10-Q 1 rmi710q1stqtr2003.txt UNITED STATES SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Quarterly Period Ended March 31, 2003 ------------------------------------------------------------------------------- Commission file number 33-30427 ------------------------------------------------------------------------------- REDWOOD MORTGAGE INVESTORS VII, a California Limited Partnership ------------------------------------------------------------------------------- (exact name of registrant as specified in its charter) California 94-3094928 ------------------------------------------------------------------------------- (State or other jurisdiction of I.R.S. Employer incorporation of organization) Identification No. 900 Veterans Blvd., Suite 500, Redwood City, CA 94063 ------------------------------------------------------------------------------- (address of principal executive office) (650) 365-5341 ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES XX NO ------------ ------------ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES NO NOT APPLICABLE X ------------ ------------- ----------- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest date. NOT APPLICABLE 1 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) BALANCE SHEETS MARCH 31, 2003 and DECEMBER 31, 2002 (unaudited) ASSETS March 31, December 31, 2003 2002 ----------------- ---------------- Cash $ 259,681 $ 1,057,845 ----------------- ---------------- Loans Loans, secured by deeds of trust 7,272,410 6,423,984 Loans, unsecured 213,174 216,770 ----------------- ---------------- 7,485,584 6,640,754 Less allowance for loan losses (769,510) (791,882) ----------------- ---------------- Net loans 6,716,074 5,848,872 ----------------- ---------------- Interest and other receivables Accrued interest 366,125 304,936 Advances on loans 19,405 17,230 ----------------- ---------------- Total interest and other receivables 385,530 322,166 ----------------- ---------------- Investment in limited liability company 1,273,543 1,212,722 ----------------- ---------------- Real estate owned, held for sale 684,391 683,136 ----------------- ---------------- Prepaid expenses 2,663 - ----------------- ---------------- Total assets $ 9,321,882 $ 9,124,741 ================= ================
LIABILITIES AND PARTNERS' CAPITAL Liabilities Line of credit $ 250,000 $ - Accounts payable 6,718 2,593 Payable to affiliate 40,577 32,176 Deferred interest - 37,704 ---------------- --------------- Total liabilities 297,295 72,473 ---------------- --------------- Partners' capital Limited partners' capital, subject to redemption 9,012,782 9,040,290 General partners' capital 11,805 11,978 ---------------- --------------- Total partners' capital 9,024,587 9,052,268 ---------------- --------------- Total liabilities and partners' capital $ 9,321,882 $ 9,124,741 ================ ===============
The accompanying notes are an integral part of these financial statements. 2 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002 (unaudited) THREE MONTHS ENDED MARCH 31, -------------------------------------- 2003 2002 ----------------- ----------------- Revenues Interest - on loans $ 164,099 $ 295,152 Interest - interest bearing accounts 1,570 1,085 Late charges 6,627 4,500 Other income 1,010 11,307 ----------------- ----------------- 173,306 312,044 ----------------- ----------------- Expenses Mortgage servicing fees 16,154 51,667 Interest on note payable - bank 169 22,227 Clerical costs through Redwood Mortgage Corp. 6,485 8,014 Asset management fees 8,517 8,881 Provisions for losses on loans and real estate (22,372) 5,731 Professional services 17,318 16,235 Printing, supplies and postage 1,586 1,235 Other 1,204 1,423 ----------------- ----------------- 29,061 115,413 ----------------- ----------------- Net income $ 144,245 $ 196,631 ================= ================= Net income: To general partners (1%) 1,442 1,966 To limited partners (99%) 142,803 194,665 ----------------- ----------------- $ 144,245 $ 196,631 ================= ================= Net income per $1,000 invested by limited partners for entire period -where income is reinvested and compounded $ 16 $ 21 ================= ================= -where partner receives income in monthly distributions $ 16 $ 21 ================= =================
The accompanying notes are an integral part of these financial statements. 