-----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, RAaE1R8vm45KTL4+IRglYVuYswubD48HF/m3jE8MyobBvAPQyzqPO/RYAGv3Zq9S 4qIQGm5i5X9OaxGwQzxLFA== 0000854092-99-000008.txt : 19991117 0000854092-99-000008.hdr.sgml : 19991117 ACCESSION NUMBER: 0000854092-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REDWOOD MORTGAGE INVESTORS VII CENTRAL INDEX KEY: 0000854092 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 943094928 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19992 FILM NUMBER: 99751524 BUSINESS ADDRESS: STREET 1: 650 EL CAMINO STE G CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 4153670121 MAIL ADDRESS: STREET 1: 650 EL CAMINO REAL STE K CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-Q 1 10Q FORM 10-Q SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Period Ended September 30, 1999 - -------------------------------------------------------------------------------- Commission file number 33-30427 - -------------------------------------------------------------------------------- REDWOOD MORTGAGE INVESTORS VII - ------------------------------------------------------------------------------- (exact name of registrant as specified in its charter) California 94-3094928 - -------------------------------------------------------------------------------- (State or other jurisdiction of I.R.S. Employer incorporation of organization) Identification No. 650 El Camino Real, Suite G, Redwood City, CA. 94063 - -------------------------------------------------------------------------------- (address of principal executive office) (650) 365-5341 - -------------------------------------------------------------------------------- (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 REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) BALANCE SHEETS DECEMBER 31, 1998 (audited) and SEPTEMBER 30, 1999 (unaudited) ASSETS Sept 30, 1999 Dec 31, 1998 (unaudited) (audited) -------------- ------------- Cash $339,588 $461,544 -------------- ------------- Accounts receivable: Mortgage Investments, secured by deeds of trust 11,581,881 13,209,186 Accrued interest on Mortgage Investments 310,724 442,350 Advances on Mortgage Investments 54,330 39,733 Accounts receivables, unsecured 161,056 242,493 ------------- ------------- 12,107,991 13,933,762 Less allowance for doubtful accounts 1,069,251 787,042 ------------ ------------- 11,038,740 13,146,720 ------------ ------------- Real estate owned, acquired through foreclosure, held for sale 327,529 397,396 Partnership Interest 5,956 0 ------------ ------------- $11,711,813 $14,005,660 ------------ ------------- LIABILITIES AND PARTNERS' CAPITAL Liabilities: Notes payable - bank line of credit $450,000 $1,912,663 Accounts payable and accrued expenses 2,551 12,547 Deferred Interest 0 131,743 -------------- ------------ 452,551 2,056,953 -------------- ------------ Partners' Capital Limited Partners' capital, subject to redemption (Note 4E): Net of formation loan receivable of $187,471 and $253,387 for 1999, and 1998, respectively 11,247,284 11,936,729 General Partners' capital 11,978 11,978 -------------- ------------ Total Partners' Capital 11,259,262 11,948,707 -------------- ------------ Total Liabilities and Partners' Capital $11,711,813 $14,005,660 -------------- ------------
See accompanying notes to financial statements. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF INCOME FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1999 and 1998 (unaudited) 9 months 9 months 3 months 3 months ended ended ended ended Sept 30, Sept 30, Sept 30, Sept 30, (unaudited) (unaudited) (unaudited) (unaudited) Revenues: Interest on Mortgage Investments $1,323,660 $1,178,911 $421,475 $401,928 Interest on bank deposits 2,406 5,416 1,137 2,176 Late charges 11,930 12,675 692 5,298 Other 6,063 8,308 1,995 2,450 ------------- ----------- -------- ------- 1,344,059 1,205,310 425,299 411,852 ------------- ----------- -------- ------- Expenses: Interest on note payable - bank 172,455 126,343 54,432 38,267 Clerical costs through Redwood Mortgage Corp. 22,795 25,895 7,190 8,396 Mortgage Servicing Fees 109,209 104,456 23,305 45,457 General Partner asset management fees 11,249 12,219 3,670 4,000 Provision for doubtful accounts and losses acquired through foreclosure 313,483 276,115 100,770 91,024 Professional Services 20,321 18,900 700 550 Printing, supplies and postage 10,012 8,620 2,351 2,349 Other 5,106 6,040 1,063 1,632 ------------- ----------- -------- ------- 664,630 578,588 193,481 191,675 ------------- ----------- -------- ------- Net income $679,429 $626,722 $231,818 $220,177 ------------- ----------- -------- ------- Net income: to General Partners (1%) $6,794 $6,267 $2,318 $2,202 Net income: to Limited Partners (99%) 672,635 620,455 229,500 217,975 ------------- ----------- -------- ------- $679,429 $626,722 $231,818 $220,177 ------------- ----------- -------- ------- Net income per $1000 invested by Limited Partners for entire period: - where income is reinvested and compounded $57.51 $48.66 $19.67 $17.13 ------------- ----------- -------- ------- - where partner receives income in monthly $56.09 $47.64 $19.54 $17.03 ------------- ----------- -------- -------
See accompanying notes to Financial Statements REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (audited) AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (unaudited) PARTNERS' CAPITAL ------------------------- LIMITED PARTNERS' CAPITAL ------------------------- Capital Account Unallocated Formation Limited Syndication Loan Partners Costs Receivable Total --------- ----------- ---------- ------- Balances at December 31, 1995 $14,216,032 ($13,588) ($517,051) $13,685,393 Formation Loan collections 0 0 62,225 62,225 Net income 850,508 0 0 850,508 Allocation of syndication costs (13,588) 13,588 0 0 Early withdrawal penalties (37,345) 0 25,663 (11,682) Partners' withdrawals (1,013,078) 0 0 (1,013,078) ---------- --------- --------- ----------- Balances at December 31, 1996 $14,002,529 $0 ($429,163) $13,573,366 Formation Loan collections 0 0 60,223 60,223 Net Income 818,610 0 0 818,610 Early withdrawal penalties (40,258) 0 27,665 (12,593) Partners' withdrawals (1,572,037) 0 0 (1,572,037) --------- --------- -------- ----------- Balances at December 31, 1997 $13,208,844 $0 ($341,275) $12,867,569 Formation Loan collections 0 0 66,908 66,908 Net Income 838,105 0 0 838,105 Early withdrawal penalties (30,529) 0 20,980 (9,549) Partners' withdrawals (1,826,304) 0 0 (1,826,304) --------- --------- -------- ----------- Balances at December 31, 1998 $12,190,116 $0 ($253,387) $11,936,729 Formation Loan collections 0 0 55,880 55,880 Net Income 672,635 0 0 672,635 Early withdrawal penalties (14,604) 0 10,036 (4,568) Partners' withdrawals (1,413,392) 0 0 (1,413,392) --------- --------- -------- ----------- Balances at September 30, 1999 $11,434,755 $0 ($187,471) $11,247,284 --------- --------- -------- ------------
See accompanying notes to financial statements REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (audited) AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (unaudited) PARTNERS' CAPITAL ---------------------------------------------------- GENERAL PARTNERS' CAPITAL ---------------------------------------------------- Unallocated Total Capital Account Syndication Partners' General Partners Costs Total Capital ------------- ------------ --------- ------------- Balances at December 31, 1995 $11,978 $(137) $11,841 $13,697,234 Formation Loan collections 0 0 0 62,225 Net income 8,591 0 8,591 859,099 Allocation of syndication costs (137) 137 0 0 Early withdrawal penalties 0 0 0 (11,682) Partners' withdrawals (8,454) 0 (8,454) (1,021,532) ------------- ----------- -------- ------------- Balances at December 31, 1996 $11,978 $0 $11,978 $13,585,344 Formation Loan collections 0 0 0 60,223 Net income 8,269 0 8,269 826,879 Early withdrawal penalties 0 0 0 (12,593) Partners' withdrawals (8,269) 0 (8,269) (1,580,306) ------------- ----------- -------- ------------- Balances at December 31, 1997 $11,978 $0 $11,978 $12,879,547 Formation Loan collections 0 0 0 66,908 Net income 8,466 0 8,466 846,571 Early withdrawal penalties 0 0 0 (9,549) Partners' withdrawals (8,466) 0 (8,466) (1,834,770) ------------- ----------- -------- ------------- Balances at December 31, 1998 $11,978 $0 $11,978 $11,948,707 Formation Loan collections 0 0 0 55,880 Net income 6,794 6,794 679,429 Early withdrawal penalties 0 0 0 (4,568) Partners' withdrawals (6,794) 0 (6,794) (1,420,186) ------------- ----------- -------- ------------- Balances at September 30, 1999 $11,978 $0 $11,978 $11,259,262 ------------- ----------- -------- -------------
