francisco Apts. 10.50% 06/01/03 875 - 100,000 100,000 - 1st San Joaquin Apts. 6.50% 05/01/06 541 89,904 75,000 96,716 34,072 2nd Sacramento Apts. 7.00% 02/10/05 234 80,250 40,125 40,125 - 2nd San Francisco Apts. 12.50% 04/01/02 120 440,000 31,884 31,807 35,460 2nd San Francisco Comm. 9.00% 05/10/02 671 - 83,333 77,485 - 1st Shasta Comm. 7.00% 07/01/02 1,131 - 146,667 134,880 134,880 1st Contra Costa Comm. 10.00% 12/01/03 471 - 53,636 53,309 - 1st Stanislaus Comm. 10.00% 07/01/11 1,995 - 219,538 216,529 - 1st Santa Clara Comm. 7.50% 02/28/07 3,206 - 513,000 560,354 - 1st Santa Clara Comm. 7.50% 02/28/07 4,290 - 686,400 686,400 - 1st Alameda Comm. 13.00% 11/01/02 2,221 310,381 205,000 205,000 220,546 2nd Alameda Comm. 10.00% 12/01/01 105 82,723 11,919 11,797 732 2nd Stanislaus Land 8.00% 12/01/04 900 - 135,000 127,450 - 1st Sacramento Land 11.00% 01/01/01 9,167 201,686 1,000,000 773,510 824,851 2nd Stanislaus Land 11.00% 07/01/01 9,167 137,737 1,000,000 1,000,000 1,064,167 2nd Stanislaus Land 11.50% 07/01/01 1,753 1,000,000 182,927 182,927 195,198 2nd Stanislaus Land 11.00% 11/01/00 783 1,141,690 85,366 73,171 92,734 3rd Stanislaus Res. 8.00% 09/30/03 90 - 12,226 11,415 - 1st Sonoma Res. 6.13% 08/01/32 1,823 - 300,000 298,439 - 1st San Mateo Res. 11.00% 09/01/04 5,167 - 563,636 563,636 - 1st Stanislaus Res. 11.00% 11/01/04 1,238 553,179 130,000 127,969 - 2nd San Mateo Res. 11.00% 02/01/04 1,788 348,257 195,000 195,000 7,150 2nd Marin Res. 11.00% 09/01/07 2,619 415,386 275,000 274,902 - 2nd San Mateo Res. 12.00% 03/01/06 810 674,532 130,000 141,163 - 3rd San Mateo ------------------------------------------------------------- Total $55,561 $5,475,725 $6,895,657 $6,423,984 $2,662,590 =============================================================
Notes: Loans classified as `impaired loans' had principal balances totaling $96,716 at December 31, 2002. Impaired loans are defined as loans where the carrying value of related balances exceeds the anticipated fair value less costs to collect. Accrued interest is no longer recorded thereon. Amounts reflected in column G (carrying amount of loans) represents both costs and the tax basis of the loans. 37 SCHEDULE IV Reconciliation of carrying amount (cost) of secured loans at close of periods Year ended December 31, --------------------------------------------------------------- 2002 2001 2000 ---------------- -------------- ---------------- Balance at beginning of year $10,091,195 $12,794,297 $11,011,660 ---------------- -------------- ---------------- Additions during period: New loans 1,447,329 3,065,934 7,112,078 Other 420,969 354,538 - ---------------- -------------- ---------------- Total Additions 1,868,298 3,420,472 7,112,078 ---------------- -------------- ---------------- Deduction during period: Collections of principal 4,569,574 6,123,574 5,324,620 Foreclosures 954,488 - - Other 11,447 - 4,821 ---------------- -------------- ---------------- Total Deductions 5,535,509 6,123,574 5,329,441 ---------------- -------------- ---------------- Balance at close of year $6,423,984 $10,091,195 $12,794,297 ================ ============== ================
38 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Part III Item 10 - Directors and Executive Officers of the Registrant The Partnership has no Officers or Directors. Rather, the activities of the Partnership are managed by the two general partners, one of whom is an individual, Michael R. Burwell. The second general partner is Gymno Corporation, a California corporation, formed in 1986. Mr. Burwell is one of the two shareholders of Gymno Corporation, a California corporation, and has a 50% interest in the corporation. Item 11 - Executive Compensation COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP As indicated above in Item 10, the Partnership has no Officers or Directors. The Partnership is managed by the general partners. There are certain fees and other items paid to management and related parties. A more complete description of management compensation is found in the Prospectus, pages 12-13, under the section "Compensation of the General Partners and the Affiliates", which is incorporated by reference. Such compensation is summarized below. The following compensation has been paid to the general partners and affiliates for services rendered during the year ended December 31, 2002. All such compensation is in compliance with the guidelines and limitations set forth in the Prospectus. Entity Receiving Compensation Description of Compensation and Services Rendered Amount I. Redwood Mortgage Corp. Mortgage Servicing Fee for servicing loans.......................$165,531 General Partners &/or Affiliates Asset Management Fee for managing assets..........................$34,869 General Partners 1% interest in profits.............................................$7,635
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP) Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection with the review, selection, evaluation, negotiation, and extension of the loans paid by the borrowers and not by the Partnership.................................$24,661 Redwood Mortgage Corp. Processing and Escrow Fees for services in connection with notary, document preparation, credit investigation, and escrow fees payable by the borrowers and not by the Partnership..........................................$1,767 Gymno Corporation Reconveyance Fee....................................................................$364