3 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002(unaudited) THREE MONTHS ENDED MARCH 31, ---------------------------------------- 2003 2002 --------------- --------------- Cash flows from operating activities Net income $ 144,245 $ 196,631 Adjustments to reconcile net income to net cash provided by operating activities Provision for (recovery of) losses on loans and real estate (22,372) 5,731 Early withdrawal penalty credited to income (755) (2,663) Change in operating assets and liabilities Accrued interest and advances on loans (63,364) 176,332 Accounts payable and other liabilities (25,178) 13,040 Prepaid expenses (2,663) - --------------- --------------- Net cash provided by operating activities 29,913 466,949 --------------- --------------- Cash flows from investing activities Principal collected on loans 446,574 1,040,727 Loans originated (1,295,000) (563,714) Payments for real estate held for sale (1,255) (1,801) Proceeds from sale of real estate held for sale - 2,565 Investments in limited liability company (60,821) - Proceeds from unsecured loans 3,596 3,750 --------------- --------------- Net cash provided by (used in) investing activities (906,906) 481,527 --------------- --------------- Cash flows from financing activities Net increase (decrease) in line of credit 250,000 (700,000) Partners withdrawals (171,171) (330,172) --------------- --------------- Net cash provided by (used in) financing activities 78,829 (1,030,172) --------------- --------------- Net decrease in cash (798,164) (81,696) Cash - beginning of year 1,057,845 389,844 --------------- --------------- Cash - end of period 259,681 308,148 =============== =============== Cash payments for interest $ 169 $ 22,227 =============== ===============
The accompanying notes are an integral part of these financial statements. 4 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS MARCH 31, 2003 (unaudited) Note 1 - General In the opinion of the management of the Partnership, the accompanying unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial information included therein. These financial statements should be read in conjunction with the audited financial statements included in the Partnership's Form 10-K for the fiscal year ended December 31, 2002 filed with the Securities and Exchange Commission. The results of operations for the three month period ended March 31, 2003 are not necessarily indicative of the operating results to be expected for the full year. Note 2 - Summary of Significant Accounting Policies Loans, secured by deeds of trust At March 31, 2003 and December 31, 2002 there were loans categorized as impaired by the Partnership of $96,716 and $96,716, respectively. In addition, the impaired loans had accrued interest and advances totaling $7,841 and $7,841 at March 31, 2003 and December 31, 2002, respectively. The reduction in carrying value of the impaired loans of $6,620 and $6,620 at March 31, 2003 and December 31, 2002, respectively, is included in the allowance for loan losses. The average recorded investment in the impaired loans was $96,716 and $493,074 for March 31, 2003 and December 31, 2002, respectively. At March 31, 2003 and December 31, 2002, the Partnership had nine loans past due 90 days or more totaling $3,034,446 and $2,913,212 (41.73% and 45.35% 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. Allowance for loan losses The composition of the allowance for loan losses as of March 31, 2003 and December 31, 2002 was as follows: March 31, December 31, 2003 2002 --------------- ---------------- Impaired loans $ 6,620 $ 6,620 Specified loans 163,731 163,731 General 510,828 533,200 Unsecured loans 88,331 88,331 --------------- ---------------- $ 769,510 $ 791,882 =============== ================ Activity in the allowance for loan losses is as follows for the three months ended March 31, 2003 and year ended December 31, 2002: March 31, December 31, 2003 2002 --------------- ---------------- Beginning balance $ 791,882 $ 887,578 Provision for loan losses - 20,394 Recoveries (22,372) (40,433) Restructures - (64,210) Write-offs - (11,447) --------------- ---------------- $ 769,510 $ 791,882 =============== ================ 5 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS MARCH 31, 2003 (unaudited) Note 2 - Summary of Significant Accounting Policies (continued) Income taxes No provision for federal and state income taxes (other than an $800 state minimum tax) is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply. Reclassifications Certain reclassifications, not affecting previously reported net income or total partners' capital, have been made to the previously issued financial statements to conform to the current year classification. Profits and losses Profits and losses are allocated among the limited partners according to their respective capital accounts monthly after 1% of the profits and losses are allocated to the general partners. note 3 - General Partners and Related Parties The following are commissions and fees, which will be paid to the general partners. Mortgage brokerage commissions For fees in connection with the review, selection, evaluation, negotiation and extension of loans, 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 the three months through March 31, 2003 and 2002, loan brokerage commissions paid by the borrowers were $42,775 and $3,900, 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 $16,154 and $51,667 were incurred for the three months through March 31, 2003 and 2002, respectively. The Partnership has a payable to Redwood Mortgage Corp. for servicing fees of $40,577 and $32,176 at March 31, 2003 and December 31, 2002, respectively. Asset management fees The general partners receive monthly fees for managing the Partnership's loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8 of 1% annually). Asset management fees of $8,517 and $8,881 were incurred for the three months through March 31, 2003 and 2002, respectively. 