See accompanying notes to financial statements REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (unaudited) 9 months ended 9 months ended Sept 30, 1999 Sept 30, 1998 (unaudited) (unaudited) --------------- -------------- Cash flows from operating activities: Net income $679,429 $626,722 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts 258,478 346,920 Provision for losses on real estate held for sale 55,005 0 Early withdrawal penalty credited to income (4,568) (7,200) (Increase) decrease in assets: Accrued interest & advances 117,029 241,754 Increase (decrease) in liabilities: Accounts payable and accrued expenses (9,996) 18,784 Deferred interest on Mortgage Investments (131,743) (69,316) --------------- --------------- Net cash provided by operating activities 963,634 1,157,664 --------------- --------------- Cash flows from investing activities: Principal collected on mortgage investments 7,059,108 4,422,118 Mortgage Investments made (5,431,803) (5,499,170) Additions to Real Estate held for sale (4,650) (33,865) Dispositions of real estate held for sale 103,696 310,002 Investment in partnership (5,956) 346,017 Accounts receivable - Unsecured (Interest and proceeds) 20,984 825 --------------- --------------- Net cash provided by (used in) investing activities 1,741,379 (454,073) --------------- --------------- Cash flows from financing activities: Increase (decrease) in note payable-bank (1,462,663) 320,846 Formation loan collections 55,880 55,023 Partners withdrawals (1,420,186) (1,319,127) --------------- --------------- Net cash provided by (used in) financing activities (2,826,969) (943,258) --------------- --------------- Net increase (decrease) in cash (121,956) (239,667) Cash - beginning of period 461,544 520,837 --------------- --------------- Cash - end of period $339,588 $281,170 --------------- ---------------
See accompanying notes to financial statements. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND SEPTEMBER 30, 1999 (unaudited) NOTE 1 - ORGANIZATION AND GENERAL Redwood Mortgage Investors VII, (the "Partnership") is a California Limited Partnership, of which the General Partners are D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation owned and operated by the individual General Partners. The Partnership was organized to engage in business as a mortgage lender for the primary purpose of making Mortgage Investments secured by Deeds of Trust on California real estate. Mortgage Investments are being arranged and serviced by Redwood Mortgage Corp., an affiliate of the General Partners. At September 30, 1992, the offering had been closed with contributed capital totaling $11,998,359 for Limited Partners. A minimum of 2,500 units ($250,000) and a maximum of 120,000 units ($12,000,000) were offered through qualified broker-dealers. As Mortgage Investments were identified, partners were transferred from applicant status to admitted partners participating in Mortgage Investment operations. Each month's income is allocated to partners based upon their proportionate share of partners'capital. Some partners have elected to withdraw income on a monthly, quarterly or annual basis. A. Sales Commissions - Formation Loan Sales commissions ranging from 0% (Units sold by General Partners) to 10% of the gross proceeds were paid by Redwood Mortgage Corp., an affiliate of the General Partners that arranges and services the Mortgage Investments. To finance the sales commissions, the Partnership was authorized to lend to Redwood Mortgage Corp., an amount not to exceed 8.3% of the gross proceeds provided that the Formation Loan for the minimum offering period could be 10% of the gross proceeds for that period. The Formation Loan is unsecured and is being repaid, without interest, in installments of principal, over a ten year period commencing January 1, 1992. At December 31, 1992, Redwood Mortgage Corp. had borrowed $914,369 from the Partnership to cover sales commissions relating to $11,998,359 Limited Partner contributions (7.62%). Through September 30, 1999, $726,898 including $134,159 in early withdrawal penalties, had been repaid leaving a balance of $187,471. The Formation Loan, which is due from an affiliate of the General Partners', has been deducted from Limited Partners' capital in the balance sheet. As amounts are collected from Redwood Mortgage Corp., the deduction from capital will be reduced. B. Other Organizational and Offering Expenses Organizational and offering expenses, other than sales commissions, but including printing costs, attorney and accountant fees, and other costs, were paid by the Partnership. Such costs were limited to 10% of the gross proceeds of the offering or $500,000 whichever was less. The General Partners were to pay any amount of such expenses in excess of 10% of the gross proceeds or $500,000. Organization costs of $10,102 and syndication costs of $415,692 were incurred by the Partnership. The sum of organization and syndication costs, $425,794, approximated 3.55% of the gross proceeds contributed by the Partners. Both the Organization and Syndication Costs have been fully amortized and allocated to the Partners. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND SEPTEMBER 30, 1999 (unaudited) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Accrual Basis Revenues and expenses are accounted for on the accrual basis of accounting wherein income is recognized as earned and expenses are recognized as incurred. Once a Mortgage Investment is categorized as impaired, interest is no longer accrued thereon. B. Management Estimates In preparing the financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the related periods. Such estimates relate principally to the determination of the allowance for doubtful accounts, including the valuation of impaired mortgage investments, and the valuation of real estate acquired through foreclosure. Actual results could differ significantly from these estimates. C. Mortgage Investments, Secured by Deeds of Trust The Partnership has both the intent and ability to hold the Mortgage Investments to maturity, i.e., held for long-term investment. They are therefore valued at cost for financial statement purposes with interest thereon being accrued by the simple interest method. Financial Accounting Standards Board Statements (SFAS) 114 and 118 (effective January 1, 1995) provide that if the probable ultimate recovery of the carrying amount of a mortgage investment, with due consideration for the fair value of collateral, is less than the recorded investment, and related amount due and the impairment is considered to be other than temporary, the carrying amount of the investment (cost) shall be reduced to the present value of future cash flows. The adoption of these statements did not have a material effect on the financial statements of the Partnership because that was the valuation method previously used on impaired Mortgage Investments. At September 30, 1999 and at December 31, 1998, and 1997, reductions in the cost of Mortgage Investments categorized as impaired by the Partnership totalled $38,634, $38,634, and $0 respectively. The reduction in stated value was accomplished by increasing the allowance for doubtful accounts. As presented in Note 10 to the financial statements as of September 30, 1999, the average mortgage investment to appraised value of security at the time the Mortgage Investments were consummated was 64.70%. When a Mortgage Investment is valued for impairment purposes, an updating is made in the valuation of collateral security. However, such a low loan to value ratio tends to minimize reductions for impairment. D. Cash and Cash Equivalents For purposes of the statements of cash flows, cash and cash equivalents include interest bearing and non-interest bearing bank deposits. E. Real Estate Owned, Held for Sale Real estate owned, held for sale, includes real estate acquired through foreclosure, and is stated at the lower of the recorded investment in the property, net of any senior indebtedness, or at the property's estimated fair value, less estimated costs to sell. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND SEPTEMBER 30, 1999 (unaudited) The following schedule reflects the costs of real estate acquired through foreclosure and the recorded reductions to estimated fair values, less estimated costs to sell as of September 30,1999, and December 31, 1998 and 1997: September 30, December 31, December 31, 1999 1998 1997 ------------ ------------ ------------ Costs of properties $420,574 $765,986 $906,499 Reduction in value (93,045) (348,590) (219,360) REO prior lien 0 (20,000) 0 ------------ ------------ ------------ Fair value reflected in financial statements $327,529 $397,396 $687,139 Effective January 1, 1996, the Partnership adopted the provisions of statement No 121 (SFAS 121) of the Financial Accounting Standards Board, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be disposed of". The adoption of SFAS 121 did not have a material impact on the Partnership's financial position because the methods indicated were essentially those previously used by the Partnership. F. Investment in Partnership (see note 5) G. Income Taxes No provision for Federal and State income taxes is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply. H. Organization and Syndication Costs The Partnership bears its own organization and syndication costs (other than certain sales commissions and fees described above) including legal and accounting expenses, printing costs, selling expenses, a 1% wholesale brokerage fee and filing fees. Organizational costs of $10,102 were capitalized and were amortized over a five year period. Syndication costs of $415,692 were charged against partners' capital and were allocated to individual partners consistent with the Partnership Agreement. I. Allowance for Doubtful Accounts Mortgage Investments and the related accrued interest, fees and advances are analyzed on a continuous basis for recoverability. Delinquencies are identified and followed as part of the Mortgage Investment system. A provision is made for doubtful accounts to adjust the allowance for doubtful accounts to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable accounts receivable, including impaired mortgage investments, other mortgage investments, accrued interest and advances on mortgage investments, and other accounts receivable (unsecured). The composition of the allowance for doubtful accounts as of September 30, 1999, and December 31, 1998, and 1997 was as follows: REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND SEPTEMBER 30, 1999 (unaudited) September 30, December 31, December 31, 1999 1998 1997 ------------ ----------- ------------ Impaired Mortgage Investments $38,634 $38,634 $0 Other Mortgage Investments 888,508 606,299 284,738 Accounts receivable, unsecured 142,109 142,109 140,000 ----------- ---------- ------------ $1,069,251 $787,042 $424,738 ----------- ---------- ------------ J. Net Income Per $1,000 Invested Amounts reflected in the statements of income as net income per $1,000 invested by Limited Partners for the entire period are actual amounts allocated to Limited Partners who have their investment throughout the period and have elected to either leave their earnings to compound or have elected to receive monthly distributions of their net income. Individual income is allocated each month based on the Limited Partners' pro rata share of Partners' Capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or selected other options. However, the net income per $1,000 average invested has approximated those reflected for those whose investments and options have remained constant. NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES The following are commissions and/or fees which are paid to the General Partners and/or related parties. A. Mortgage Brokerage Commissions Redwood Mortgage Corp. receives mortgage brokerage commissions for services in connection with the review, selection, evaluation, negotiation and extension of Mortgage Investments in an amount up to 12% of the principal amount of the Mortgage Investments through the period ending 6 months after the termination date of the offering. Thereafter, commissions are limited to an amount not to exceed 4% of the total Partnership assets per year. Such commissions are paid by the borrowers, and are not an expense to the Partnership. B. Mortgage Servicing Fees Redwood Mortgage Corp. also receives monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal, or such lesser amount as is reasonable and customary in the geographic area where the property securing the Mortgage Investment is located. Mortgage servicing fees of $109,209, $83,559, and $97,267 were incurred for nine months through September 30, 1999 and for years 1998 and 1997, respectively. C. Asset Management Fee The General Partners receive a monthly fee for managing the Partnership's Mortgage Investment portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8 of 1% annual). No management fees were incurred for year 1997. For nine months through September 30, 1999, and for the year ended December 31, 1998, management fees of $11,249 and $16,141, respectively, were paid to the General Partners. D. Other Fees The Partnership Agreement provides for other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to parties related to the General Partners. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND SEPTEMBER 30, 1999 (unaudited) E. Income and Losses All income is credited or charged to partners in relation to their respective partnership interests. The partnership interest of the General Partners (combined) is a total of 1%. F. Operating Expenses The General Partners or their affiliate (Redwood Mortgage Corp.) are reimbursed by the Partnership for all operating expenses actually incurred by them on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and legal fees and expenses, postage and preparation of reports to Limited Partners. Such reimbursements are reflected as expenses in the Statements of Income. G. General Partners Contributions The General Partners collectively or severally are to contribute 1/10 of 1% in cash contributions as proceeds from the offering were admitted to Limited Partner capital. As of December 31, 1992 a General Partner, GYMNO Corporation, had contributed $11,998, 1/10 of 1% of Limited Partner contributions in accordance with Section 4.02(a) of the Partnership Agreement. NOTE 4 - OTHER PARTNERSHIP PROVISIONS A. Applicant Status Subscription funds received from purchasers of units were not admitted to the Partnership until appropriate lending opportunities were available. During the period prior to the time of admission, which ranged between 1-120 days, purchasers' subscriptions remained irrevocable and earned interest at money market rates, which were lower than the return on the Partnership's Mortgage Investment portfolio. Interest earned prior to admission was credited to partners in applicant status. As Mortgage Investments were made, applicants' subscriptions were transferred to Limited Partner status to begin sharing in income from Mortgage Investments secured by deeds of trust. The interest earned prior to admission was either paid to the investors or transferred to Partners' Capital along with the original investment. B. Term of the Partnership The term of the Partnership is approximately 40 years, unless sooner terminated as provided. The provisions provide for no capital withdrawal for the first five years, subject to the penalty provision set forth in (E) below. Thereafter, investors have the right to withdraw over a five-year period, or longer. C. Election to Receive Monthly, Quarterly or Annual Distributions Upon subscription, investors elected either to receive monthly, quarterly or annual distributions of earnings allocations, or to allow earnings to compound for at least a period of 5 years. D. Profits and Losses Profits and losses are allocated among the Limited Partners in proportion to their respective capital accounts after 1% is allocated to the General Partners. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND SEPTEMBER 30, 1999 (unaudited) E. Liquidity, Capital Withdrawals and Early Withdrawals There are substantial restrictions on transferability of Units and accordingly an investment in the Partnership is not liquid. Limited Partners had no right to withdraw from the Partnership or to obtain the return of their capital account for at least one year from the date of purchase of Units which in all instances had occurred as of September 30, 1999. In order to provide a certain degree of liquidity to the Limited Partners after the one-year period, Limited Partners may withdraw all or part of their Capital Accounts from the Partnership in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty. The 10% penalty is applicable to the amount withdrawn early and will be deducted from the Capital Account. Withdrawal after the one-year holding period and before the five-year holding period was permitted only upon the terms set forth above. 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 (20) 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 (20) 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. F. Guaranteed Interest Rate For Offering Period During the period commencing with the day a Limited Partner was admitted to the Partnership and ending 3 months after the offering termination date, the General Partners guaranteed an interest rate equal to the greater of actual earnings from mortgage operations or 2% above The Weighted Average cost of Funds Index for the Eleventh District Savings Institutions (Savings & Loan & Thrift Institutions) as computed by the Federal Home Loan Bank of San Francisco monthly, up to a maximum interest rate of 12%. The guarantee amounted to $12,855 and $5,195 in 1990 and 1991, respectively. In 1992 and 1993, actual realization exceeded the guaranteed amount each month. Beginning with fiscal years after 1993, the guarantee no longer applies. NOTE 5 - INVESTMENT IN PARTNERSHIP The Partnership's interest in land located in East Palo Alto, CA., was acquired through foreclosure. The Partnership's interest was invested with that of two other Partnerships. The Partnerships had been attempting to develop the property into single family residences. Significant community resistance, as well as environmental and fish and wildlife concerns affected efforts to obtain the required approvals. The Partnership, in resolving disputes which arose during the course of the Partnership's attempt to obtain entitlements to develop the property, entered into agreements on May 8, 1998 with Rhone-Poulanc, Inc. These agreements, among other things, restrict the property to non-residential uses, provide for appropriate indemnifications, and include other consideration including the payment of cash. The Partnership still retains liability for the remediation of pesticide contamination affecting the property. Investigation of remediation options are ongoing. At this time management does not believe that remediation of the pesticide contaminants will have a material adverse effect on the financial condition of the Partnership. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND SEPTEMBER 30, 1999 (unaudited) NOTE 6 - LEGAL PROCEEDINGS Legal actions against borrowers and other involved parties have been initiated by the Partnership to recover payments against unsecured accounts receivable totalling $161,056 at September 30, 1999. The Partnership, along with numerous others, including a developer, a contractor and other lenders, is named as a defendant in a lawsuit involving the Partnership's attempt to recover its investment in real estate acquired through foreclosure. Management anticipates that the ultimate results of these cases will not have a material adverse effect on the net assets of the Partnership, with due consideration having been given in arriving at the allowance for doubtful accounts. NOTE 7 - NOTE PAYABLE BANK - LINE OF CREDIT The Partnership had a bank line of credit secured by its Mortgage Investment portfolio of up to $3,000,000 at .50% over prime. The balances outstanding as of December 31, 1998, and December 31, 1997 were $1,912,663, and $2,341,816 respectively, and the interest rate was 8.50% (8.00% prime + .50%). This line of credit expired in December, 1998, but was formally extended to March 31, 1999. In 1999 a new line of credit was secured with another institution. The new borrowing limit is $3,500,000, at prime, plus .25% (8.25% + .25% = 8.50%). The balance outstanding as of September 30, 1999 was $450,000. NOTE 8 - INCOME TAXES The following reflects a reconciliation from net assets (Partners' Capital) reflected in the financial statements to the tax basis of those net assets: Sept. 30, Dec. 31 Dec. 31 1999 1998 1997 ----------- ------------- ------------ Net assets - Partners' Capital per financial statements $11,259,262 11,948,707 $12,879,547 Formation Loan receivable 187,471 253,387 341,275 Allowance for doubtful accounts 1,069,251 787,042 424,738 ----------- ------------- ------------ Net assets tax basis $12,515,984 $12,989,136 $13,645,560 =========== ============= ============= In 1998, approximately 68% of taxable income was allocated to tax exempt organizations i.e., retirement plans. Such plans do not have to file income tax returns unless their "unrelated business income" exceeds $1,000. Applicable amounts become taxable when distribution is made to participants. NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of financial instruments: (a) Cash and Cash Equivalents - The carrying amount equals fair value. All amounts, including interest bearing, are subject to immediate withdrawal. (b) The Carrying Value of Mortgage Investments - (see note 2 (c)) is $11,581,881. The September 30, 1999, fair value of these investments of $11,319,809 is estimated based upon projected cash flows discounted at the estimated current interest rates at which similar Mortgage Investments would be made. The applicable amount of the allowance for doubtful accounts along with accrued interest and advances related thereto should also be considered in evaluating the fair value versus the carrying value. REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND SEPTEMBER 30, 1999 (unaudited) NOTE 10 - ASSET CONCENTRATIONS AND CHARACTERISTICS The Mortgage Investments are secured by recorded deeds of trust. At September 30, 1999, there were 48 Mortgage Investments outstanding with the following characteristics: Number of Mortgage Investments outstanding 48 Total Mortgage Investments outstanding $11,581,881 Average Mortgage Investment outstanding $241,289 Average Mortgage Investment as percent of total 2.08% Average Mortgage Investment as percent of Partners' Capital 2.14% Largest Mortgage Investment outstanding $1,500,000 Largest Mortgage Investment as percent of total 12.95% Largest Mortgage Investment as percent of Partners' Capital 13.32% Number of counties where security is located (all California) 14 Largest percentage of Mortgage Investments in one county 26.98% Average Mortgage Investment to appraised value of security at time Mortgage Investment was consummated 64.70% Number of Mortgage Investments in foreclosure 1 The following categories of mortgage investments are pertinent at September 30, 1999, and December 31, 1998, 1997: September 30 December 31 December 31 1999 1998 1997 ------------ ----------- ------------- First Trust Deeds $4,891,101 $8,638,976 $6,810,113 Second Trust Deeds 4,924,230 4,188,401 