39 III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE STATEMENT OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $30,572 Item 12 - Security Ownership of Certain Beneficial Owners and Management The general partners are to own an aggregate total of 1% of the Partnership including a 1% portion of income and losses. Item 13 - Certain Relationships and Related Transactions Refer to footnotes 3 and 4 of the Notes to Financial Statements in Part II item 8, which describes related party fees and data. Also refer to the Prospectus dated October 20, 1989 (incorporated herein by reference) on page 12 "Compensation of General Partners and Affiliates" and page 14 "Conflicts of Interest". Item 14 - Controls and Procedures Based on their evaluation of the effectiveness of the Partnership's disclosure controls and procedures, as of a date within 90 days prior to the date of the filing of this report, the President and Chief Financial Officer of Gymno Corporation, the Partnership's corporate general partner, has concluded that the Partnership's disclosure controls and procedures are effective and sufficient to ensure that the Partnership record, process, summarize, and report information required to be disclosed in its periodic reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission's rules and forms. Subsequent to the date of such evaluation, there have not been any significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls, including any corrective action with regard to significant deficiencies and material weaknesses. 40 Part IV Item 15 - Exhibits, Financial Statements and Schedules, and Reports on Form 8-K A Documents filed as part of this report are incorporated: 1. In Part II, Item 8 under A - Financial Statements. 2. The Financial Statement Schedules are listed in Part II - Item 8 under B - Financial Statement Schedules. 3. Exhibits. Exhibit No. Description of Exhibits - ------------------ ------------------------- 3.1 Limited Partnership Agreement 3.2 Form of Certificate of Limited Partnership Interest 3.3 Certificate of Limited Partnership 10.1 Escrow Agreement 10.2 Servicing Agreement 10.3 (a) Form of Note secured by Deed of Trust which provides for principal and interest payments. (b) Form of Note secured by Deed of Trust which provides principal and interest payments and right of assumption (c) Form of Note secured by Deed of Trust which provides for interest only payments (d) Form of Note 10.4 (a) Deed of Trust and Assignment of Rents to accompany Exhibits 10.3 (a), and (c) (b) Deed of Trust and Assignment of Rents to accompany Exhibit 10.3 (b) (c) Deed of Trust to accompany Exhibit 10.3 (d) 10.5 Promissory Note for Formation Loan 10.6 Agreement to Seek a Lender All of these exhibits were previously filed as the exhibits to Registrant's Statement on Form S-11 (Registration No. 33-30427 and incorporated by reference herein). B. Reports of Form 8-K. No reports on Form 8-K have been filed during the last quarter of the period covered by this report. C. See A (3) above. D. See A (2) above. Additional reference is made to the prospectus (S-11 filed as part of the Registration statement) dated October 20, 1989 to pages 65 through 67 and Supplement #5 dated February 14, 1992 for financial data related to Gymno Corporation, a general partner. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized on the 31st day of March 2003. REDWOOD MORTGAGE INVESTORS VII By: /S/ Michael R. Burwell --------------------------------------------- Michael R. Burwell, General Partner By: Gymno Corporation, General Partner By: /S/ Michael R. Burwell -------------------------------------------------- Michael R. Burwell, President, Secretary & Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity indicated on the 31st day of March 2003. Signature Title Date /S/ Michael R. Burwell - ------------------------- Michael R. Burwell General Partner March 31, 2003 /S/ Michael R. Burwell - ------------------------- Michael R. Burwell President, Secretary & Chief March 31, 2003 Financial Officer of Gymno Corporation (Principal Financial and Accounting Officer); Director of Gymno Corporation 42 Exhibit 99.1 GENERAL PARTNER CERTIFICATION I, Michael R. Burwell, General Partner of the Partnership, certify that: 1. I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VII, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Michael R. Burwell - ---------------------------- Michael R. Burwell, General Partner March 31, 2003 43 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Redwood Mortgage Investors VII (the "Partnership") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the Partnership, certify, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Michael R. Burwell - ----------------------------- Michael R. Burwell, General Partner March 31, 2003 44 Exhibit 99.2 PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner of the Partnership, certify that: 1. I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VII, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Michael R. Burwell - -------------------------- Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner March 31, 2003 45 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Redwood Mortgage Investors VII (the "Partnership") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner of the Partnership, certify that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Michael R. Burwell - ----------------------------- Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner March 31, 2003 46 -----END PRIVACY-ENHANCED MESSAGE-----