6 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS MARCH 31, 2003 (unaudited) Note 3 - 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 the three months through March 31, 2003 and 2002, operating expenses totaling $6,485 and $8,014, respectively, were reimbursed to Redwood Mortgage Corp. Note 4 - Real Estate Held for Sale The following schedule reflects the costs of real estate acquired through foreclosure and the recorded reductions to estimated fair values, including estimated costs to sell as of March 31, 2003 and December 31, 2002: March 31, December 31, 2003 2002 ---------------- --------------- Costs of properties $ 1,264,477 $ 1,263,222 Reduction in value (580,086) (580,086) ---------------- --------------- Real estate held for sale $ 684,391 $ 683,136 ================ =============== Note 5 - 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 the three months through March 31, 2003 and year 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 March 31, 2003 and December 31, 2002 is as follows: March 31, December 31, 2003 2002 ---------------- ----------------- Assets $ 1,875,007 $ 1,814,186 Liabilities (601,464) (601,464) ---------------- ----------------- Total $ 1,273,543 $ 1,212,722 ================ ================= 7 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS MARCH 31, 2003 (unaudited) Note 6 - 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 March 31, 2003 and December 31, 2002 were $250,000 and $0, respectively; the interest rate was 4.50% (4.25% prime + .25%) at March 31, 2003. This line of credit expires December 2007 and requires the Partnership to meet certain financial covenants. As of March 31, 2003, 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 7 - Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments: Secured loans had a carrying value of $7,272,410 and $6,423,984, at March 31, 2003 and December 31, 2002, respectively. The fair value of these loans of $7,088,368 and $6,030,669, respectively, was estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made. The applicable amount of the allowance for loan losses along with accrued interest and advances related thereto should also be considered in evaluating the fair value versus the carrying value. Note 8 - Asset Concentrations and Characteristics The loans are secured by recorded deeds of trust. At March 31, 2003 and December 31, 2002 there were 26 and 25 secured loans outstanding, respectively, with the following characteristics: March 31, December 31, 2003 2002 --------------- ---------------- Number of secured loans outstanding 26 25 Total secured loans outstanding $ 7,272,410 $ 6,423,984 Average secured loan outstanding $ 279,708 $ 256,959 Average secured loan as percent of total 3.85% 4.00% Average secured loan as percent of Partners' capital 3.09% 2.84% Largest secured loan outstanding $ 1,000,000 $ 1,000,000 Largest secured loan as percent of total 13.75% 15.57% Largest secured loan as percent of Partners' capital 11.06% 11.05% Number of counties where security is located (all California) 10 11 Largest percentage of loans in one county 36.55% 41.38% Average secured loan to appraised value of security at time loan was consummated 62.11% 65.86% Number of secured loans in foreclosure 2 2 Amount of secured loans in foreclosure $ 236,807 $ 236,807
8 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS MARCH 31, 2003 (unaudited) Note 8 - Asset Concentrations and Characteristics (continued) The following categories of secured loans were held at March 31, 2003 and December 31, 2002: March 31, December 31, 2003 2002 -------------- -------------- First trust deeds $ 3,562,581 $ 3,269,897 Second trust deeds 3,636,658 2,939,753 Third trust deeds 73,171 214,334 -------------- -------------- Total loans 7,272,410 6,423,984 Prior liens due other lenders 6,468,369 5,475,725 -------------- -------------- Total debt $13,740,779 $11,899,709 ============== ============== Appraised property value at time of loan $22,121,579 $18,069,602 Total investments as percent of appraisals 62.11% 65.86% Investments by type of property Owner occupied homes $ 987,386 $ 1,037,474 Non-owner occupied homes 575,009 575,051 Apartments 1,508,648 708,648 Commercial 4,201,367 4,102,811 -------------- -------------- $ 7,272,410 $ 6,423,984 ============== ============== Scheduled maturity dates of secured loans as of March 31, 2003 are as follows: Year Ending December 31, ----------------------------------- 2003 $ 3,094,389 2004 711,087 2005 940,125 2006 96,716 2007 1,521,557 Thereafter 908,536 ---------------- Total $ 7,272,410 ================ The scheduled maturities for 2003 above include approximately $2,400,534 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 March 31, 2003 of $210,184 were in one bank. The balance exceeded FDIC insurance limits (up to $100,000 per bank) by $110,184. 