5,719,369 Third Trust Deeds 1,566,549 181,808 720,258 Fourth Trust Deeds 200,001 200,001 200,001 ------------ ----------- ------------- Total Mortgage Investments 11,581,881 13,209,186 13,449,741 Prior liens due other lenders 16,591,114 12,728,867 17,951,579 ------------ ----------- ------------- Total debt $28,172,995 $25,938,053 $31,401,320 ------------ ----------- ------------- Appraised property value at time of loan $43,543,813 $42,393,561 $52,077,885 ------------ ----------- ------------- Total investments as a percent of appraised Value 64.70% 61.18% 60.30% ------------ ----------- ------------- Investments by Type of Property Owner occupied homes $774,029 $746,334 $1,104,742 Non-Owner occupied homes 1,634,589 1,691,016 1,464,596 Apartments 553,063 897,292 1,666,916 Commercial 8,620,200 9,874,544 9,213,487 ------------ ----------- ----------- $11,581,881 $13,209,186 $13,449,741 ============ =========== ============= REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998(audited) AND SEPTEMBER 30, 1999 (unaudited) Scheduled maturity dates of Mortgage Investments as of September 30, 1999, are as follows: Year Ending December 31, -------------------- 1999 $2,103,816 2000 4,730,310 2001 4,084,000 2002 264,486 2003 64,047 Thereafter 335,222 =============== $11,581,881 =============== The scheduled maturities for 1999 include approximately $2,012,816 in eleven Mortgage Investments which are past maturity at September 30, 1999. Interest payment on most of these Mortgage Investments are current. Eleven Mortgage Investments with principal outstanding of $1,655,227 had interest payments overdue in excess of 90 days. Two Mortgage Investments with principal outstanding of $231,966 were considered impaired at September 30, 1999. That is interest accruals are no longer recorded thereon. The cash balance at September 30, 1999 of $339,588 was in three banks with interest bearing balances totalling $291,983. The balances exceeded FDIC insurance limits (up to $100,000 per bank) by $142,701. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ---------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- On September 30, 1992, the Partnership had sold 119,983.59 units and its contributed capital totaled $11,998,359 of the approved $12,000,000 issue, in units of $100 each. As of that date, the offering was formally closed. At September 30, 1999, Partners' Capital totalled $11,259,262. At September 30, 1999, the Partnership Mortgage Investments outstanding totalled $11,581,881. This represents a decrease of $1,627,305 from the December 31, 1998 Mortgage Investments balance. This reduction in Mortgage Investments outstanding as of September 30, 1999 was chiefly due to the pay-off of some substantially larger notes during the third quarter. The proceeds from the note pay-offs were used to partially pay down the line of credit which shows a decrease from June 30, 1999 balance. The ability of the Partnership to invest in new Mortgage Investments during nine months through September 30, 1999, was partially offset by withdrawals of income and capital by the Partners in the amount of $1,427,995 including early withdrawal penalties. Mortgage Investments increased from $12,036,293 from 1996 to $13,449,741 in 1997, an increase of $1,413,448. This was chiefly due to the ability of the General Partners to reduce the net amounts invested in real estate owned (REO) during the twelve months, by increasing bank credit line borrowing to $2,341,816 as of December 31, 1997 from $1,175,000 as of December 31, 1996, and by reinvesting earnings of $419,231. Mortgage Investments decreased slightly from $12,382,641 as of December 31, 1995, to $12,036,293 as of December 31, 1996. The Partnership began funding Mortgage Investments on December 27, 1989, and as of September 30, 1999, had credited the Partners' accounts with income at an average annualized yield of 7.75%. Currently, mortgage interest rates are lower than those prevalent at the inception of the Partnership. New Mortgage Investments are being originated at these lower interest rates. The result is a reduction of the average return across the entire portfolio held by the Partnership. In the immediate future, interest rates are expected to fluctuate only slightly. The General Partners cannot at this time predict at what levels interest rates will be in the future. Although the rates charged by the Partnership are influenced by the level of interest rates in the market, the General Partners do not anticipate that rates charged by the Partnership to its borrowers will change significantly. As of September 30, 1999, the Partnership Real Estate Owned account and the investment in Partnership account have been reduced to $358,052 and $5,956, respectively. These accounts had combined balances of $397,396, $1,033,156 and $1,710,739 for the years ended December 31, 1998 and 1997, and 1996, respectively. The conversion of these non-earning assets to income producing assets will generate increased income. The overall effect of these developments will allow the Partnership to increase the annualized yields paid by the Partnership in future quarters. The General Partners anticipate that the annualized yield for the year, 1999, will be higher than the previous year. The Partnership has a line of credit (see Note 7). This added source of funds helps to maximize the Partnership yield by allowing the Partnership to minimize the amount of funds in lower yield investment accounts when appropriate Mortgage Investments are not currently available. Since most of the Mortgage Investments made by the Partnership bear interest at a rate in excess of the rate payable to the bank which extended the line of credit, once the required principal and interest payments on the line of credit are paid to the bank, the Mortgage Investments funded using the line of credit generate revenue for the Partnership. As of September 30, 1999, the Partnership is current with its interest payments on the line of credit. In 1996, interest payments decreased to $127,454 reflecting the Partnership's overall smaller average outstanding credit line balance due primarily to a large number of Mortgage Investment payoffs. For the years ended December 31, 1997 and 1998, interest paid was $198,316 and $170,867 respectively, reflecting an overall greater average utilization of the credit line from the previous three years. The Partnership's income and expenses, accruals and delinquencies are within the normal range of the General Partners' expectations, based upon their experience in managing similar partnerships over the last twenty-two years. Mortgage Servicing Fees decreased from $97,267 in 1996, to $83,559 in 1997, primarily due to timing of receipt of payments from borrowers and actual payment of the Mortgage Servicing Fee. Mortgage Servicing Fees increased in 1998 to $128,493 due to an increase of the monthly loan servicing fee to 1/12% (1% per year). For nine months through September 30, 1999, Mortgage Servicing Fees incurred were $109,209. Asset Management Fees increased from $0 in 1997 to $16,141 in 1998. Asset Management Fees for nine months ended September 30, 1999, were $11,249. All other expenses fluctuated in a very close range except for Interest on Note Payable - bank and Provision for Doubtful Accounts and losses on Real Estate acquired through foreclosure. Each of these are discussed elsewhere in this Management Discussion and Analysis of Financial Condition and Results of Operations. Borrower foreclosures, as set forth under Results of Operations, are a normal aspect of Partnership operations and the General Partners anticipate that they will not have a material effect on liquidity. As of September 30, 1999, there was one property in foreclosure. Cash is constantly being generated from interest earnings, late charges, pre-payment penalties, amortization of Mortgage Investments and pay-off on notes. Currently, cash flow exceeds Partnership expenses, earnings and capital payout requirements. Excess cash flow will be invested in new Mortgage Investment opportunities when available, used to reduce the Partnership credit line or other Partnership business. The General Partners regularly review the Mortgage Investment portfolio, examining the status of delinquencies, the underlying collateral securing these properties, the REO expenses and sales activities, borrowers' payment records, etc. Data on the local real estate market and on the national and local economy are studied. Based upon this information and other data, loss reserves are increased or decreased. Because of the number of variables involved, the magnitude of possible swings and the General Partners' inability to control many of these factors, actual results may differ significantly from estimates made by the General Partners. Management provided $419,437, $434,495 and $423,054 as provision for doubtful accounts for the years ended December 31, 1996, 1997 and 1998, respectively. During nine months through September 30, 1999, the Partnership provided $313,483 for doubtful accounts. The provision for doubtful accounts was increased to $434,495 in 1997as the selling of REO accumulated primarily in the California recession of the early to mid 1990's netted less proceeds than originally anticipated and the General Partners further refinement of anticipated sales proceeds on remaining REO, collections of unsecured receivables, and additional provisions for unspecified losses. The provision for doubtful accounts was decreased by $11,441 to $423,054 in 1998. This decrease reflected reduced expected REO anticipated losses and improved collections of secured and unsecured receivables. The September 23, 1999 issue of the San Mateo Times published a new UCLA Anderson forecast which focused on the California economy. The General Partners agree with their observations and predictions. The UCLA focus stated: "The California economy will grow at a healthy pace over the next two decades, but there is little chance of returning to the sustained economic boom that carried the state during the first four decades following World War II. California's economic growth will be limited by the consequences of population growth: high housing costs, traffic congestion and long commute times, according to the quarterly forecast released Tuesday. Looking at the national scene, the forecast predicted the Federal Reserve Board will raise interest rates another half percent over the next few months and then hold steady at 5.75 percent through 2000 to further curb inflation risks. The increase will slow economic growth from 3.9 percent in 1999 to 2.5 percent. "This forecast is for a very soft landing", the forecast said. In California, employment will grow by about 2.1 percent annually through 2020, good for a cumulative increase of 50 percent. That rate contrasts with an average growth rate of 3.5 percent from 1950 to 1990, when the California economy depended heavily on the Cold War arms race and expanding government space programs, said Tom Lieser, executive director of the Anderson Forecast and author of the report's California section. "A lot of that basically fell from the sky so to speak", Lieser said. "It came from the defense budget right to our doorstep. California was blessed with conditions that made this the capital of the aerospace industry". That market changed in 1990 when the Cold War ended and defense spending fell sharply. The United States fell into recession, with California suffering more than most other states. What eventually emerged, Lieser said, is an economy that is more diverse and less vulnerable to the federal budget. "Now we have a market-driven economy, which was built on the technological specialization that we had from aerospace and our universities. We build on that, but we don't have to worry about that going away". he said. Aerospace employment peaked in the 1980s at 380,000, and fell to 165,000 by 1996 in the wake of the downsizing. Aerospace employment has stabilized, but growth will be limited, the report said. The challenge of the next two decades will be to build housing, roads and other infrastructure that sustained growth will require". To the Partnership, the above evaluation of the California economy means an increase in property values, job growth, personal income growth, etc. This translates into more loan activity, which is beneficial to the Partnership. The Partnership's interest in land located in East Palo Alto, Ca, was acquired through foreclosure. The Partnership's basis of $ 0, $346,017 and $242,394 for the years ended December 31, 1998, 1997 and 1996 respectively, has been invested with that of two other Partnerships. The Partnership had been attempting to develop the property into a subdivision consisting of approximately 63 residential units (the "Development"). The proposed Development had gained significant public awareness as a result of certain environmental, fish and wildlife, population density, and other concerns. Incorporated into the proposed Development were various mitigation measures which included remediation of hazardous material existing on the property, and the protection of potentially affected species due to the proximity of the property to the San Francisco Baylands. These issues and others sparked significant public controversy. Opposition against and support for the proposed Development existed. Among those in opposition to the project is Rhone Poulanc, Inc. which is responsible for a nearby hazardous waste site. Rhone Poulanc, Inc. has been identified as the Responsible Party for the arsenic contamination which affected a portion of the property. On May 8, 1998, the Partnership, in order to resolve disputes which arose during the course of the attempts to obtain entitlements for this Development, entered into agreements with Rhone-Poulanc, Inc. which, among other things, restricted the property to non residential uses, provided for appropriate indemnification and included other considerations including a cash payment to the Partnership. The Partnership has retained ownership of the property, which is subject to various deed restrictions, options and/or first rights of refusal. The General Partners are pleased with this outcome to the residential development attempt. The General Partners may now explore other available options with respect to alternative uses for the property. In order to pursue these options, rezoning of the property's existing residential zoning classification will be required. The Partnership is continuing to explore remediation options available to mitigate the pesticide contamination which affects the property. This pesticide contamination appears to be the result of agricultural operations by prior owners and is unrelated to the arsenic contamination for which Rhone-Poulanc, Inc. remains responsible. At this time the General Partners do not believe that remediation of the pesticide contaminants will have a material adverse effect on the financial condition of the Partnership. At the time of subscription to the Partnership, Limited Partners elected whether to receive monthly, quarterly or annual cash distributions from the Partnership or to compound earnings in their capital account. If the Limited Partner initially elected to receive monthly, quarterly or annual distributions, such election, once made, was irrevocable. However, a Limited Partner could change his election regarding whether he wanted to receive such distributions on a monthly, quarterly or annual basis. If the Limited Partner initially elected to compound earnings in their capital account in lieu of cash distributions, he could, after five (5) years, change his election and receive monthly, quarterly or annual cash distributions. Earning allocable to Limited Partners who elected to compound earnings in their capital accounts are retained by the Partnership for making further Mortgage Investments or for other proper Partnership purposes, and such amounts are being added to such Limited Partners' capital accounts. During the last three years and the nine month period ending September 30, 1999, the following distribution of earnings, after allocation of syndication costs, were made to the Limited Partners. These earnings are tabulated separately for compounding and distributing partners. 