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. This borrower accounted for approximately 25% of the loan balance at March 31, 2003. 9 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS MARCH 31, 2003 (unaudited) Note 9 - 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 March 31, 2003. As of March 31, 2003 the Partnership had two loans under workout agreements totaling $64,999. Construction loans Periodically the Partnership has construction loans, which are at various stages of completion. The Partnership approves the borrowers up to a maximum loan balance; however, disbursements are made during completion phases throughout the construction process. At March 31, 2003, all the construction loans were paid off. Legal proceedings The Partnership is involved in various legal actions arising in the normal course of business. In the opinion of management, such matters will not have a material effect upon the financial position of the Partnership. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP Critical Accounting Policies. In preparing the financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet 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-Q may contain forward looking statements. Uses of words such as "will", "may", "anticipate", "estimate", "continue" or other forward looking words, discuss future expectations or predictions. The foregoing analysis of 2003 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 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 three months ended March 31 2003 and 2002, loan brokerage commissions paid by borrowers were $42,775 and $3,900, respectively. 11 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 $16,154 and $51,667 were incurred for the three months ended March 31, 2003 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 $8,517 and $8,881 were incurred by the Partnership for the three months ended March 31, 2003 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. Such reimbursements are reflected as expenses in the statement of income. 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 March 31, 2003 and 2002, 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 months ended March 31, 2003 and 2002 The net income decrease of $52,386 (26.64%) for the three months ended March 31, 2003 versus the three month period ended March 31, 2002 was due primarily to a decrease in interest earned on loans of $131,053(44.4%), an increase in interest-interest bearing accounts of $485 (44.70%), an increase in late charges of $2,127 (47.27%), and a decrease in other income of $10,297 (91.07%) offset by expense increases (decreases). Significant expense decreases for the three month period ended March 31, 2003 versus March 31, 2002 included lower mortgage servicing fees of $35,513, a decrease in the provision for losses on loans and real estate of $28,103, a decrease in interest expense of $22,058, and an increase in professional fees of $1,083. The decrease in interest on loans of $131,053 (44.4%) for the three months ended March 31, 2003 versus March 31, 2002 was due primarily to a reduction of the loan portfolio to $7,272,410 from $9,899,551, and a reduction in average portfolio interest rate as compared to the first quarter 2002. The decrease in interest on the line of credit of $22,058 (99.24%) for the three months ended March 31, 2003 versus March 31, 2002 is due to lower overall usage of the line of credit during the first quarter of 2003. The Partnership utilized its bank line of credit less during the first quarter of 2003 compared to the first quarter of 2002. The outstanding balances of $250,000 at March 31, 2003 versus $1,207,000 at March 31, 2002 are reflective of the overall lower credit line usage. Cash generated from interest earnings, late charges, amortization of principal and loan payoffs was utilized to pay down the credit line. The decrease in mortgage servicing fees of $35,513 (68.73%) for the three months ended March 31, 2003 versus March 31, 2002 is attributable to a decrease in loan portfolio to $7,272,410 from $9,899,551. In addition, higher mortgage servicing fees during the three months through March 31, 2002 was due to collection of servicing fees on impaired loans during the first quarter of 2002. 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. 12 Loan loss recoveries of $22,372 occurred during the first quarter of 2003. No further provision was made as the general partners felt that the allowance for loan losses of $769,510 as of March 31, 2003 was more than adequate to offset any potential loss in loans or real estate. The decrease in asset management fees of $364 (4.10%) for the three months ended March 31, 2003 versus the respective period ended March 31, 2002 is due to a decrease in the partners' capital under management at March 31, 2003 and 2002 of $9,024,857 and $9,296,042, respectively. The increase in professional fees of $1,083 (6.67%) for the three months ended March 31, 2003 versus March 31, 2002 is due to timing of services provided in 2003 compared to 2002 in relation to its audit and tax return processing. Partnership capital continued to