9 months December 31, December 31, December 31, through 1996 1997 1998 Sept 30, 1999 ------------ ------------ ----------- ------------- Compounding Partners $514,167 $419,231 $381,747 $310,571 Distributing Partners $336,341 $399,379 $456,358 $362,064 ----------- ------------ ----------- ------------- Total Earnings $850,508 $818,610 $838,105 $672,635 As of December 31, 1996, December 31, 1997, December 31, 1998 and nine months through September 30, 1999, Limited Partners electing to withdraw earnings represented 36%, 44%, 53%, 54% and 56% of the Limited Partners' capital. The Partnership also allows the Limited Partners to withdraw their capital account subject to certain limitations (see liquidation provisions of Partnership Agreement). For the three years and the nine month period stated above, capital liquidation subject to a 10% penalty and the normal capital liquidation for accounts to be paid over 5 years or more, distributed to Limited Partners totalled: 9 months December 31, December 31, December 31, through 1996 1997 1998 September 30, 1999 ------------ ---------- ------------ ---------------- Capital liquidation 10% penalty $403,634 $475,348 $381,458 $182,083 no penalty $318,902 $737,568 $1,019,017 $883,848 ------------ ------------ ------------ ------------- Total $722,536 $1,212,916 $1,400,475 $1,065,931 These withdrawals are within the normally anticipated range that the General Partners would expect in their experience in this and other partnerships. The General Partners expect that a small percentage of Limited Partners will elect to liquidate their capital accounts over one year with a 10% early withdrawal penalty. In originally conceiving the Partnership, the General Partners wanted to provide Limited Partners needing their capital returned a degree of liquidity. Generally, Limited Partners electing to withdraw over one year need to liquidate investment to raise cash. The trend the Partnership is experiencing in withdrawals by Limited Partners electing a one year liquidation program represents a small percentage of Limited Partner capital as of December 31, 1996, December 31, 1997, December 31, 1998 and September 30, 1999, respectively and is expected by the General Partners to commonly occur at these levels. This ability to withdraw after five years by Limited Partners has the effect of providing Limited Partner liquidity which the General Partners then expect a portion of the Limited Partners to avail themselves of. This has the anticipated effect of the Partnership growing, primarily through reinvestment of earnings in years one through five. The General Partners expect to see increasing numbers of Limited Partner withdrawals in years five through eleven, at which time the bulk of those Limited Partners who have sought withdrawal have been liquidated. After year eleven, liquidation generally subsides and the Partnership capital again tends to increase. Actual liquidation of both capital and earnings from year five (1994) through year nine (1998), and nine months through September 30, 1999, is shown hereunder: Years ended December 31, ------------------------- 1994 1995 1996 ------------- ------------ ------------- Earnings $263,206 270,760 336,341 Capital* $340,011 184,157 722,536 ------------ ------------ ------------- Total $603,217 $454,917 $1,058,877 ------------ ------------ ------------- 9 months 1997 1998 through 9/30/99 ------------ ------------ ------------- Earnings 399,379 456,358 362,064 Capital* 1,212,916 1,400,475 1,065,931 ----------- ------------ ------------- Total $1,612,295 $1,856,833 $1,427,995 ----------- ------------ ------------- * These amounts represent gross of early withdrawal penalties. The Year 2000 will be a challenge for the entire world, with respect to the conversion of existing computerized operations. The Partnership is completing its assessment of Year 2000 hardware and software issues. The hardware issue is fully complete and tested. The Partnership relies on Redwood Mortgage Corp., an affiliate of the Partnership, third party and software vendors for its computer software. Major services provided to the Partnership by these companies are loan servicing, accounting and investor services. The software for loan servicing is installed and is in compliance with Year 2000 issues. Installation of accounting software that is Year 2000 compliant began and was completed during the second quarter of 1999 and has been tested since that time. The investor servicing software is still being modified, however software maintenance agreements provide for Year 2000 compliance. Additionally, the Partnership has contacted several outside vendors that provide investor services as a possible alternative to providing investor services in house. These service providers will be more expensive than the current in house systems, but they do provide a back-up alternative. Reports are being run parallel to insure accuracy of Year 2000 compliance. This will continue through December 31, 1999. The costs of updating the various software systems will be borne by the various companies that supply the Partnership with services. Therefore, no significant capital outlays are anticipated and the Partnership expects only incidental costs of conversion for Year 2000 issues. The Partnership is in the business of making Mortgage Investments secured by real estate. The most important factor in making the Mortgage Investments is the value of the real estate security. Year 2000 issues have some potential to affect industries and businesses located in the marketplaces in which the Partnership places its Mortgage Investments. This would only have an effect on the Partnership if Year 2000 issues cause a significant downturn in the northern California economy. The fact that Silicon Valley is located in our marketplace, there may be significant increased demand for Silicon Valley type services and goods as companies make ready for the Year 2000 conversion. Although almost complete, if any or all accounting, loan servicing and investor services conversions should fail, the size and scope of the Partnership's activities are such that a failure could be handled at an equal or higher cost. This could be done on a manual basis or outsourced to other servicers existing in the industry, while correcting systems problems and are likely to be temporarily in nature. While this would entail some initial set up costs, these costs would likely not be so significant as to have a material effect upon the Partnership. Shifting portions of daily operations to manual or outsourced systems may result in time delays, which could negatively affect customer relations and lead to the potential loss of new loans and Limited Partner investments. The foregoing analysis of Year 2000 issues includes forward-looking statements and predictions about possible or future events, results of operations and financial condition. As such, this analysis may prove to be inaccurate because of assumptions made by the General Partners or the actual development of future events. No assurance can be given that any of these statements or predictions will ultimately prove to be correct or even substantially correct. Various other risks and uncertainties could also affect the Year 2000 analysis causing a more severe effect on the Partnership than discussed above. The General Partners Year 2000 compliance testing cannot guarantee that all computer systems will function without error beyond the Year 2000. Risks also exist with respect to Year 2000 compliance by external parties who may have no relationship to the Partnership or the General Partners, but who have a significant relationship with one or more third parties, and may have a system failure that adversely affects the Partnership's ability to conduct business. While the General Partners are attempting to identify such external parties, no