decrease as the limited partners capital declined due to both earnings distribution and capital liquidations. For the three months ended March 31, 2003 earnings and capital liquidated was $57,158 and $113,151, respectively versus $80,447 and $250,422, respectively for the corresponding period in 2002. At March 31, 2003, outstanding foreclosures remained at two ($236,807) from the two ($986,372) that existed at March 31, 2002. These foreclosures are a reflection of the difficult economic times at March 31, 2003 and March 31, 2002, yet are not unusual in the general partners' experience and we do not anticipate a reduction in net income due to these foreclosures. The general partners received Mortgage Brokerage Commissions from the loan borrowers of $42,775 for the three months ended March 31, 2003 as compared to $3,900 for the three months ended March 31, 2002. The increase is due to more loans written in the three months ended March 31, 2003. During 2001, and through March 31, 2003, 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 early 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 6.75% and 7.30% 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 March 31, 2003, there were two properties in foreclosure. The principal amount of these foreclosures was $236,807. 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. 13 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 held for sale 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 and 2003, the Northern California real estate market slowed and the national and local economies have slipped into recession. As of March 31, 2003, two notices of default are currently filed beginning the process of foreclosing two additional loans. The principal amounts of the two foreclosed loans total $236,807 or 3.26% 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 $64,999 as of March 31, 2003. 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 March 31, 2003, 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 ($22,372) and $5,731, as provisions for losses on loans and real estate for the three months ended March 31, 2003 and 2002, respectively. The reserve for losses on loans and real estate had a balance of $769,510 as of March 31, 2003. This balance reflects reduced expected loan or real estate anticipated losses in 2003 and that current reserves are adequate to handle potential losses. If conditions change, the Partnership may again increase its provisions for loan and real estate losses. The Partnership makes loans primarily in Northern California. As of March 31, 2003, approximately 57.77%, ($4,201,144) 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 March 31, 2003, the Partnership had an average loan to value ratio computed as of the date the loan was made of 62.11%. 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. PORTFOLIO REVIEW - For the three months ended March 31, 2003 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 March 31, 2003 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 $4,201,144 (57.77%) and $6,485,539 (65.51%) of the outstanding loan portfolio. The remainder of the portfolio represented loans secured by real estate located primarily in Northern California. 14 As of March 31, 2003, approximately 21.48% ($1,562,396), was invested in loans secured by single family homes (1-4 units), approximately 20.75% ($1,508,648), was invested in loans secured by multifamily dwellings (apartments over 4 units), approximately 28.11% ($2,044,309), was invested in loans secured by commercial properties, and approximately 29.66% ($2,157,057) was invested in loans secured by land. As of March 31, 2002, approximately 18.39% ($1,820,339), was invested in loans secured by single family homes (1-4 units), approximately 15.79% ($1,563,213) was invested in loans secured by multifamily dwellings (apartments over 4 units), approximately 39.65% ($3,924,789) was invested in loans secured by commercial properties, and approximately 26.17% ($2,591,210) was invested in loans secured by land. As of March 31, 2003, the Partnership held 26 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 March 31, 2003: PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS As of March 31, 2003 # of Loans Amount Percent ------------- -------------- ------------ 1st Mortgages 13 $3,562,581 49% 2nd Mortgages 12 3,636,658 50% 3rd Mortgages 1 73,171 1% ============ ============== ============ Total 26 $7,272,410 100% Maturing 12/31/03 and prior 13 $3,094,389 43% Maturing prior to 12/31/04 3 711,087 10% Maturing prior to 12/31/05 2 940,125 13% Maturing after 12/31/05 8 2,526,809 34% ============ ============== ============ Total 26 $7,272,410 100% Average Loan $ 279,708 4% Largest Loan 1,000,000 14% Smallest Loan 11,373 0.16% Average Loan-to-Value 62% 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 three months ended March 31, 2003 and 2002, the Partnership made distributions of earnings to limited partners of $57,158 and $80,447, respectively. Distribution of Earnings to limited partners, which were not withdrawn for the three months ended March 31, 2003 and 2002 were $85,645 and $114,218, respectively. As of March 31, 2003 and 2002, limited partners electing to withdraw earnings represented 37%and 42% 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 three months ended March 31, 2003 and 2002, $9,440 and $33,291 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 March 31, 2003 and 2002, respectively. 15 Additionally, for the three months ended March 31, 2003 and 2002, $103,711 and $217,131, respectively, were liquidated by limited partners who have elected a liquidation program over a period of five years or longer. This ability to withdraw after five years by limited partners has the effect of providing limited partner liquidity. The general partners expect a portion of the limited partners to take advantage of this provision. This has the anticipated effect of the Partnership growing, primarily through reinvestment of earnings in years one through five. The general partners expect to see increasing numbers of limited partner withdrawals in years five through eleven, after which time the bulk of those limited partners who have sought withdrawal have been liquidated. After year eleven, liquidation generally subsides. In some cases in order to satisfy Broker Dealers and other reporting requirements, the general partners have valued the limited partners' interest in the Partnership on a basis which utilizes a per Unit system of calculation, rather than based upon the investors' capital account. This information has been reported in this manner in order to allow the Partnership to integrate with certain software used by the Broker Dealers and other reporting entities. In those cases, the Partnership will report to Broker Dealers, Trust Companies and others a "reporting" number of Units based upon a $1.00 per Unit calculation. The number of reporting Units provided will be calculated based upon the limited partner's capital account value divided by $1.00. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The reporting Units are solely for Broker Dealers requiring such information for their software programs and do not reflect actual Units owned by a limited partner or the limited partners' right or interest in cash flow or any other economic benefit in the Partnership. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The amount of Partnership earnings each investor is entitled to receive is determined by the ratio that each investor's capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any NASD member client account statement in providing a per Unit estimated value of the client's investment in the Partnership in accordance with NASD Rule 2340. While the general partners have set an estimated value for the Partnership Units, such determination may not be representative of the ultimate price realized by an investor for such Units upon sale. No public trading market exists for the Partnership's Units and none is likely to develop. Thus, there is no certainty that the Units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the Partnership, which may include early withdrawal penalties (See the section of the Prospectus entitled "Risk Factors - Purchase of Units is a long term investment"). Current Economic Conditions. As contained in a collection of real estate statistics listed in the San Francisco Chronicle dated February 21, 2003, Bay Area home sales slowed in January but prices rose. The article stated, "The torrid pace of home sales in the Bay Area cooled slightly in January, but the median price year-over-year rose nearly 9 %, a real estate information firm said Thursday. The median price of a house in the nine-county Bay Area was $404,000 in January, up 8.9% from the year-ago median of $371,000, but down 2.9% from the December median of $416,000. Last summer, the Bay Area median reached an all-time high of $417,000. The median is the midpoint; half of the sales prices in the month were below and half were above $404,000. A total of 6,944 houses and condos sold last month in the nine counties, down 0.7% from the 6,990 sold in January 2002. Sales dropped 19% in Napa, 2.1% in San Francisco and 7.6% in Santa Clara. Researchers at DataQuick in La Jolla (San Diego County) said the drop reflects stronger-than-expected sales in January 2002, when buyers who had fled the market after September 11 terrorist attacks returned, prompted largely by falling interest rates. The January 2002 sales figure was the highest for that month in a decade. `Everyone put things on hold (after Sept. 11), and several months later, people jumped back in,' said John Karevoll, DataQuick researcher. Although sales fell 19% in Napa County, the median price there jumped 31.1% to $405,000 - though Karevoll pointed out the county routinely has the fewest sales per month. In San Francisco, the median price rose 8.5% to $539,000. Santa Clara, hit hard by the dot-com bust, saw the smallest rise in median home price - up 4.9% to $447,000. Economists are keeping a close eye on the housing market, one of the few bright sectors in an otherwise stormy economy. To some pundits, the Bay Area market, in particular, has raised red flags because home prices have continued to rise despite widespread layoffs and a beleaguered technology sector." 