assurance can be given that it will be able to do so. Furthermore, third parties with direct relationships with the Partnership, whose systems have been identified as likely to be Year 2000 compliant, may suffer a breakdown due to unforeseen circumstances. It is also possible that the information collected by the General Partners' for these third parties regarding their compliance with Year 2000 issues may be incorrect. Finally, it should be noted that the foregoing discussion of Year 2000 issues assumes that to the extent the General Partners systems fail, whether because of unforeseen complications or because of third parties' failure, switching to manual operations will allow the Partnership to continue to conduct its business. While the General Partner believes this assumption to be reasonable, if it is incorrect, the Partnerships results of operations would likely be adversely affected. COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP - ------------------------------------------------------------------ The Partnership has no officers or directors. The Partnership is managed by the General Partners. There are certain fees and other items paid to management and related parties. A more complete description of management compensation is found in the Prospectus, pages 12-13, under the section "Compensation of the General partners and their 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 nine month period ended September 30, 1999. All such compensation is in compliance with the guidelines and limitations set forth in the Prospectus. Entity Receiving Description of Compensation Amount Compensation and Services Rendered - -------------------------------------------------------------------------------- I. Redwood Mortgage Mortgage Servicing Fee for Corp. servicing Mortgage Investments ...................$109,209 General Partners &/or Affliates Asset Management Fee for managing assets....................................$11,249 General Partners 1% interest in profits..............................$6,794 II. FEES PAID BY BORROWERS ON MORTGAGE INVESTMENTS PLACED BY COMPANIES RELATED TO THE GENERAL PARTNERS WITH THE PARTNERSHIP (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP) Redwood Mortgage Mortgage Brokerage Commissions for services in connection Corp. with the review, selection, evaluation, negotiation, and extension of the Mortgage Investments paid by the borrowers and not by the Partnership.........................$130,463 Redwood Mortgage Processing and Escrow Fees for services in connection Corp. with notary, docyment preparation, credit investigation, and escrow fees payable by the borrowers and not by the Partnership..........................................$3,408 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..........................................$22,795 MORTGAGE INVESTMENT PORTFOLIO SUMMARY AS OF SEPTEMBER 30, 1999 Partnership Highlights - ------------------------------------------------------------------------------- Mortgage Investment to Value Ratios First Trust Deeds $4,891,100.96 Appraised Value of Properties * 8,073,973.00 Total Investment as a % of Appraised Value 60.58% First Trust Deed Mortgage Investments 4,891,100.96 Second Trust Deed Mortgage Investments 4,924,229.99 Third Trust Deed Mortgage Investments 1,566,548.71 Fourth Trust Deed Mortgage Investments ** 200,001.20 ---------------- $11,581,880.86 First Trust Deeds due other Lenders 14,596,768.00 Second Trust Deeds due other Lenders 1,851,488.00 Third Trust Deeds due other Lenders 142,858.00 ---------------- Total Debt $28,172,994.86 Appraised Property Value * 43,543,813.00 Total Investment as a % of Appraised Value 64.70% Number of Mortgage Investments Outstanding 48 Average Investment $241,289.18 Average Investment as a % of Net Assets 2.14% Largest Investment Outstanding 1,500,000.00 Largest Investment as a % of Net Assets 13.32% Loans as a Percentage of Total Mortgage Investments First Trust Deed Mortgage Investments 42.23% Second Trust Deed Mortgage Investments 42.52% Third Trust Deed Mortgage Investments 13.52% Fourth Trust Deed Mortgage Investments 1.73% ---------------- Total 100.00% Mortgage Investments by Type of Owner Occupied Homes $774,029.29 6.68% Non Owner Occupied Homes 1,634,588.46 14.11% Apartments 553,062.84 4.78% Commercial 8,620,200.27 74.43% ------------- ---------------- Total $11,581,880.86 100.00% Statement of Conditions of Mortgage Investments Number of Mortgage Investments in Foreclosure 1 *Values used are the appraisal values utilized at the time the mortgage investment was consummated. Diversification by County County Total Loans Percent Stanislaus $3,124,456.60 26.98% San Mateo 3,016,090.05 26.04% Santa Clara 1,712,387.34 14.79% San Francisco 1,289,242.93 11.13% Contra Costa 741,077.83 6.40% Alameda 721,642.91 6.23% Marin 370,388.39 3.20% Sonoma 158,736.30 1.37% Sacramento 111,981.41 0.97% Ventura 91,000.00 0.79% Shasta 80,451.27 0.69% Monterey 77,077.39 0.66% Santa Cruz 46,376.24 0.40% Solano 40,972.20 0.35% ------------- ---------- Total $11,581,880.86 100.00% ------------- ---------- ** Redwood Mortgage Investors VII, together with other Redwood Partnerships, holds a second and a fourth trust deed against the secured property. In addition, the principals behind the borrower corporation have given personal guarantees as collateral. The overall loan to value ratio of this loan is 76.52%. The borrower is paying a fixed interest rate of 12.25%, and the Partnership and other lenders will also be entitled to share in profits generated by the corporation with respect to the secured property. The affiliates of the Partnership had entered into previous loan transactions with this borrower which have been concluded successfully, resulting in additional revenue beyond interest payments for the affiliates involved. PART 2 OTHER INFORMATION Item 1. Legal Proceedings ----------------- None, where the Partnership is a defendant. Please refer to Note 6 of Notes to Financial Statements. Item 2. Changes in the Securities ------------------------- Not Applicable Item 3. Defaults upon Senior Securities ------------------------------- Not Applicable Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- Not Applicable Item 5. Other Information ----------------- Not Applicable Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Not Applicable (b) Form 8-K The registrant has not filed any reports on Form 8-K during the three month period ending September 30, 1999 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized on the 10th day of November, 1999. REDWOOD MORTGAGE INVESTORS VII By: /s/ D. Russell Burwell ------------------------- D. Russell Burwell, General Partner By: /s/ Michael R. Burwell ------------------------- Michael R. Burwell, General Partner By: Gymno Corporation, General Partner By: /s/ D. Russell Burwell ------------------------- D. Russell Burwell, President By: /s/ Michael R. Burwell ------------------------- Michael R. Burwell, Secretary/Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity indicated on the 10th day of November, 1999. Signature Title Date - --------- ----- ---- /s/ D. Russell Burwell - --------------------------------- D. Russell Burwell General Partner November 10, 1999 - --------------------------------- /s/ Michael R. Burwell - ---------------------------------- Michael R. Burwell General Partner November 10, 1999 /s/ D. Russell Burwell - --------------------------------- D. Russell Burwell President of Gymno Corporation, November 10, 1999 (Principal Executive Officer); Director of Gymno Corporation /s/ Michael R. Burwell - -------------------------------- Michael R. Burwell Secretary/Treasurer of Gymno November 10, 1999 Corporation (Principal Financial and Accounting Officer); Director of Gymno Corporation EX-27 2 FDS --
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 339,588 0 12,107,991 1,069,251 0 0 0 0 11,711,813 0 0 452,551 0 0 11,259,262 11,711,813 0 1,344,059 0 178,692 0 313,483 172,455 679,429 0 679,429 0 0 0 679,429 .00 .00
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