16 January Home Sales ------------------------------------------------------------------------------------------------------------------ Sold* Sold* Pct. Median Median Pct. Jan. 02 Jan. 03 Change Jan. 02 Jan. 03 Change ---------- ---------- ------------ ------------ ------------- ----------- Alameda 1,478 1,471 -0.5% $358,000 $392,000 9.5% Contra Costa 1,319 1,392 5.5 309,000 355,000 14.9 Marin 259 269 3.9 502,000 535,000 6.6 Napa 163 132 -19.0 309,000 405,000 31.1 San Francisco 375 367 -2.1 497,000 539,000 8.5 San Mateo 581 541 -6.9 478,000 507,000 6.1 Santa Clara 1,635 1,510 -7.6 426,000 447,000 4.9 Solano 601 658 9.5 238,000 276,000 16.0 Sonoma 579 604 4.3 297,000 343,000 15.5 Bay Area 6,990 6,944 -0.7 371,000 404,000 8.9
*Sales include new and existing houses and condos. Source: DataQuick Information Systems, www.dqnews.com 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. In spite of the slowing economy, commercial lending opportunities exist which the Partnership may advantage itself of. According to the San Francisco Business Times of the week of January 3, 2003, the real estate market took its first steps on the long road back. The article states, "After back-to-back terrible years, the mere fact that 2003 is not likely to be worse counts as good news. The market seems to be at the bottom of the bottom and it may see a slight improvement in 2003. None of real estate's highly paid crystal ballers, including University of California, Berkeley's Ken Rosen, is predicting major improvement in 2003 because they don't see significant job creation. The uncertainty of war in the Middle East and continuing problems in high tech and travel, meanwhile, conspire to keep the lid on chances for a major recovery in 2003. That doesn't mean that there won't be major lease deals. Orrick Herrington & Sutcliffe will likely sign a 150,000-square-foot lease in San Francisco at either Foundry Square or 400 Sansome Street that will have more value than any lease signed throughout 2002 anywhere in the region. Commercial vacancy in San Francisco hovers around 20% while down on the harder hit Peninsula it is closer to 25%. Nobody dares calculate shadow space - those canyons of empty cubicles that corporations aren't using or subleasing. That space has to fill before companies absorb new space, a factor likely to further delay any recovery. New office building, which tends to lag a recovery in the leasing market, is still several years away, barring some plans by government agencies. `It will be another lean year with some pockets of activity in non-cyclical areas such as the nonprofits,' said Dave Klein, senior vice president of BT Commercial. `Education and nonprofits will suck up a lot of space, but demand from the big corporate office users will still be soft. We're at the bottom of the bottom now and after 10 consecutive quarters of negative absorption we could see some slight positive absorption by the end of the first quarter.' Major foreclosures have been noticeably absent thus far in the downturn thanks to microscopic interest rates. If landlords continue to have to carry empty buildings, bankruptcy courts could see more activity this year. To the Partnership, stabilizing vacancy rates may mean that we are at the vacancy rate bottom. High levels of space exist, and as tenant 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 foreclosures or delinquencies. 17 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 March 31, 2003. 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 March 31, 2003: 2003 2004 2005 2006 2007 Thereafter Total -------------- ----------- ----------- ----------- ------------ ------------ ------------- Interest earning assets: Money market accounts $ 3,020 $ 3,020 Average interest rate 1.00% 1.00% Loans secured by deeds of trust $3,094,390 711,086 940,125 96,716 1,521,557 908,536 $7,272,410 Average interest rate 11.22% 10.46% 9.87% 6.50% 8.13% 8.73% 9.95% Interest bearing liabilities: Line of credit $ 250,000 $ 250,000 Average interest rate 4.50% 4.50%
Market Risk. The Partnership's line of credit bears interest at a variable rate, tied to the prime rate. As a result, the Partnership's primary market risk exposure with respect to its obligations is to changes in interest rates, which will affect the interest cost of outstanding amounts on the 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. 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 March 31, 2003) 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. Controls and Procedures. Within the 90 days prior to the date of this report, the general partner of the Partnership carried out an evaluation, under the supervision and with the participation of the general partner's management, including the general partner's President and Chief Financial Officer, of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the President and Chief Financial Officer of the general partner concluded that the Partnership's disclosure controls and procedures are effective. There were no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 18 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 March 31, 2003 the general partners have determined that the allowance for loan losses of $769,510 (8.5% 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 March 31, 2003, 9 loans were delinquent over 90 days amounting to $3,034,446. 19 COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP The Partnership has no officers or directors. The Partnership is managed by the general partners. There are certain fees and other items paid to management and related parties. A more complete description of management compensation is found in the Prospectus part of Form S-11 and subsequent amendments related to the offering of Partnership interests, pages 12-13, under the section "Compensation of the General Partners and the Affiliates", which are incorporated by reference. Such compensation is summarized below. The following compensation has been paid to the general partners and affiliates for services rendered during the three months ended March 31, 2003. All such compensation is in compliance with the guidelines and limitations set forth in the Prospectus. Entity Receiving Compensation Description of Compensation and Services Rendered Amount ------------------------------------------------------------------------------------------------------------- I. Redwood Mortgage Corp. Loan Servicing Fee for servicing loan ...............................$16,154 General Partners &/or Affiliates Asset Management Fee for managing assets .............................$8,517 General Partners 1% interest in profits ...............................................$1,442
II. FEES PAID BY BORROWERS ON LOANS PLACED BY COMPANIES RELATED TO THE GENERAL PARTNERS WITH THE PARTNERSHIP (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP) Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection with the review, selection, evaluation, negotiation, and extension of the loan paid by the borrowers and not by the Partnership......................$42,775 Redwood Mortgage Corp. Processing and Escrow Fees for services in connection with notary, document preparation, credit investigation, and escrow fees paid by the borrowers and not by the Partnership .....................................$987 Gymno Corporation, Inc. Reconveyance Fee..............................................................$180
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,485 20 PART 2 OTHER INFORMATION Item 1. Legal Proceedings The Partnership periodically is a defendant in various legal actions. Please refer to Note 9 of the Financial Statements. Item 2. Changes in the Securities Not Applicable Item 3. Defaults upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (99.1) Certification of Michael R. Burwell, General Partner (99.2) Certification of Michael R. Burwell, President, Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General Partner (b) Form 8-K Not Applicable 21 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized on the 15th day of May 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/Treasurer & Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity indicated on the 15th day of May 2003. Signature Title Date /S/ Michael R. Burwell ------------------------ Michael R. Burwell General Partner May 15, 2003 /S/ Michael R. Burwell ------------------------ Michael R. Burwell President, Secretary/Treasurer May 15, 2003 of Gymno Corporation (Principal Financial and Accounting Officer); Director of Gymno Corporation 22 Exhibit 99.1 GENERAL PARTNER CERTIFICATION I, Michael R. Burwell, General Partner, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage Investors VII, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, is made known to us, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Michael R. Burwell ----------------------------------- Michael R. Burwell, General Partner May 15, 2003 23 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Redwood Mortgage Investors VII (the "Partnership") on Form 10-Q for the period ending March 31, 2003 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 May 15, 2003 24 Exhibit 99.2 PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage Investors VII, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, is made known to us, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Michael R. Burwell --------------------------------- Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner May 15, 2003 25 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Redwood Mortgage Investors VII (the "Partnership") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President, Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General Partner of the Partnership, certify that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Michael R. Burwell ------------------------------------------- Michael R. Burwell, President, Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General Partner May 15, 2003 26